|
TEXAS NEW MEXICO POWER CO - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations for PNMR is presented on a combined basis, including
certain information applicable to PNM and TNMP. The MD&A for PNM and TNMP is
presented as permitted by Form 10-Q General Instruction H (2). This report uses
the term "Company" when discussing matters of common applicability to PNMR, PNM,
and TNMP. A reference to a "Note" in this Item 2 refers to the accompanying
Notes to Condensed Consolidated Financial Statements (Unaudited) included in
Item 1, unless otherwise specified. Certain of the tables below may not appear
visually accurate due to rounding.
MD&A FOR PNMR
EXECUTIVE SUMMARY
Company Overview and Strategy
PNMR is a holding company with two regulated utilities serving approximately
739,000 residential, commercial, and industrial customers and end-users of
electricity in New Mexico and Texas. In the latter part of 2011, PNMR exited
both of its competitive businesses, First Choice and Optim Energy, and
repositioned itself as a holding company solely operating its electric
utilities, PNM and TNMP. Optim Energy had no impact on 2011 results of
operations because it was written off in 2010 and PNMR had no further financial
commitment to Optim Energy.
Strategic Goals
PNMR is focused on achieving the following strategic goals:
• Earning authorized returns on its regulated businesses
• Continuing to improve credit ratings
• Providing a top-quartile total return to investors
PNMR's success in accomplishing these strategic goals is highly dependent on
continued favorable regulatory treatment for its utilities. Both PNM and TNMP
seek cost recovery for their investments through general rate cases and various
rate riders. The PUCT has approved mechanisms that allow for recovery of capital
invested in transmission and distribution projects without having to file a
general rate case and allows for more timely recovery of amounts invested in
TNMP's systems.
PNM and TNMP completed rate proceedings before their state regulators in 2011.
PNM has two rate cases pending before FERC. A settlement in one case is pending
FERC approval and an agreement in principle has been reached in the other. In
August 2012, the NMPRC approved PNM's application for a renewable energy rider
to recover NMPRC approved renewable energy costs. Additional information about
rate filings is provided in Note 17 of the Notes to Consolidated Financial
Statements in the 2011 Annual Reports on Form 10-K and in Note 10. PNM
previously announced that it intended to file a request for an increase in the
rates charged to New Mexico retail customers in late 2012, but now anticipates
this filing will occur in mid-2013, partially due to the lack of clarity around
the timing and amount of capital that will be required for BART at SJGS, as
discussed below.
Fair and timely rate treatment from regulators is crucial to achieving PNMR's
strategic goals because it leads to PNM and TNMP earning their allowed returns.
PNMR believes that if the utilities earn their allowed returns, it would be
viewed positively by rating agencies and would further improve credit ratings,
which could lower costs to customers. Also, earning allowed returns should
result in increased earnings for PNMR, which should lead to increased total
returns to investors.
PNM's interest in PVNGS Unit 3 is permanently excluded from NMPRC jurisdictional
rates. While PVNGS Unit 3's financial contribution is not calculated in the
authorized returns on its regulated business, it impacts PNM's earnings and has
demonstrated to be a valuable asset. Power generated from PNM's 134 MW interest
in PVNGS Unit 3 is currently sold into the wholesale market and any earnings or
losses are attributable to shareholders.
63--------------------------------------------------------------------------------
Table of Contents
Exit from Competitive Businesses
As a result of the exit from its competitive businesses, First Choice and Optim
Energy, PNMR's business model is centered on its electric utilities. The
elimination of the competitive businesses should reduce PNMR's risk and earnings
volatility. Additional discussion about the exit from the competitive businesses
is found in Notes 2 and 21 of the Notes to Consolidated Financial Statements in
the 2011 Annual Reports on Form 10-K.
Business Principles
In addition to its strategic goals, three principles drive PNMR's business
strategy and decision-making:
• Contribute to the economic vitality of the communities we serve
• Demonstrate environmental stewardship
• Exhibit social responsibility
In support of these principles, PNMR works closely with customers, stakeholders,
legislators, and regulators to ensure that our resource plans and infrastructure
investments benefit from robust public dialogue and balance the diverse needs of
our communities.
Economic Vitality
PNMR and its utilities are keenly aware of the roles they play in enhancing
economic vitality in their New Mexico and Texas service territories. We believe
there is a direct connection between electric infrastructure and economic
growth. When considering expanding or relocating to other communities,
businesses consider energy affordability and energy reliability to be important
factors. PNM and TNMP strive to balance service affordability with
infrastructure investment to maintain a high level of electric reliability. The
utilities also work to ensure that rates reflect actual costs of providing
service.
Investing in PNM's and TNMP's infrastructure is critical to ensure reliability
and meet future energy needs. Both utilities have long-established records of
providing customers with top-tier electric reliability. In September 2011, TNMP
began its deployment of smart meters in homes and businesses across its Texas
service area. As part of the State of Texas' long-term initiative to create a
smart electric grid, the smart meter rollout will ultimately give consumers more
energy consumption data and help them make more informed decisions. TNMP's
deployment is expected to be completed in 2016.
Environmental Stewardship
For years, PNMR has demonstrated its commitment to environmental stewardship.
