UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
UNITED STATES
|
SECURITIES AND EXCHANGE COMMISSION
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Washington, D.C. 20549 |
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FORM 10-Q
|
(Mark One) |
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
SECURITIES EXCHANGE ACT OF 1934 |
|
For the quarterly period ended June 30, 2006
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- OR -
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE |
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from _______________ to _________________ |
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| | | | |
Commission | | Name of Registrants, State of Incorporation, | | I.R.S. Employer |
File Number | | Address and Telephone Number | | Identification No. |
| 001-32462 | | PNM Resources, Inc. | | 85-0468296 |
| | | (A New Mexico Corporation) | | |
| | | Alvarado Square | | |
| | | Albuquerque, New Mexico 87158 | | |
| | | (505) 241-2700 | | |
| | | | | |
| 001-06986 | | Public Service Company of New Mexico | | 85-0019030 |
| | | (A New Mexico Corporation) | | |
| | | Alvarado Square | | |
| | | Albuquerque, New Mexico 87158 | | |
| | | (505) 241-2700 | | |
| | | | | |
| 002-97230 | | Texas-New Mexico Power Company | | 75-0204070 |
| | | (A Texas Corporation) | | |
| | | 4100 International Plaza, | | |
| | | P.O. Box 2943 | | |
| | | Fort Worth, Texas 76113 | | |
| | | (817) 731-0099 | | |
|
|
Indicate by check mark whether PNM Resources, Inc. (“PNMR”) and Public Service Company of New Mexico (“PNM”) (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) have been subject to such filing requirements for the past 90 days. YES üNO
Indicate by check mark whether Texas-New Mexico Power Company (“TNMP”) (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
YES NO ü
(NOTE: As a voluntary filer, not subject to the filing requirements, TNMP filed all reports under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months.)
Indicate by check mark whether Texas New Mexico Power Company (“TNMP”) (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
YES NOü
(NOTE: As a voluntary filer, not subject to the filing requirements, TNMP filed all reports under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months.)
Indicate by check mark whether PNMR is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act).
Large accelerated filer ü | Accelerated filer | Non-accelerated filer |
Indicate by check mark whether each of PNM and TNMP is a large accelerated filer, accelerated filer, or non-accelerated filer (as defined in Rule 12b-2 of the Act).
Large accelerated filer | Accelerated filer | Non-accelerated filer ü |
Indicate by check mark whether any of the registrants is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES NO ü
As of AugustMay 1, 2006, 69,592,2452007, 76,687,480 shares of common stock, no par value per share, of PNMR were outstanding.
The total number of shares of Common Stockcommon stock of PNM outstanding as of AugustMay 1, 20062007 was 39,117,799 all held by PNMR (and none held by non-affiliates).
The total number of shares of Common Stockcommon stock of TNMP outstanding as of AugustMay 1, 20062007 was 9,6156,358 all held indirectly by PNMR (and none held by non-affiliates).
EXPLANATORY NOTE REGARDING AMENDMENT NO. 1
This Amendment No. 1 to the Quarterly Report on Form 10-Q (“Amendment No. 1”) amends the Registrants’ Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2007, initially filed with the Securities and Exchange Commission ("SEC") on May 10, 2007 (the “Original Filing”).
In 1985 and 1986, PNM, a wholly-owned subsidiary of PNMR, entered into 11 separate transactions through which it sold all of its interest in Units 1 and 2 of the Palo Verde Nuclear Generating Station and related common facilities to institutional investors. At the same time, PNM entered into agreements to lease back the facilities that were sold. These transactions resulted in gains, which in accordance with generally accepted accounting principles (“GAAP”) were deferred and amortized over the lives of the leases, approximately 30 years.
In 1990, the New Mexico Public Service Commission (“NMPSC”), the predecessor to the New Mexico Public Regulation Commission, ordered that the portion of the gain on the sale-leasebacks attributable to PNM’s New Mexico customers was to reduce electric rates over 15 years. Accordingly, under GAAP, the amortization period for the portion of the gain on the sale-leasebacks remaining at that time and attributable to New Mexico customers should have been changed to match the rate-making treatment, which would have resulted in that portion of the gain being completely amortized by 2001. However, PNM continued to amortize the gain over the lives of the leases for financial reporting purposes, which was longer than the 15 years determined by the NMPSC. The portion of the gain not attributable to PNM’s New Mexico customers was not affected by the NMPSC order and has continued to be amortized over the lives of the leases in accordance with GAAP.
Management of PNMR and PNM determined that in accordance with SEC Staff Accounting Bulletin 108 the Original Filing for PNMR and PNM should be restated to correct this error.
The restatement increased the beginning balance of retained earnings for both PNMR and PNM as of January 1, 2004 by $15.5 million and removed the amortization of the portion of the gain attributable to New Mexico customers, which amounts to a $0.3 million decrease in net earnings for the three months ended March 31, 2007 and 2006. The change in net earnings for removed the amortization, which is a non-cash item, is offset by a change in deferred credits and accumulated on the statements of cash flows resulting in no net impact on cash flows from operating activities and does not impact the subtotals of the statements of cash flows. The restatement also impacts the Notes to the Consolidated Financial Statements. Refer to Note 16 to the Consolidated Financial Statements for additional detail on the restatement.
In addition to these items, the following sections of this Form 10-Q/A have been revised to reflect the restatement: Part I – Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations, Item 4 – Controls and Procedures and Part II – Item 6 – Exhibits.
With the exception of the corrections described above, Amendment No. 1 sets forth the Original Filing in its entirety for the convenience of the reader. Amendment No. 1 has been signed as of a current date and all certifications of the Registrants’ Chief Executive Officer and Principal Financial Officer are given as of a current date. This Amendment does not reflect events occurring after the filing of the Original Filing or modify or update the Original Filing in any way other than to correct the items described above.
PNM AND TNMP MEET THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS (H) (1) (a) AND (b) OF FORM 10-Q AND ARE THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION (H) (2).
This Form 10-Q10-Q/A represents separate filings by PNMR, PNM and TNMP. Information herein relating to an individual registrant is filed by that registrant on its own behalf. PNM makes no representations as to the information relating to PNMR and its subsidiaries other than PNM.PNM (and its subsidiary). TNMP makes no representations as to the information relating to PNMR and its subsidiaries other than TNMP.TNMP (and its subsidiaries). When this Form 10-Q10-Q/A is incorporated by reference into any filing with the SEC made by PNM or TNMP, the portions of this Form 10-Q10-Q/A that relate to PNMR and its subsidiaries other than PNM (and its subsidiary) or TNMP (and its subsidiaries), respectively, are not incorporated by reference therein.
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
INDEX
| | Page No. |
GLOSSARY | 1 |
GLOSSARY | 1 |
PART I. FINANCIAL INFORMATION:INFORMATION | |
| |
| ITEM 1. FINANCIAL STATEMENTS (Unaudited) | |
| PNM RESOURCES, INC. AND SUBSIDIARIES | |
PNM Resources, Inc.CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Restated) | 4 |
Three Months Ended March 31, 2007 and Subsidiaries2006 | |
Condensed Consolidated Statements of EarningsCONDENSED CONSOLIDATED BALANCE SHEETS | 5 |
| March 31, 2007 (Restated) and December 31, 2006 | |
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Restated) | 7 |
Three and Six Months Ended June 30,March 31, 2007 and 2006 and 2005 | 3 |
Condensed Consolidated Balance Sheets | |
June 30,CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Restated) | 9 |
| Three Months Ended March 31, 2007 and 2006 | |
| PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY | |
| CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Restated) | 10 |
| Three Months Ended March 31, 2007 and 2006 | |
| CONDENSED CONSOLIDATED BALANCE SHEETS | 11 |
March 31, 2007 (Restated) and December 31, 2005 | 4 |
Condensed Consolidated Statements of Cash Flows2006 | |
SixCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Restated) | 13 |
Three Months Ended June 30,March 31, 2007 and 2006 and 2005 | 6 |
Condensed Consolidated Statements of Comprehensive Income | |
| CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Restated) | 15 |
Three and Six Months Ended June 30,March 31, 2007 and 2006 and 2005 | 8 |
Public Service Company of New Mexico and Subsidiary | |
Condensed Consolidated Statements of EarningsTEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES | |
| CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS | 16 |
Three and Six Months Ended June 30,March 31, 2007 and 2006 and 2005 | 9 |
Condensed Consolidated Balance Sheets | |
June 30, 2006CONDENSED CONSOLIDATED BALANCE SHEETS | 17 |
March 31, 2007 and December 31, 2005 | 10 |
Condensed Consolidated Statements of Cash Flows2006 | |
SixCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | 19 |
Three Months Ended June 30,March 31, 2007 and 2006 and 2005 | 12 |
Condensed Consolidated Statements of Comprehensive Income | |
| CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | 21 |
Three and Six Months Ended June 30,March 31, 2007 and 2006 and 2005 | 14 |
Texas-New Mexico Power Company and Subsidiaries | |
Condensed Consolidated Statements of EarningsNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated) | |
Three and Six Months Ended June 30, 2006 and 2005 | 15 |
Condensed Consolidated Balance Sheets | |
June 30, 2006 and December 31, 2005 | 17 |
Condensed Consolidated Statements of Cash Flows | |
Six Months Ended June 30, 2006 and 2005 | 19 |
Condensed Consolidated Statements of Comprehensive Income | |
Three and Six Months Ended June 30, 2006 and 2005 | 21 |
Notes to Condensed Consolidated Financial Statements | 23 |
| |
| ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION | 68 |
CONDITION AND RESULTS OF OPERATIONS | |
| 58 |
| ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 106 |
| 85 |
| ITEM 4. CONTROLS AND PROCEDURES | 112 |
| 94 |
PART II. OTHER INFORMATION:INFORMATION | |
| |
| ITEM 1. LEGAL PROCEEDINGS | 114 |
| 96 |
| ITEM 1A. RISK FACTORS | 114 |
| |
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | 114 |
| |
ITEM 5. OTHER EVENTS | 114 |
| 96 |
| ITEM 6. EXHIBITS | 115 97 |
SIGNATURE | |
Signature | 11698 |
GLOSSARY
Definitions: | |
| Afton | Afton Generating Station |
| ALJ | Administrative Law Judge |
| Altura | Altura Power L.P. |
APB | Accounting Principles Board |
| APS | Arizona Public Service Company |
| Avistar | Avistar, Inc. |
| BART | Best Available Retrofit Technology |
| Board | Board of Directors of PNMR |
| BTU | British Thermal Unit |
| Cal PX | California Power Exchange |
| Cal ISO | California Independent System Operator |
| Cascade | Cascade Investment, L.L.C. |
| Company | PNM Resources, Inc. and Subsidiaries |
| Constellation | Constellation Energy Commodities Group, Inc. |
DecathermCTC | 1,000,000 BTUsCompetition Transition Charge |
DeltaDecatherm | Delta-Person Limited PartnershipMillion BTUs |
| EaR | Earnings at Risk |
| ECJV | ECJV Holdings, LLC |
| ECMT | EnergyCo Marketing and Trading, LLC |
| EEI | Edison Electric Institute |
| EIP | Eastern Interconnection Project |
| EITF | Emerging Issues Task Force |
| EnergyCo | EnergyCo, LLC, a joint venture between PNMR and ECJV |
| EPA | United States Environmental Protection Agency |
EPE | El Paso Electric Company |
| ERCOT | Electric Reliability Council of Texas |
| ESI | Electric Service Identifier |
| ESPP | Employee Stock Purchase Plan |
| FASB | Financial Accounting Standards Board |
| FCPSP | First Choice Power Special Purpose, L.P. |
Federal Funds Rate | Overnight Rate on Federal funds transactions with members of the Federal Reserve System, as published by the Federal Reserve Bank |
| FERC | Federal Energy Regulatory Commission |
| FIN | FASB Interpretation Number |
| FIP | Federal Implementation Plan |
| First Choice | First Choice Power, L. P. and Subsidiaries |
| Four Corners | Four Corners Power Plant |
| GAAP | Generally Accepted Accounting Principles in the United States of America |
LIBORISO | London Interbank Offered Rate |
Lordsburg | Lordsburg Generating StationIndependent System Operator |
| Luna | Luna Energy Facility |
| MMBTUs | Million British Thermal UnitsBTUs |
Moody'sMoody’s | Moody’s Investor Services, Inc. |
| MW | Megawatt |
| MWh | Megawatt Hour |
| Navajo Acts | Navajo Nation Air Pollution Prevention and Control Act, the Navajo NationSafe Drinking Water Act, and the Navajo Nation Pesticide Act |
| Ninth Circuit | United States Court of Appeals for the Ninth Circuit |
| NMED | New Mexico Environment Department |
| NMPRC | New Mexico Public Regulation Commission |
| NOPR | Notice of Proposed Rulemaking |
| NSPS | New Source Performance Standards |
| NSR | New Source Review |
OASISNYMEX | Open Access Same Time Information SystemNew York Mercantile Exchange |
| OATT | Open Access Transmission Tariff |
OMOI | Office of Market Oversight and Investigation |
| O&M | Operations and Maintenance |
PEP | PNMR Omnibus Performance Equity Plan |
| PGAC | Purchased Gas Adjustment Clause |
| PG&E | Pacific Gas and Electric Co. |
| PNM | Public Service Company of New Mexico and Subsidiary |
| PNM Facility | PNM’s $400 Million Unsecured Revolving Credit Facility |
| PNMR | PNM Resources, Inc. and Subsidiaries |
| PNMR Facility | PNMR’s $600 Million Unsecured Revolving Credit Facility |
| PPA | Power Purchase Agreement |
| PSA | Power Supply Agreement |
| PSD | Prevention of Significant Deterioration |
| PUCT | Public Utility Commission of Texas |
| PVNGS | Palo Verde Nuclear Generating Station |
ReevesREC | Reeves Generating StationRenewable Energy Certificates |
| REP | Retail Electricity Provider |
| RMC | Risk Management Committee |
RMRRRTO | Routine Maintenance, Repair or ReplacementRegional Transmission Organization |
| SDG&E | San Diego Gas and Electric Company |
| SEC | United States Securities and Exchange Commission |
Sempra | Sempra Generation, a subsidiary of Sempra Energy |
SESCO | San Angelo Electric Service Company |
| SFAS | FASB Statement of Financial Accounting Standards |
| SJCC | San Juan Coal Company |
| SJGS | San Juan Generating Station |
| SOAH | State Office of Administrative Hearings |
| S&P | Standard and Poors Ratings Services |
SPS | Southwestern Public Service Company |
TCEQ | Texas Commission on Environmental Quality |
| TECA | Texas Electric Choice Act |
| TNMP | Texas-New Mexico Power Company and Subsidiaries |
| TNP | TNP Enterprises, Inc. and Subsidiaries |
| Throughput | Volumes of gas delivered, whether or not owned by the Company |
| Twin Oaks | Assets of Twin Oaks Power, L.P. and Twin Oaks Power III, L.P. |
| VaR | Value at Risk |
WSPP | Western Systems Power Pool |
Accounting Pronouncements, (as amended): |
| EITF 03-11 | EITF Issue No. 03-11 “Reporting Realized Gains and Losses on Derivative Instruments that are Subject to FASB Statement No. 133 and Not Held for Trading Purposes” |
| EITF 03-13 | EITF Issue No. 03-13 “Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report Discontinued Operations“ |
| FIN 48 | FIN No. 48 “Accounting for Uncertainty in Income Taxes” |
| SAB 108 | SEC Staff Accounting Bulletin No. 108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” |
| SFAS 5 | SFAS No. 5 “Accounting for Contingencies” |
| SFAS 57 | SFAS No. 57 “Related Party Disclosures” |
| SFAS 71 | SFAS No. 71 “Accounting for Effects of Certain Types of Regulation” |
| SFAS 128 | SFAS No. 128 “Earnings per Share” |
| SFAS 133 | SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” |
| SFAS 141 | SFAS No. 141 “Business Combinations” |
| SFAS 144 | SFAS No.144 “Accounting for the Impairment or Disposal of Long-Lived Assets” |
| SFAS 149 | SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PNM RESOURCES, INC. AND SUBSIDIARIES
| | | Three Months Ended | | Six Months Ended | |
| | | June 30, | | June 30, | |
| | | 2006 | | 2005 | | 2006 | | 2005 | |
| | | (In thousands, except per share amounts) | |
Operating Revenues: | | | | | | | | | | | | | |
| Electric | | $ | 477,603 | | $ | 322,676 | | $ | 925,819 | | $ | 585,119 | |
| Gas | | | 68,869 | | | 82,261 | | | 276,345 | | | 247,494 | |
| Other | | | 197 | | | 317 | | | 306 | | | 554 | |
| Total operating revenues | | | 546,669 | | | 405,254 | | | 1,202,470 | | | 833,167 | |
| | | | | | | | | | | | | | |
Operating Expenses: | | | | | | | | | | | | | |
| Cost of energy sold | | | 306,500 | | | 238,191 | | | 732,472 | | | 485,669 | |
| Administrative and general | | | 66,311 | | | 52,786 | | | 131,616 | | | 94,095 | |
| Energy production costs | | | 43,714 | | | 39,805 | | | 81,301 | | | 75,838 | |
| Depreciation and amortization | | | 37,953 | | | 35,637 | | | 72,283 | | | 64,464 | |
| Transmission and distribution costs | | | 21,314 | | | 15,051 | | | 40,364 | | | 29,113 | |
| Taxes, other than income taxes | | | 18,261 | | | 10,571 | | | 35,225 | | | 19,442 | |
| Income taxes | | | 6,190 | | | (3,367 | ) | | 16,437 | | | 10,024 | |
| Total operating expenses | | | 500,243 | | | 388,674 | | | 1,109,698 | | | 778,645 | |
| Operating income | | | 46,426 | | | 16,580 | | | 92,772 | | | 54,522 | |
| | | | | | | | | | | | | | |
Other Income and Deductions: | | | | | | | | | | | | | |
| Interest income | | | 8,916 | | | 11,622 | | | 19,067 | | | 20,922 | |
| Other income | | | 1,922 | | | 2,634 | | | 5,089 | | | 6,344 | |
| Carrying charges on regulatory assets | | | 2,004 | | | 525 | | | 3,977 | | | 525 | |
| Other deductions | | | (2,497 | ) | | (1,542 | ) | | (4,013 | ) | | (3,678 | ) |
| Other income taxes | | | (3,834 | ) | | (4,677 | ) | | (8,935 | ) | | (8,561 | ) |
| Net other income and deductions | | | 6,511 | | | 8,562 | | | 15,185 | | | 15,552 | |
| | | | | | | | | | | | | | |
Interest Charges | | | 36,498 | | | 21,533 | | | 65,061 | | | 35,824 | |
| | | | | | | | | | | | | | |
Preferred Stock Dividend Requirements of | | | | | | | | | | | | | |
Subsidiary | | | 132 | | | 2,068 | | | 264 | | | 2,200 | |
| | | | | | | | | | | | | | |
Net Earnings | | $ | 16,307 | | $ | 1,541 | | $ | 42,632 | | $ | 32,050 | |
| | | | | | | | | | | | | | |
Net Earnings per Common Share (see Note 5): | | | | | | | | | | | | | |
Basic | | $ | 0.24 | | $ | 0.02 | | $ | 0.62 | | $ | 0.51 | |
| | | | | | | | | | | | | | |
Diluted | | $ | 0.23 | | $ | 0.02 | | $ | 0.61 | | $ | 0.50 | |
| | | | | | | | | | | | | | |
Dividends Declared per Common Share | | $ | 0.22 | | $ | 0.19 | | $ | 0.44 | | $ | 0.37 | |
| | | | | | | | | | | | | | |
| The accompanying notes, as they relate to PNMR, are an integral part of these financial statements. |
| | | Three Months Ended March 31, | |
| | | 2007 | | | 2006 | |
| | | (As Restated, | | | (As Restated, | |
| | | See Note 16) | | | See Note 16) | |
| | | (In thousands, except share information) | |
Operating Revenues: | | | | | | |
| Electric | | $ | 436,807 | | | $ | 448,216 | |
| Gas | | | 216,484 | | | | 207,476 | |
| Other | | | 210 | | | | 109 | |
| Total operating revenues | | | 653,501 | | | | 655,801 | |
| | | | | | | | | |
Operating Expenses: | | | | | | | | |
| Cost of energy sold | | | 378,520 | | | | 425,972 | |
| Administrative and general | | | 71,206 | | | | 65,305 | |
| Energy production costs | | | 47,824 | | | | 37,911 | |
| Depreciation and amortization | | | 40,442 | | | | 34,330 | |
| Transmission and distribution costs | | | 22,567 | | | | 19,050 | |
| Taxes other than income taxes | | | 18,620 | | | | 16,964 | |
| Income taxes | | | 13,948 | | | | 10,247 | |
| Total operating expenses | | | 593,127 | | | | 609,779 | |
| Operating income | | | 60,374 | | | | 46,022 | |
| | | | | | | | | |
Other Income and Deductions: | | | | | | | | |
| Interest income | | | 10,788 | | | | 10,151 | |
| Gains on investment securities | | | 70 | | | | 966 | |
| Other income | | | 2,012 | | | | 2,201 | |
| Equity in net loss of EnergyCo | | | (662 | ) | | | - | |
| Carrying charges on regulatory assets | | | - | | | | 1,973 | |
| Other deductions | | | (987 | ) | | | (1,516 | ) |
| Other income taxes | | | (3,950 | ) | | | (5,101 | ) |
| Net other income and deductions | | | 7,271 | | | | 8,674 | |
| Earnings before interest charges | | | 67,645 | | | | 54,696 | |
| | | | | | | | | |
Interest Charges : | | | | | | | | |
| Interest on long-term debt | | | 24,009 | | | | 22,531 | |
| Other interest charges | | | 13,838 | | | | 6,032 | |
| Total interest charges | | | 37,847 | | | | 28,563 | |
| | | | | | | | | |
Preferred Stock Dividend Requirements of Subsidiary | | | 132 | | | | 132 | |
| | | | | | | | | |
Net Earnings | | $ | 29,666 | | | $ | 26,001 | |
| | | | | | | | | |
Net Earnings per Common Share (see Note 5): | | | | | | | | |
| Basic | | $ | 0.39 | | | $ | 0.38 | |
| Diluted | | $ | 0.38 | | | $ | 0.37 | |
Dividends Declared per Common Share | | $ | 0.23 | | | $ | 0.22 | |
The accompanying notes, as they relate to PNMR, are an integral part of these condensed consolidated financial statements.