PNMR's environmental objectives focus on four areas:
• Deploying renewable energy
• Reducing emissions from existing fossil-fueled power plants
• Increasing energy efficiency participation
• Reducing waste
In 2011, PNM completed its $95 million investment in a utility-owned renewable
energy project when five utility-scale solar facilities went online. The five
solar sites located in Alamogordo, Deming, Los Lunas, Las Vegas, and Albuquerque
provide a combined 22 MW of power. A sixth facility, the 500-KW PNM Prosperity
Energy Storage Project, uses advanced batteries to store solar power and
dispatch the energy either during high-use periods or when solar production is
limited. The project features one of the largest combinations of battery storage
and PV energy in the nation and involves extensive research and development of
smart grid concepts with the Electric Power Research Institute, East Penn
Manufacturing Co., Northern New Mexico College, Sandia National Laboratories,
and the University of New Mexico. When the facility went online in September
2011, it was the nation's first solar storage facility fully integrated into a
utility's power grid.
In addition, PNM's resource portfolio includes the purchase of 200 MW of wind
power. PNM also purchases power from a customer-owned distributed solar
generation program having an installed capacity of 14 MW at the end of 2011,
which capacity is expected to increase to 21 MW by the end of 2012. Distributed
generation, wind, and solar power are key means for PNM to meet the RPS
established by the REA and related regulations issued by the NMPRC. These rules
require a utility to achieve prescribed levels of energy sales from renewable
sources within its generation mix, if that can be accomplished without exceeding
the RCT cost limit set by the NMPRC, which aims to moderate the cost to
consumers when utilities use more renewable resources.
64--------------------------------------------------------------------------------
Table of Contents
PNM sought and received a waiver from the NMPRC excusing it from meeting the RPS
in 2012 because the cost to achieve the full RPS would exceed the RCT. However,
PNM will continue to procure renewable resources while balancing the bill impact
to customers in order to meet New Mexico's escalating RPS requirements.
On April 30, 2012, PNM filed its 2013 Renewable Energy Plan, which calls for:
• 20 MW of PNM-owned solar facilities to be in service by the end of 2013
• A 20-year PPA for the output of a 10-MW geothermal facility to be in
service by January 1, 2014
• Limited wind and solar REC purchases in 2013
The proposed plan would achieve RPS quantity compliance in 2013, but likely will
be slightly below the 20% solar renewable energy diversity requirement. However,
the plan would achieve full quantity and diversity compliance in 2014 and will
be beneath the RCT for both years. A hearing on the proposed plan was held in
September 2012 before the NMPRC and a decision is expected by November 30, 2012.
PNM's SJGS near Farmington, New Mexico, is one of the top performers in the
nation with respect to mercury removal. The plant outperforms the mercury limit
imposed by EPA in the 2011 Mercury and Air Toxics Standards. Major environmental
upgrades on each of the four units at SJGS, which were completed in early 2009,
have significantly reduced emissions of NOx, SO2, particulate matter, and
mercury. PNM's share of the costs of these upgrades was $161 million. Since
2006, SJGS has reduced NOx emissions by 38%, SO2 by 69%, particulate matter by
65%, and mercury by 99%.
In order to keep costs to customers as low as possible while also reducing
visibility impairment related to regional haze, PNM has supported the
installation of SNCRs at SJGS, a technology also proposed by the State of New
Mexico to meet the regional haze regulations. However, EPA issued its FIP
requiring SCRs to be installed at SJGS, which PNM estimates would significantly
exceed the cost of installing SNCRs. Due to the compliance deadline under the
FIP, PNM is preparing to install SCRs at SJGS while simultaneously pursuing two
other paths regarding BART at SJGS. PNM is pursuing legal relief in the Tenth
Circuit and administrative relief from the EPA regarding the FIP. PNM is also
participating in discussions with stakeholders regarding an alternative to the
FIP and SIP. See Note 9.
PNM is challenging EPA's proposal in the courts and administratively within EPA.
Oral arguments on the court challenge were held October 23, 2012, but no
decision has been issued. There is no deadline for a court decision. In July
2012, the NMED established a process to explore whether stakeholders could reach
agreement on an alternative to SCRs and SNCRs. PNM supported that process and
advocated for alternatives that would cost consumers less than the FIP while
also achieving environmental benefits and considering economic impact to New
Mexico. In September 2012, NMED proposed an alternative to EPA suggesting the
closure of Units 1 and 2 at SJGS and the installation of SNCRs on Units 3 and 4
by the end of 2017. The NMED also suggested replacement of PNM's share of the
capacity from the two closed units with gas-fired generation. The Company views
the NMED proposal as an important step in meeting the objectives of addressing
the environmental needs of the regional haze program at a lower cost to
customers while balancing the economic impact to the "four corners" region. In
order for the NMED proposal to proceed, there would need to be an agreement in
principle among EPA, NMED, and PNM. The proposal would also be subject to
approval by the other owner of SJGS Units 1 and 2, as well as various regulatory
agencies. The proposal could also be subject to administrative and judicial
challenge by others.