PNM RESOURCES, INC. AND SUBSIDIARIES | |
CONDENSED CONSOLIDATED BALANCE SHEETS | |
| (Unaudited) | |
| | |
| | | June 30, | | December 31, | |
| | | 2006 | | 2005 | |
| | | (In thousands) | |
ASSETS | | | | | |
Utility Plant: | | | | | |
| Electric plant in service | | $ | 4,020,138 | | $ | 3,315,642 | |
| Gas plant in service | | | 728,494 | | | 711,823 | |
| Common plant in service and plant held for future use | | | 144,764 | | | 135,849 | |
| | | | 4,893,396 | | | 4,163,314 | |
| Less accumulated depreciation and amortization | | | 1,428,793 | | | 1,374,599 | |
| | | | 3,464,603 | | | 2,788,715 | |
| Construction work in progress | | | 144,514 | | | 168,195 | |
| Nuclear fuel, net of accumulated amortization of $13,758 and $14,679 | | | 28,086 | | | 27,182 | |
| | | | | | | | |
| Net utility plant | | | 3,637,203 | | | 2,984,092 | |
| | | | | | | | |
Other Property and Investments: | | | | | | | |
| Investment in lessor notes | | | 271,000 | | | 286,678 | |
| Other investments | | | 137,020 | | | 180,013 | |
| Non-utility property, net of accumulated depreciation of $2,372 and $22 | | | 7,898 | | | 4,214 | |
| | | | | | | | |
| Total other property and investments | | | 415,918 | | | 470,905 | |
| | | | | | | | |
Current Assets: | | | | | | | |
| Cash and cash equivalents | | | 73,890 | | | 68,199 | |
| Special deposits | | | 5,159 | | | 534 | |
| Accounts receivable, net of allowance for uncollectible accounts of $4,856 and $3,653 | | | 127,726 | | | 128,834 | |
| Unbilled revenues | | | 100,900 | | | 151,773 | |
| Other receivables | | | 64,296 | | | 64,285 | |
| Inventories | | | 60,547 | | | 52,037 | |
| Regulatory assets | | | 830 | | | 28,058 | |
| Other current assets | | | 108,087 | | | 102,577 | |
| | | | | | | | |
| Total current assets | | | 541,435 | | | 596,297 | |
| | | | | | | | |
Deferred Charges: | | | | | | | |
| Regulatory assets | | | 357,106 | | | 347,279 | |
| Prepaid pension cost | | | 93,471 | | | 91,444 | |
| Goodwill | | | 495,441 | | | 499,155 | |
| Other intangible assets, net of accumulated amortization of $1,397 and $742 | | | 102,857 | | | 78,512 | |
| Other deferred charges | | | 94,112 | | | 57,025 | |
| | | | | | | | |
| Total deferred charges | | | 1,142,987 | | | 1,073,415 | |
| | | $ | 5,737,543 | | $ | 5,124,709 | |
| |
| The accompanying notes, as they relate to PNMR, are an integral part of these financial statements. |
PNM RESOURCES, INC. AND SUBSIDIARIES | |
CONDENSED CONSOLIDATED BALANCE SHEETS | |
| (Unaudited) | |
| | | | |
| | | June 30, | | December 31, | |
| | | 2006 | | 2005 | |
| | | (In thousands) | |
CAPITALIZATION AND LIABILITIES | | | | | |
Capitalization: | | | | | |
| Common stockholders’ equity: | | | | | |
| Common stock outstanding (no par value, 120,000,000 shares authorized: issued | | | | | |
| 69,216,719 and 68,786,286 at June 30, 2006 and December 31, 2005, respectively) | | $ | 826,899 | | $ | 813,425 | |
| Accumulated other comprehensive loss, net of tax | | | (99,168 | ) | | (91,589 | ) |
| Retained earnings | | | 592,115 | | | 564,623 | |
| | | | | | | | |
| Total common stockholders’ equity | | | 1,319,846 | | | 1,286,459 | |
| Cumulative preferred stock of subsidiary without mandatory redemption | | | | | | | |
| ($100 stated value, 10,000,000 shares authorized: issued 115,293 at | | | | | | | |
| June 30, 2006 and December 31, 2005) | | | 11,529 | | | 11,529 | |
| Long-term debt | | | 1,743,555 | | | 1,746,395 | |
| | | | | | | | |
| Total capitalization | | | 3,074,930 | | | 3,044,383 | |
| | | | | | | | |
Current Liabilities: | | | | | | | |
| Short-term debt | | | 842,500 | | | 332,200 | |
| Accounts payable | | | 136,504 | | | 206,648 | |
| Accrued interest and taxes | | | 63,720 | | | 27,815 | |
| Regulatory liabilities | | | 1,600 | | | 7,085 | |
| Other current liabilities | | | 259,554 | | | 149,748 | |
| | | | | | | | |
| Total current liabilities | | | 1,303,878 | | | 723,496 | |
| | | | | | | | |
Long-Term Liabilities: | | | | | | | |
| Accumulated deferred income taxes | | | 433,049 | | | 451,263 | |
| Accumulated deferred investment tax credits | | | 31,989 | | | 33,806 | |
| Regulatory liabilities | | | 395,000 | | | 402,253 | |
| Asset retirement obligations | | | 58,175 | | | 55,646 | |
| Accrued pension liability and postretirement benefit cost | | | 223,930 | | | 227,202 | |
| Other deferred credits | | | 216,592 | | | 186,660 | |
| | | | | | | | |
| Total long-term liabilities | | | 1,358,735 | | | 1,356,830 | |
| | | | | | | | |
| Commitments and Contingencies (see Note 9) | | | - | | | - | |
| | | $ | 5,737,543 | | $ | 5,124,709 | |
| | | | | | | | |
| The accompanying notes, as they relate to PNMR, are an integral part of these financial statements. |
PNM RESOURCES, INC. AND SUBSIDIARIES
(Unaudited)
| | | March 31, | | | December 31, | |
| | | 2007 | | | 2006 | |
| | | (As Restated, | | | | |
| | | See Note 16) | | | | |
| | | (In thousands) | |
| | | | | | | |
ASSETS | | | | | | |
Utility Plant: | | | | | | |
| Electric plant in service | | $ | 4,278,802 | | | $ | 4,263,068 | |
| Gas plant in service | | | 732,152 | | | | 721,168 | |
| Common plant in service and plant held for future use | | | 159,925 | | | | 157,064 | |
| | | | 5,170,879 | | | | 5,141,300 | |
| Less accumulated depreciation and amortization | | | 1,668,056 | | | | 1,639,156 | |
| | | | 3,502,823 | | | | 3,502,144 | |
| Construction work in progress | | | 262,850 | | | | 230,871 | |
| Nuclear fuel, net of accumulated amortization of $17,296 and $14,008 | | | 32,610 | | | | 28,844 | |
| | | | | | | | | |
| Net utility plant | | | 3,798,283 | | | | 3,761,859 | |
| | | | | | | | | |
Other Property and Investments: | | | | | | | | |
| Investment in PVNGS lessor notes | | | 245,356 | | | | 257,659 | |
| Investment in EnergyCo | | | 1,838 | | | | - | |
| Other investments | | | 177,759 | | | | 169,720 | |
| Non-utility property, net of accumulated depreciation of $2,967 and $2,812 | | | 7,307 | | | | 7,565 | |
| | | | | | | | | |
| Total other property and investments | | | 432,260 | | | | 434,944 | |
| | | | | | | | | |
Current Assets: | | | | | | | | |
| Cash and cash equivalents | | | 44,986 | | | | 123,419 | |
| Special deposits | | | 818 | | | | 5,146 | |
| Accounts receivable, net of allowance for uncollectible accounts of $6,792 and $6,899 | | | 199,719 | | | | 168,126 | |
| Unbilled revenues | | | 82,482 | | | | 116,878 | |
| Other receivables | | | 73,396 | | | | 73,744 | |
| Inventories | | | 69,712 | | | | 63,329 | |
| Regulatory assets | | | 2,833 | | | | 17,507 | |
| Derivative instruments | | | 54,290 | | | | 59,312 | |
| Income taxes receivable | | | 61,526 | | | | 65,210 | |
| Other current assets | | | 62,820 | | | | 63,414 | |
| | | | | | | | | |
| Total current assets | | | 652,582 | | | | 756,085 | |
| | | | | | | | | |
Deferred Charges: | | | | | | | | |
| Regulatory assets | | | 547,084 | | | | 553,564 | |
| Pension asset | | | 9,508 | | | | 8,853 | |
| Goodwill | | | 494,513 | | | | 495,738 | |
| Other intangible assets, net of accumulated amortization of $2,380 and $2,052 | | | 101,874 | | | | 102,202 | |
| Derivative instruments | | | 22,897 | | | | 39,886 | |
| Other deferred charges | | | 73,401 | | | | 77,703 | |
| | | | | | | | | |
| Total deferred charges | | | 1,249,277 | | | | 1,277,946 | |
| | | | | | | | | |
| | | $ | 6,132,402 | | | $ | 6,230,834 | |
The accompanying notes, as they relate to PNMR, are an integral part of these condensed consolidated financial statements.
PNM RESOURCES, INC. AND SUBSIDIARIES | |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |
| (Unaudited) | |
| | | | | | |
| | | Six Months Ended | |
| | | June 30, | |
| | | 2006 | | 2005 | |
| | | (In thousands) | |
Cash Flows From Operating Activities: | | | | | |
| Net earnings | | $ | 42,632 | | $ | 32,050 | |
| Adjustments to reconcile net earnings to net cash flows from operating activities: | | | | | | | |
| Depreciation and amortization | | | 81,465 | | | 69,510 | |
| Allowance for equity funds used during construction | | | (73 | ) | | (1,196 | ) |
| Accumulated deferred income tax | | | (7,920 | ) | | 4,381 | |
| Net unrealized (gains)/losses on trading and marketing securities | | | 1,864 | | | (812 | ) |
| Realized gains on investment securities | | | (1,839 | ) | | (2,229 | ) |
| Carrying charges on deferred stranded costs | | | (3,978 | ) | | (525 | ) |
| Interest on retail competition transition obligation | | | 885 | | | - | |
| Carrying charges on other regulatory assets and liabilities | | | (1,829 | ) | | (1,317 | ) |
| Amortization of fair value of acquired Twin Oaks sales contract | | | (16,878 | ) | | - | |
| Amortization of emissions allowances | | | 832 | | | - | |
| Amortization of fair value of acquired First Choice contracts | | | (2,780 | ) | | (370 | ) |
| Stock based compensation expense | | | 5,513 | | | - | |
| Excess tax benefits from stock-based payment arrangements | | | (908 | ) | | - | |
| Other, net | | | 1,203 | | | 318 | |
| Changes in certain assets and liabilities, net of amounts acquired: | | | | | | | |
| Accounts receivable - customer | | | 25,314 | | | 23,046 | |
| Accounts receivable - other | | | (4,888 | ) | | (5,918 | ) |
| Unbilled revenues | | | 46,947 | | | 36,661 | |
| Regulatory assets | | | 21,120 | | | (9,087 | ) |
| Other assets | | | (4,445 | ) | | (1,561 | ) |
| Accrued postretirement benefit costs | | | (5,299 | ) | | (1,091 | ) |
| Accounts payable | | | (88,241 | ) | | (44,382 | ) |
| Accrued interest and taxes | | | 36,812 | | | 41,880 | |
| Other liabilities | | | (13,884 | ) | | (25,921 | ) |
| Net cash flows from operating activities | | | 111,625 | | | 113,437 | |
| | | | | | | | |
Cash Flows From Investing Activities: | | | | | | | |
| Utility plant additions | | | (123,288 | ) | | (74,790 | ) |
| Nuclear fuel additions | | | (5,280 | ) | | (5,159 | ) |
| Proceeds from sales of securities | | | 45,322 | | | 41,910 | |
| Purchases of securities | | | (45,738 | ) | | (42,693 | ) |
| Return of principal PVNGS lessor notes | | | 11,297 | | | 10,681 | |
| Cash acquired from purchase of TNP, net of cash paid | | | - | | | 34,531 | |
| Twin Oaks business acquisition | | | (481,015 | ) | | - | |
| Other, net | | | 2,309 | | | 4,061 | |
| Net cash flows used for investing activities | | | (596,393 | ) | | (31,459 | ) |
| | | | | | | | |
| The accompanying notes, as they relate to PNMR, are an integral part of these financial statements. |
PNM RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | March 31, | | | December 31, | |
| | | 2007 | | | 2006 | |
| | | (As Restated, | | | | |
| | | See Note 16) | | | | |
| | | (In thousands, except share information) | |
| | | | | | | |
CAPITALIZATION AND LIABILITIES | | | | | | |
Capitalization: | | | | | | |
| Common stockholders' equity: | | | | | | |
| Common stock outstanding (no par value, 120,000,000 shares authorized: issued | | | | | | |
| and outstanding 76,683,386 and 76,648,472 shares) | | $ | 1,039,908 | | | $ | 1,040,451 | |
| Accumulated other comprehensive income, net of income tax | | | 13,855 | | | | 28,909 | |
| Retained earnings | | | 649,218 | | | | 635,550 | |
| Total common stockholders' equity | | | 1,702,981 | | | | 1,704,910 | |
| Cumulative preferred stock of subsidiary without mandatory redemption | | | | | | | | |
| requirements ($100 stated value, 10,000,000 shares authorized: | | | | | | | | |
| 115,293 issued and outstanding) | | | 11,529 | | | | 11,529 | |
| Long-term debt | | | 1,766,994 | | | | 1,765,907 | |
| | | | | | | | | |
| Total capitalization | | | 3,481,504 | | | | 3,482,346 | |
| | | | | | | | | |
Current Liabilities: | | | | | | | | |
| Short-term debt | | | 739,345 | | | | 764,345 | |
| Accounts payable | | | 190,070 | | | | 214,229 | |
| Accrued interest and taxes | | | 55,248 | | | | 98,789 | |
| Regulatory liabilities | | | 16,131 | | | | 1,172 | |
| Derivative instruments | | | 49,698 | | | | 71,019 | |
| Other current liabilities | | | 222,209 | | | | 226,507 | |
| | | | | | | | | |
| Total current liabilities | | | 1,272,701 | | | | 1,376,061 | |
| | | | | | | | | |
Long-Term Liabilities: | | | | | | | | |
| Accumulated deferred income taxes | | | 591,341 | | | | 586,283 | |
| Accumulated deferred investment tax credits | | | 29,383 | | | | 30,236 | |
| Regulatory liabilities | | | 391,261 | | | | 389,330 | |
| Asset retirement obligations | | | 62,602 | | | | 61,338 | |
| Accrued pension liability and postretirement benefit cost | | | 132,461 | | | | 134,799 | |
| Derivative instruments | | | 21,075 | | | | 16,290 | |
| Other deferred credits | | | 150,074 | | | | 154,151 | |
| | | | | | | | | |
| Total long-term liabilties | | | 1,378,197 | | | | 1,372,427 | |
| | | | | | | | | |
Commitments and Contingencies (see Note 9) | | | | | | | | |
| | | | | | | | | |
| | | $ | 6,132,402 | | | $ | 6,230,834 | |
The accompanying notes, as they relate to PNMR, are an integral part of these condensed consolidated financial statements.
PNM RESOURCES, INC. AND SUBSIDIARIES | |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |
| (Unaudited) | |
| | | | | | |
| | | Six Months Ended | |
| | | June 30, | |
| | | 2006 | | 2005 | |
| | | (In thousands) | |
Cash Flows From Financing Activities: | | | | | |
| Short-term borrowings (repayments), net | | | 30,300 | | | (74,000 | ) |
| Short-term bridge loan for Twin Oaks acquisition | | | 480,000 | | | - | |
| Long-term debt borrowings | | | - | | | 239,832 | |
| Long-term debt repayments | | | - | | | (110,532 | ) |
| Issuance of common stock | | | 9,281 | | | 101,231 | |
| Repurchase of common stock-based payments | | | (1,965 | ) | | (10,263 | ) |
| Excess tax benefits from stock-based payment arrangements | | | 908 | | | - | |
| Dividends paid | | | (29,029 | ) | | (25,299 | ) |
| Other, net | | | 964 | | | 2,820 | |
| Net cash flows from financing activities | | | 490,459 | | | 123,789 | |
| | | | | | | | |
| Increase in Cash and Cash Equivalents | | | 5,691 | | | 205,767 | |
| Beginning of Period | | | 68,199 | | | 17,195 | |
| End of Period | | $ | 73,890 | | $ | 222,962 | |
| | | | | | | | |
Supplemental Cash Flow Disclosures: | | | | | | | |
| Interest paid, net of capitalized interest | | $ | 67,495 | | $ | 13,541 | |
| | | | | | | | |
| Income taxes paid (refunded), net | | $ | (11,586 | ) | $ | (16,176 | ) |
| | | | | | | | |
| The accompanying notes, as they relate to PNMR, are an integral part of these financial statements. |
PNM RESOURCES, INC. AND SUBSIDIARIES
(Unaudited)
| | | Three Months Ended | |
| | | March 31, | |
| | | 2007 | | | 2006 | |
| | | (As Restated, | | | (As Restated, | |
| | | See Note 16) | | | See Note 16) | |
| | | (In thousands) | |
Cash Flows From Operating Activities: | | | | | | |
| Net earnings | | $ | 29,666 | | | $ | 26,001 | |
| Adjustments to reconcile net earnings to net cash flows from operating activities: | | | | | | | | |
| Depreciation and amortization | | | 47,432 | | | | 40,011 | |
| Allowance for equity funds used during construction | | | (454 | ) | | | (47 | ) |
| Deferred income tax expense (benefit) | | | 14,282 | | | | (10,279 | ) |
| Equity in net loss of EnergyCo | | | 662 | | | | - | |
| Net unrealized gains on derivatives | | | (3,795 | ) | | | (2,703 | ) |
| Realized gains on investment securities | | | (811 | ) | | | (1,407 | ) |
| Carrying charges on regulatory assets and liabilities | | | (1,018 | ) | | | (2,833 | ) |
| Amortization of fair value of acquired Twin Oaks sales contract | | | (20,035 | ) | | | - | |
| Amortization of emissions allowances | | | 701 | | | | - | |
| Amortization of fair value of acquired First Choice contracts | | | (361 | ) | | | (4,402 | ) |
| Stock based compensation expense | | | 4,381 | | | | 4,373 | |
| Excess tax benefit from stock-based payment arrangements | | | (6 | ) | | | (313 | ) |
| Other, net | | | 1,317 | | | | 2,456 | |
| Changes in certain assets and liabilities: | | | | | | | | |
| Accounts receivable | | | (31,487 | ) | | | 22,461 | |
| Other receivables | | | 14,703 | | | | 14,180 | |
| Unbilled revenues | | | 34,396 | | | | 23,296 | |
| Regulatory assets | | | 4,624 | | | | 22,144 | |
| Other assets | | | 2,799 | | | | 11,043 | |
| Accrued pension liability and postretirement benefit costs | | | (2,776 | ) | | | (2,841 | ) |
| Accounts payable | | | (25,897 | ) | | | (102,149 | ) |
| Accrued interest and taxes | | | (6,029 | ) | | | 24,751 | |
| Deferred credits | | | (5,459 | ) | | | (5,112 | ) |
| Other liabilities | | | (13,213 | ) | | | (26,184 | ) |
| Net cash flows from operating activities | | | 43,622 | | | | 32,446 | |
| | | | | | | | | |
Cash Flows From Investing Activities: | | | | | | | | |
| Utility plant additions | | | (89,484 | ) | | | (51,727 | ) |
| Proceeds from sales of investment securities | | | 31,803 | | | | 30,449 | |
| Purchases of investment securities | | | (36,365 | ) | | | (30,301 | ) |
| Proceeds from sales of utility plant | | | 4,572 | | | | - | |
| Return of principal on PVNGS lessor notes | | | 11,612 | | | | 10,956 | |
| Investment in EnergyCo | | | (2,500 | ) | | | - | |
| Other, net | | | 4,290 | | | | 870 | |
| Net cash flows from investing activities | | | (76,072 | ) | | | (39,753 | ) |
The accompanying notes, as they relate to PNMR, are an integral part of these condensed consolidated financial statements.
PNM RESOURCES, INC. AND SUBSIDIARIES | |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | |
| (Unaudited) | |
| | | | | | |
| | | Three Months Ended | | Six Months Ended | |
| | | June 30, | | June 30, | |
| | | 2006 | | 2005 | | 2006 | | 2005 | |
| | | | | (In thousands) | | | |
| | | | | | | | | | |
Net Earnings | | $ | 16,307 | | $ | 1,541 | | $ | 42,632 | | $ | 32,050 | |
| Other Comprehensive Income (Loss): | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Unrealized gain (loss) on securities: | | | | | | | | | | | | | |
| Unrealized holding gains (losses) arising during | | | | | | | | | | | | | |
| the period, net of tax (expense) benefit | | | | | | | | | | | | | |
| of $154, $(437), $(6,953) and $(402) | | | (236 | ) | | 667 | | | 10,610 | | | 612 | |
| Reclassification adjustment for gains included in | | | | | | | | | | | | | |
| net income, net of tax expense | | | | | | | | | | | | | |
| of $606, $134, $427 and $662 | | | (924 | ) | | (204 | ) | | (652 | ) | | (1,010 | ) |
| | | | | | | | | | | | | | |
Fair value adjustment for certain | | | | | | | | | | | | | |
derivative transactions: | | | | | | | | | | | | | |
| Change in fair market value of designated | | | | | | | | | | | | | |
| cash flow hedges, net of tax (expense) benefit | | | | | | | | | | | | | |
| of $2,557, $(1,996), $8,177 and $(3,975) | | | (5,130 | ) | | 3,098 | | | (13,612 | ) | | 6,118 | |
| Reclassification adjustment for (gains) losses | | | | | | | | | | | | | |
| included in net income, net of tax expense | | | | | | | | | | | | | |
| (benefit) of $(2,059), $23, $2,619 and $849 | | | 3,723 | | | (35 | ) | | (3,925 | ) | | (1,295 | ) |
| | | | | | | | | | | | | | |
Total Other Comprehensive Income (Loss) | | | (2,567 | ) | | 3,526 | | | (7,579 | ) | | 4,425 | |
| | | | | | | | | | | | | | |
Total Comprehensive Income | | $ | 13,740 | | $ | 5,067 | | $ | 35,053 | | $ | 36,475 | |
| | | | | | | | | | | | | | |
| The accompanying notes, as they relate to PNMR, are an integral part of these financial statements. |
PNM RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | Three Months Ended | |
| | | March 31, | |
| | | 2007 | | | 2006 | |
| | | (As Restated, | | | (As Restated, | |
| | | See Note 16) | | | See Note 16) | |
| | | (In thousands) | |
Cash Flows From Financing Activities: | | | | | | |
| Short-term debt borrowings (repayments), net | | | (25,000 | ) | | | (1,213 | ) |
| Issuance of common stock | | | 1,070 | | | | 671 | |
| Proceeds from stock option exercise | | | 6,509 | | | | 1,765 | |
| Purchases of common stock to satisfy stock awards | | | (11,587 | ) | | | (2,853 | ) |
| Excess tax benefits from stock-based payment arrangements | | | 6 | | | | 313 | |
| Dividends paid | | | (16,863 | ) | | | (13,758 | ) |
| Other, net | | | (118 | ) | | | (47 | ) |
| Net cash flows from financing activities | | | (45,983 | ) | | | (15,122 | ) |
| | | | | | | | | |
Change in Cash and Cash Equivalents | | | (78,433 | ) | | | (22,429 | ) |
Cash and Cash Equivalents at Beginning of Period | | | 123,419 | | | | 68,199 | |
Cash and Cash Equivalents at End of Period | | $ | 44,986 | | | $ | 45,770 | |
| | | | | | | | | |
Supplemental Cash Flow Disclosures: | | | | | | | | |
| Interest paid, net of capitalized interest | | $ | 37,218 | | | $ | 25,750 | |
| Income taxes paid (refunded), net | | $ | - | | | $ | - | |
The accompanying notes, as they relate to PNMR, are an integral part of these condensed consolidated financial statements.
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY | |
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC. | |
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS | |
| (Unaudited) | |
| | |
| | | Three Months Ended | | Six Months Ended | |
| | | June 30, | | June 30, | |
| | | 2006 | | 2005 | | 2006 | | 2005 | |
| | | | | (In thousands) | | | |
Operating Revenues: | | | | | | | | | |
| Electric | | $ | 259,298 | | $ | 270,005 | | $ | 570,765 | | $ | 532,448 | |
| Gas | | | 68,869 | | | 82,261 | | | 276,345 | | | 247,494 | |
| Total operating revenues | | | 328,167 | | | 352,266 | | | 847,110 | | | 779,942 | |
| | | | | | | | | | | | | | |
Operating Expenses: | | | | | | | | | | | | | |
| Cost of energy sold | | | 185,410 | | | 206,798 | | | 524,672 | | | 454,210 | |
| Administrative and general | | | 40,520 | | | 42,496 | | | 81,648 | | | 82,975 | |
| Energy production costs | | | 42,080 | | | 39,806 | | | 79,667 | | | 75,839 | |
| Depreciation and amortization | | | 24,289 | | | 32,417 | | | 49,144 | | | 60,362 | |
| Transmission and distribution costs | | | 15,916 | | | 13,898 | | | 30,223 | | | 27,961 | |
| Taxes, other than income taxes | | | 8,414 | | | 7,459 | | | 17,727 | | | 15,751 | |
| Income taxes | | | (1,254 | ) | | (1,677 | ) | | 13,708 | | | 12,966 | |
| Total operating expenses | | | 315,375 | | | 341,197 | | | 796,789 | | | 730,064 | |
| Operating income | | | 12,792 | | | 11,069 | | | 50,321 | | | 49,878 | |
| | | | | | | | | | | | | | |
Other Income and Deductions: | | | | | | | | | | | | | |
| Interest income | | | 8,670 | | | 9,097 | | | 18,023 | | | 18,303 | |
| Other income | | | 1,705 | | | 2,185 | | | 3,533 | | | 5,461 | |
| Other deductions | | | (1,504 | ) | | (864 | ) | | (2,355 | ) | | (2,028 | ) |
| Other income taxes | | | (3,444 | ) | | (4,220 | ) | | (7,455 | ) | | (8,061 | ) |
| Net other income and deductions | | | 5,427 | | | 6,198 | | | 11,746 | | | 13,675 | |
| | | | | | | | | | | | | | |
Interest Charges | | | 14,899 | | | 13,137 | | | 28,319 | | | 26,937 | |
| | | | | | | | | | | | | | |
Net Earnings | | | 3,320 | | | 4,130 | | | 33,748 | | | 36,616 | |
| | | | | | | | | | | | | | |
Preferred Stock Dividend Requirements | | | 132 | | | 132 | | | 264 | | | 264 | |
| | | | | | | | | | | | | | |
Net Earnings Available for Common Stock | | $ | 3,188 | | $ | 3,998 | | $ | 33,484 | | $ | 36,352 | |
| | | | | | | | | | | | | | |
| The accompanying notes, as they relate to PNM, are an integral part of these financial statements. |
PNM RESOURCES, INC. AND SUBSIDIARIES
(Unaudited)
| | | Three Months Ended March 31, | |
| | | 2007 | | | 2006 | |
| | | (As Restated, | | | (As Restated, | |
| | | See Note 16) | | | See Note 16) | |
| | | (In thousands) | |
| | | | | | | |
Net Earnings | | $ | 29,666 | | | $ | 26,001 | |
| | | | | | | | | |
Other Comprehensive Income: | | | | | | | | |
| | | | | | | | | |
Unrealized gains (losses) on investment securities: | | | | | | | | |
| Unrealized holding gains arising during the period, | | | | | | | | |
| net of income tax expense of $1,420 and $7,605 | | | 2,167 | | | | 11,604 | |
| Reclassification adjustment for (gains) included in net | | | | | | | | |
| earnings, net of income tax expense of $435 and $319 | | | (663 | ) | | | (486 | ) |
| | | | | | | | | |
Fair value adjustment for certain derivative transactions: | | | | | | | | |
| Change in fair market value of designated cash flow hedges, | | | | | | | | |
| net of income tax benefit of $11,886 and $9,064 | | | (18,112 | ) | | | (14,646 | ) |
| Reclassification adjustment for (gains) losses included in | | | | | | | | |
| net earnings, net of income tax expense (benefit) | | | | | | | | |
| of $(954) and $1,195 | | | 1,554 | | | | (1,484 | ) |
| | | | | | | | | |
Total Other Comprehensive Income (Loss) | | | (15,054 | ) | | | (5,012 | ) |
| | | | | | | | | |
Total Comprehensive Income | | $ | 14,612 | | | $ | 20,989 | |
The accompanying notes, as they relate to PNMR, are an integral part of these condensed consolidated financial statements.