In order to be able to install SCRs on all four units of SJGS by the compliance
deadline set forth in the FIP, PNM obtained bids for the installation of SCR
technology. PNM entered into a contract on October 31, 2012 with an engineering,
procurement, and construction contractor to install SCRs and is negotiating a
contract with an engineering firm for construction management services on behalf
of the SJGS owners. The construction contract includes termination provisions in
the event that SCRs are determined in the future to be unnecessary. The
construction contract contains a cost estimate, which will be refined through an
"open book" subcontractor bidding process with final costs to be determined by
June 30, 2013. Based on the indicative bid for construction, PNM estimates the
total cost to install SCRs on all four units of SJGS will be between
approximately $824 million and $910 million, which amounts include costs for
construction management, gross receipts taxes, AFUDC, and other PNM costs. PNM's
share of the costs would be about 46.3% based upon its SJGS ownership interest.
Energy efficiency also plays a significant role in helping to keep customers'
electricity costs low and meeting their energy needs. PNM's and TNMP's energy
efficiency and load management portfolios continue to be robust. In 2011, annual
energy saved as a result of PNM's portfolio of energy efficiency programs was
approximately 58,900 MWh. This is equivalent to the consumption of approximately
7,700 homes in PNM's service territory. PNM's load management and energy
efficiency programs also help lower peak demand requirements. TNMP's energy
efficiency programs in 2011 resulted in energy savings totaling an estimated
13,435 MWh.
65--------------------------------------------------------------------------------
Table of Contents
In 2008, PNMR established a three-year waste-reduction goal in which all
facilities were to maintain recycling programs and identify significant waste
streams. The target called for at least 75% of facilities to implement plans to
reduce a minimum of
one waste stream by 15% below 2009 levels. By the end of 2011, more than 87% of
PNMR facilities had achieved the waste-reduction goal.
Social Responsibility
Through outreach, collaboration, and various community-oriented programs, PNMR
continues to make significant progress in two of its key focus areas of
low-income assistance and energy efficiency support in New Mexico and Texas.
Building off work that began in 2008, continuing outreach efforts include
numerous community events that connected low-income customers with non-profit
community service providers offering support and help with such needs as utility
bills, food, clothing, medical programs, services for seniors, and
weatherization. Additionally, four of the largest grants awarded in 2011 by PNMR
supported nonprofits in various areas such as:
• Adult literacy
• Assistance for families trying to emerge from poverty
• Food rescue from restaurants and grocers to help feed those in need
• Assistance for low-income individuals to build a home, start a small
business, or pursue higher education
In 2011, the PNM Good Neighbor Fund provided $1.2 million of assistance with
utility bills to 9,907 families. Further, as part of the settlement in its 2010
Electric Rate Case, PNM agreed to voluntarily contribute an additional $1.3
million to the Good Neighbor Fund. This fund, along with additional
collaboration with various other agencies, has helped to reduce the electricity
affordability gap for many vulnerable customer groups such as seniors, young
families, and medically challenged households.
The PNM Resources Foundation helps nonprofits become more energy efficient
through Reduce Your Use grants. For 2012, the foundation awarded $0.3 million to
55 New Mexico nonprofits for such projects as shade structure installations,
window replacements, and efficient appliance purchases. In 2011, the foundation
gave more than $0.3 million to support 87 projects in New Mexico and Texas that
helped purchase energy efficiency appliances and install high-performance
windows and solar panels. Since the program's inception in 2008, Reduce Your Use
grants have provided nonprofit agencies in New Mexico and Texas with a total of
$1.3 million of support.
Economic Factors
In the three months ended September 30, 2012, PNM experienced a decrease in
weather-normalized, retail load of 0.3% and TNMP experienced an increase in
weather-normalized, retail load of 3.7% compared to the three months ended
September 30, 2011. In the nine months ended September 30, 2012, PNM and TNMP
experienced increases in weather-normalized, retail load of 0.2% and 4.1%
compared to the nine months ended September 30, 2011. In recent years, New
Mexico and Texas have fared better than the national average in unemployment.
However, New Mexico's figures may be misleading due to people dropping out of
the work force. Employment growth is much more telling, as Texas leads the way
with growth rates well above the national rate while New Mexico's employment is
relatively flat.
Rate Base Potential Growth
Based on the 5-year capital plan announced in December 2011, PNM expects rate
base to grow at a 2% compound annual rate through 2013. That growth figure could
be 7% from 2011 through 2016 through additional potential capital investments.
The largest of these involves possibly being required to install SCRs to reduce
emissions at SJGS and Four Corners. The addition of other facilities, such as
renewable resources and peaking capacity, could also expand rate base. TNMP's
compound annual rate base growth rate through 2013 is estimated at 8%,
predicated on the utility's 5-year capital plan announced in December 2011. A
significant portion of TNMP's capital additions should be recovered through
expedited transmission and distribution cost recovery mechanisms authorized by
the PUCT. PNMR will continue to carefully balance the potential rate base growth
for PNM and TNMP with customer rate impacts.