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY | |
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC. | |
CONDENSED CONSOLIDATED BALANCE SHEETS | |
| (Unaudited) | |
| | |
| | | June 30, | | December 31, | |
| | | 2006 | | 2005 | |
| | | (In thousands) | |
ASSETS | | | | | |
Utility Plant: | | | | | |
| Electric plant in service | | $ | 2,673,780 | | $ | 2,576,182 | |
| Gas plant in service | | | 728,494 | | | 711,823 | |
| Common plant in service and plant held for future use | | | 72,806 | | | 74,857 | |
| | | | 3,475,080 | | | 3,362,862 | |
| Less accumulated depreciation and amortization | | | 1,241,740 | | | 1,205,386 | |
| | | | 2,233,340 | | | 2,157,476 | |
| Construction work in progress | | | 115,161 | | | 137,663 | |
| Nuclear fuel, net of accumulated amortization of $13,758 and $14,679 | | | 28,086 | | | 27,182 | |
| | | | | | | | |
| Net utility plant | | | 2,376,587 | | | 2,322,321 | |
| | | | | | | | |
Other Property and Investments: | | | | | | | |
| Investment in lessor notes | | | 271,000 | | | 286,678 | |
| Other investments | | | 127,097 | | | 170,422 | |
| Non-utility property | | | 966 | | | 966 | |
| | | | | | | | |
| Total other property and investments | | | 399,063 | | | 458,066 | |
| | | | | | | | |
Current Assets: | | | | | | | |
| Cash and cash equivalents | | | 2,720 | | | 12,690 | |
| Special deposits | | | 376 | | | 263 | |
| Accounts receivable, net of allowance for uncollectible accounts of $1,440 and $1,435 | | | 68,805 | | | 108,569 | |
| Unbilled revenues | | | 55,907 | | | 121,453 | |
| Other receivables | | | 60,630 | | | 53,546 | |
| Affiliate accounts receivable | | | 8,613 | | | - | |
| Inventories | | | 49,017 | | | 50,411 | |
| Regulatory assets | | | 830 | | | 28,058 | |
| Other current assets | | | 69,184 | | | 75,885 | |
| | | | | | | | |
| Total current assets | | | 316,082 | | | 450,875 | |
| | | | | | | | |
Deferred Charges: | | | | | | | |
| Regulatory assets | | | 226,130 | | | 223,325 | |
| Prepaid pension cost | | | 93,471 | | | 91,444 | |
| Other deferred charges | | | 44,984 | | | 41,720 | |
| | | | | | | | |
| Total deferred charges | | | 364,585 | | | 356,489 | |
| | | $ | 3,456,317 | | $ | 3,587,751 | |
| | | | | | | | |
| The accompanying notes, as they relate to PNM, are an integral part of these financial statements. |
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
(Unaudited)
| | | Three Months Ended March 31, | |
| | | 2007 | | | 2006 | |
| | | (As Restated, | | | (As Restated, | |
| | | See Note 16) | | | See Note 16) | |
| | | (In thousands) | |
Operating Revenues: | | | | | | |
| Electric | | $ | 240,325 | | | $ | 311,467 | |
| Gas | | | 216,484 | | | | 207,476 | |
| Total operating revenues | | | 456,809 | | | | 518,943 | |
| | | | | | | | | |
Operating Expenses: | | | | | | | | |
| Cost of energy sold | | | 264,881 | | | | 339,262 | |
| Administrative and general | | | 44,382 | | | | 41,128 | |
| Energy production costs | | | 40,829 | | | | 37,911 | |
| Depreciation and amortization | | | 26,356 | | | | 24,855 | |
| Transmission and distribution costs | | | 17,641 | | | | 14,307 | |
| Taxes other than income taxes | | | 8,686 | | | | 9,313 | |
| Income taxes | | | 14,862 | | | | 14,962 | |
| Total operating expenses | | | 417,637 | | | | 481,738 | |
| Operating income | | | 39,172 | | | | 37,205 | |
| | | | | | | | | |
Other Income and Deductions: | | | | | | | | |
| Interest income | | | 8,702 | | | | 9,353 | |
| Gains on investment securities | | | 58 | | | | 944 | |
| Other income | | | 1,141 | | | | 884 | |
| Other deductions | | | (609 | ) | | | (851 | ) |
| Other income taxes | | | (3,492 | ) | | | (4,011 | ) |
| Net other income and deductions | | | 5,800 | | | | 6,319 | |
| Earnings before interest charges | | | 44,972 | | | | 43,524 | |
| | | | | | | | | |
Interest Charges: | | | | | | | | |
| Interest on long-term debt | | | 12,437 | | | | 11,859 | |
| Other interest charges | | | 3,655 | | | | 1,561 | |
| Total interest charges | | | 16,092 | | | | 13,420 | |
| | | | | | | | | |
Net Earnings | | | 28,880 | | | | 30,104 | |
| | | | | | | | | |
Preferred Stock Dividend Requirements | | | 132 | | | | 132 | |
| | | | | | | | | |
Net Earnings Available for Common Stock | | $ | 28,748 | | | $ | 29,972 | |
The accompanying notes, as they relate to PNMR, are an integral part of these condensed consolidated financial statements.
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY | |
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC. | |
CONDENSED CONSOLIDATED BALANCE SHEETS | |
| (Unaudited) | |
| | |
| | | June 30, | | December 31, | |
| | | 2006 | | 2005 | |
| | | (In thousands) | |
CAPITALIZATION AND LIABILITIES | | | | | |
Capitalization: | | | | | |
| Common stockholder’s equity: | | | | | |
| Common stock outstanding (no par value, 40,000,000 shares authorized: | | | | | |
| issued 39,117,799 at June 30, 2006 and December 31, 2005) | | $ | 765,500 | | $ | 765,500 | |
| Accumulated other comprehensive loss, net of tax | | | (94,950 | ) | | (90,515 | ) |
| Retained earnings | | | 366,025 | | | 332,542 | |
| | | | | | | | |
| Total common stockholder’s equity | | | 1,036,575 | | | 1,007,527 | |
| Cumulative preferred stock without mandatory redemption ($100 stated value, | | | | | | | |
| 10,000,000 shares authorized: issued 115,293 at June 30, 2006 and | | | | | | | |
| December 31, 2005) | | | 11,529 | | | 11,529 | |
| Long-term debt | | | 986,377 | | | 987,068 | |
| | | | | | | | |
| Total capitalization | | | 2,034,481 | | | 2,006,124 | |
| | | | | | | | |
Current Liabilities: | | | | | | | |
| Short-term debt | | | 100,200 | | | 128,200 | |
| Accounts payable | | | 70,385 | | | 170,517 | |
| Affiliate accounts payable | | | 61,274 | | | 50,070 | |
| Accrued interest and taxes | | | 49,898 | | | 15,951 | |
| Regulatory liabilities | | | 1,600 | | | 7,085 | |
| Other current liabilities | | | 84,537 | | | 91,668 | |
| | | | | | | | |
| Total current liabilities | | | 367,894 | | | 463,491 | |
| | | | | | | | |
Long-Term Liabilities: | | | | | | | |
| Accumulated deferred income taxes | | | 278,693 | | | 300,752 | |
| Accumulated deferred investment tax credits | | | 30,842 | | | 32,266 | |
| Regulatory liabilities | | | 338,258 | | | 346,007 | |
| Asset retirement obligations | | | 57,438 | | | 54,940 | |
| Accrued pension liability and postretirement benefit cost | | | 214,834 | | | 217,092 | |
| Other deferred credits | | | 133,877 | | | 167,079 | |
| | | | | | | | |
| Total long-term liabilities | | | 1,053,942 | | | 1,118,136 | |
| Commitments and Contingencies (see Note 9) | | | - | | | - | |
| | | $ | 3,456,317 | | $ | 3,587,751 | |
| | | | | | | | |
| The accompanying notes, as they relate to PNM, are an integral part of these financial statements. |
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
(Unaudited)
| | | March 31, | | | December 31, | |
| | | 2007 | | | 2006 | |
| | | (As Restated, | | | | |
| | | See Note 16) | | | | |
| | | (In thousands) | |
| | | | | | | |
ASSETS | | | | | | |
Utility Plant: | | | | | | |
| Electric plant in service | | $ | 2,909,250 | | | $ | 2,742,795 | |
| Gas plant in service | | | 732,152 | | | | 721,168 | |
| Common plant in service and plant held for future use | | | 57,082 | | | | 72,806 | |
| | | | 3,698,484 | | | | 3,536,769 | |
| Less accumulated depreciation and amortization | | | 1,361,127 | | | | 1,279,349 | |
| | | | 2,337,357 | | | | 2,257,420 | |
| Construction work in progress | | | 243,335 | | | | 191,403 | |
| Nuclear fuel, net of accumulated amortization of $17,296 and $14,008 | | | 32,610 | | | | 28,844 | |
| | | | | | | | | |
| Net utility plant | | | 2,613,302 | | | | 2,477,667 | |
| | | | | | | | | |
Other Property and Investments: | | | | | | | | |
| Investment in PVNGS lessor notes | | | 245,356 | | | | 257,659 | |
| Other investments | | | 146,210 | | | | 138,777 | |
| Non-utility property | | | 979 | | | | 966 | |
| | | | | | | | | |
| Total other property and investments | | | 392,545 | | | | 397,402 | |
| | | | | | | | | |
Current Assets: | | | | | | | | |
| Cash and cash equivalents | | | 6,433 | | | | 11,886 | |
| Special deposits | | | 548 | | | | 376 | |
| Accounts receivable, net of allowance for uncollectible accounts of $1,703 and $1,788 | | | 155,013 | | | | 122,648 | |
| Unbilled revenues | | | 56,575 | | | | 81,166 | |
| Other receivables | | | 61,434 | | | | 62,040 | |
| Affiliate accounts receivable | | | - | | | | 7,879 | |
| Inventories | | | 58,101 | | | | 51,801 | |
| Regulatory assets | | | 2,833 | | | | 17,507 | |
| Income taxes receivable | | | 2,731 | | | | 13,222 | |
| Derivative instruments | | | 26,755 | | | | 27,750 | |
| Other current assets | | | 53,184 | | | | 51,231 | |
| | | | | | | | | |
| Total current assets | | | 423,607 | | | | 447,506 | |
| | | | | | | | | |
Deferred Charges: | | | | | | | | |
| Regulatory assets | | | 406,492 | | | | 410,979 | |
| Derivative instruments | | | 18,168 | | | | 12,504 | |
| Goodwill | | | 102,562 | | | | - | |
| Other deferred charges | | | 64,804 | | | | 66,465 | |
| | | | | | | | | |
| Total deferred charges | | | 592,026 | | | | 489,948 | |
| | | | | | | | | |
| | | $ | 4,021,480 | | | $ | 3,812,523 | |
The accompanying notes, as they relate to PNM, are an integral part of these condensed consolidated financial statements.
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY | |
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC. | |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |
| (Unaudited) | |
| | | | | | |
| | | Six Months Ended | |
| | | June 30, | |
| | | 2006 | | 2005 | |
| | | (In thousands) | |
Cash Flows From Operating Activities: | | | | | |
| Net earnings | | $ | 33,748 | | $ | 36,616 | |
| Adjustments to reconcile net earnings to net cash flows from operating activities: | | | | | | | |
| Depreciation and amortization | | | 57,771 | | | 66,868 | |
| Allowance for equity funds used during construction | | | 1 | | | (1,163 | ) |
| Accumulated deferred income tax | | | (15,001 | ) | | 3,720 | |
| Net unrealized (gains)/losses on trading securities | | | 1,965 | | | (812 | ) |
| Realized gains on investment securities | | | (1,842 | ) | | (2,229 | ) |
| Carrying charges on other regulatory assets and liabilities | | | (1,829 | ) | | (1,317 | ) |
| Changes in certain assets and liabilities: | | | | | | | |
| Accounts receivable - customer | | | 39,764 | | | 28,184 | |
| Accounts receivable - other | | | (7,084 | ) | | (3,296 | ) |
| Unbilled revenues | | | 65,547 | | | 40,143 | |
| Regulatory assets | | | 22,846 | | | (10,069 | ) |
| Other assets | | | (7,384 | ) | | 3,738 | |
| Accrued postretirement benefit costs | | | (4,285 | ) | | (3,983 | ) |
| Accounts payable | | | (100,132 | ) | | (68,594 | ) |
| Accrued interest and taxes | | | 33,570 | | | 11,745 | |
| Other liabilities | | | (16,914 | ) | | (16,376 | ) |
| Net cash flows from operating activities | | | 100,741 | | | 83,175 | |
| | | | | | | | |
Cash Flows From Investing Activities: | | | | | | | |
| Utility plant additions | | | (94,728 | ) | | (54,728 | ) |
| Nuclear fuel additions | | | (5,280 | ) | | (5,159 | ) |
| Proceeds from sales of securities | | | 45,322 | | | 41,910 | |
| Purchases of securities | | | (45,738 | ) | | (42,693 | ) |
| Return of principal PVNGS lessor notes | | | 11,297 | | | 10,681 | |
| Other, net | | | 6,601 | | | 472 | |
| Net cash flows used for investing activities | | | (82,526 | ) | | (49,517 | ) |
| | | | | | | | |
| The accompanying notes, as they relate to PNM, are an integral part of these financial statements. |
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | March 31, | | | December 31, | |
| | | 2007 | | | 2006 | |
| | | (As Restated, | | | | |
| | | See Note 16) | | | | |
| | | (In thousands, except share information) | |
| | | | | | | |
CAPITALIZATION AND LIABILITIES | | | | | | |
Capitalization: | | | | | | |
| Common stockholder's equity: | | | | | | |
| Common stock outstanding (no par value, 40,000,000 shares authorized: | | | | | | |
| 39,117,799 shares issued and outstanding) | | $ | 932,483 | | | $ | 765,500 | |
| Accumulated other comprehensive income, net of income tax | | | 12,741 | | | | 8,761 | |
| Retained earnings | | | 445,264 | | | | 415,875 | |
| Total common stockholder's equity | | | 1,390,488 | | | | 1,190,136 | |
| Cumulative preferred stock without mandatory redemption requirements | | | | | | | | |
| ($100 stated value, 10,000,000 shares authorized: 115,293 shares issued | | | | | | | | |
| and outstanding) | | | 11,529 | | | | 11,529 | |
| Long-term debt | | | 988,400 | | | | 987,205 | |
| | | | | | | | | |
| Total capitalization | | | 2,390,417 | | | | 2,188,870 | |
| | | | | | | | | |
Current Liabilities: | | | | | | | | |
| Short-term debt | | | 245,700 | | | | 250,274 | |
| Accounts payable | | | 128,918 | | | | 138,577 | |
| Affiliate accounts payable | | | 23,676 | | | | 16,898 | |
| Accrued interest and taxes | | | 41,979 | | | | 41,340 | |
| Regulatory liabilities | | | 16,131 | | | | 1,172 | |
| Derivative instruments | | | 26,099 | | | | 43,096 | |
| Other current liabilities | | | 58,744 | | | | 82,262 | |
| | | | | | | | | |
| Total current liabilities | | | 541,247 | | | | 573,619 | |
| | | | | | | | | |
Long-Term Liabilities: | | | | | | | | |
| Accumulated deferred income taxes | | | 399,676 | | | | 368,256 | |
| Accumulated deferred investment tax credits | | | 28,917 | | | | 29,404 | |
| Regulatory liabilities | | | 349,989 | | | | 335,196 | |
| Asset retirement obligations | | | 61,812 | | | | 60,493 | |
| Accrued pension liability and postretirement benefit cost | | | 127,298 | | | | 129,595 | |
| Derivative instruments | | | 10,894 | | | | 14,100 | |
| Other deferred credits | | | 111,230 | | | | 112,990 | |
| | | | | | | | | |
| Total long-term liabilities | | | 1,089,816 | | | | 1,050,034 | |
| | | | | | | | | |
Commitments and Contingencies (see Note 9) | | | | | | | | |
| | | | | | | | | |
| | | $ | 4,021,480 | | | $ | 3,812,523 | |
The accompanying notes, as they relate to PNM, are an integral part of these condensed consolidated financial statements.
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY | |
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC. | |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |
| (Unaudited) | |
| | | | | | |
| | | Six Months Ended | |
| | | June 30, | |
| | | 2006 | | 2005 | |
| | | (In thousands) | |
Cash Flows From Financing Activities: | | | | | |
| Short-term borrowings (repayments), net | | | (28,000 | ) | | (41,600 | ) |
| Long-term debt repayments | | | (298 | ) | | - | |
| Dividends paid | | | (264 | ) | | (264 | ) |
| Change in affiliate borrowings | | | - | | | (300 | ) |
| Other, net | | | 377 | | | (228 | ) |
| Net cash flows used for financing activities | | | (28,185 | ) | | (42,392 | ) |
| | | | | | | | |
| Decrease in Cash and Cash Equivalents | | | (9,970 | ) | | (8,734 | ) |
| Beginning of Period | | | 12,690 | | | 16,448 | |
| End of Period | | $ | 2,720 | | $ | 7,714 | |
| | | | | | | | |
Supplemental Cash Flow Disclosures: | | | | | | | |
| Interest paid, net of capitalized interest | | $ | 30,193 | | $ | 25,680 | |
| | | | | | | | |
| Income taxes paid, net | | $ | 457 | | $ | 3 | |
| | | | | | | | |
| The accompanying notes, as they relate to PNM, are an integral part of these financial statements. |
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
(Unaudited)
| | | Three Months Ended March 31, | |
| | | 2007 | | | 2006 | |
| | | (As Restated, | | | (As Restated, | |
| | | See Note 16) | | | See Note 16) | |
| | | (In thousands) | |
Cash Flows From Operating Activities: | | | | | | |
| Net earnings | | $ | 28,880 | | | $ | 30,104 | |
| Adjustments to reconcile net earnings to net cash flows from operating activities: | | | | | |
| Depreciation and amortization | | | 32,854 | | | | 29,780 | |
| Allowance for equity funds used during construction | | | (380 | ) | | | 1 | |
| Deferred income tax expense (benefit) | | | 7,137 | | | | (11,889 | ) |
| Net unrealized gains on derivatives | | | (3,892 | ) | | | (504 | ) |
| Realized gains on investment securities | | | (811 | ) | | | (1,407 | ) |
| Carrying charges on other regulatory assets and liabilities | | | (1,018 | ) | | | (1,297 | ) |
| Other, net | | | (923 | ) | | | (105 | ) |
| Changes in certain assets and liabilities, net of amounts acquired: | | | | | | | | |
| Accounts receivable | | | (22,552 | ) | | | 19,292 | |
| Unbilled revenues | | | 28,122 | | | | 18,131 | |
| Regulatory assets | | | 3,947 | | | | 23,102 | |
| Other assets | | | 11,851 | | | | 17,715 | |
| Accrued pension liability and postretirement benefit costs | | | (1,457 | ) | | | (566 | ) |
| Accounts payable | | | (12,482 | ) | | | (86,523 | ) |
| Accrued interest and taxes | | | 9,418 | | | | 36,804 | |
| Deferred credits | | | (4,246 | ) | | | (2,531 | ) |
| Other liabilities | | | (6,935 | ) | | | (24,089 | ) |
| Net cash flows from operating activities | | | 67,513 | | | | 46,018 | |
| | | | | | | | | |
Cash Flows From Investing Activities: | | | | | | | | |
| Utility plant additions | | | (80,335 | ) | | | (38,806 | ) |
| Proceeds from sales of investment securities | | | 31,803 | | | | 30,449 | |
| Purchases of investment securities | | | (36,365 | ) | | | (30,301 | ) |
| Proceeds from sales of utility plant assets | | | 4,572 | | | | - | |
| Return of principal on PVNGS lessor notes | | | 11,612 | | | | 10,956 | |
| Other, net | | | 871 | | | | 652 | |
| Net cash flows from investing activities | | | (67,842 | ) | | | (27,050 | ) |
The accompanying notes, as they relate to PNM, are an integral part of these condensed consolidated financial statements.
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY | |
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC. | |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | |
| (Unaudited) | |
| | |
| | | Three Months Ended | | Six Months Ended | |
| | | June 30, | | June 30, | |
| | | 2006 | | 2005 | | 2006 | | 2005 | |
| | | | | | | | | | |
Net Earnings Available for Common Stock | | $ | 3,188 | | $ | 3,998 | | $ | 33,484 | | $ | 36,352 | |
| Other Comprehensive Income (Loss): | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Unrealized gain (loss) on securities: | | | | | | | | | | | | | |
| Unrealized holding gains (losses) arising during | | | | | | | | | | | | | |
| the period, net of tax (expense) benefit | | | | | | | | | | | | | |
| of $154, $(437), $(6,953) and $(402) | | | (236 | ) | | 667 | | | 10,610 | | | 612 | |
| Reclassification adjustment for gains included in | | | | | | | | | | | | | |
| net income, net of tax expense | | | | | | | | | | | | | |
| of $606, $134, $427 and $662 | | | (924 | ) | | (204 | ) | | (652 | ) | | (1,010 | ) |
| | | | | | | | | | | | | | |
Fair value adjustment for certain | | | | | | | | | | | | | |
derivative transactions: | | | | | | | | | | | | | |
| Change in fair market value of designated | | | | | | | | | | | | | |
| cash flow hedges, net of tax (expense) benefit | | | | | | | | | | | | | |
| of $606, $(1,469), $6,563 and $(3,448) | | | (926 | ) | | 2,242 | | | (10,015 | ) | | 5,262 | |
| Reclassification adjustment for gains included | | | | | | | | | | | | | |
| in net income, net of tax expense | | | | | | | | | | | | | |
| of $3, $23 and $2,869 and $849 | | | (4 | ) | | (35 | ) | | (4,378 | ) | | (1,295 | ) |
| | | | | | | | | | | | | | |
Total Other Comprehensive Income (Loss) | | | (2,090 | ) | | 2,670 | | | (4,435 | ) | | 3,569 | |
| | | | | | | | | | | | | | |
Total Comprehensive Income | | $ | 1,098 | | $ | 6,668 | | $ | 29,049 | | $ | 39,921 | |
| | | | | | | | | | | | | | |
| The accompanying notes, as they relate to PNM, are an integral part of these financial statements. |
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | Three Months Ended March 31, | |
| | | 2007 | | | 2006 | |
| | | (As Restated, | | | (As Restated, | |
| | | See Note 16) | | | See Note 16) | |
| | | (In thousands) | |
Cash Flows From Financing Activities: | | | | | | |
| Short-term debt borrowings (repayments), net | | | (4,574 | ) | | | (24,913 | ) |
| Dividends paid | | | (132 | ) | | | (132 | ) |
| Other, net | | | (418 | ) | | | 23 | |
| Net cash flows from financing activities | | | (5,124 | ) | | | (25,022 | ) |
| | | | | | | | | |
Change in Cash and Cash Equivalents | | | (5,453 | ) | | | (6,054 | ) |
Cash and Cash Equivalents at Beginning of Period | | | 11,886 | | | | 12,690 | |
Cash and Cash Equivalents at End of Period | | $ | 6,433 | | | $ | 6,636 | |
| | | | | | | | | |
Supplemental Cash Flow Disclosures: | | | | | | | | |
| Interest paid, net of capitalized interest | | $ | 21,883 | | | $ | 11,935 | |
| Income taxes paid (refunded), net | | $ | - | | | $ | - | |
| | | | | | | | | |
Supplemental schedule of noncash investing and financing activities: | | | | | |
| | | | | | | | | |
| As of January 1, 2007, TNMP transferred its New Mexico operational assets and liabilities to PNMR through | |
| a redemption of TNMP’s common stock. PNMR contemporaneously contributed the TNMP | |
| New Mexico operational assets and liabilities to PNM. See Note 14. | | | | | |
| | | | | | | | | |
| Assets transferred | | $ | 216,422 | | | | | |
| Liabilities transferred | | | 49,438 | | | | | |
| Net assets transferred - increase in common stockholder's equity | | $ | 166,984 | | | | | |
The accompanying notes, as they relate to PNM, are an integral part of these condensed consolidated financial statements.
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
(Unaudited)
| | | Three Months Ended March 31, | |
| | | 2007 | | | 2006 | |
| | | (As Restated, | | | (As Restated, | |
| | | See Note 16) | | | See Note 16) | |
| | | (In thousands) | |
| | | | | | | |
Net Earnings Available for Common Stock | | $ | 28,748 | | | $ | 29,972 | |
| | | | | | | | | |
Other Comprehensive Income (Loss): | | | | | | | | |
| | | | | | | | | |
Unrealized gains (losses) on investment securities: | | | | | | | | |
| Unrealized holding gains arising during the period, | | | | | | | | |
| net of income tax expense of $1,420 and $7,605 | | | 2,167 | | | | 11,604 | |
| Reclassification adjustment for (gains) included in net | | | | | | | | |
| earnings, net of income tax expense of $435 and $319 | | | (663 | ) | | | (486 | ) |
| | | | | | | | | |
Fair value adjustment for certain derivative transactions: | | | | | | | | |
| Change in fair market value of designated cash flow hedges, | | | | | | | | |
| net of income tax (expense) benefit of $(1,013) and $6,607 | | | 1,545 | | | | (10,081 | ) |
| Reclassification adjustment for (gains) losses included in net | | | | | | | | |
| earnings, net of income tax expense (benefits) of $(610) and $2,217 | | | 931 | | | | (3,382 | ) |
| | | | | | | | | |
Total Other Comprehensive Income (Loss) | | | 3,980 | | | | (2,345 | ) |
| | | | | | | | | |
Total Comprehensive Income | | $ | 32,728 | | | $ | 27,627 | |
The accompanying notes, as they relate to PNM, are an integral part of these condensed consolidated financial statements.