66--------------------------------------------------------------------------------
Table of Contents
Results of Operations
A summary of net earnings attributable to PNMR is as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2012 2011 Change 2012 2011 Change
(In millions, except per share amounts)
Net earnings $ 57.9 $ 43.7 $ 14.2 $ 96.5 $ 64.4 $ 32.1
Average diluted common
and common equivalent
shares 80.4 91.7 (11.4 ) 80.4 92.0 (11.6 )
Net earnings per
diluted share $ 0.72 $ 0.48 $ 0.24 $ 1.20 $ 0.70 $ 0.50
The components of the change in earnings attributable to PNMR are:
Three Months Ended Nine Months Ended
September 30, 2012 September 30, 2012
(In millions)
PNM Electric $ 12.5 $ 44.7
TNMP Electric 0.2 3.0
First Choice (0.6 ) (20.7 )
Corporate and Other 2.1 5.0
Net change $ 14.2 $ 32.1
PNMR's operational results were affected by the following:
• Exit from unregulated businesses - PNMR sold First Choice in 2011;
therefore 2012 results of operations do not include First Choice
• Rate increases for PNM and TNMP - Additional information about these
rate increases is provided in Note 17 of the Notes toConsolidated
Financial Statements in the 2011 Annual Reports on Form 10-K
• Decrease in the number of common and common equivalent shares
primarily due to PNMR's purchase of its equity described in Note 6 of
the Notes to Consolidated Financial Statements in the 2011 Annual
Reports on Form 10-K
• Other factors impacting results of operation for each segment are
discussed under Results of Operations below
Liquidity and Capital Resources
During 2011, PNMR and PNM replaced their revolving credit facilities with new
facilities. The new facilities provide capacities for short-term borrowing and
letters of credit of $300.0 million for PNMR and $400.0 million for PNM. In
addition, TNMP has a $75.0 million revolving credit facility. Total availability
for PNMR on a consolidated basis was $653.5 million at October 26, 2012. The
Company utilizes these credit facilities and cash flows from operations to
provide funds for both construction and operational expenditures. PNMR also has
intercompany loan agreements with each of its subsidiaries.
The Company projects that its total capital requirements, consisting of
construction expenditures and dividends, will total $1,526.9 million for
2012-2016, including amounts expended through September 30, 2012. This estimate
does not include amounts for environmental upgrades at SJGS or Four Corners that
may be required by EPA to address regional haze or other environmental
compliance requirements, additional renewable resources that may be required to
meet the RPS, or additional peaking resources that may be needed to meet needs
outlined in PNM's current IRP. In addition to internal cash generation, the
Company anticipates that it will be necessary to obtain additional long-term
financing in the form of debt refinancing, new debt issuances, and/or new equity
in order to fund its capital requirements through 2016. The Company currently
believes that its internal cash generation, existing credit arrangements, and
access to public and private capital markets will provide sufficient resources
to meet the Company's capital requirements.
67--------------------------------------------------------------------------------
Table of Contents
RESULTS OF OPERATIONS
Segment Information
The following discussion is based on the segment methodology that PNMR's
management uses for making operating decisions and assessing performance of its
various business activities. See Note 2 for more information on PNMR's operating
segments.
The following discussion and analysis should be read in conjunction with the
Condensed Consolidated Financial Statements and Notes thereto. Trends and
contingencies of a material nature are discussed to the extent known. Refer also
to Disclosure Regarding Forward Looking Statements and to Part II, Item 1A. Risk
Factors.
PNM Electric
The following table summarizes the operating results for PNM Electric:
Three Months Ended September 30, Nine Months Ended September 30,
2012 2011 Change 2012 2011 Change
(In millions)
Electric operating revenues $ 321.7 $ 323.8 $ (2.1 ) $ 832.2 $ 797.2 $ 35.0
Cost of energy 99.2 108.7 (9.5 ) 263.0 279.4 (16.4 )
Margin 222.5 215.1 7.4 569.2 517.8 51.4
Operating expenses 101.1 102.1 (1.0 ) 311.5 329.5 (18.0 )
Depreciation and amortization 24.4 25.1 (0.6 ) 72.0 71.7 0.3
Operating income 97.0 87.9 9.1 185.7 116.6 69.1
Other income (deductions) 8.4 (1.8 ) 10.2 19.1 16.2 3.0
Net interest charges (19.2 ) (18.5 ) (0.7 ) (56.7 ) (54.6 ) (2.1 )
Earnings before income taxes 86.1 67.6 18.5 148.2 78.2 70.0
Income (taxes) (31.2 ) (25.1 ) (6.2 ) (51.9 ) (26.6 ) (25.4 )
Valencia non-controlling interest (4.0 ) (4.1 ) 0.1 (10.7 ) (10.8 ) 0.1
Preferred stock dividend requirements (0.1 ) (0.1 ) - (0.4 ) (0.4 ) -
Segment earnings $ 50.8 $ 38.3 $ 12.5 $ 85.2 $ 40.5 $ 44.7
The following table summarizes the significant changes to electric operating
revenues, cost of energy, and margin:
2011/2012 Change
Three Months Ended September 30, Nine Months Ended September 30,
Electric Electric
Operating Cost of Operating Cost of
Revenues Energy Margin Revenues Energy Margin
(In millions)