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
| | | Post-Acquisition | | Post-Acquisition | | Pre-Acquisition | |
| | | Three months ended | | For the period | | For the period | |
| | | June 30, | | June 6-June 30, | | April 1-June 6, | |
| | | 2006 | | 2005 | | 2005 | |
| | | | | (In thousands) | | | |
| | | | | | | | |
Operating Revenues: | | | | | | | |
| Electric | | $ | 61,456 | | $ | 19,235 | | $ | 46,938 | |
| Total operating revenues | | | 61,456 | | | 19,235 | | | 46,938 | |
| | | | | | | | | | | |
Operating Expenses: | | | | | | | | | | |
| Cost of energy sold | | | 22,651 | | | 6,702 | | | 16,793 | |
| Administrative and general | | | 9,688 | | | 2,183 | | | 4,551 | |
| Depreciation and amortization | | | 7,832 | | | 2,085 | | | 5,436 | |
| Transmission and distribution costs | | | 5,399 | | | 1,150 | | | 3,944 | |
| Taxes, other than income taxes | | | 5,872 | | | 1,885 | | | 3,195 | |
| Income taxes | | | 1,238 | | | 1,125 | | | 2,808 | |
| Total operating expenses | | | 52,680 | | | 15,130 | | | 36,727 | |
| Operating income | | | 8,776 | | | 4,105 | | | 10,211 | |
| | | | | | | | | | | |
Other Income and Deductions: | | | | | | | | | | |
| Interest income | | | 81 | | | 87 | | | 360 | |
| Other income | | | 125 | | | 111 | | | 252 | |
| Carrying charges on regulatory assets | | | 2,004 | | | 525 | | | 1,394 | |
| Other deductions | | | (32 | ) | | (11 | ) | | (30 | ) |
| Other income taxes | | | (847 | ) | | (314 | ) | | (715 | ) |
| Net other income and deductions | | | 1,331 | | | 398 | | | 1,261 | |
| | | | | | | | | | | |
Interest Charges | | | 7,271 | | | 1,956 | | | 5,088 | |
| | | | | | | | | | | |
Net Earnings | | $ | 2,836 | | $ | 2,547 | | $ | 6,384 | |
| | | | | | | | | | | |
| The accompanying notes, as they relate to TNMP, are an integral part of these financial statements. |
| | | Three Months Ended March 31, | |
| | | 2007 | | 2006 | |
| | | (In thousands) | |
| | | | | | |
Electric Operating Revenues | | $ | 40,928 | | $ | 35,547 | |
| | | | | | | | |
Operating Expenses: | | | | | | | |
| Cost of energy sold | | | 7,171 | | | 6,448 | |
| Administrative and general | | | 8,902 | | | 9,215 | |
| Depreciation and amortization | | | 7,000 | | | 6,174 | |
| Transmission and distribution costs | | | 4,923 | | | 3,745 | |
| Taxes other than income taxes | | | 4,825 | | | 5,190 | |
| Income taxes | | | 352 | | | (1,679 | ) |
| Total operating expenses | | | 33,173 | | | 29,093 | |
| Operating income | | | 7,755 | | | 6,454 | |
| | | | | | | | |
| | | | | | | | |
Other Income and Deductions: | | | | | | | |
| Interest income | | | 88 | | | 255 | |
| Other income | | | 276 | | | 168 | |
| Carrying charges on regulatory assets | | | - | | | 1,973 | |
| Other deductions | | | (27 | ) | | (24 | ) |
| Other income taxes | | | (76 | ) | | (907 | ) |
| Net other income and deductions | | | 261 | | | 1,465 | |
| Earnings before interest charges | | | 8,016 | | | 7,919 | |
| | | | | | | | |
Interest Charges: | | | | | | | |
| Interest on long-term debt | | | 6,432 | | | 6,432 | |
| Other interest charges | | | 646 | | | 802 | |
| Total interest charges | | | 7,078 | | | 7,234 | |
| | | | | | | | |
Net Earnings From Continuing Operations | | | 938 | | | 685 | |
| | | | | | | | |
Discontinued Operations, net of income tax | | | | | | | |
expense of $0 and $1,003 | | | - | | | 471 | |
| | | | | | | | |
Net Earnings | | $ | 938 | | $ | 1,156 | |
The accompanying notes, as they relate to TNMP, are an integral part of these condensed consolidated financial statements.
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
| | | Post-Acquisition | | Post-Acquisition | | | Pre-Acquisition | |
| | | Six months ended | | For the period | | | For the period | |
| | | June 30, | | June 6-June 30, | | | January 1-June 6, | |
| | | 2006 | | 2005 | | | 2005 | |
| | | | | (In thousands) | | | | |
| | | | | | | | | |
Operating Revenues: | | | | | | | | |
| Electric | | $ | 124,141 | | $ | 19,235 | | | $ | 112,820 | |
| Total operating revenues | | | 124,141 | | | 19,235 | | | | 112,820 | |
| | | | | | | | | | | | |
Operating Expenses: | | | | | | | | | | | |
| Cost of energy sold | | | 49,823 | | | 6,702 | | | | 43,885 | |
| Administrative and general | | | 20,919 | | | 2,183 | | | | 11,048 | |
| Depreciation and amortization | | | 15,563 | | | 2,085 | | | | 12,954 | |
| Transmission and distribution costs | | | 10,112 | | | 1,150 | | | | 9,111 | |
| Taxes, other than income taxes | | | 11,479 | | | 1,885 | | | | 9,228 | |
| Income taxes | | | 558 | | | 1,125 | | | | 5,055 | |
| Total operating expenses | | | 108,454 | | | 15,130 | | | | 91,281 | |
| Operating income | | | 15,687 | | | 4,105 | | | | 21,539 | |
| | | | | | | | | | | | |
Other Income and Deductions: | | | | | | | | | | | |
| Interest income | | | 336 | | | 87 | | | | 650 | |
| Other income | | | 311 | | | 111 | | | | 523 | |
| Carrying charges on regulatory assets | | | 3,977 | | | 525 | | | | (1,407 | ) |
| Other deductions | | | (62 | ) | | (11 | ) | | | (79 | ) |
| Other income taxes | | | (1,759 | ) | | (314 | ) | | | 154 | |
| Net other income and deductions | | | 2,803 | | | 398 | | | | (159 | ) |
| | | | | | | | | | | | |
Interest Charges | | | 14,498 | | | 1,956 | | | | 12,120 | |
| | | | | | | | | | | | |
Net Earnings | | $ | 3,992 | | $ | 2,547 | | | $ | 9,260 | |
| | | | | | | | | | | | |
| The accompanying notes, as they relate to TNMP, are an integral part of these financial statements. |
16| | | March 31, | | December 31, | |
| | | 2007 | | 2006 | |
| | | (In thousands) | |
| | | | | | |
ASSETS | | | | | |
Utility Plant: | | | | | |
| Electric plant in service | | $ | 774,716 | | $ | 925,538 | |
| Common plant in service and plant held for future use | | | 488 | | | 589 | |
| | | | 775,204 | | | 926,127 | |
| Less accumulated depreciation and amortization | | | 267,013 | | | 326,404 | |
| | | | 508,191 | | | 599,723 | |
| Construction work in progress | | | 10,318 | | | 13,799 | |
| Net utility plant | | | 518,509 | | | 613,522 | |
| | | | | | | | |
Other Property and Investments: | | | | | | | |
| Other investments | | | 555 | | | 511 | |
| Non-utility property, net of accumulated depreciation of $0 and $3 | | | 2,110 | | | 2,120 | |
| Total other property and investments | | | 2,665 | | | 2,631 | |
| | | | | | | | |
Current Assets: | | | | | | | |
| Cash and cash equivalents | | | 92 | | | 2,542 | |
| Accounts receivable, net of allowance for uncollectible accounts of $0 and $31 | | | 7,184 | | | 10,317 | |
| Federal income tax receivable | | | 40,068 | | | 40,473 | |
| Unbilled revenues | | | 2,170 | | | 6,000 | |
| Affiliate accounts receivable | | | 12,011 | | | - | |
| Other receivables | | | 4,850 | | | 1,515 | |
| Inventories | | | 1,549 | | | 1,509 | |
| Other current assets | | | 205 | | | 944 | |
| Total current assets | | | 68,129 | | | 63,300 | |
| | | | | | | | |
Deferred Charges: | | | | | | | |
| Stranded costs | | | 88,956 | | | 89,949 | |
| Carrying charges on stranded costs | | | 41,112 | | | 41,584 | |
| Other regulatory assets | | | 10,525 | | | 11,052 | |
| Goodwill | | | 260,183 | | | 363,764 | |
| Pension asset | | | 9,508 | | | 8,853 | |
| Other deferred charges | | | 7,647 | | | 9,205 | |
| Total deferred charges | | | 417,931 | | | 524,407 | |
| | | | | | | | |
| | | $ | 1,007,234 | | $ | 1,203,860 | |
The accompanying notes, as they relate to TNMP, are an integral part of these condensed consolidated financial statements.
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES | |
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC. | |
CONDENSED CONSOLIDATED BALANCE SHEETS | |
| (Unaudited) | |
| | |
| | | June 30, | | December 31, | |
| | | 2006 | | 2005 | |
| | | (In thousands) | |
ASSETS | | | | | |
Utility Plant: | | | | | |
| Electric plant in service | | $ | 893,196 | | $ | 877,893 | |
| Construction work in progress | | | 6,683 | | | 7,138 | |
| Common plant in service and plant held for future use | | | 589 | | | 589 | |
| | | | 900,468 | | | 885,620 | |
| Less accumulated depreciation and amortization | | | 308,383 | | | 296,611 | |
| | | | | | | | |
| Net utility plant | | | 592,085 | | | 589,009 | |
| | | | | | | | |
Other Property and Investments: | | | | | | | |
| Other investments | | | 548 | | | 548 | |
| Non-utility property, net of accumulated depreciation of $3 and $3 | | | 2,120 | | | 2,120 | |
| | | | | | | | |
| Total other property and investments | | | 2,668 | | | 2,668 | |
| | | | | | | | |
Current Assets: | | | | | | | |
| Cash and cash equivalents | | | 18,732 | | | 16,228 | |
| Accounts receivable, net of allowance for uncollectible accounts of $79 and $100 | | | 11,058 | | | 13,191 | |
| Federal income tax refund | | | 33,671 | | | 36,392 | |
| Unbilled revenues | | | 5,962 | | | 6,679 | |
| Affiliate accounts receivable | | | 10,809 | | | - | |
| Other receivables | | | 720 | | | 6,087 | |
| Inventories | | | 1,495 | | | 1,478 | |
| Other current assets | | | 794 | | | 1,211 | |
| | | | | | | | |
| Total current assets | | | 83,241 | | | 81,266 | |
| | | | | | | | |
Deferred Charges: | | | | | | | |
| Stranded costs | | | 87,316 | | | 87,316 | |
| Carrying charges on stranded costs | | | 37,895 | | | 33,918 | |
| Other regulatory assets | | | 5,765 | | | 2,720 | |
| Goodwill | | | 363,763 | | | 367,245 | |
| Other deferred charges | | | 3,339 | | | 4,948 | |
| | | | | | | | |
| Total deferred charges | | | 498,078 | | | 496,147 | |
| | | $ | 1,176,072 | | $ | 1,169,090 | |
| | | | | | | | |
| The accompanying notes, as they relate to TNMP, are an integral part of these financial statements. |
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES | |
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC. | |
CONDENSED CONSOLIDATED BALANCE SHEETS | |
| (Unaudited) | |
| | | | | | |
| | | June 30, | | December 31, | |
| | | 2006 | | 2005 | |
| | | (In thousands) | |
CAPITALIZATION AND LIABILITIES | | | | | |
Capitalization: | | | | | |
| Common stockholder’s equity: | | | | | |
| Common stock outstanding ($10 par value, 12,000,000 shares authorized: | | | | | |
| issued 9,615 at June 30, 2006 and December 31, 2005) | | $ | 96 | | $ | 96 | |
| Paid-in-capital | | | 492,812 | | | 494,287 | |
| Accumulated other comprehensive loss, net of tax | | | (29 | ) | | (29 | ) |
| Retained earnings | | | 9,442 | | | 5,450 | |
| | | | | | | | |
| Total common stockholder’s equity | | | 502,321 | | | 499,804 | |
| Long-term debt | | | 416,012 | | | 415,864 | |
| | | | | | | | |
| Total capitalization | | | 918,333 | | | 915,668 | |
| | | | | | | | |
Current Liabilities: | | | | | | | |
| Accounts payable | | | 11,833 | | | 11,913 | |
| Affiliate accounts payable | | | 17,545 | | | - | |
| Accrued interest and taxes | | | 13,459 | | | 24,250 | |
| Accrued payroll and benefits | | | 671 | | | 3,268 | |
| Other current liabilities | | | 6,824 | | | 5,516 | |
| | | | | | | | |
| Total current liabilities | | | 50,332 | | | 44,947 | |
| | | | | | | | |
Long-Term Liabilities: | | | | | | | |
| Accumulated deferred income taxes | | | 139,669 | | | 139,405 | |
| Accumulated deferred investment tax credits | | | 1,147 | | | 1,540 | |
| Regulatory liabilities | | | 56,742 | | | 56,246 | |
| Accrued pension liability | | | 2,202 | | | 3,585 | |
| Accrued postretirement benefit cost | | | 6,894 | | | 6,525 | |
| Other deferred credits | | | 753 | | | 1,174 | |
| | | | | | | | |
| Total long-term liabilities | | | 207,407 | | | 208,475 | |
| Commitments and Contingencies (see Note 9) | | | - | | | - | |
| | | $ | 1,176,072 | | $ | 1,169,090 | |
| | | | | | | | |
| The accompanying notes, as they relate to TNMP, are an integral part of these financial statements. |
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | March 31, | | December 31, | |
| | | 2007 | | 2006 | |
| | | (In thousands, except share information) | |
| | | | | | |
CAPITALIZATION AND LIABILITIES | | | | | |
Capitalization: | | | | | |
| Common stockholder’s equity: | | | | | |
| Common stock outstanding ($10 par value, 12,000,000 shares authorized: | | | | | |
| 6,358 and 9,615 shares issued and outstanding) | | $ | 64 | | $ | 96 | |
| Paid-in-capital | | | 326,111 | | | 492,812 | |
| Accumulated other comprehensive income, net of income tax | | | 562 | | | 562 | |
| Retained earnings | | | 24,049 | | | 21,149 | |
| Total common stockholder’s equity | | | 350,786 | | | 514,619 | |
| Long-term debt | | | 419,127 | | | 420,546 | |
| | | | | | | | |
| Total capitalization | | | 769,913 | | | 935,165 | |
| | | | | | | | |
Current Liabilities: | | | | | | | |
| Short term debt - affiliate | | | 29,200 | | | - | |
| Accounts payable | | | 3,639 | | | 11,332 | |
| Affiliate accounts payable | | | 6,460 | | | 15,673 | |
| Accrued interest and taxes | | | 15,892 | | | 23,110 | |
| Other current liabilities | | | 5,058 | | | 10,102 | |
| | | | | | | | |
| Total current liabilities | | | 60,249 | | | 60,217 | |
| | | | | | | | |
Long-Term Liabilities: | | | | | | | |
| Accumulated deferred income taxes | | | 126,979 | | | 145,641 | |
| Accumulated deferred investment tax credits | | | 467 | | | 832 | |
| Regulatory liabilities | | | 41,272 | | | 54,134 | |
| Accrued pension liability and postretirement benefit cost | | | 5,163 | | | 5,203 | |
| Other deferred credits | | | 3,191 | | | 2,668 | |
| | | | | | | | |
| Total long-term liabilities | | | 177,072 | | | 208,478 | |
| | | | | | | | |
Commitments and Contingencies (see Note 9) | | | | | | | |
| | | | | | | | |
| | | $ | 1,007,234 | | $ | 1,203,860 | |
The accompanying notes, as they relate to TNMP, are an integral part of these condensed consolidated financial statements.
TEXAS-NEW MEXICO POWER COMPANY | |
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC. | |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |
| (Unaudited) | |
| | |
| | | Post-Acquisition | | Post-Acquisition | | | Pre-Acquisition | |
| | | Six months ended | | For the period | | | For the period | |
| | | June 30, | | June 6-June 30, | | | January 1-June 6, | |
| | | 2006 | | 2005 | | | 2005 | |
| | | | | (In thousands) | | | | |
Cash Flows From Operating Activities: | | | | | | | | |
| Net earnings | | $ | 3,992 | | $ | 2,547 | | | $ | 9,260 | |
| Adjustments to reconcile net earnings to net cash flows from | | | | | | | | | | | |
| operating activities: | | | | | | | | | | | |
| Depreciation and amortization | | | 15,712 | | | 2,261 | | | | 14,042 | |
| Allowance for equity funds used during construction | | | (74 | ) | | (8 | ) | | | (60 | ) |
| Accumulated deferred income tax | | | 1,877 | | | 75 | | | | (1,267 | ) |
| Carrying charges on deferred stranded costs | | | (3,978 | ) | | (525 | ) | | | 1,407 | |
| Interest on retail competition transition obligation | | | 885 | | | - | | | | - | |
| Other, net | | | (21 | ) | | (1 | ) | | | (120 | ) |
| Changes in certain assets and liabilities: | | | | | | | | | | | |
| Accounts receivable | | | 2,154 | | | 823 | | | | 149 | |
| Unbilled revenues | | | 717 | | | (139 | ) | | | (106 | ) |
| Other assets | | | 7,053 | | | (1,468 | ) | | | (3,800 | ) |
| Accrued postretirement benefit costs | | | (1,014 | ) | | (2,583 | ) | | | 495 | |
| Accounts payable | | | (79 | ) | | 652 | | | | (5,379 | ) |
| Accrued interest and taxes | | | (10,872 | ) | | 1,586 | | | | (4,134 | ) |
| Change in affiliate accounts | | | 6,736 | | | 1,249 | | | | 47 | |
| Other liabilities | | | (2,583 | ) | | 2,180 | | | | 4,819 | |
| Net cash flows from operating activities | | | 20,505 | | | 6,649 | | | | 15,353 | |
| | | | | | | | | | | | |
Cash Flows From Investing Activities: | | | | | | | | | | | |
| Utility plant additions | | | (18,152 | ) | | (1,685 | ) | | | (17,822 | ) |
| Other, net | | | 69 | | | 840 | | | | (242 | ) |
| Acquisition costs | | | - | | | (3,473 | ) | | | - | |
| Net cash flows used for investing activities | | | (18,083 | ) | | (4,318 | ) | | | (18,064 | ) |
| |
| The accompanying notes, as they relate to TNMP, are an integral part of these financial statements. |
TEXAS-NEW MEXICO POWER COMPANY
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
(Unaudited)
| | | Three Months Ended March 31, | |
| | | 2007 | | 2006 | |
| | | (In thousands) | |
Cash Flows From Operating Activities: | | | | | |
| Net earnings | | $ | 938 | | $ | 1,156 | |
| Adjustments to reconcile net earnings to | | | | | | | |
| net cash flows from operating activities: | | | | | | | |
| Depreciation and amortization | | | 6,905 | | | 7,805 | |
| Rate case amortization | | | 938 | | | - | |
| Allowance for equity funds used during construction | | | (74 | ) | | (47 | ) |
| Deferred income tax expense (benefit) | | | (1,247 | ) | | 430 | |
| Carrying charges on deferred stranded costs | | | - | | | (1,973 | ) |
| Interest on retail competition transition obligation | | | - | | | 437 | |
| Other, net | | | (350 | ) | | 340 | |
| Changes in certain assets and liabilities: | | | | | | | |
| Accounts receivable | | | (6,532 | ) | | 2,173 | |
| Unbilled revenues | | | 299 | | | (316 | ) |
| Other assets | | | 548 | | | 1,838 | |
| Accrued pension liability and postretirement benefit costs | | | (185 | ) | | (507 | ) |
| Accounts payable | | | (4,870 | ) | | 725 | |
| Accrued interest and taxes | | | (4,481 | ) | | (6,477 | ) |
| Change in affiliate accounts | | | (13,610 | ) | | 4,528 | |
| Other liabilities | | | (2,123 | ) | | (2,072 | ) |
| Net cash flows from operating activities | | | (23,844 | ) | | 8,040 | |
| | | | | | | | |
Cash Flows From Investing Activities: | | | | | | | |
| Utility plant additions | | | (7,804 | ) | | (7,216 | ) |
| Other, net | | | (3 | ) | | 31 | |
| Net cash flows from investing activities | | | (7,807 | ) | | (7,185 | ) |
The accompanying notes, as they relate to TNMP, are an integral part of these condensed consolidated financial statements.
TEXAS-NEW MEXICO POWER COMPANY | |
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC. | |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |
| (Unaudited) | |
| | |
| | | Post-Acquisition | | Post-Acquisition | | | Pre-Acquisition | |
| | | Six months ended | | For the period | | | For the period | |
| | | June 30, | | June 6-June 30, | | | January 1-June 6, | |
| | | 2006 | | 2005 | | | 2005 | |
| | | | | (In thousands) | | | | |
Cash Flows From Financing Activities: | | | | | | | | |
| Other, net | | | 82 | | | - | | | | 127 | |
| Net cash flows from financing activities | | | 82 | | | - | | | | 127 | |
| | | | | | | | | | | | |
| Increase/(Decrease) in Cash and Cash Equivalents | | | 2,504 | | | 2,331 | | | | (2,584 | ) |
| Beginning of Period | | | 16,228 | | | 63,175 | | | | 65,759 | |
| End of Period | | $ | 18,732 | | $ | 65,506 | | | $ | 63,175 | |
| | | | | | | | | | | | |
Supplemental Cash Flow Disclosures: | | | | | | | | | | | |
| Interest paid, net of capitalized interest | | $ | 18,439 | | $ | 1 | | | $ | 12,868 | |
| | | | | | | | | | | | |
| Income taxes paid, net | | $ | - | | $ | - | | | $ | 2,456 | |
| |
| The accompanying notes, as they relate to TNMP, are an integral part of these financial statements. |
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | Three Months Ended March 31, | |
| | | 2007 | | 2006 | |
| | | (In thousands) | |
| | | | | | |
Cash Flow From Financing Activities: | | | | | |
| Short-term debt - affiliate | | | 29,200 | | | - | |
| Other, net | | | 1 | | | 34 | |
| | | | | | | | |
| Net cash flows from financing activities | | | 29,201 | | | 34 | |
| | | | | | | | |
Change in Cash and Cash Equivalents | | | (2,450 | ) | | 889 | |
Cash and Cash Equivalents at Beginning of Period | | | 2,542 | | | 16,228 | |
Cash and Cash Equivalents at End of Period | | $ | 92 | | $ | 17,117 | |
| | | | | | | | |
Supplemental Cash Flow Disclosures: | | | | | | | |
| Interest paid, net of capitalized interest | | $ | 5,912 | | $ | 5,482 | |
| Income taxes paid (refunded), net | | $ | - | | $ | - | |
| | | | | | | | |
Supplemental schedule of noncash investing and financing activities: | | | | | | | |
| | | | | | | | |
| As of January 1, 2007, TNMP transferred its New Mexico operational assets and liabilities to PNMR through | | | | | | | |
| a redemption of TNMP’s common stock. PNMR contemporaneously contributed the TNMP | | | | | | | |
| New Mexico operational assets and liabilities to PNM. See Note 14. | | | | | | | |
| | | | | | | | |
| Assets transferred | | $ | 216,422 | | | | |
| Liabilities transferred | | | 49,438 | | | | |
| Net assets transferred - common stock redeemed | | $ | 166,984 | | | | |
The accompanying notes, as they relate to TNMP, are an integral part of these condensed consolidated financial statements.
TEXAS-NEW MEXICO POWER COMPANY | |
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC. | |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | |
| (Unaudited) | |
| | |
| | | Post-Acquisition | | Post-Acquisition | | | Pre-Acquisition | |
| | | Three months ended | | For the period | | | For the period | |
| | | June 30, | | June 6-June 30, | | | April 1-June 6, | |
| | | 2006 | | 2005 | | | 2005 | |
| | | | | (In thousands) | | | | |
| | | | | | | | | |
Net Earnings | | $ | 2,836 | | $ | 2,547 | | | $ | 6,384 | |
| Other Comprehensive Income: | | | | | | | | | | | |
| | | | | | | | | | | | |
| Interest rate hedge net of reclassification adjustment, net of | | | | | | | | | | | |
| income tax benefit (expense) of $0 , $0 and $1,004 | | $ | - | | $ | - | | | $ | 1,632 | |
| | | | | | | | | | | | |
Total Other Comprehensive Income | | $ | - | | $ | - | | | $ | 1,632 | |
| | | | | | | | | | | | |
Total Comprehensive Income | | $ | 2,836 | | $ | 2,547 | | | $ | 8,016 | |
| |
| The accompanying notes, as they relate to TNMP, are an integral part of these financial statements. |
TEXAS-NEW MEXICO POWER COMPANY
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
(Unaudited)
| | | Three Months Ended March 31, | |
| | | 2007 | | 2006 | |
| | | (In thousands) | |
| | | | | | |
Net Earnings and Total Comprehensive Income (Loss) | | $ | 938 | | $ | 1,156 | |
The accompanying notes, as they relate to TNMP, are an integral part of these condensed consolidated financial statements.
TEXAS-NEW MEXICO POWER COMPANY | |
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC. | |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | |
| (Unaudited) | |
| | |
| | | Post-Acquisition | | Post-Acquisition | | | Pre-Acquisition | |
| | | Six months ended | | For the period | | | For the period | |
| | | June 30, | | June 6-June 30, | | | January 1-June 6, | |
| | | 2006 | | 2005 | | | 2005 | |
| | | | | (In thousands) | | | | |
| | | | | | | | | |
Net Earnings | | $ | 3,992 | | $ | 2,547 | | | $ | 9,260 | |
| Other Comprehensive Income: | | | | | | | | | | | |
| | | | | | | | | | | | |
| Interest rate hedge net of reclassification adjustment, net of | | | | | | | | | | | |
| income tax benefit (expense) of $0 , $0 and $1,084 | | $ | - | | $ | - | | | $ | 1,761 | |
| | | | | | | | | | | | |
Total Other Comprehensive Income | | $ | - | | $ | - | | | $ | 1,761 | |
| | | | | | | | | | | | |
Total Comprehensive Income | | $ | 3,992 | | $ | 2,547 | | | $ | 11,021 | |
| |
| The accompanying notes, as they relate to TNMP, are an integral part of these financial statements. |
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(Unaudited)
(1) | Significant Accounting Policies and Responsibility for Financial Statements |
Financial Statement Preparation
In the opinion of the management of PNMR, the accompanying unaudited interim Condensed Consolidated Financial Statements reflect all normal and recurring accruals and adjustments which are necessary to present fairly the Company’s financial position at June 30, 2006March 31, 2007 and December 31, 2005,2006, the consolidated results of its operations and comprehensive income for the three and six months ended June 30,March 31, 2007 and 2006 and 2005 and the consolidated statements of cash flows for the sixthree months ended June 30, 2006March 31, 2007 and 2005. 2006. The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could ultimately differ from those estimated.
These Condensed Consolidated Financial Statements are unaudited, and certain information and note disclosures normally included in the Company’s annual Consolidated Financial Statements have been condensed or omitted, as permitted under the applicable rules and regulations. PNMR’s four primary subsidiaries are PNM, TNMP, First Choice and Altura. Readers of these financial statements should refer to PNMR’s, PNM’s and TNMP’s audited Consolidated Financial Statements and Notes thereto for the year ended December 31, 20052006 that are included in their respective Annual Reports on Form 10-K/10-K/A (Amendment No. 2)1) for the year ended December 31, 2005.2006. The results of operations presented in the accompanying Condensed Consolidated Financial Statements are not necessarily representative of operations for an entire year.
TNP Acquisition
As discussed in Note 2, on June 6, 2005, PNMR completed the acquisition of TNP effective at 8:00 AM Central Daylight Time. The acquisition was accounted for using the purchase method of accounting. The purchase accounting entries are reflected on PNMR’s financial statements as of the purchase date. PNMR “pushed down” the effects of purchase accounting to the financial statements of TNP’s principal subsidiaries, TNMP and First Choice. Accordingly, TNMP’s post-acquisition financial statements reflect a new basis of accounting, and separate financial statements and note amounts in tabular format are presented for pre-acquisition and post-acquisition periods, separated by a heavy black line.
Presentation
The Notes to Condensed Consolidated Financial Statements include disclosures for PNMR, PNM and TNMP. For discussion purposes, this report will use the term “Company” when discussing matters of common applicability to PNMR, PNM and TNMP. Discussions regarding only PNMR, PNM or TNMP will be clearly indicated as such.
Change in Presentation
Certain amounts in the 20052006 Condensed Consolidated Financial Statements and Notes thereto for PNMR, PNM and TNMP have been reclassified to conform to the 20062007 financial statement presentation. Specifically,
At December 31, 2006, certain amounts inincome tax receivables and payables were shown on a net basis. At March 31, 2007, these income tax receivables and payables are shown gross on the 2005 Condensed Consolidated Financial Statements and Notes thereto of TNMPBalance Sheet. For comparability, the December 31, 2006 balances have been reclassified to conform to PNMR’s presentationresulting in income tax receivables and payables each being increased by $65.2 million for comparability.PNMR, $13.2 million for PNM, and $4.1 million for TNMP.
Principles of Consolidation
The Condensed Consolidated Financial Statements include the accounts of the Company and subsidiaries in which it owns a majority voting interest.interest and the PVNGS Capital Trust. PNMR’s primary subsidiaries are PNM, TNMP, First Choice and Altura. Corporate administrative and general expenses, which represent costs that are driven primarily by corporate level activities, are allocated to the business segments. Other significant intercompany transactions between PNMR, PNM and TNMP in 20062007 or 20052006 include energy purchases and sales, dividends paid on common stock the redemption of common stock of TNMP, and consolidation of the PVNGS capital trust.Capital Trust. All significant intercompany transactions and balances have been eliminated. See(See Note 12.)
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(Unaudited)
Financial Statement Preparation
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual recorded amounts could differ from those estimated.
Goodwill and Other Intangible Assets
The excess purchase price over the fair value of the assets acquired and the liabilities assumed by PNMR for its June 6, 2005 acquisition of TNP was recorded as goodwill. Under the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), the Company does not amortize goodwill. Certain intangible assets are amortized over their estimated useful lives. Goodwill and non-amortizing intangible assets are evaluated for impairment at least annually, or more frequently if events and circumstances indicate that the goodwill and intangible assets might be impaired. Goodwill for TNMP and First Choice and the First Choice trade name, which is a non-amortized intangible asset, were evaluated for impairment as of April 1, 2006. As a result of the evaluation, no impairment was recognized. Other intangible assets subject to amortization are evaluated for impairment in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) when events and circumstances indicate that the assets might be impaired. As of June 30, 2006, goodwill on PNMR’s and TNMP's Condensed Consolidated Balance Sheet decreased $3.7 million and $3.5 million, respectively, for amounts recorded as a result of corrections to deferred taxes related to pre-acquisition periods.
Decommissioning Costs
Accounting for decommissioning costs for nuclear and fossil-fuel generation involves significant estimates related to costs to be incurred many years in the future after plant closure. Changes in these estimates could significantly impact PNMR’s and PNM’s financial position, results of operations and cash flows. PNM owns and leases nuclear and fossil-fuel facilities that are within and outside of its retail service areas. In accordance with SFAS No. 143, "Accounting for Asset Retirement Obligations” (“SFAS 143”), PNM is only required to recognize and measure decommissioning liabilities for tangible long-lived assets for which a legal obligation exists. Adoption of the statement changed the method of accounting for both nuclear generation decommissioning and fossil-fuel generation decommissioning. Nuclear decommissioning costs and related accruals are based on site-specific estimates of the costs for removing all radioactive materials and other structures at the site. PNM’s accruals for Units 1, 2 and 3 have been made based on such estimates, the guidelines of the NRC and the probability of a license extension. PVNGS Unit 3 is excluded from PNM’s retail rates while PVNGS Units 1 and 2 are included. PNM collects a provision for ultimate decommissioning of PVNGS Units 1 and 2 in its rates and recognizes a corresponding expense and liability for these amounts. PNM believes that it will continue to be able to collect in rates for its legal asset retirement obligations for nuclear generation activities included in the ratemaking process.
Stock-Based Compensation
See Note 6 for a comprehensive discussion of the accounting for stock-based compensation expense, including a discussion of the assumptions used to estimate the fair market value of awards.
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Carrying Charges on Stranded Costs
TNMP’s estimate of allowable carrying charges on stranded costs that it may recover from its transmission and distribution customers is based on a United States Supreme Court ruling and the PUCT’s application of that ruling. As of June 30, 2006 and December 31, 2005, the regulatory asset recorded on the Condensed Consolidated Balance Sheets for carrying costs was $37.9 million and $33.9 million, respectively (see Note 10). As of June 30, 2006, the equity-related portion of carrying costs totaled $29.5 million. TNMP expects to collect the equity-related portion of carrying costs from customers but is prohibited under GAAP from recognizing those amounts in its consolidated financial statements until the actual receipt of the equity-related portion of carrying costs from customers.
(2)Acquisitions
Twin Oaks
| Acquisition of Twin Oaks |
On April 18, 2006, PNMR’s wholly owned subsidiary, Altura, purchased the Twin Oaks business, which included athe 305 MW coal-fired Twin Oaks power plant located 150 miles south of Dallas, Texas for $480.0 million in cash plus the assumption of contracts and liabilities.Texas. The results of Twin Oaks operations have been included in the Consolidated Financial Statements of PNMR from that date. PNMR acquired Twin Oaks to expand the Company’s merchant generation fleet in order to serve a growing wholesale market in the Southwest. PNMR secured bridge financing for Altura to close the transaction (see Note 7). In addition, PNMR incurred transaction and other costs of $1.0 million.
The following table presents the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.
At April 18, 2006 | |
| (In thousands) | |
| Net utility plant | | $ | 595,336 | |
| Other current assets | | | 10,341 | |
| Other intangible assets | | | 25,000 | |
| Other deferred charges | | | 99,598 | |
| Total assets acquired | | | 730,275 | |
| | | | | |
| Other current liabilities | | | 96,088 | |
| Other deferred credits | | | 153,173 | |
| Total liabilities assumed | | | 249,261 | |
| | | | | |
| Net assets acquired | | $ | 481,014 | |
Altura obtained, or is in the process of obtaining, independent valuations of acquired property and intangible assets; thus, the allocation of the purchase price is subject to adjustment and will be finalized within one year of the acquisition.
The Purchase Agreement also includes the development rights for a possible 600-megawatt expansion of the plant, which PNMR has classified as an intangible asset. The necessary permits for the plant expansion are being obtained, which are expected in 2007. An additional $2.5 million payment will be made to the seller upon the issuance of an air permit for the expansion and an additional $2.5 million will be paid upon Altura beginning construction of the expansion. PNMR has not made a decision regarding the Twin Oaks expansion, but it is considering a variety of options, including self development or sale to a third party.
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As part of the acquisition of Twin Oaks, PNMR determined the fair value of two contractual obligations to sell power. The first contract obligates PNMR to sell power through September 2007 at which time the second contract begins and extends for three years. In comparing the pricing terms of the contractual obligations against the forward price of electricity in the relevant market, PNMR concluded that the contracts were below market. In accordance with SFAS No. 141, as amended,“Business Combinations” (“SFAS 141”), the contracts were recorded at fair value and will be amortized as an increase in operating revenue over the contract lives. The amortization matches the difference between the forward price curve and the contractual obligations for each month in accordance with the contract as of the acquisition date. For the first contract, $95.2$94.9 million was recorded in other current liabilities and $52.7$52.4 million was recorded in other deferred credits for a contract total of $147.3 million. As of March 31, 2007, the Company had amortized $90.9 million, including $20.0 million during the three months ended March 31, 2007, leaving a balance on the first contract of $56.4 million. For the second contract, $29.6 million was recorded in other deferred credits. ForSee Note 4 for information on the second contract, $29.7 million was recorded in other deferred credits.accounting treatment of these contracts.
The following unaudited pro forma financial information presents a summary of PNMR’s consolidated results of operations for the three and six months ended June 30,March 31, 2006 and 2005 assuming the acquisition of Twin Oaks had been completed as of January 1, 2006, and 2005, respectively, including adjustments which are based upon preliminary estimates, to reflect the allocation of the purchase price to the acquired net assets. The pro forma financial information does not include synergy savings that may result from the business combination and is not necessarily indicative of the results of operations if the acquisition had been effective as of these dates. In addition, the pro forma financial information does not include results of operations from TNP prior to its acquisition on June 6, 2005.
| | | For the Three Months Ended | | For the Six Months Ended | |
| | | June 30, | | June 30, | |
| | | 2006 | | 2005 | | 2006 | | 2005 | |
| | | (In thousands, except per share amounts) | |
| Operating revenues | | $ | 559,375 | | $ | 452,788 | | $ | 1,262,178 | | $ | 928,771 | |
| Operating expenses | | $ | 506,659 | | $ | 418,032 | | $ | 1,146,775 | | $ | 836,894 | |
| Earnings before extraordinary item | | $ | 21,631 | | $ | 12,927 | | $ | 57,512 | | $ | 55,826 | |
| Net earnings | | $ | 21,631 | | $ | 12,927 | | $ | 57,512 | | $ | 55,826 | |
| Net earnings per common share: | | | | | | | | | | | | | |
| Basic | | $ | 0.31 | | $ | 0.20 | | $ | 0.84 | | $ | 0.89 | |
| Diluted | | $ | 0.31 | | $ | 0.19 | | $ | 0.83 | | $ | 0.87 | |
TNP
On June 6, 2005, PNMR acquired all of the outstanding common shares of TNP, including its principal subsidiaries, TNMP and First Choice. The aggregate purchase price was $1,221 million, including a net payment to the previous owner of $162.0 million consisting of $74.6 million of cash and common stock valued at $87.4 million. The results of TNP’s operations have been included in the Condensed Consolidated Financial Statements of PNMR from thatthis date.
| | | For the Three Months | |
| | | Ended March 31, 2006 | |
| | | (In thousands, except per share amounts) | |
| | | | |
| Operating revenues | | $ | 694,948 | |
| Operating expenses | | $ | 637,328 | |
| Net earnings | | $ | 30,813 | |
| Net earnings per common share: | | | | |
| Basic | | $ | 0.45 | |
| Diluted | | $ | 0.44 | |
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(Unaudited)
(3) Segment Information
The following segment presentation is based on the methodology that the Company’s management uses for making operating decisions and assessing performance of its various business activities. The following presentation reports operating results without regard to the effect of accounting or regulatory changes and similar other items not related to normal operations. A reconciliation from theAs discussed below and effective January 1, 2007, TNMP’s New Mexico operations were transferred to PNM Electric. See Note 14. The 2006 segment presentation to the GAAP financial statementsinformation is provided.presented as previously reported and does not reflect this transfer.
REGULATED OPERATIONS
PNM Electric
PNM Electric consists of the operations of PNM,is a regulated utility. PNM Electricutility that provides integrated electricity services that include the generation, transmission and distribution of electricity for retail electric customers in New Mexico and the sale of transmission to third parties as well as to the PNM Wholesale and TNMP Electric segments.segment.
TNMP Electric
TNMP Electric consists of the operations of TNMP,is a regulated utility. Inutility operating in Texas and, through December 31, 2006, in New Mexico. TNMP’s operations are subject to traditional cost of service regulation. TNMP Electric provides regulated transmission and distribution services to its customers which include First Choice. In New Mexico,in Texas under the TECA.
Through December 31, 2006, TNMP Electric providesprovided integrated electricityelectric services that includeincluded the transmission, distribution, purchase and sale of electricity to its New Mexico customers as well as transmission to third parties and to PNM. TNMP Electric's Texas andEffective January 1, 2007, TNMP’s New Mexico operations are subjectwere transferred to traditional cost-of-service regulation.
PNM. PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
PNM Gas
PNM Gas is a regulated utility that distributes natural gas to most of the major communities in New Mexico. The customer base of PNM Gas includes both sales-service customers and transportation-service customers. PNM Gas purchases natural gas in the open market and resells it at cost to its sales-service customers. As a result, increases or decreases in gas revenues resulting from gas price fluctuations do not impact PNMR’s or PNM’s consolidated gross margin or earnings.
UNREGULATED OPERATIONS
Wholesale
For PNMR andWholesale includes PNM Wholesale and Altura and consists of the generation and sale of electricity into the wholesale market. PNM Wholesale sells the unused capacity of PNM'sPNM’s jurisdictional assets as well as the capacity of PNM’s wholesale plants excluded from retail rates. Although the FERC has jurisdiction over the rates of PNM Wholesale, the Company includes PNM Wholesale in the unregulated portion of its business because PNM Wholesale is not subject to traditional rate of return regulation.
The Wholesale segment Altura is included in PNMR’sthe results of operations also includes the results of Alturafor PNMR from the date of acquisition of Twin Oaks on April 18, 2006 (see(See Note 2). AlturaPower from Twin Oaks is not includedsold at wholesale in the results of operations for PNM.markets served by ERCOT.
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES
(Unaudited)
First Choice
First Choice is a certified retail electric provider operating in Texas, which allows it to provide electricity to residential, small and large commercial, industrial and institutional customers. Although First Choice is regulated in certain respects by the PUCT, under ERCOT, the CompanyPNMR includes First Choice in the unregulated portion of its business because First Choice is not subject to traditional rate of return regulation.
CORPORATE AND OTHER
PNMR provides energy and technology related services through its wholly owned subsidiary, Avistar, and those results are included in the Corporate and Other segment. PNMR Services Company provides corporate services to the Company and its subsidiaries and is also included in the Corporate and Other segment.
Adjustments related to EITF 03-11 are included in Corporate and Other. This requires a net presentation of all realized gains and losses on non-normal derivative transactions that do not physically deliver and that are offset by similar transactions during settlement. Management evaluates Wholesale operations on a gross presentation basis due to its primarily net asset-backed marketing strategy and the importance it places on the Company’s ability to repurchase and remarket previously sold capacity.
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(Unaudited)
PNMR Segment InformationSEGMENT INFORMATION
Summarized financial information for PNMR by business segment for the three months ended June 30, 2006March 31, 2007 is as follows (in thousands):
| | | Regulated | | Unregulated | | | | | | | |
| Segments of Business | | PNM | | TNMP | | PNM | | | | First | | Corporate | | | | | |
| | | Electric | | Electric | | Gas | | Wholesale | | Choice | | & Other | | | | Consolidated | |
2006: | | | | | | | | | | | | | | | | | |
| Operating revenues | | $ | 144,080 | | $ | 43,437 | | $ | 68,869 | | $ | 141,820 | | $ | 154,908 | | $ | (6,445 | ) | | (a) | | $ | 546,669 | |
| Intersegment revenues | | | 2,256 | | | 18,019 | | | 92 | | | 12,674 | | | - | | | (33,041 | ) | | | | | - | |
Total revenues | | | 146,336 | | | 61,456 | | | 68,961 | | | 154,494 | | | 154,908 | | | (39,486 | ) | | | | | 546,669 | |
| Less: Cost of energy | | | 43,308 | | | 22,652 | | | 42,168 | | | 119,869 | | | 118,073 | | | (39,570 | ) | | (a) | | | 306,500 | |
| Intersegment energy | | | | | | | | | | | | | | | | | | | | | | | | | |
| Transfer | | | 8,524 | | | - | | | - | | | (8,524 | ) | | - | | | - | | | | | | - | |
Gross margin | | | 94,504 | | | 38,804 | | | 26,793 | | | 43,149 | | | 36,835 | | | 84 | | | | | | 240,169 | |
| Operating expenses | | | 66,564 | | | 20,957 | | | 25,881 | | | 18,380 | | | 15,367 | | | 2,451 | | | (b) | | | 149,600 | |
| Depreciation and | | | | | | | | | | | | | | | | | | | | | | | | | |
| amortization | | | 14,316 | | | 7,831 | | | 5,994 | | | 7,155 | | | 510 | | | 2,147 | | | | | | 37,953 | |
| Income taxes | | | 1,852 | | | 1,239 | | | (3,236 | ) | | 3,219 | | | 7,363 | | | (4,247 | ) | | (b) | | | 6,190 | |
Operating income | | | 11,772 | | | 8,777 | | | (1,846 | ) | | 14,395 | | | 13,595 | | | (267 | ) | | | | | 46,426 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | | 6,626 | | | 81 | | | 468 | | | 1,323 | | | 116 | | | 302 | | | | | | 8,916 | |
| Other income/(deductions) | | | 216 | | | 2,097 | | | (11 | ) | | 330 | | | (225 | ) | | (1,110 | ) | | | | | 1,297 | |
| Other income taxes | | | (2,709 | ) | | (847 | ) | | (181 | ) | | (654 | ) | | 42 | | | 515 | | | | | | (3,834 | ) |
| Interest charges | | | (8,946 | ) | | (7,271 | ) | | (3,091 | ) | | (9,512 | ) | | (248 | ) | | (7,430 | ) | | | | | (36,498 | ) |
Segment net income (loss) | | $ | 6,959 | | $ | 2,837 | | $ | (4,661 | ) | $ | 5,882 | | $ | 13,280 | | $ | (7,990 | ) | | | | $ | 16,307 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross property additions | | $ | 46,114 | | $ | 10,936 | | $ | 9,633 | | $ | 5,797 | | $ | - | | $ | 4,267 | | | | | $ | 76,747 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
At June 30, 2006: | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 1,935,934 | | $ | 1,131,593 | | $ | 616,678 | | $ | 1,082,632 | | $ | 374,640 | | $ | 596,066 | | | | | $ | 5,737,543 | |
Goodwill | | $ | - | | $ | 363,763 | | $ | - | | $ | - | | $ | 131,678 | | $ | - | | | | | $ | 495,441 | |
| | | | | Regulated | | | | Unregulated | | | | | | |
| Segments of Business | | PNM | | TNMP | | PNM | | | | First | | Corporate | | | | |
| | | Electric (c) | | Electric (c) | | Gas | | Wholesale | | Choice | | and Other | | | Consolidated | |
| | | | | | | | | | | | | | | | | |
2007: | | | | | | | | | | | | | | | | |