Retail rate increases $ 5.6 $ - $ 5.6 $ 40.3 $ - $ 40.3
Wholesale rate increases 1.4 - 1.4 2.8 - 2.8
Retail load, fuel, and transmission (11.7 ) (9.1 ) (2.6 ) (13.7 ) (17.4 ) 3.7
Energy efficiency rider 7.2 - 7.2 17.1 - 17.1
Renewable energy rider 1.5 0.6 0.9 1.5 0.6 0.9
Unregulated margin (1.4 ) (0.1 ) (1.3 ) (5.5 ) 0.7 (6.2 )
Net unrealized economic hedges (4.7 ) (0.9 ) (3.8 ) (7.5 ) (0.3 ) (7.2 )
Net change $ (2.1 ) $ (9.5 ) $ 7.4 $ 35.0 $ (16.4 ) $ 51.4
68--------------------------------------------------------------------------------
Table of Contents
The following table shows electric operating revenues by customer class and
average number of customers:
Three Months Ended September 30, Nine Months Ended September 30,
2012 2011 Change 2012 2011 Change
(In millions, except customers)
Residential $ 126.1 $ 124.8 $ 1.3 $ 318.9 $ 291.4 $ 27.5
Commercial 120.4 115.7 4.7 317.1 287.8 29.3
Industrial 29.4 28.0 1.4 77.6 71.3 6.3
Public authority 8.1 7.4 0.7 19.3 17.8 1.5
Other retail 2.3 2.7 (0.4 ) 9.5 7.3 2.2
Transmission 10.8 14.3 (3.5 ) 29.3 35.3 (6.0 )
Firm requirements wholesale 10.5 8.1 2.4 28.8 25.1 3.7
Other sales for resale 15.8 19.8 (4.0 ) 35.4 57.4 (22.0 )
Mark-to-market activity (1.7 ) 3.0 (4.7 ) (3.7 ) 3.8 (7.5 )
$ 321.7 $ 323.8 $ (2.1 ) $ 832.2 $ 797.2 $ 35.0
Average retail customers
(thousands) 505.6 503.8 1.8 505.3 503.7 1.6
The following table shows GWh sales by customer class:
Three Months Ended September 30, Nine Months Ended September 30,
2012 2011 Change 2012 2011 Change
Residential 975.7 1,006.0 (30.3 ) 2,573.3 2,587.2 (13.9 )
Commercial 1,103.5 1,130.0 (26.5 ) 3,064.1 3,060.2 3.9
Industrial 471.6 429.4 42.2 1,313.0 1,187.8 125.2
Public authority 84.0 84.1 (0.1 ) 211.1 214.1 (3.0 )
Firm requirements wholesale 162.0 154.6 7.4 485.8 481.0 4.8
Other sales for resale 536.9 580.4 (43.5 ) 1,263.4 1,709.9 (446.5 )
3,333.7 3,384.5 (50.8 ) 8,910.7 9,240.2 (329.5 )
On August 21, 2011, PNM implemented a $72.1 million annual non-fuel rate
increase for its retail customers. This rate increase improved revenues and
margin by $5.6 million and $40.3 million for the three and nine months ended
September 30, 2012. Lower retail loads, driven by weather, reduced revenues and
margin for the three and nine months ended September 30, 2012 by $4.7 million
and $0.8 million, as milder weather in the third quarter was partially offset by
warmer weather in the second quarter. The average number of retail customers and
usage per customer have stayed relatively flat during 2012. The increase in fuel
costs and the reduction in off-system sales volumes resulting from the fire
incident at the mine providing coal to SJGS are recovered through PNM's FPPAC
and did not negatively impact 2012 results. See Note 9 for more discussion on
the SJGS mine fire incident.
PNM implemented new rates, subject to refund, for one of its firm-requirements
wholesale customers in April 2012, which improved revenues and margin by $1.4
million and $2.8 million for the three and nine months ended September 30, 2012.
See Note 10.
PNM offers several energy efficiency programs and initiatives to its retail
customers regulated by the NMPRC. In addition, PNM is allowed to earn adders on
these programs, based on energy savings of the programs. PNM recovers these
energy efficiency program costs via a rate rider. For the three and nine months
ended September 30, 2012, revenues and margin improved by $7.2 million and $17.1
million, of which $0.3 million and $0.8 million is adder revenues and the
remaining $6.9 million and $16.3 million is offset by an increase in operating
expense for energy efficiency program costs.
On August 20, 2012, PNM implemented its renewable energy rider, a mechanism
approved by NMPRC, which will recover renewable energy procurement costs,
including the investment in and an allowed return on the 22 MW PNM-owned solar
PV facilities incurred to meet PNM's RPS. See Note 10. For the three and nine
months ended September 30, 2012, PNM revenues
69--------------------------------------------------------------------------------
Table of Contents
increased by $1.5 million and cost of energy for the purchase of RECs increased
by $0.6 million. Revenues included a return on investment of $0.3 million and
the remaining revenues recover renewable energy operating expenses and
depreciation.
For the three and nine months ended September 30, 2012, lower unregulated
revenues of $1.4 million and $5.5 million and margin of $1.3 million and $6.2
million resulted from lower market power prices on sales from and increases in
nuclear fuel costs associated with PNM's share of PVNGS Unit 3, which is
excluded from retail regulation.
Changes in unrealized mark-to-market gains and losses are based on economic
hedges in place for sales and fuel costs not covered under the FPPAC, primarily
associated with PVNGS Unit 3. Unrealized losses of $1.1 million for the three
months ended September 30, 2012 compared to unrealized gains of $2.7 million for
the three months ended September 30, 2011, decreased margin by $3.8 million.
Unrealized losses of $3.1 million for the nine months ended September 30, 2012
compared to unrealized gains of $4.1 million for the nine months ended September
30, 2011, decreased margin by $7.2 million.
For the three months ended September 30, 2012, operating expenses decreased by
$1.0 million. For the nine months ended September 30, 2012, operating expenses
decreased by $18.0 million, primarily due to a regulatory disallowance of $17.5
million recorded in the second quarter of 2011. See Note 17 of the Notes to
Consolidated Financial Statements in the 2011 Annual Reports on Form 10-K. PNM
incurred $1.0 million and $2.7 million in the three and nine months ended
September 30, 2011 to implement several process improvement activities, which
did not recur in 2012 resulting in lower operating expenses. The benefits of
these process improvement initiatives and labor savings further reduced
operating expenses by $3.0 million and $4.9 million for the three and nine
months ended September 30, 2012. Lower incentive compensation of $1.8 million
and $1.9 million reduced operating expenses for the three and nine months ended
September 30, 2012. Adjustments of $4.4 million and $6.1 million for additional
taxes other than income, primarily gross receipts taxes, were recorded in the
three and nine months ended September 30, 2011 with no such adjustments recorded
in 2012, resulted in reduced operating expenses in 2012 compared to 2011. For
the nine months ended September 30, 2012, improved plant performance at SJGS and
PVNGS reduced maintenance expenses by $2.4 million compared to 2011. Also, the
timing of a planned outage at a gas facility in 2011 of $1.4 million and lower
vegetation management costs of $1.0 million reduced expenses for the nine months
ended September 30, 2012. For the three and nine months ended September 30,
2012, these savings were offset by increases of $6.9 million and $16.3 million
of energy efficiency program costs, which are recovered through revenues
discussed above.
For the three months ended September 30, 2012, other income (deductions) was
$10.2 million higher than 2011, primarily related to improved performance of the
NDT assets of $10.8 million. PNM incurred net losses, including impairments of
the NDT investments of $4.1 million, in the third quarter of 2011, compared to
net gains of $5.7 million in the third quarter 2012. In addition, the equity
portion of AFUDC of $0.9 million improved other income. For the nine months
ended September 30, 2012, other income (deductions) was $3.0 million higher,
primarily related to improved performance of the NDT assets of $2.8 million,
higher equity portion of AFUDC of $3.0 million, offset by lower interest income
on the PVNGS lessor notes of $2.1 million due to lower outstanding balances.
For the three and nine months ended September 30, 2012, interest expense
increased $2.2 million and $6.6 million due to the issuance of $160.0 million of
5.35% long-term debt in October 2011, which increases were partially offset by
$0.5 million and $2.0 million increases in the debt portion of AFUDC and $0.7
million and $2.8 million of interest charges on PNM's investment in renewable
resources that are deferred for recovery through the renewable energy rider. As
discussed above, PNM implemented its renewable energy rider in August 2012 and
interest costs associated with its investment in renewable energy are included
in amounts being recovered through the rider.
70--------------------------------------------------------------------------------
Table of Contents
TNMP Electric
The following table summarizes the operating results for TNMP Electric:
Three Months Ended September 30, Nine Months Ended September 30,
2012 2011 Change 2012 2011 Change
(In millions)
Total electric operating
revenues $ 68.7 $ 67.0 $ 1.7 $ 187.4 $ 180.8 $ 6.6
Cost of energy 11.6 10.3 1.3 34.3 30.7 3.6
Margin 57.1 56.7 0.4 153.1 150.1 3.0
Operating expenses 22.3 22.5 (0.1 ) 64.2 67.4 (3.2 )
Depreciation and
amortization 13.8 12.7 1.1 37.2 33.7 3.5
Operating income 21.0 21.6 (0.6 ) 51.7 49.0 2.7
Other income (deductions) 0.4 0.3 0.1 1.2 0.9 0.4
Net interest charges (7.0 ) (7.3 ) 0.2 (21.2 ) (21.9 ) 0.7
Earnings before income
taxes 14.3 14.6 (0.3 ) 31.7 28.0 3.7
Income (taxes) (5.2 ) (5.7 ) 0.5 (11.6 ) (10.8 ) (0.7 )
Segment earnings $ 9.1 $ 8.9 $ 0.2 $ 20.1 $ 17.1 $ 3.0
The following table summarizes the significant changes to total electric
operating revenues, cost of energy, and margin:
2011/2012 Change
Three Months Ended September 30, Nine Months Ended September 30,
Electric Electric
Operating Cost of Operating Cost of
Revenues Energy Margin Revenues Energy Margin
(In millions)
Rate increases $ - $ - $ - $ 0.7 $ - $ 0.7
Customer usage/load (1.1 ) - (1.1 ) (2.6 ) - (2.6 )
Transmission cost recovery 1.4 1.3 0.1 3.4 3.6 (0.2 )
AMS surcharge 2.1 - 2.1 5.4 - 5.4
Other (0.7 ) - (0.7 ) (0.3 ) - (0.3 )
Net change $ 1.7 $ 1.3 $ 0.4 $ 6.6 $ 3.6 $ 3.0
The following table shows total electric operating revenues by retail tariff
consumer class, including intersegment revenues, and average number of
consumers:
Three Months Ended September 30, Nine Months Ended September 30,
2012 2011 Change 2012 2011 Change
(In millions, except consumers)
Residential $ 33.2 $ 34.5 $ (1.3 ) $ 79.9 $ 77.8 $ 2.1
Commercial 22.7 21.7 1.0 65.1 62.0 3.1
Industrial 3.2 3.3 (0.1 ) 10.1 9.5 0.6
Other 9.6 7.5 2.1 32.3 31.5 0.8
$ 68.7 $ 67.0 $ 1.7 $ 187.4 $ 180.8 $ 6.6
Average consumers
(thousands) (1) 233.6 232.2 1.4 232.7 231.3 1.4
(1) TNMP provides transmission and distribution services to REPs that
provide electric service to consumers in TNMP's service territories.