| Operating revenues | | $ | 167,875 | | $ | 24,161 | | $ | 216,484 | | $ | 125,867 | | $ | 135,518 | | $ | (16,404 | ) | (a) | | $ | 653,501 | |
| Intersegment revenues | | | 2,238 | | | 16,767 | | | 48 | | | 8,684 | | | 47 | | | (27,784 | ) | | | | - | |
Total Revenues | | | 170,113 | | | 40,928 | | | 216,532 | | | 134,551 | | | 135,565 | | | (44,188 | ) | | | | 653,501 | |
| Cost of energy | | | 66,502 | | | 7,171 | | | 161,713 | | | 76,347 | | | 110,816 | | | (44,029 | ) | (a) | | | 378,520 | |
| Intersegment energy transfer | | | (5,658 | ) | | - | | | - | | | 5,658 | | | - | | | - | | | | | - | |
Gross Margin | | | 109,269 | | | 33,757 | | | 54,819 | | | 52,546 | | | 24,749 | | | (159 | ) | | | | 274,981 | |
| Operating expenses | | | 72,636 | | | 18,650 | | | 25,612 | | | 25,701 | | | 15,157 | | | 2,461 | | (b) | | | 160,217 | |
| Depreciation and amortization | | | 16,385 | | | 7,000 | | | 6,181 | | | 7,759 | | | 471 | | | 2,646 | | | | | 40,442 | |
| Income taxes | | | 4,129 | | | 352 | | | 7,922 | | | 3,937 | | | 3,407 | | | (5,799 | ) | (b) | | | 13,948 | |
Operating Income | | | 16,119 | | | 7,755 | | | 15,104 | | | 15,149 | | | 5,714 | | | 533 | | | | | 60,374 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | | 6,117 | | | 88 | | | 996 | | | 1,438 | | | 483 | | | 1,666 | | | | | 10,788 | |
| Other income (deductions) | | | 137 | | | 249 | | | 122 | | | 298 | | | (42 | ) | | (463 | ) | | | | 301 | |
| Other income taxes | | | (2,476 | ) | | (76 | ) | | (443 | ) | | (687 | ) | | (157 | ) | | (111 | ) | | | | (3,950 | ) |
| Net interest charges | | | (9,819 | ) | | (7,078 | ) | | (3,015 | ) | | (9,141 | ) | | (115 | ) | | (8,679 | ) | | | | (37,847 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Segment Net Earnings (Loss) | | $ | 10,078 | | $ | 938 | | $ | 12,764 | | $ | 7,057 | | $ | 5,883 | | $ | (7,054 | ) | | | $ | 29,666 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Gross Property Additions | | $ | 61,921 | | $ | 7,804 | | $ | 7,150 | | $ | 10,589 | | $ | (114 | ) | $ | 2,134 | | | | $ | 89,484 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| At March 31, 2007: | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Assets | | $ | 2,357,886 | | $ | 986,568 | | $ | 684,430 | | $ | 1,044,787 | | $ | 342,472 | | $ | 716,259 | | | | $ | 6,132,402 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Goodwill | | $ | 102,562 | | $ | 260,183 | | $ | - | | $ | - | | $ | 131,768 | | $ | - | | | | $ | 494,513 | |
| (a) | Reflects EITF 03-11 impact, under which wholesale revenues and the associated cost of energy of $6.6$16.6 million are reclassified to a net margin basis in accordance with GAAP. |
| (b) | Includes TNP and Twin Oaks acquisition integrationEnergyCo formation costs of $1.8$1.2 million included in operating expenses and an income tax benefit of $0.7$0.5 million included in income taxes. |
| (c) | Operations and assets, including goodwill, transferred from TNMP Electric to PNM Electric on January 1, 2007 are included in PNM Electric and excluded from TNMP Electric. |
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(Unaudited)
Summarized financial information for PNMR by business segment for the three months ended June 30, 2005March 31, 2006 is as follows (in thousands):
| | | Regulated | | Unregulated | | | | | | | |
| Segments of Business | | PNM | | TNMP | | PNM | | | | First | | Corporate | | | | | |
| | | Electric | | Electric* | | Gas | | Wholesale | | Choice* | | & Other | | | | Consolidated | |
2005: | | | | | | | | | | | | | | | | | |
| Operating revenues | | $ | 137,314 | | $ | 12,684 | | $ | 82,261 | | $ | 139,273 | | $ | 43,031 | | $ | (9,309 | ) | | (a) | | $ | 405,254 | |
| Intersegment revenues | | | 1,467 | | | 6,551 | | | 123 | | | 3,009 | | | - | | | (11,150 | ) | | | | | - | |
Total revenues | | | 138,781 | | | 19,235 | | | 82,384 | | | 142,282 | | | 43,031 | | | (20,459 | ) | | | | | 405,254 | |
| Less: Cost of energy | | | 44,998 | | | 6,702 | | | 53,292 | | | 119,653 | | | 34,083 | | | (20,537 | ) | | (a) | | | 238,191 | |
| Intersegment energy | | | | | | | | | | | | | | | | | | | | | | | | | |
| transfer | | | (3,412 | ) | | - | | | - | | | 3,412 | | | - | | | - | | | | | | - | |
Gross margin | | | 97,195 | | | 12,533 | | | 29,092 | | | 19,217 | | | 8,948 | | | 78 | | | | | | 167,063 | |
| Operating expenses | | | 65,786 | | | 5,086 | | | 24,234 | | | 11,080 | | | 3,197 | | | 8,830 | | | (b) | | | 118,213 | |
| Depreciation and | | | | | | | | | | | | | | | | | | | | | | | | | |
| amortization | | | 17,495 | | | 2,085 | | | 5,596 | | | 4,041 | | | 105 | | | 6,315 | | | (c) | | | 35,637 | |
| Income taxes | | | 2,155 | | | 1,175 | | | (1,442 | ) | | 44 | | | 2,020 | | | (7,319 | ) | | (b,c,e) | | | (3,367 | ) |
Operating income | | | 11,759 | | | 4,187 | | | 704 | | | 4,052 | | | 3,626 | | | (7,748 | ) | | | | | 16,580 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | | 6,473 | | | 87 | | | 487 | | | 1,303 | | | 161 | | | 3,111 | | | | | | 11,622 | |
| Other income/(deductions) | | | 1,020 | | | 625 | | | 408 | | | 405 | | | (15 | ) | | (2,894 | ) | | (d) | | | (451 | ) |
| Other income taxes | | | (2,967 | ) | | (314 | ) | | (354 | ) | | (677 | ) | | (51 | ) | | (314 | ) | | (d) | | | (4,677 | ) |
| Interest charges | | | (8,471 | ) | | (1,956 | ) | | (2,905 | ) | | (3,987 | ) | | (28 | ) | | (4,186 | ) | | (e) | | | (21,533 | ) |
Segment net income (loss) | | $ | 7,814 | | $ | 2,629 | | $ | (1,660 | ) | $ | 1,096 | | $ | 3,693 | | $ | (12,031 | ) | | | | $ | 1,541 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross property additions | | $ | 26,091 | | $ | 1,685 | | $ | 9,774 | | $ | 2,855 | | $ | 46 | | $ | 9,805 | | | | | $ | 50,256 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2005: | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 1,937,811 | | $ | 1,169,090 | | $ | 721,021 | | $ | 421,377 | | $ | 318,820 | | $ | 556,590 | | | | | $ | 5,124,709 | |
Goodwill | | $ | - | | $ | 367,245 | | $ | - | | $ | - | | $ | 131,910 | | $ | - | | | | | $ | 499,155 | |
| | | | | Regulated | | | | Unregulated | | | | | | |
| Segments of Business | | PNM | | TNMP | | PNM | | | | First | | Corporate | | | | |
| | | Electric (c) | | Electric (c) | | Gas | | Wholesale | | Choice | | and Other | | | Consolidated | |
2006: | | | | | | | | | | | | | | | | |
| Operating revenues | | $ | 136,596 | | $ | 46,969 | | $ | 207,476 | | $ | 164,311 | | $ | 105,082 | | $ | (4,633 | ) | (a) | | $ | 655,801 | |
| Intersegment revenues | | | 2,182 | | | 15,716 | | | 49 | | | 15,177 | | | - | | | (33,124 | ) | | | | - | |
Total Revenues | | | 138,778 | | | 62,685 | | | 207,525 | | | 179,488 | | | 105,082 | | | (37,757 | ) | | | | 655,801 | |
| Cost of energy | | | 45,474 | | | 27,172 | | | 157,691 | | | 142,877 | | | 90,335 | | | (37,577 | ) | (a) | | | 425,972 | |
| Intersegment energy transfer | | | (5,178 | ) | | - | | | - | | | 5,178 | | | - | | | - | | | | | - | |
Gross Margin | | | 98,482 | | | 35,513 | | | 49,834 | | | 31,433 | | | 14,747 | | | (180 | ) | | | | 229,829 | |
| Operating expenses | | | 67,478 | | | 21,532 | | | 25,090 | | | 11,785 | | | 13,178 | | | 167 | | (b) | | | 139,230 | |
| Depreciation and amortization | | | 14,972 | | | 7,731 | | | 5,920 | | | 3,161 | | | 498 | | | 2,048 | | | | | 34,330 | |
| Income taxes | | | 2,943 | | | (673 | ) | | 6,266 | | | 5,014 | | | 300 | | | (3,603 | ) | (b) | | | 10,247 | |
Operating Income | | | 13,089 | | | 6,923 | | | 12,558 | | | 11,473 | | | 771 | | | 1,208 | | | | | 46,022 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | | 6,511 | | | 255 | | | 1,265 | | | 1,279 | | | 392 | | | 449 | | | | | 10,151 | |
| Other income (deductions) | | | 198 | | | 2,129 | | | 101 | | | 706 | | | (10 | ) | | 368 | | | | | 3,492 | |
| Other income taxes | | | (2,656 | ) | | (912 | ) | | (541 | ) | | (786 | ) | | (139 | ) | | (67 | ) | | | | (5,101 | ) |
| Net interest charges | | | (8,597 | ) | | (7,227 | ) | | (2,997 | ) | | (3,821 | ) | | (224 | ) | | (5,697 | ) | | | | (28,563 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Segment Net Earnings (Loss) | | $ | 8,545 | | $ | 1,168 | | $ | 10,386 | | $ | 8,851 | | $ | 790 | | $ | (3,739 | ) | | | $ | 26,001 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Gross Property Additions | | $ | 30,316 | | $ | 7,216 | | $ | 4,365 | | $ | 3,751 | | $ | 297 | | $ | 5,782 | | | | $ | 51,727 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
At March 31, 2006: | | | | | | | | | | | | | | | | | | | | | | | | |
Total Assets | | $ | 1,913,142 | | $ | 1,168,674 | | $ | 650,588 | | $ | 406,267 | | $ | 327,431 | | $ | 536,861 | | | | $ | 5,002,963 | |
Goodwill | | $ | - | | $ | 367,245 | | $ | - | | $ | - | | $ | 131,910 | | $ | - | | | | $ | 499,155 | |
| (a) | Reflects EITF 03-11 impact, under which wholesale revenues and the associated cost of energy of $9.6$4.7 million are reclassified to a net margin basis in accordance with GAAP. |
| (b) | Includes TNP acquisition relatedintegration costs of $4.6$0.9 million and regulatory costs of $2.3 millionincluded in operating expenses and an income tax benefit of $2.7$0.4 million included in income taxes associated with the NMPRC’s approval of the TNP acquisition. |
(c) | Includes a write-off of software costs of $4.5 million in depreciation and amortization expense and an income tax benefit of $1.8 million in the income taxes. |
(d) | Includes income from proceeds earned on the TNP debt refinancing of $1.3 million and an income tax expense of $0.5 million in the income taxes. |
(e)(c) | Includes TNP debt refinancing costs of $4.9 millionOperations and assets, including goodwill, transferred from TNMP Electric to PNM Electric on January 1, 2007 are excluded from PNM Electric and included in interest charges and an income tax benefit of $1.8 million in income taxes. TNMP Electric. |
* | Includes results from June 6 through June 30, 2005 |
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(Unaudited)
Summarized financial information for PNMRPNM by business segment for the sixthree months ended June 30, 2006March 31, 2007 is as follows (in thousands):
| | | Regulated | | Unregulated | | | | | | | |
| Segments of Business | | PNM | | TNMP | | PNM | | | | First | | Corporate | | | | | |
| | | Electric | | Electric | | Gas | | Wholesale | | Choice | | & Other | | | | Consolidated | |
2006: | | | | | | | | | | | | | | | | | |
| Operating revenues | | $ | 280,676 | | $ | 90,406 | | $ | 276,345 | | $ | 306,131 | | $ | 259,990 | | $ | (11,078 | ) | | (a) | | $ | 1,202,470 | |
| Intersegment revenues | | | 4,438 | | | 33,735 | | | 141 | | | 27,851 | | | - | | | (66,165 | ) | | | | | - | |
Total revenues | | | 285,114 | | | 124,141 | | | 276,486 | | | 333,982 | | | 259,990 | | | (77,243 | ) | | | | | 1,202,470 | |
| Less: Cost of energy | | | 88,782 | | | 49,823 | | | 199,859 | | | 262,746 | | | 208,408 | | | (77,146 | ) | | (a) | | | 732,472 | |
| Intersegment energy | | | | | | | | | | | | | | | | | | | | | | | | | |
| transfer | | | 3,346 | | | - | | | - | | | (3,346 | ) | | - | | | - | | | | | | - | |
Gross margin | | | 192,986 | | | 74,318 | | | 76,627 | | | 74,582 | | | 51,582 | | | (97 | ) | | | | | 469,998 | |
| Operating expenses | | | 133,718 | | | 42,489 | | | 50,971 | | | 30,165 | | | 28,545 | | | 2,618 | | | (b) | | | 288,506 | |
| Depreciation and | | | | | | | | | | | | | | | | | | | | | | | | | |
| amortization | | | 29,288 | | | 15,563 | | | 11,914 | | | 10,316 | | | 1,008 | | | 4,194 | | | | | | 72,283 | |
| Income taxes | | | 4,924 | | | 566 | | | 3,030 | | | 8,233 | | | 7,663 | | | (7,979 | ) | | (b) | | | 16,437 | |
Operating income (loss) | | | 25,056 | | | 15,700 | | | 10,712 | | | 25,868 | | | 14,366 | | | 1,070 | | | | | | 92,772 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | | 13,137 | | | 336 | | | 1,733 | | | 2,602 | | | 508 | | | 751 | | | | | | 19,067 | |
| Other income/(deductions) | | | 414 | | | 4,226 | | | 90 | | | 1,036 | | | (235 | ) | | (742 | ) | | | | | 4,789 | |
| Other income taxes | | | (5,365 | ) | | (1,759 | ) | | (722 | ) | | (1,440 | ) | | (97 | ) | | 448 | | | | | | (8,935 | ) |
| Interest charges | | | (17,543 | ) | | (14,498 | ) | | (6,088 | ) | | (13,333 | ) | | (472 | ) | | (13,127 | ) | | | | | (65,061 | ) |
Segment net income | | $ | 15,699 | | $ | 4,005 | | $ | 5,725 | | $ | 14,733 | | $ | 14,070 | | $ | (11,600 | ) | | | | $ | 42,632 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross property additions | | $ | 76,430 | | $ | 18,152 | | $ | 13,998 | | $ | 9,548 | | $ | 297 | | $ | 10,143 | | | | | $ | 128,568 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
At June 30, 2006: | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 1,935,934 | | $ | 1,131,593 | | $ | 616,678 | | $ | 1,082,632 | | $ | 374,640 | | $ | 596,066 | | | | | $ | 5,737,543 | |
Goodwill | | $ | - | | $ | 363,763 | | $ | - | | $ | - | | $ | 131,678 | | $ | - | | | | | $ | 495,441 | |
| Segments of Business | | PNM | | PNM | | PNM | | Corporate | | | | |
| | | Electric (b) | | Gas | | Wholesale | | and Other | | | Consolidated | |
| | | | | | | | | | | | | |
2007: | | | | | | | | | | | | |
| Operating revenues | | $ | 167,875 | | $ | 216,484 | | $ | 89,064 | | $ | (16,614 | ) | (a) | | $ | 456,809 | |
| Intersegment revenues | | | 2,238 | | | 48 | | | 8,684 | | | (10,970 | ) | | | | - | |
Total Revenues | | | 170,113 | | | 216,532 | | | 97,748 | | | (27,584 | ) | | | | 456,809 | |
| Cost of energy | | | 66,502 | | | 161,713 | | | 64,181 | | | (27,515 | ) | (a) | | | 264,881 | |
| Intersegment energy transfer | | | (5,658 | ) | | - | | | 5,658 | | | - | | | | | - | |
Gross Margin | | | 109,269 | | | 54,819 | | | 27,909 | | | (69 | ) | | | | 191,928 | |
| Operating expenses | | | 72,636 | | | 25,612 | | | 13,441 | | | (151 | ) | | | | 111,538 | |
| Depreciation and amortization | | | 16,385 | | | 6,181 | | | 3,150 | | | 640 | | | | | 26,356 | |
| Income taxes | | | 4,129 | | | 7,922 | | | 3,039 | | | (228 | ) | | | | 14,862 | |
Operating Income | | | 16,119 | | | 15,104 | | | 8,279 | | | (330 | ) | | | | 39,172 | |
| | | | | | | | | | | | | | | | | | | |
| Interest income | | | 6,117 | | | 996 | | | 1,321 | | | 268 | | | | | 8,702 | |
| Other income (deductions) | | | 137 | | | 122 | | | 298 | | | (99 | ) | | | | 458 | |
| Other income taxes | | | (2,476 | ) | | (443 | ) | | (641 | ) | | 68 | | | | | (3,492 | ) |
| Net interest charges | | | (9,819 | ) | | (3,015 | ) | | (3,642 | ) | | 384 | | | | | (16,092 | ) |
| | | | | | | | | | | | | | | | | | | |
Segment Net Earnings | | $ | 10,078 | | $ | 12,764 | | $ | 5,615 | | $ | 291 | | | | $ | 28,748 | |
| | | | | | | | | | | | | | | | | | | |
Gross Property Additions | | $ | 61,921 | | $ | 7,150 | | $ | 11,264 | | $ | - | | | | $ | 80,335 | |
| | | | | | | | | | | | | | | | | | | |
At March 31, 2007: | | | | | | | | | | | | | | | | | | |
Total Assets | | $ | 2,392,709 | | $ | 693,168 | | $ | 395,056 | | $ | 540,547 | | | | $ | 4,021,480 | |
Goodwill | | $ | 102,562 | | $ | - | | $ | - | | $ | - | | | | $ | 102,562 | |
| (a) | Reflects EITF 03-11 impact, under which wholesale revenues and the associated cost of energy of $11.4$16.6 million are reclassified to a net margin basis in accordance with GAAP. |
| (b) | Includes TNPoperations and Twin Oaks acquisition integration costs of $2.8 million and an income tax benefit of $1.1 million in income taxes.assets, including goodwill, transferred from TNMP Electric to PNM Electric on January 1, 2007. |
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(Unaudited)
Summarized financial information for PNMRPNM by business segment for the sixthree months ended June 30, 2005March 31, 2006 is as follows (in thousands):
| Segments of Business | | PNM | | PNM | | PNM | | Corporate | | | | |
| | | Electric (b) | | Gas | | Wholesale | | and Other | | | Consolidated | |
2006: | | | | | | | | | | | | |
| Operating revenues | | $ | 136,596 | | $ | 207,476 | | $ | 164,311 | | $ | (4,741 | ) | (a) | | $ | 503,642 | |
| Intersegment revenues | | | 2,058 | | | 49 | | | - | | | (2,107 | ) | | | | - | |
| Affiliated Sales | | | 124 | | | - | | | 15,177 | | | - | | | | | 15,301 | |
Total Revenues | | | 138,778 | | | 207,525 | | | 179,488 | | | (6,848 | ) | | | | 518,943 | |
| Cost of energy | | | 45,474 | | | 157,691 | | | 142,877 | | | (6,780 | ) | (a) | | | 339,262 | |
| Intersegment energy transfer | | | (5,178 | ) | | - | | | 5,178 | | | - | | | | | - | |
Gross Margin | | | 98,482 | | | 49,834 | | | 31,433 | | | (68 | ) | | | | 179,681 | |
| Operating expenses | | | 67,478 | | | 25,090 | | | 11,785 | | | (1,694 | ) | | | | 102,659 | |
| Depreciation and amortization | | | 14,972 | | | 5,920 | | | 3,161 | | | 802 | | | | | 24,855 | |
| Income taxes | | | 2,943 | | | 6,266 | | | 5,014 | | | 739 | | | | | 14,962 | |
Operating Income | | | 13,089 | | | 12,558 | | | 11,473 | | | 85 | | | | | 37,205 | |
| | | | | | | | | | | | | | | | | | | |
| Interest income | | | 6,511 | | | 1,265 | | | 1,279 | | | 298 | | | | | 9,353 | |
| Other income/(deductions) | | | 198 | | | 101 | | | 706 | | | (160 | ) | | | | 845 | |
| Other income taxes | | | (2,656 | ) | | (541 | ) | | (786 | ) | | (28 | ) | | | | (4,011 | ) |
| Net interest charges | | | (8,597 | ) | | (2,997 | ) | | (3,821 | ) | | 1,995 | | | | | (13,420 | ) |
| | | | | | | | | | | | | | | | | | | |
Segment Net Earnings | | $ | 8,545 | | $ | 10,386 | | $ | 8,851 | | $ | 2,190 | | | | $ | 29,972 | |
| | | | | | | | | | | | | | | | | | | |
Gross Property Additions | | $ | 30,316 | | $ | 4,365 | | $ | 3,751 | | $ | 374 | | | | $ | 38,806 | |
| | | | | | | | | | | | | | | | | | | |
At March 31, 2006: | | | | | | | | | | | | | | | | | | |
Total Assets | | $ | 1,913,142 | | $ | 650,588 | | $ | 406,267 | | $ | 480,548 | | | | $ | 3,450,545 | |
| | | Regulated | | Unregulated | | | | | | | |
| Segments of Business | | PNM | | TNMP | | PNM | | | | First | | Corporate | | | | | |
| | | Electric | | Electric* | | Gas | | Wholesale | | Choice* | | & Other | | | | Consolidated | |
2005: | | | | | | | | | | | | | | | | | |
| Operating revenues | | $ | 269,805 | | $ | 12,684 | | $ | 247,494 | | $ | 271,277 | | $ | 43,031 | | $ | (11,124 | ) | | (a) | | $ | 833,167 | |
| Intersegment revenues | | | 3,158 | | | 6,551 | | | 176 | | | 3,009 | | | - | | | (12,894 | ) | | | | | - | |
Total revenues | | | 272,963 | | | 19,235 | | | 247,670 | | | 274,286 | | | 43,031 | | | (24,018 | ) | | | | | 833,167 | |
| Less: Cost of energy | | | 92,401 | | | 6,702 | | | 167,727 | | | 208,965 | | | 34,083 | | | (24,209 | ) | | (a) | | | 485,669 | |
| Intersegment energy | | | | | | | | | | | | | | | | | | | | | | | | | |
| transfer | | | (17,535 | ) | | - | | | - | | | 17,535 | | | - | | | - | | | | | | - | |
Gross margin | | | 198,097 | | | 12,533 | | | 79,943 | | | 47,786 | | | 8,948 | | | 191 | | | | | | 347,498 | |
| Operating expenses | | | 129,123 | | | 5,086 | | | 48,325 | | | 21,968 | | | 3,197 | | | 10,789 | | | (b) | | | 218,488 | |
| Depreciation and | | | | | | | | | | | | | | | | | | | | | | | | | |
| amortization | | | 35,053 | | | 2,085 | | | 11,172 | | | 8,028 | | | 105 | | | 8,021 | | | (c) | | | 64,464 | |
| Income taxes | | | 6,654 | | | 1,175 | | | 5,787 | | | 3,875 | | | 2,020 | | | (9,487 | ) | | (b,c,e) | | | 10,024 | |
Operating income (loss) | | | 27,267 | | | 4,187 | | | 14,659 | | | 13,915 | | | 3,626 | | | (9,132 | ) | | | | | 54,522 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | | 13,689 | | | 87 | | | 1,243 | | | 2,647 | | | 161 | | | 3,095 | | | | | | 20,922 | |
| Other income/(deductions) | | | 1,577 | | | 625 | | | 485 | | | 1,338 | | | (15 | ) | | (3,019 | ) | | (d) | | | 991 | |
| Other income taxes | | | (6,044 | ) | | (314 | ) | | (684 | ) | | (1,578 | ) | | (51 | ) | | 110 | | | (d) | | | (8,561 | ) |
| Interest charges | | | (17,114 | ) | | (1,956 | ) | | (5,829 | ) | | (8,003 | ) | | (28 | ) | | (2,894 | ) | | (e) | | | (35,824 | ) |
Segment net income | | $ | 19,375 | | $ | 2,629 | | $ | 9,874 | | $ | 8,319 | | $ | 3,693 | | $ | (11,840 | ) | | | | $ | 32,050 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross property additions | | $ | 40,715 | | $ | 1,685 | | $ | 18,721 | | $ | 4,169 | | $ | 46 | | $ | 14,613 | | | | | $ | 79,949 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2005: | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 1,937,811 | | $ | 1,169,090 | | $ | 721,021 | | $ | 421,377 | | $ | 318,820 | | $ | 556,590 | | | | | $ | 5,124,709 | |
Goodwill | | $ | - | | $ | 367,245 | | $ | - | | $ | - | | $ | 131,910 | | $ | - | | | | | $ | 499,155 | |
| (a) | Reflects EITF 03-11 impact, under which wholesale revenues and the associated cost of energy of $11.7$4.7 million are reclassified to a net margin basis in accordance with GAAP. |
| (b) | Includes acquisition related costs of $4.6 millionExcludes operations and regulatory costs of $2.3 million in operating expenses and an income tax benefit of $2.7 million in income taxes associated with the NMPRC’s approval of the TNP acquisition.assets, including goodwill, transferred from TNMP Electric to PNM Electric on January 1, 2007. |
(c) | Includes a write-off of software costs of $4.5 million in depreciation and amortization expense and an income tax benefit of $1.8 million in the income taxes. |
(d) | Includes income from proceeds earned on the TNP debt refinancing of $1.3 million and an income tax expense of $0.5 million in the income taxes. |
(e) | Includes TNP debt refinancing costs of $4.9 million in interest charges and an income tax benefit of $1.8 million in income taxes. |
* | Includes results from June 6 through June 30, 2005 |
TNMP SEGMENT INFORMATION
TNMP operates in only one reportable segment; therefore tabular presentation of segment data is not presented.