The number of consumers above represents the customers of these REPs.
Under TECA, consumers in Texas have the ability to choose any REP to
provide energy. The average consumers reported above include
71--------------------------------------------------------------------------------
Table of Contents
66,273 and 67,549 consumers for the three and nine months ended September 30,
2011, who had chosen First Choice as their REP. These consumers are also
included as customers in the First Choice segment.
The following table shows GWh sales by retail tariff consumer class:
Three Months Ended September 30, Nine Months Ended September 30,
2012 2011 Change 2012 2011 Change
Residential 930.4 1,015.0 (84.6 ) 2,173.4 2,319.4 (146.0 )
Commercial 692.5 703.7 (11.2 ) 1,796.7 1,825.7 (29.0 )
Industrial 695.4 675.2 20.2 2,025.6 1,931.1 94.5
Other 26.5 28.7 (2.2 ) 78.0 82.5 (4.5 )
2,344.8 2,422.6 (77.8 ) 6,073.7 6,158.7 (85.0 )
(1) The GWh sales reported above include 324.1 and 775.3 GWhs for the three
and nine months ended September 30, 2011 used by consumers who had
chosen First Choice as their REP. These GWhs are also included below in
the First Choice segment.
For the three months ended September 30, 2012, temperatures were cooler compared
to the extremely warm summer in 2011 reducing revenues and margin. The
reductions in revenues and margin were partially offset by an increase in the
average number of consumers and higher usage per consumer, excluding impacts
from weather. For the nine months ended September 30, 2012, milder weather
compared to 2011, also reduced revenues and margin. An increase in the number of
consumers, increased usage per consumer, and an increase in rates partially
offset the weather impacts. For the three and nine months ended September 30,
2012, the AMS surcharge improved revenues and margin by $2.1 million and $5.4
million, including a return on investment of $0.2 million and $0.8 million. The
remaining surcharge revenues offset increases in operating expenses and
depreciation. On September 27, 2012, TNMP implemented a $2.5 million annual
increase in its transmission cost of service rates to recover additional
investment in transmission plant and associated costs. See Note 10.
For the three months ended September 30, 2012, savings from process improvement
initiatives and labor efficiencies of $1.0 million reduced operating expenses.
These reductions are offset by $1.1 million costs associated with the
implementation of AMS, which are recovered via the surcharge described above.
For the nine months ended September 30, 2012, operating expenses are lower
compared to the same period in 2011, primarily due to a regulatory disallowance
of $3.9 million recorded in the second quarter of 2011. See Note 10. In
addition, operating expenses for the nine months ended September 30, 2012
reflect reductions due to process improvement initiatives and labor efficiencies
of $2.6 million and lower maintenance costs of $1.1 million due to a spike in
reliability related costs caused by severe drought conditions in 2011. An
increase of $2.1 million of AMS related costs, which are recovered via a
surcharge, offset these savings.
Increases in depreciation and amortization expenses for the three and nine
months ended September 30, 2012 are mainly due to the AMS investment, which is
recovered through the surcharge discussed above. In addition, increases in
transmission plant also increased depreciation expense.
Interest expense decreased in 2012 as a result of TNMP refinancing its term loan
in September 2011.
72
--------------------------------------------------------------------------------
Table of Contents
First Choice
As discussed in Note 14, PNMR sold First Choice on November 1, 2011. The table
below summarizes the operating results for First Choice for the three and nine
months ended September 30, 2011:
Three Months Ended Nine Months Ended
September 30, 2011 September 30, 2011
(In millions)
Total electric operating revenues $ 171.0 $ 405.5
Cost of energy 144.0 303.3
Margin 27.0 102.2
Operating expenses 25.1 67.7
Depreciation and amortization 0.3 1.0
Operating income 1.5 33.5
Other income (deductions) (0.1 ) (0.4 )
Net interest charges (0.2 ) (0.5 )
Earnings before income taxes 1.2 32.6
Income (taxes) (0.6 ) (11.8 )
Segment earnings $ 0.6 $ 20.7
The following table shows total electric operating revenues by customer class
and actual number of customers:
Three Months Ended Nine Months Ended
September 30, 2011 September 30, 2011
(In millions, except customers)
Residential $ 104.2 $ 241.9
Commercial 62.5 152.2
Other 4.3 11.4
$ 171.0 $ 405.5
Actual customers (thousands) (1,2) 223.1 223.1
(1) See note above in the TNMP Electric segment discussion about the impact
of TECA.
(2) Due to the competitive nature of First Choice's business, actual
customer counts are presented in the table above as a more
representative business indicator than the average consumers that are
shown in the table for TNMP.
The following table shows GWh electric sales by customer class(1):
Three Months Ended Nine Months Ended
September 30, 2011 September 30, 2011
Residential 812.8 1,871.5
Commercial 569.5 1,397.8
1,382.3 3,269.3
(1) See note above in the TNMP Electric segment discussion about the impact
of TECA.
During the three and nine months ended September 30, 2011, favorable weather and
increases in both MWh sales and number of customers, which were partially offset
by a decrease in average revenue rates, favorably impacted operating revenues.