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(Unaudited)
PNM Segment Information
Summarized financial information for PNM by business segment for the three months ended June 30, 2006 is as follows (in thousands):
| Segments of Business | | PNM | | PNM | | PNM | | | | | | | |
| | | Electric | | Gas | | Wholesale | | Other | | | | Consolidated | |
2006: | | | | | | | | | | | | | |
| Operating revenues | | $ | 144,080 | | $ | 68,869 | | $ | 109,063 | | $ | (6,642 | ) | | (a) | | $ | 315,370 | |
| Intersegment revenues | | | 2,256 | | | 92 | | | 12,674 | | | (2,225 | ) | | | | | 12,797 | |
Total revenues | | | 146,336 | | | 68,961 | | | 121,737 | | | (8,867 | ) | | | | | 328,167 | |
| Less: Cost of energy | | | 43,308 | | | 42,168 | | | 108,756 | | | (8,822 | ) | | (a) | | | 185,410 | |
| Intersegment energy transfer | | | 8,524 | | | - | | | (8,524 | ) | | - | | | | | | - | |
Gross margin | | | 94,504 | | | 26,793 | | | 21,505 | | | (45 | ) | | | | | 142,757 | |
| Operating expenses | | | 66,564 | | | 25,881 | | | 14,928 | | | (443 | ) | | | | | 106,930 | |
| Depreciation and amortization | | | 14,316 | | | 5,994 | | | 3,191 | | | 788 | | | | | | 24,289 | |
| Income taxes | | | 1,852 | | | (3,236 | ) | | (180 | ) | | 310 | | | | | | (1,254 | ) |
Operating income | | | 11,772 | | | (1,846 | ) | | 3,566 | | | (700 | ) | | | | | 12,792 | |
| | | | | | | | | | | | | | | | | | | | |
| Interest income | | | 6,626 | | | 468 | | | 1,276 | | | 300 | | | | | | 8,670 | |
| Other income/(deductions) | | | 216 | | | (11 | ) | | 315 | | | (451 | ) | | | | | 69 | |
| Other income taxes | | | (2,709 | ) | | (181 | ) | | (630 | ) | | 76 | | | | | | (3,444 | ) |
| Interest charges | | | (8,946 | ) | | (3,091 | ) | | (3,842 | ) | | 980 | | | | | | (14,899 | ) |
Segment net income | | $ | 6,959 | | $ | (4,661 | ) | $ | 685 | | $ | 205 | | | | | $ | 3,188 | |
| | | | | | | | | | | | | | | | | | | | |
Gross property additions | | $ | 46,114 | | $ | 9,633 | | $ | 5,797 | | $ | (342 | ) | | | | $ | 61,202 | |
| | | | | | | | | | | | | | | | | | | | |
At June 30, 2006: | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 1,943,340 | | $ | 616,678 | | $ | 410,579 | | $ | 485,720 | | | | | $ | 3,456,317 | |
(a) (4) | Reflects EITF 03-11 impact, under which wholesale revenues and the associated cost of energy of $6.6 million are reclassified to a net margin basis in accordance with GAAP. |
PNM RESOURCES, INC. AND SUBSIDIARIESEnergy Related Derivative Contracts
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Summarized financial information for PNM by business segment for the three months ended June 30, 2005 is as follows (in thousands):
| Segments of Business | | PNM | | PNM | | PNM | | | | | | | |
| | | Electric | | Gas | | Wholesale | | Other | | | | Consolidated | |
2005: | | | | | | | | | | | | | |
| Operating revenues | | $ | 137,314 | | $ | 82,261 | | $ | 139,273 | | $ | (9,627 | ) | | (a) | | $ | 349,221 | |
| Intersegment revenues | | | 1,467 | | | 123 | | | 3,009 | | | (1,554 | ) | | | | | 3,045 | |
Total revenues | | | 138,781 | | | 82,384 | | | 142,282 | | | (11,181 | ) | | | | | 352,266 | |
| Less: Cost of energy | | | 44,998 | | | 53,292 | | | 119,653 | | | (11,145 | ) | | (a) | | | 206,798 | |
| Intersegment energy transfer | | | (3,412 | ) | | - | | | 3,412 | | | - | | | | | | - | |
Gross margin | | | 97,195 | | | 29,092 | | | 19,217 | | | (36 | ) | | | | | 145,468 | |
| Operating expenses | | | 65,786 | | | 24,234 | | | 11,080 | | | 2,559 | | | (b) | | | 103,659 | |
| Depreciation and amortization | | | 17,495 | | | 5,596 | | | 4,041 | | | 5,285 | | | (c) | | | 32,417 | |
| Income taxes | | | 2,155 | | | (1,442 | ) | | 44 | | | (2,434 | ) | | (b,c) | | | (1,677 | ) |
Operating income | | | 11,759 | | | 704 | | | 4,052 | | | (5,446 | ) | | | | | 11,069 | |
| | | | | | | | | | | | | | | | | | | | |
| Interest income | | | 6,473 | | | 487 | | | 1,303 | | | 834 | | | | | | 9,097 | |
| Other income/(deductions) | | | 1,020 | | | 408 | | | 405 | | | (644 | ) | | | | | 1,189 | |
| Other income taxes | | | (2,967 | ) | | (354 | ) | | (677 | ) | | (222 | ) | | | | | (4,220 | ) |
| Interest charges | | | (8,471 | ) | | (2,905 | ) | | (3,987 | ) | | 2,226 | | | | | | (13,137 | ) |
Segment net income | | $ | 7,814 | | $ | (1,660 | ) | $ | 1,096 | | $ | (3,252 | ) | | | | $ | 3,998 | |
| | | | | | | | | | | | | | | | | | | | |
Gross property additions | | $ | 26,091 | | $ | 9,774 | | $ | 2,855 | | $ | (3,822 | ) | | | | $ | 34,898 | |
| | | | | | | | | | | | | | | | | | | | |
At December 31, 2005: | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 1,937,811 | | $ | 721,021 | | $ | 421,377 | | $ | 507,542 | | | | | $ | 3,587,751 | |
(a) | Reflects EITF 03-11 impact, under which wholesale revenues and the associated cost of energy of $9.6 million are reclassified to a net margin basis in accordance with GAAP. |
(b) | Includes acquisition related costs of $1.2 million and regulatory costs of $2.3 million in operating expenses and an income tax benefit of $1.4 million in income taxes associated with the NMPRC’s approval of the TNP acquisition. |
(c) | Includes a write-off of software costs of $4.5 million in depreciation and amortization expense and an income tax benefit of $1.8 million in the income taxes. |
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Summarized financial information for PNM by business segment for the six months ended June 30, 2006 is as follows (in thousands):
| Segments of Business | | PNM | | PNM | | PNM | | | | | | | |
| | | Electric | | Gas | | Wholesale | | Other | | | | Consolidated | |
2006: | | | | | | | | | | | | | |
| Operating revenues | | $ | 280,676 | | $ | 276,345 | | $ | 273,374 | | $ | (11,383 | ) | | (a) | | $ | 819,012 | |
| Intersegment revenues | | | 4,438 | | | 141 | | | 27,851 | | | (4,332 | ) | | | | | 28,098 | |
Total revenues | | | 285,114 | | | 276,486 | | | 301,225 | | | (15,715 | ) | | | | | 847,110 | |
| Less: Cost of energy | | | 88,782 | | | 199,859 | | | 251,633 | | | (15,602 | ) | | (a) | | | 524,672 | |
| Intersegment energy transfer | | | 3,346 | | | - | | | (3,346 | ) | | - | | | | | | - | |
Gross margin | | | 192,986 | | | 76,627 | | | 52,938 | | | (113 | ) | | | | | 322,438 | |
| Operating expenses | | | 133,718 | | | 50,971 | | | 26,713 | | | (2,137 | ) | | | | | 209,265 | |
| Depreciation and amortization | | | 29,288 | | | 11,914 | | | 6,352 | | | 1,590 | | | | | | 49,144 | |
| Income taxes | | | 4,924 | | | 3,030 | | | 4,834 | | | 920 | | | | | | 13,708 | |
Operating income (loss) | | | 25,056 | | | 10,712 | | | 15,039 | | | (486 | ) | | | | | 50,321 | |
| | | | | | | | | | | | | | | | | | | | |
| Interest income | | | 13,137 | | | 1,733 | | | 2,555 | | | 598 | | | | | | 18,023 | |
| Other income/(deductions) | | | 414 | | | 90 | | | 1,021 | | | (611 | ) | | | | | 914 | |
| Other income taxes | | | (5,365 | ) | | (722 | ) | | (1,416 | ) | | 48 | | | | | | (7,455 | ) |
| Interest charges | | | (17,543 | ) | | (6,088 | ) | | (7,663 | ) | | 2,975 | | | | | | (28,319 | ) |
Segment net income | | $ | 15,699 | | $ | 5,725 | | $ | 9,536 | | $ | 2,524 | | | | | $ | 33,484 | |
| | | | | | | | | | | | | | | | | | | | |
Gross property additions | | $ | 76,430 | | $ | 13,998 | | $ | 9,548 | | $ | 32 | | | | | $ | 100,008 | |
| | | | | | | | | | | | | | | | | | | | |
At June 30, 2006: | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 1,943,340 | | $ | 616,678 | | $ | 410,579 | | $ | 485,720 | | | | | $ | 3,456,317 | |
(a) | Reflects EITF 03-11 impact, under which wholesale revenues and the associated cost of energy of $11.4 million are reclassified to a net margin basis in accordance with GAAP. |
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Summarized financial information for PNM by business segment for the six months ended June 30, 2005 is as follows (in thousands):
| Segments of Business | | PNM | | PNM | | PNM | | | | | | | |
| | | Electric | | Gas | | Wholesale | | Other | | | | Consolidated | |
2005: | | | | | | | | | | | | | |
| Operating revenues | | $ | 269,805 | | $ | 247,494 | | $ | 271,277 | | $ | (11,679 | ) | | (a) | | $ | 776,897 | |
| Intersegment revenues | | | 3,158 | | | 176 | | | 3,009 | | | (3,298 | ) | | | | | 3,045 | |
Total revenues | | | 272,963 | | | 247,670 | | | 274,286 | | | (14,977 | ) | | | | | 779,942 | |
| Less: Cost of energy | | | 92,401 | | | 167,727 | | | 208,965 | | | (14,883 | ) | | (a) | | | 454,210 | |
| Intersegment energy transfer | | | (17,535 | ) | | - | | | 17,535 | | | - | | | | | | - | |
Gross margin | | | 198,097 | | | 79,943 | | | 47,786 | | | (94 | ) | | | | | 325,732 | |
| Operating expenses | | | 129,123 | | | 48,325 | | | 21,968 | | | 3,110 | | | (b) | | | 202,526 | |
| Depreciation and amortization | | | 35,053 | | | 11,172 | | | 8,028 | | | 6,109 | | | (c) | | | 60,362 | |
| Income taxes | | | 6,654 | | | 5,787 | | | 3,875 | | | (3,350 | ) | | (b,c) | | | 12,966 | |
Operating income (loss) | | | 27,267 | | | 14,659 | | | 13,915 | | | (5,963 | ) | | | | | 49,878 | |
| | | | | | | | | | | | | | | | | | | | |
| Interest income | | | 13,689 | | | 1,243 | | | 2,647 | | | 724 | | | | | | 18,303 | |
| Other income/(deductions) | | | 1,577 | | | 485 | | | 1,338 | | | (231 | ) | | | | | 3,169 | |
| Other income taxes | | | (6,044 | ) | | (684 | ) | | (1,578 | ) | | 245 | | | | | | (8,061 | ) |
| Interest charges | | | (17,114 | ) | | (5,829 | ) | | (8,003 | ) | | 4,009 | | | | | | (26,937 | ) |
Segment net income | | $ | 19,375 | | $ | 9,874 | | $ | 8,319 | | $ | (1,216 | ) | | | | $ | 36,352 | |
| | | | | | | | | | | | | | | | | | | | |
Gross property additions | | $ | 40,715 | | $ | 18,721 | | $ | 4,169 | | $ | (3,718 | ) | | | | $ | 59,887 | |
| | | | | | | | | | | | | | | | | | | | |
At December 31, 2005: | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 1,937,811 | | $ | 721,021 | | $ | 421,377 | | $ | 507,542 | | | | | $ | 3,587,751 | |
(a) | Reflects EITF 03-11 impact, under which wholesale revenues and the associated cost of energy of $11.7 million are reclassified to a net margin basis in accordance with GAAP. |
(b) | Includes acquisition related costs of $1.2 million and regulatory costs of $2.3 million in operating expenses and an income tax benefit of $1.4 million in income taxes associated with the NMPRC’s approval of the TNP acquisition. |
(c) | Includes a write-off of software costs of $4.5 million in depreciation and amortization expense and an income tax benefit of $1.8 million in the income taxes. |
TNMP
TNMP operates in only one reportable segment; therefore tabular presentation of segment data is not required.
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4) Fair Value of Commodity Financial InstrumentsOVERVIEW
GAAP defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. Although management uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique. Fair value is based on current market quotes. The market prices used to fair value PNM’sthe Company’s energy portfolio are based on closing exchange prices and over-the-counter quotations.
The Company may enter into agreements for the sale or purchase of derivative instruments, including options and swaps, to manage risks related to changes in natural gas prices and electric prices. At the inception of any such transaction, the Company documents the relationships between the hedging instruments and the items being hedged. This documentation includes the strategy that supports executing the specific transaction. See Note 7 for detailsadditional information regarding interest rate swaps that PNMR and PNM have entered into.swaps.
The Company utilizes the following derivative instruments by commodity type:
Energy Contracts - forward derivative physical and financial purchases and sales of electricity and gas with the intent of optimizing the Company’s net generation position and to take advantage of existing market opportunities.
Gas Fixed-for-Float Swaps - forward financial purchasesand physical contracts and sales of fixed-for-float price swaps to manage the price risk associated with electricity and gas and to hedge the variable component of certain heat-rate based power products used to serve customer load.products.
Options - forward physical and financial purchases and sales of electric and gas option-type derivative instruments with the intent of optimizing the Company’s net generation position and to take advantage of existing market opportunities.
PGAC portion of options, swaps and hedges - forward financial and physical transactions to hedge a portion of PNM’s winter gas purchase portfolio.
PNMR
In addition to the commodity transactions that PNM and TNMP enterenters into as described below,above, two other subsidiaries of PNMR enter into commodity transactions.
Normal Sales and Purchases Transactions
PNMR’s subsidiary, First Choice, enters into physical energy contracts to meet the needs of its competitive and price-to-beat customer load. These contracts qualify for “normal”the “normal sales and purchases” accounting designationexception pursuant to SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), as the energy purchased is physically delivered and sold to First Choice customers within ERCOT. Expenses related to these purchases are recorded in cost of energy at the time of delivery.
PNMR’s subsidiary, Altura, at the time of acquisition of Twin Oaks (see Note 2), assumed an existing contract for the energy output of the Twin Oaks facility. This contract qualifies for “normal”the “normal sales and purchases” accounting designationexception pursuant to SFAS 133, as the energy sold is physically delivered within ERCOT to meet the needs of the purchaser's load requirements. Revenue related to this sale is recorded in electric revenues at the time of delivery.
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(Unaudited)
Hedge Accounting Transactions
First Choice also enters into natural gas transactionsswaps and options to hedge the variable component of certain heat-rate power productscontracts used to serve retail customer load. These productsThe heat-rate contracts are priced based on gas to powera gas-to-power conversion ratesfactor using the spot priceNYMEX last day natural gas rates. Both the natural gas swaps and options qualify for natural gas. The contracts qualify forcash flow hedge accounting treatment under SFAS 133133. The natural gas swaps and there isthe underlying power contract both contain like terms as both are indexed to NYMEX last day rates. Therefore the transactions are effective and no hedge ineffectiveness on theseis recorded. The settlement day for the natural gas option contracts is one day prior to NYMEX last day. PNMR has tested the effectiveness and determined that the transactions becauseare highly effective in offsetting changes associated with the underlying contract andpower contract. The ineffectiveness reported through the derivative instrument are both indexed to the NYMEX rates. Any market changes in valuation are recorded in other comprehensive income.income statement as of March 2007 was immaterial. The maximum length of time over which First Choice is hedging its exposure to the variability in future cash flows is December 2006.through October 2007.
Altura, at the time of the acquisition of Twin Oaks (see Note 2), assumed an existing forward contract for the energy output of the Twin Oaks facility. This forward physical contract is designated as a hedge of the cash flow risk associated with Altura’sTwin Oaks’ forecasted excess generation. This hedge is effective in offsetting future cash flow volatility caused by changes in the forward price of electricity and qualifies for hedge accounting under SFAS 133. The value of the electricity hedge is recorded in other deferred charges. There is no hedge ineffectiveness on this transaction because the hedged transaction and the hedged item are based on the same forward curve. Any market changes in valuation are recorded in other comprehensive income. The length of time over which AlturaTwin Oaks is hedging its exposure to the variability in future cash flows is through SeptemberDecember 2010.
Mark-to-Market Transactions
Electricity Contracts
First Choice enters into various forward physical and financial contracts for the purchase and sale of electricity with the intent of optimizing market opportunities. These contracts, which are derivatives, do not qualify for “normal” or “hedge” designation pursuant to SFAS 133, and are marked to market. The change in market valuation is recognized in earnings each period.
Gas Contracts
First Choice enters into various gas contracts on a trading basis to optimize market opportunities. These contracts are marked to market in accordance with SFAS 133. The change in market valuation is recognized in earnings each period.
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(Unaudited)
PNMR’s commodity derivative instruments are summarized as follows:
| | | June 30, | | December 31, | | June 30, | | December 31, | | | March 31, | | December 31, | | March 31, | | December 31, | |
| | | 2006 | | 2005 | | 2006 | | 2005 | | | 2007 | | 2006 | | 2007 | | 2006 | |
Type of Derivative | | Mark-to-Market Instruments | | Hedge Instruments | | | Mark-to-Market Instruments | | Hedge Instruments | |
| | | | | (In thousands) | | | | | | | (In thousands) | | | |
Current Assets | | | | | | | | | | | | | | | | | | |
| Energy Contracts | | $ | 25,967 | | $ | 11,650 | | $ | 252 | | $ | 6,616 | | |
| Gas fixed for float swaps | | | 11,231 | | | 6,488 | | | 3,990 | | | 10,465 | | |
| Energy contracts | | | $ | 14,924 | | $ | 17,773 | | $ | 5,494 | | $ | 7,208 | |
| Gas fixed-for-float swaps and futures | | | | 19,828 | | | 21,875 | | | 3,901 | | | 4,655 | |
| Options | | | 1,751 | | | 3,746 | | | - | | | 261 | | | | 4,682 | | | 4,032 | | | - | | | - | |
| Derivative assets for gas off-system sales | | | | | | | | | | | | | | |
| forward physical trades | | | | 479 | | | - | | | - | | | - | |
| PGAC portion of options, swaps and hedges | | | - | | | - | | | 3,412 | | | 7,528 | | | | - | | | - | | | 3,302 | | | 16,748 | |
| Total Current Assets | | | 38,949 | | | 21,884 | | | 7,654 | | | 24,870 | | | | 39,913 | | | 43,680 | | | 12,697 | | | 28,611 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred Charges | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Energy Contracts | | | 2,477 | | | 3,477 | | | 6,090 | | | - | | |
| Gas fixed for float swaps | | | 768 | | | 12,459 | | | 2,056 | | | 13,614 | | |
| Energy contracts | | | | 2,581 | | | 2,666 | | | - | | | 26,991 | |
| Gas fixed-for-float swaps | | | | 14,041 | | | 7,288 | | | 3,200 | | | 1,872 | |
| Options | | | 1,515 | | | 5,329 | | | - | | | - | | | | 3,075 | | | 1,028 | | | - | | | - | |
| PGAC portion of options, swaps and hedges | | | - | | | - | | | 1,622 | | | (5,906 | ) | | | - | | | - | | | 749 | | | 3,337 | |
| Total Deferred Charges | | | 4,760 | | | 21,265 | | | 9,768 | | | 7,708 | | | | 19,697 | | | 10,982 | | | 3,949 | | | 32,200 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Assets | | $ | 43,709 | | $ | 43,149 | | $ | 17,422 | | $ | 32,578 | | | | 59,610 | | | 54,662 | | | 16,646 | | | 60,811 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Current Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Energy Contracts | | $ | (23,815 | ) | $ | (7,333 | ) | $ | (209 | ) | $ | (503 | ) | |
| Gas fixed for float swaps | | | (11,607 | ) | | (7,151 | ) | | (5,410 | ) | | (3,970 | ) | |
| Energy contracts | | | | (18,782 | ) | | (16,499 | ) | | (808 | ) | | - | |
| Gas fixed-for-float swaps | | | | (17,139 | ) | | (21,518 | ) | | (384 | ) | | (6,845 | ) |
| Options | | | (1,362 | ) | | (3,293 | ) | | (8,286 | ) | | (844 | ) | | | (4,008 | ) | | (4,003 | ) | | - | | | (109 | ) |
| PGAC portion of options, swaps and hedges | | | - | | | - | | | (3,412 | ) | | 3,942 | | | | - | | | - | | | (3,302 | ) | | (16,748 | ) |
| Total Current Liabilities | | | (36,784 | ) | | (17,777 | ) | | (17,317 | ) | | (1,375 | ) | | | (39,929 | ) | | (42,020 | ) | | (4,494 | ) | | (23,702 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Energy Contracts | | | (2,623 | ) | | (3,444 | ) | | (1,008 | ) | | - | | |
| Gas fixed for float swaps | | | (354 | ) | | (12,257 | ) | | (221 | ) | | - | | |
| Energy contracts | | | | (6,583 | ) | | (7,472 | ) | | (6,356 | ) | | (154 | ) |
| Gas fixed-for-float swaps | | | | (2,144 | ) | | (862 | ) | | (835 | ) | | (1,915 | ) |
| Options | | | (1,284 | ) | | (5,143 | ) | | - | | | - | | | | (3,693 | ) | | (842 | ) | | - | | | - | |
| PGAC portion of options, swaps and hedges | | | - | | | - | | | (1,622 | ) | | (5,564 | ) | | | - | | | - | | | (749 | ) | | (3,337 | ) |
| Total Long-Term Liabilities | | | (4,261 | ) | | (20,844 | ) | | (2,851 | ) | | (5,564 | ) | | | (12,420 | ) | | (9,176 | ) | | (7,940 | ) | | (5,406 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | �� | | | |
tTTotal Liabilities | | $ | (41,045 | ) | $ | (38,621 | ) | $ | (20,168 | ) | $ | (6,939 | ) | |
Total Liabilities | | | | (52,349 | ) | | (51,196 | ) | | (12,434 | ) | | (29,108 | ) |
| | | | | | | | | | | | | | | |
Net Total Assets and Liabilities | | | $ | 7,261 | | $ | 3,466 | | $ | 4,212 | | $ | 31,703 | |
Gains or losses related to hedged instruments are reclassified from accumulated other comprehensive income when the hedged transaction settles and impacts earnings. The amount which will be reclassified in the next twelve months represents the net ofamounts, other than PGAC, shown as current assets and current liabilities, excluding the PGAC,relate to contracts that will be settled in the above table.next twelve months.
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(Unaudited)
The following table details the changes in the net asset or liability position from one period to the next for mark to market energy transactions for the operations of First Choice and Wholesale:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | |
| | | 2006 | | 2005 | | 2006 | | 2005 | |
| | | | | (In thousands) | | | |
| Amount realized on contracts delivered | | | | | | | | | |
| during period | | $ | (3,966 | ) | $ | (322 | ) | $ | (4,108 | ) | $ | (254 | ) |
| Changes in fair value | | | 308 | | | 211 | | | 2,244 | | | 1,066 | |
| Net change recorded as mark-to-market | | $ | (3,658 | ) | $ | (111 | ) | $ | (1,864 | ) | $ | 812 | |
The net change in fair value on PNMR’s commodity derivative instruments designated as hedging instruments are summarized as follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | |
| | | 2006 | | 2005 | | 2006 | | 2005 | |
Type of Derivative | | Hedge Instruments | |
| | | | | (In thousands) | | | |
| Change in fair value of energy contracts | | $ | 6,557 | | $ | 1,127 | | $ | (988 | ) | $ | (2,194 | ) |
| Change in fair value of gas fixed for float swaps | | | (6,133 | ) | | 3,310 | | | (19,694 | ) | | 9,530 | |
| Change in the fair value of options | | | (2,401 | ) | | 583 | | | (7,703 | ) | | 583 | |
| Net change in fair value | | $ | (1,977 | ) | $ | 5,020 | | $ | (28,385 | ) | $ | 7,919 | |
PNM
Normal Sales and Purchases Transactions
PNM enters into physical gas contracts to meet the needs of its gas retail sales-service customers. These contracts qualify for “normal”“the normal sales and purchases” accounting designationsexceptions pursuant to SFAS 133 as the gas is physically delivered and sold to end-use customers.133.
PNM also enters into forward physical contracts for the sale of PNM’s electric capacity in excess of its retail and wholesale firm requirement needs, including reserves. In addition, PNM enters into forward physical contracts for the purchase of retail needs, including reserves, when resource shortfalls are forecast to exist. PNM generally accounts for these as normal sales and purchases as defined by SFAS 133. From time to time PNM makes forward purchases to serve its retail needs when the cost of purchased power is less than the incremental cost of its generation.
The operations of PNM, including both firm commitments and other wholesale sale activities, are managed primarily through a net asset-backed strategy, whereby PNM’s aggregate net open position is covered by its own excess generation capabilities. PNM is exposed to market risk if its generation capabilities were disrupted or if its retail load requirements were greater than anticipated. If PNM were required to cover all or a portion of its net open contract position, it would have to meet its commitments through market purchases.
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Hedge Accounting Transactions
PGAC
The NMPRC has authorized PNM to use financial instruments to hedge certain portions of natural gas supply contracts during the winter months to protect PNM’s sales-service gas customers from the risk of adverse price fluctuations in the natural gas market. PNM has elected to use call options and financial swaps to hedge certain portions of the physical gas purchase contracts used exclusively for resale to PNM’s sales-service gas customers. The contracts qualify for hedge accounting treatment under SFAS 133. Option premium expenses are deferred on PNM’s balance sheet as prepaid gas costsa regulatory asset as incurred and amortized into the PGAC for recovery as a component of gas costs during the winter heating season. Option premium expense and hedge gains and losses from both types of instruments are passed through PNM’s PGAC with no income statement effect if deemed prudently incurred by the NMPRC.
PNM also enters into financial swaps to hedge the variable portion of its winter gas portfolio. PNM has hedged 13.26.1 million MMBtus utilizing the fixed-for-float strategy for 2006-2007 and the 2007-2008 winter heating season. Any settled fixed-for-float financial transactions are passed through PNM’s PGAC.
Gas Off-System Sales
PNM enters into physical and financial swaps to hedge the variable component of its physical natural gas purchases and sales. Both the hedges and the underlying contracts are indexed to the NYMEX rates, and the price movements in the financial transactions offset price movements in the underlying contracts. The hedges are based on prices for spot gas delivered to pipelines at basins within the state of New Mexico. The hedges are effective in offsetting future cash flow volatility caused by changes in natural gas prices. These hedges qualify as cash flow hedges pursuant to SFAS 133. The value of the natural gas hedges are recorded in other current assets. Valuation prior to settlement and eventual settled margins from these types of transactions are shared on a 70%/30% basis with PNM’s customers and PNM, respectively. The eventual settled margins from the 70% of these transactions are returned to PNM’s customers. The maximum length of time over which PNM is hedging its exposure to the variability in future cash flows is through December 2006.
Wholesale Electricity
PNM enters into various forward physical contracts to hedge the cash flow risk associated with PNM’s forecasted excess generation. These hedges are effective in offsetting future cash flow volatility caused by changes in the forward price of electricity and qualify for hedge accounting under SFAS 133. The value of the electricity hedges are recorded in other deferred charges. There is no hedge ineffectiveness on these transactions because the hedged transactions and the hedged item are based on the same forward curve. Any market changes in valuation are recorded in other comprehensive income. The maximum length of time over which PNM is hedging its exposure to the variability in future cash flows is through September 2008.
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES
(Unaudited)
Wholesale Gas
PNM also enters into various fixed-for-float price swaps to manage the costs associated with running PNM’s gas generation units. The hedges are effective in offsetting future cash flow volatility caused by increaseschanges in natural gas prices. There is no hedge ineffectiveness on these transactions because the hedged transactions and the hedged item are based on the same forward curve. Any market changes in valuation from inception until March 30, 2007 are recorded in other comprehensive income.income; market valuation changes from March 30, 2007 until settlement are marked to market. The maximum length of time over which PNM is hedging its exposure to the variability in future cash flows is through June 2016.
SO2 Allowances
PNM RESOURCES, INC. AND SUBSIDIARIEShas entered into a fair value hedge to protect against fair-value changes to the Company’s SO
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY2
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES emission allowances inventory. PNM assessed the effectiveness of the fair value hedge based on the changes in the intrinsic value of the hedging instrument and the hedged item. At March 31, 2007, PNM recognized an ineffectiveness gain on the hedging transaction of $1.1 million.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Mark-to-Market Transactions
Wholesale Electricity
PNM enters into various commodity derivative instruments, including but not limited to, forward physical contracts and options for the purchase and sale of electricity with the intent of optimizing market opportunities. These derivative contracts which are derivatives, do not qualify for “normal”“the normal sales and purchases” exceptions or “hedge” designation pursuant to SFAS 133, and are marked to market. The change in market valuation is recognized in earnings each period.
Wholesale Gas
PNM enters into various fixed-for-floatfixed for float price swaps and physical gas purchases to manage the price risk of certain forward sales of power.power and the costs associated with running PNM's gas generation units. These contracts along with the underlying power sales, are marked to market in accordance with GAAP. The change in mark-to-market valuation is recognized in earnings each period and is recorded in operating revenues, if a sales position, and cost of energy, if a purchase position, as applicable. The change in market valuation is recognized in earnings each period.
Liquidity Reserves
The market prices used to value PNM mark-to-market energy transactions and cash flow contracts are based on index prices and broker quotations. PNM enters into long-term physical option contracts and long-term financial gas swap contracts that are classified as derivatives and consequently marked to market through earnings. Generally, market data to value these types of transactions at PNM is available for up to 5 years for gas swaps and up to 18 months for options. The remaining time period, referred to as the illiquid period, is valued using internally developed pricing data. As a result, PNM records liquidity reserves on these contracts for market gains and losses in the illiquid period. PNM regularly assesses the validity and availability of pricing data for the illiquid period of its derivative transactions and adjusts its liquidity reserves, accordingly.
PNM also records liquidity reserves for the illiquid period for electricity contracts. This period is greater than five years which requires internal model assumptions and calculations to establish a forward market curve.