Due to extreme temperatures during the three months ended September 30, 2011,
First Choice incurred significantly higher purchased power costs per MWh which
negatively impacted the total amount of cost of energy.
First Choice managed its exposure to fluctuations in market energy prices by
matching sales contracts with supply instruments designed to preserve targeted
margin. Accordingly, First Choice had forward contracts for the purchase of
energy to cover the future load requirements for most of its fixed price sales
contracts. Gains or losses on unrealized economic hedges
73--------------------------------------------------------------------------------
Table of Contents
represent changes in unrealized fair value estimates related to these forward
supply contracts. Changes in the fair value of supply contracts that were not
designated or were not eligible for hedge or normal purchase or sales
accounting were marked to market through current period earnings as required by
GAAP. During 2011, market energy prices increased, which resulted in unrealized
mark-to-market gains on certain of First Choice's forward supply contracts.
First Choice was not required to mark the related fixed price sales contracts to
market, which would likely show offsetting gains and losses as market energy
prices fluctuate. Gains on unrealized economic hedges increased segment earnings
by $1.7 million in the nine months ended September 30, 2011.
The allowance for uncollectible accounts and related bad debt expense was based
on collections and write-off experience. Lower customer departures, lower
default rates, and an increase in commercial customers reduced bad debts in 2011
compared to previous years. Initiatives to reduce bad debts included efforts to
reduce the default rate experienced for customers switching to another REP and
increased focus on identifying new customer prospects that were more likely to
demonstrate desired payment behavior. First Choice focused its marketing efforts
on commercial customers and customers with established payment patterns. First
Choice also increased the credit score required to become a customer and
expanded the circumstances where customers were required to provide advance
deposits to obtain service, or both. Bad debt expense was $7.6 million and $17.9
million for the three and nine months ended September 30, 2011.
During 2011, increases in marketing and operational costs were partially offset
by a decrease in incentive compensation expense. The increases in operational
costs were primarily related to developing a pre-pay option for customers and
establishing local office locations. Interest expense decreased in 2011
primarily due to lower short-term debt.
Corporate and Other
The table below summarizes the operating results for Corporate and Other:
Three Months Ended September 30, Nine Months Ended September 30,
2012 2011 Change 2012 2011 Change
(In millions)
Total revenues $ - $ (12.2 ) $ 12.2 $ - $ (30.8 ) $ 30.8
Cost of energy - (12.2 ) 12.2 - (30.6 ) 30.6
Margin - - - - (0.1 ) 0.1
Operating expenses (4.8 ) (1.6 ) (3.2 ) (12.7 ) (7.2 ) (5.5 )
Depreciation and
amortization 4.6 4.3 0.3 13.1 12.8 0.3
Operating income
(loss) 0.2 (2.7 ) 2.9 (0.4 ) (5.7 ) 5.3
Other income
(deductions) (0.9 ) (1.7 ) 0.8 (4.9 ) (5.0 ) 0.1
Net interest charges (4.2 ) (5.1 ) 0.9 (12.4 ) (15.2 ) 2.8
Earnings (loss) before
income taxes (4.9 ) (9.6 ) 4.7 (17.8 ) (26.0 ) 8.2
Income (taxes) benefit 2.9 5.4 (2.5 ) 8.9 12.0 (3.1 )
Segment earnings (loss) $ (2.0 ) $ (4.1 ) $ 2.1 $ (8.9 ) $ (14.0 ) $ 5.0
The Corporate and Other segment includes consolidation elimination of revenue
and cost of energy between business segments, primarily related to TNMP's sale
of transmission services to First Choice prior to November 1, 2011, when PNMR
sold First Choice. Accordingly, there was no elimination of intersegment revenue
in 2012.
Operating expense decreased primarily due to legal and consulting expenses
incurred in 2011 related to assessment of strategic alternatives for PNMR's
competitive businesses that did not recur in 2012.
Depreciation expense increased $1.0 million and $2.6 million in the three and
nine months ended September 30, 2012 compared to 2011 due to accelerated
amortization of leasehold improvements for part of its corporate headquarters.
The accelerated amortization is offset by lower depreciation on software
applications of $0.9 million and $2.5 million for the three and nine months
ended September 30, 2012 compared to 2011. Changes in depreciation and
amortization are offset in operating expenses as a result of allocation of these
costs to other business segments. PNM and TNMP defer their allocations of the
accelerated amortization of leasehold improvements as regulatory assets to be
recovered through rates.
74--------------------------------------------------------------------------------
Table of Contents
Other income and deductions increased for the three months ended September 30,
2012 compared to 2011 as a result of recording an additional pre-tax gain of
$1.0 million on the sale of First Choice (Note 14). This gain was offset by
lower performance on other investments for the nine months ended September 30,
2012 compared to 2011.
Interest charges decreased $1.2 million and $3.5 million for the three and nine
months ended September 30, 2012 compared to 2011 due to the re-acquisition of
$50.0 million of PNMR 9.25% senior unsecured notes in November 2011.
[ Back To TMCnet.com's Homepage ]
|
Call Center/CRM
Info Tech 
IP Communications 
Mobile 
Green 
Satellite 
Robotics 
Internet Telephony Magazine
Click here to read latest issue
CUSTOMER 
Cloud Computing Magazine
Click here to read latest issue
M2M Evolution Magazine