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
PNM’s commodity derivative instruments are summarized as follows:
| | | June 30, | | December 31, | | June 30, | | December 31, | |
| | | 2006 | | 2005 | | 2006 | | 2005 | |
Type of Derivative | | Mark-to-Market Instruments | | Hedge Instruments | |
| | | | | (In thousands) | | | |
Current Assets | | | | | | | | | |
| Energy Contracts | | $ | 13,314 | | $ | 6,126 | | $ | 252 | | $ | 6,616 | |
| Gas fixed for float swaps | | | 1,037 | | | 2,074 | | | 3,990 | | | 9,150 | |
| Options | | | 748 | | | 2,136 | | | - | | | - | |
| PGAC portion of options, swaps and hedges | | | - | | | - | | | 3,412 | | | 7,528 | |
| Total Current Assets | | | 15,099 | | | 10,336 | | | 7,654 | | | 23,294 | |
| | | | | | | | | | | | | | |
Deferred Charges | | | | | | | | | | | | | |
| Energy Contracts | | | 1,886 | | | 3,477 | | | - | | | - | |
| Gas fixed for float swaps | | | 535 | | | 12,459 | | | 2,056 | | | 13,614 | |
| Options | | | 1,515 | | | 5,329 | | | - | | | - | |
| PGAC portion of options, swaps and hedges | | | - | | | - | | | 1,622 | | | (5,906 | ) |
| Total Deferred Charges | | | 3,936 | | | 21,265 | | | 3,678 | | | 7,708 | |
| | | | | | | | | | | | | | |
Total Assets | | $ | 19,035 | | $ | 31,601 | | $ | 11,332 | | $ | 31,002 | |
| | | | | | | | | | | | | | |
Current Liabilities | | | | | | | | | | | | | |
| Energy Contracts | | $ | (14,628 | ) | $ | (5,931 | ) | $ | (209 | ) | $ | (503 | ) |
| Gas fixed for float swaps | | | (187 | ) | | (351 | ) | | (1,090 | ) | | (1,255 | ) |
| Options | | | (363 | ) | | (2,217 | ) | | - | | | - | |
| PGAC portion of options, swaps and hedges | | | - | | | - | | | (3,412 | ) | | 3,942 | |
| Total Current Liabilities | | | (15,178 | ) | | (8,499 | ) | | (4,711 | ) | | 2,184 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Energy Contracts | | | (2,280 | ) | | (3,444 | ) | | (1,008 | ) | | - | |
| Gas fixed for float swaps | | | - | | | (12,257 | ) | | (221 | ) | | - | |
| Options | | | (1,284 | ) | | (5,143 | ) | | - | | | - | |
| PGAC portion of options, swaps and hedges | | | - | | | - | | | (1,622 | ) | | (5,564 | ) |
| Total Long-Term Liabilities | | | (3,564 | ) | | (20,844 | ) | | (2,851 | ) | | (5,564 | ) |
| | | | | | | | | | | | | | |
| | $ | (18,742 | ) | $ | (29,343 | ) | $ | (7,562 | ) | $ | (3,380 | ) |
Gains or losses are reclassified from accumulated other comprehensive income when the hedged transaction settles and impacts earnings. The amount which will be reclassified in the next twelve months represents the net of current assets and current liabilities, excluding the PGAC in the above table.
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(Unaudited)
The following table details the changes in the net asset or liability position from one period to the next for mark to market energy transactions for the operations of Wholesale:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | |
| | | 2006 | | 2005 | | 2006 | | 2005 | |
| | | | | (In thousands) | | | |
| Amount realized on contracts delivered | | | | | | | | | |
| during period | | $ | (658 | ) | $ | (322 | ) | $ | (85 | ) | $ | (254 | ) |
| Changes in fair value | | | (1,811 | ) | | 211 | | | (1,880 | ) | | 1,066 | |
| Net change recorded as mark-to-market | | $ | (2,469 | ) | $ | (111 | ) | $ | (1,965 | ) | $ | 812 | |
The net change in fair value on PNM’s commodity derivative instruments designated as hedging instruments are summarized as follows:
| | | Three months ended June 30, | | Six months ended June 30, | |
| | | 2006 | | 2005 | | 2006 | | 2005 | |
Type of Derivative | | Hedge Instruments | |
| | | | | (In thousands) | | | |
| Change in fair value of energy contracts | | $ | 466 | | $ | 1,127 | | $ | (7,078 | ) | $ | (2,194 | ) |
| Change in fair value of gas fixed for float swaps | | | (2,019 | ) | | 2,510 | | | (16,774 | ) | | 8,730 | |
| Net change in fair value | | $ | (1,553 | ) | $ | 3,637 | | $ | (23,852 | ) | $ | 6,536 | |
| | | March 31, | | December 31, | | March 31, | | December 31, | |
| | | 2007 | | 2006 | | 2007 | | 2006 | |
Type of Derivative | | Mark-to-Market Instruments | | Hedge Instruments | |
| | | | | (In thousands) | | | |
Current Assets | | | | | | | | | |
| Energy contracts | | $ | 8,253 | | $ | 16,374 | | $ | - | | $ | 1,057 | |
| Gas fixed-for-float swaps | | | 6,544 | | | 1,950 | | | 3,656 | | | 1,615 | |
| Options | | | 2,841 | | | 2,986 | | | - | | | - | |
| Derivative assets for gas off-system sales | | | | | | | | | | | | | |
| forward physical trades | | | 479 | | | - | | | - | | | - | |
| PGAC portion of options, swaps and hedges | | | - | | | - | | | 3,302 | | | 16,748 | |
| Total Current Assets | | | 18,117 | | | 21,310 | | | 6,958 | | | 19,420 | |
| | | | | | | | | | | | | | |
Deferred Charges | | | | | | | | | | | | | |
| Energy contracts | | | - | | | 2,666 | | | - | | | - | |
| Gas fixed-for-float swaps | | | 12,172 | | | 7,101 | | | 3,200 | | | 1,872 | |
| Options | | | 2,797 | | | 825 | | | - | | | - | |
| PGAC portion of options, swaps and hedges | | | - | | | - | | | 749 | | | 3,337 | |
| Total Deferred Charges | | | 14,969 | | | 10,592 | | | 3,949 | | | 5,209 | |
| | | | | | | | | | | | | | |
Total Assets | | | 33,086 | | | 31,902 | | | 10,907 | | | 24,629 | |
| | | | | | | | | | | | | | |
Current Liabilities | | | | | | | | | | | | | |
| Energy contracts | | | (11,069 | ) | | (10,928 | ) | | (808 | ) | | - | |
| Gas fixed-for-float swaps | | | (4,492 | ) | | (6,440 | ) | | (330 | ) | | (2,872 | ) |
| Options | | | (2,933 | ) | | (3,255 | ) | | - | | | - | |
| PGAC portion of options, swaps and hedges | | | - | | | - | | | (3,302 | ) | | (16,748 | ) |
| Total Current Liabilities | | | (18,494 | ) | | (20,623 | ) | | (4,440 | ) | | (19,620 | ) |
| | | | | | | | | | | | | | |
Long-Term Liabilities | | | | | | | | | | | | | |
| Energy contracts | | | (4,214 | ) | | (7,472 | ) | | (1,194 | ) | | (154 | ) |
| Gas fixed-for-float swaps | | | (291 | ) | | (421 | ) | | (835 | ) | | (1,915 | ) |
| Options | | | (3,610 | ) | | (801 | ) | | - | | | - | |
| PGAC portion of options, swaps and hedges | | | - | | | - | | | (749 | ) | | (3,337 | ) |
| Total Long-Term Liabilities | | | (8,115 | ) | | (8,694 | ) | | (2,778 | ) | | (5,406 | ) |
| | | | | | | | | | | | | | |
Total Liabilities | | | (26,609 | ) | | (29,317 | ) | | (7,218 | ) | | (25,026 | ) |
| | | | | | | | | | | | | | |
Net Total Assets and Total Liabilities | | $ | 6,477 | | $ | 2,585 | | $ | 3,689 | | $ | (397 | ) |
TNMP
Normal Sales and Purchases Transactions
In the normal course of business, TNMP enters into commodity contracts, which include components for additional purchasesGains or sales of electricity, in order to meet customer requirements. Criteria by which option-type and forward contracts for electricity can qualify for the normal purchase and sales exception have been defined by SFAS 133. In accordance with SFAS 133, management has determined that its contracts for electricity qualify for the normal purchases and sales exception. Revenuelosses related to sales of electricity is recordedhedged instruments are reclassified from accumulated other comprehensive income when the hedged transaction settles and impacts earnings. The amounts, other than PGAC, shown as current assets and current liabilities, relate to contracts that will be settled in electric revenues at the time of delivery. Expenses related to purchases of electricity are recorded in cost of energy at the time of delivery.
next twelve months.
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(Unaudited)
In accordance with SFAS No. 128, “Earnings per Share,” dual presentation of basic and diluted earnings per share has been presented in the Condensed Consolidated Statements of Earnings.Earnings of PNMR. The following reconciliation illustrates the impact on the share amounts of potential common shares and the earnings per share amounts:
| | | Three Months Ended | | Six Months Ended | |
| | | June 30, | | June 30, | |
| | | 2006 | | 2005 | | 2006 | | 2005 | |
| | | (In thousands, except per share amounts) | |
Basic: | | | | | | | | | |
| | | | | | | | | | |
Net Earnings | | $ | 16,307 | | $ | 1,541 | | $ | 42,632 | | $ | 32,050 | |
| | | | | | | | | | | | | | |
| Average Number of Common Shares Outstanding | | | 68,852 | | | 65,534 | | | 68,819 | | | 63,057 | |
| | | | | | | | | | | | | | |
Net Earnings per Share of | | | | | | | | | | | | | |
Common Stock (Basic) | | $ | 0.24 | | $ | 0.02 | | $ | 0.62 | | $ | 0.51 | |
| | | | | | | | | | | | | | |
Diluted: | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Net Earnings | | $ | 16,307 | | $ | 1,541 | | $ | 42,632 | | $ | 32,050 | |
| | | | | | | | | | | | | | |
| Average Number of Common Shares Outstanding | | | 68,852 | | | 65,534 | | | 68,819 | | | 63,057 | |
| Dilutive Effect of Common Stock | | | | | | | | | | | | | |
| Equivalents (a) | | | 581 | | | 955 | | | 530 | | | 953 | |
| Average Common and Common | | | | | | | | | | | | | |
| Equivalent Shares Outstanding | | | 69,433 | | | 66,489 | | | 69,349 | | | 64,010 | |
| | | | | | | | | | | | | | |
Net Earnings per Share of Common | | | | | | | | | | | | | |
Stock (Diluted) | | $ | 0.23 | | $ | 0.02 | | $ | 0.61 | | $ | 0.50 | |
| | | Three Months Ended | |
| | | March 31, | |
| | | 2007 | | 2006 | |
| | | (In thousands, except per share amounts) | |
| | | | | | |
Net Earnings | | $ | 29,666 | | $ | 26,001 | |
| | | | | | | | |
Average Number of Common Shares Outstanding | | | 76,659 | | | 68,787 | |
| Dilutive effect of common stock equivalents: | | | | | | | |
| Stock options and restricted stock | | | 701 | | | 497 | |
| Equity-linked units | | | 739 | | | 91 | |
Average Common and Common Equivalent Shares Outstanding | | | 78,099 | | | 69,375 | |
| | | | | | | | |
Net Earnings per Share of Common Stock: | | | | | | | |
| | | | | | | | |
| Basic | | $ | 0.39 | | $ | 0.38 | |
| Diluted | | $ | 0.38 | | $ | 0.37 | |
| | (a) | Excludes the effect of average anti-dilutive common stock equivalents related to out-of-the-money options of 661,855zero and 4,154722,306 for the three months ended March 31, 2007 and 736,869 and 232,006 for the six months ended June 30, 2006, and 2005, respectively. Excludes the effect of anti-dilutive equity-linked units of 4,945,000 for the three and six months ended June 30, 2006 and 2005 (see Note 7). |
(6)
| Stock-Based Compensation
|
PNMR has various types of stock-based compensation programs, including stock options, restricted stock and performance shares granted under the PEP. PNMR also has an ESPP. All stock-based compensation is granted through stock-based employee compensation plans maintained by PNMR. Although certain PNM and TNMP employees participate in the PNMR plans, PNM and TNMP do not have separate employee stock-based compensation plans. Readers should refer to Note 13 of the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K/A (Amendment No. 2) for the year ended December 31, 2005 for additional information on these plans.
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment” ("SFAS 123R"), utilizing the modified prospective approach. Prior to the adoption of SFAS 123R, stock option grants, performance shares and ESPP issuances were accounted for in accordance with the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and accordingly, no compensation expense was recognized for these awards. Restricted stock was also accounted for under APB 25 and compensation expense was recognized for restricted stock awards prior to the adoption of SFAS 123R. “Restricted stock” is the name of these awards provided for in the PEP and refers to awards of stock subject to vesting. It does not refer to restricted shares with contractual post-vesting restrictions as defined in SFAS 123R.
Under the modified prospective approach, SFAS 123R applies to all new awards and to awards that were outstanding on January 1, 2006 that are subsequently modified, repurchased or cancelled. Compensation expense recognized in 2006 includes compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123, and compensation expense for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. Prior periods were not restated to reflect the impact of adopting the new standard.
The unearned stock-based compensation related to stock options and restricted stock awards is being amortized to compensation expense over the requisite vesting period, which is generally equally over three years. However, plan provisions provide that upon retirement, participants become 100% vested in stock options and restricted stock awards; therefore, in accordance with SFAS 123R, compensation expense for stock options and restricted stock awards to participants that are retirement eligible on the grant date is recognized immediately at the grant date and is not amortized over a period of time.
Total compensation expense for stock-based payment arrangements recognized by PNMR for the three and six months ended June 30, 2006 was $1.1 million and $5.5 million, respectively. Of this total expense, $0.9 million and $4.2 million was allocated to PNM for the three and six months ended June 30, 2006, respectively, and $0.2 million and $0.9 million was allocated to TNMP for the three and six months ended June 30, 2006, respectively. No compensation expense was recognized by PNMR, PNM or TNMP for the three or six months ended June 30, 2005.
The total tax benefit recognized by PNMR for the three and six months ended June 30, 2006 was $0.5 million and $2.2 million, respectively. At June 30, 2006, PNMR had approximately $6.0 million of unrecognized compensation expense related to stock-based payments that is expected to be recognized over a weighted-average period of 1.5 years.
PNMR receives a tax deduction for certain stock option exercises during the period the options are exercised, generally for the excess of the price at which the options are sold over the exercise prices of the options and a tax deduction for increases in the value of equity instruments issued under stock-based payment arrangements. Prior to the adoption of SFAS 123R, all tax benefits resulting from the exercise of stock options and stock-based payment arrangements were reported as operating cash flows in the Condensed Consolidated Statements of Cash Flows. In accordance with SFAS 123R, for the six months ended June 30, 2006, PNMR’s Condensed Consolidated Statements of Cash Flows presentation reports the tax benefits from the exercise of stock options and stock-based payments as financing cash flows. For the six months ended June 30, 2006, $0.9 million of tax benefits were reported as financing cash flows rather than operating cash flows in PNMR’s Condensed Consolidated Statements of Cash Flows.
All stock incentives (options, restricted stock and performance shares) issued to employees and non-employee directors are awarded according to the applicable plan terms. The source of shares for exercised stock options, delivery of vested restricted stock and performance shares is shares acquired on the open market, rather than newly issued shares. During 2006, PNMR expects to repurchase between 1,200,000 shares and 2,000,000 shares for these awards using an independent broker. The source of shares for the ESPP is primarily newly issued shares.
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table illustrates the reduction to PNMR’s earnings and basic and diluted earnings per share due to the adoption of SFAS 123R for the three and six months ended June 30, 2006:
| | | Three Months Ended | | Six Months Ended | |
| | | June 30, 2006 | |
| | | (In thousands, except per share amounts) | |
| | | | | | |
| Reduction - PNMR income from operations | | $ | 807 | | $ | 3,515 | |
| Reduction - PNMR income before income taxes | | $ | 807 | | $ | 3,515 | |
| Reduction - PNMR net earnings | | $ | 492 | | $ | 2,142 | |
| Reduction - PNMR earnings per share | | | | | | | |
| Basic | | $ | 0.01 | | $ | 0.03 | |
| Diluted | | $ | 0.01 | | $ | 0.03 | |
The following table illustrates the effect on PNMR’s net earnings and diluted earnings per share had PNMR accounted for stock-based compensation in accordance with SFAS No. 123, “Share-Based Payment” for the three and six months ended June 30, 2005:
| | | Three Months Ended | | Six Months Ended | |
| | | June 30, 2005 | |
| | | (In thousands, except per share amounts) | |
| | | | | | |
| Net earnings | | $ | 1,541 | | $ | 32,050 | |
| Add: Stock compensation expense included | | | | | | | |
| in reported income, net of related tax effects | | | - | | | - | |
| Deduct: Total stock-based employee | | | | | | | |
| compensation expense determined | | | | | | | |
| under fair value based method for all | | | | | | | |
| awards, net of related tax effects | | | (346 | ) | | (693 | ) |
| Pro forma net earnings | | $ | 1,195 | | $ | 31,357 | |
| | | | | | | | |
| Earnings per share: | | | | | | | |
| Basic - as reported | | $ | 0.02 | | $ | 0.51 | |
| | | | | | | | |
| Basic - pro forma | | $ | 0.02 | | $ | 0.50 | |
| | | | | | | | |
| Diluted - as reported | | $ | 0.02 | | $ | 0.50 | |
| | | | | | | | |
| Diluted - pro forma | | $ | 0.02 | | $ | 0.49 | |
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Stock Options
The Company uses the Black-Scholes option pricing model to estimate the fair value of stock-based awards with the following weighted-average assumptions for the indicated periods:
| | Six Months Ended |
| | June 30, |
| | 2006 | | 2005 |
| | | | |
| Dividend yield | 3.33% | | 2.55% |
| Expected volatility | 21.70% | | 24.29% |
| Risk-free interest rate | 4.37% | | 3.79% |
| Expected life of option (years) | 4.14 | | 4.23 |
The assumptions above are based on multiple factors, including historical exercise patterns of employees in relatively homogeneous groups with respect to exercise and post-vesting employment termination behaviors, expected future exercising patterns for these same homogeneous groups and both the implied and historical volatility of PNMR’s stock price.
The following table represents stock option activity for the six months ended June 30, 2006:
| | | | | Weighted- | | | | Weighted- | |
| | | | | Average | | Aggregate | | Average | |
| | | | | Exercise | | Intrinsic | | Remaining | |
Stock Options | | Shares | | Price | | Value | | Contract Life | |
| | | (In thousands, except share and per share amounts) | |
| | | | | | | | | | |
| Outstanding at beginning of period | | | 3,016,549 | | $ | 18.97 | | | | | | | |
| | | | | | | | | | | | | | |
| Granted | | | 817,200 | | $ | 24.07 | | | | | | | |
| | | | | | | | | | | | | | |
| Exercised | | | (268,576 | ) | $ | 15.59 | | | | | | | |
| | | | | | | | | | | | | | |
| Forfeited or expired | | | (79,294 | ) | $ | 21.53 | | | | | | | |
| | | | | | | | | | | | | | |
| Outstanding at end of period | | | 3,485,879 | | $ | 20.37 | | $ | 16,000 | | | 7.44 Years | |
| | | | | | | | | | | | | | |
| Options exercisable at end of period | | | 2,057,966 | | $ | 17.51 | | $ | 15,331 | | | 6.29 Years | |
| | | | | | | | | | | | | | |
| Options available for future grant | | | 3,325,987 | | | | | | | | | | |
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(Unaudited)
(6) | Stock-Based Compensation |
Information concerning the Company’s stock-based compensation plans is contained in Note 13 of the Notes to Consolidated Financial Statements in the 2006 Annual Reports on Form 10-K/A (Amendment No. 1).
Stock Options
The following table summarizesrepresents stock option activity for the sixthree months ended June 30:March 31, 2007:
Stock Options | | 2006 | | 2005 | |
| | | (In thousands, except per share amounts) | |
| | | | | | |
| Weighted-average grant date fair value of options granted | | $ | 3.87 | | $ | 5.41 | |
| Total fair value of options that vested during the period | | $ | 4,632 | | $ | 4,322 | |
| Total intrinsic value of options exercised during the period | | $ | 2,556 | | $ | 11,547 | |
| | | | | | | | | Weighted- | |
| | | | | Weighted- | | Aggregate | | Average | |
| | | | | Average | | Intrinsic | | Remaining | |
| | | | | Exercise | | Value | | Contract Life | |
Stock Options | | Shares | | Price | | (In thousands) | | (Years) | |
| | | | | | | | | | |
| Outstanding at beginning of period | | | 2,999,606 | | $ | 21.02 | | | | | | | |
| Granted | | | 754,000 | | $ | 30.50 | | | | | | | |
| Exercised | | | (278,859 | ) | $ | 20.11 | | | | | | | |
| Forfeited | | | (11,636 | ) | $ | 27.26 | | | | | | | |
| | | | | | | | | | | | | | |
| Outstanding at end of period | | | 3,463,111 | | $ | 23.11 | | $ | 31,737 | | | 7.57 | |
| | | | | | | | | | | | | | |
| Options exercisable at end of period | | | 1,848,561 | | $ | 19.03 | | $ | 24,525 | | | 6.17 | |
| | | | | | | | | | | | | | |
| Options available for future grant | | | 2,485,793 | | | | | | | | | | |
Restricted Stock
The PEP, described in Note 13 of the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K/A (Amendment No. 2) for the year ended December 31, 2005, allows for the issuance of restricted stock awards. As noted above, “restricted stock” is the name of these awards provided for in the PEP and refers to awards of stock subject to vesting. It does not refer to restricted shares with contractual post-vesting restrictions as defined in SFAS 123R. The compensation expense for these awards was determined based on the market price of PNMR stock on the date of grant reduced by the present value of future dividends applied to the total number of shares that were anticipated to fully vest and then amortized over the vesting period.
The Company estimates the fair value of restricted stock awards based on the market price of PNMR common stock on the date of grant reduced by the present value of estimated future dividends with the following weighted-average assumptions for the indicated periods:
| Six Months Ended
|
| June 30,
|
| 2006
| | 2005
|
| | | |
Expected quarterly dividends per share | $0.20 | | N/A |
Risk-free interest rate | 4.64% | | N/A |
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(Unaudited)
The following table provides additional information concerning stock option activity for the three months ended March 31:
Stock Options | | 2007 | | 2006 | |
| | | (In thousands, except per share amounts) | |
| | | | | | |
| Weighted-average grant date fair value per share of options granted | | $ | 4.70 | | $ | 3.87 | |
| Total intrinsic value of options exercised during the period | | $ | 3,103 | | $ | 851 | |
Restricted Stock
The following table summarizes nonvested restricted stock activity for the sixthree months ended June 30, 2006:March 31, 2007:
| | | | | Weighted- | | | | | Weighted- |
| | | | | Average | | | | | Average |
| | | | | Grant-Date | | | | | Grant-Date |
Nonvested Restricted Stock | | Shares | | Fair Value | | | Shares | | Fair Value |
| | | | | | | | | | |
| Nonvested at beginning of period | | | 109,044 | | $ | 24.92 | | | 161,769 | | $24.55 |
| | | | | | | | | |
| Granted | | | 105,400 | | $ | 21.86 | | | 94,000 | | $28.76 |
| | | | | | | | | |
| Vested | | | (39,571 | ) | $ | 24.69 | | | (64,301) | | $23.24 |
| | | | | | | | | |
| Forfeited | | | (6,684 | ) | $ | 22.35 | | |
| | | | | | | | | |
| Nonvested at end of period | | | 168,189 | | $ | 23.17 | | | 191,468 | | $25.93 |
The following table summarizes restricted stock activity for the six months ended June 30:
Nonvested Restricted Stock | | 2006 | | 2005 | |
| | | (In thousands, except per share amounts) | |
| | | | | | |
| Weighted-average grant date fair value of shares granted | | $ | 21.86 | | $ | 26.80 | |
| Total fair value of shares that vested during the period | | $ | 977 | | $ | 276 | |
Performance Shares
The PEP allows for the issuance of performance share awards. Under the provisions of SFAS 123R, the compensation expense for these awards was determined based on the market price of PNMR common stock on the date of grant applied to the total numbers of shares that were anticipated to be awarded.
ESPP
Under the ESPP, employees were allowed to purchase shares of PNMR’s common stock at a 15% discount of the lower of the market price of stock at the beginning of the offering period and end of each purchase period for the six months ended June 30, 2006. Under the provisions of SFAS 123R, the compensation expense for the shares issued under the ESPP was determined based on the fair value of PNMR's commonshares of restricted stock usingthat vested during the Black-Scholes model. Beginning July 1, 2006, the discount ratethree months ended March 31, 2007 was changed to 5%, and the look-back feature was eliminated; therefore, the plan is no longer considered compensatory.$2.0 million.
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(Unaudited)
PNMR
Long-Term Debt
See “PNM” below for details aboutInformation concerning the April 2006 remarketingCompany’s financing activities is contained in Note 6 of PNM’s pollution control revenue bonds.
Revolvingthe Notes to Consolidated Financial Statements in the Annual Reports on Form 10-K/A (Amendment No. 1). PNMR and Other Credit Facilities
PNMR has a $600.0 million unsecuredPNM have revolving credit facility (the “PNMR Facility”). The PNMR Facility has an expiration date of August 15, 2010facilities for borrowings up to $600 million and includes two one-year extension options$400 million, respectively, that are subject to approval by a majority of the lenders. At June 30, 2006, there were no outstanding borrowings under the PNMR Facility; however, $107.7 million of letters of credit are outstanding, which reduces the available capacity under the PNMR Facility.
At June 30, 2006, PNMR also had $15.0 millionprimarily expire in local lines of credit. There were no outstanding borrowings under the2011 and local lines of credit at June 30, 2006.
amounting to $15 million and $13.5 million, respectively. PNMR has aand PNM also have commercial paper programprograms under which itthey may issue up to $400.0$400 million in commercial paper for up to 270 days. The commercial paper is unsecured and the proceeds are used for short-term cash management needs. The PNMR Facility serves as a backstop for the outstanding commercial paper. At June 30, 2006, PNMR had $126.3$300 million of commercial paper, outstanding.
At June 30, 2006, First Choice had up to $300.0 million of borrowing capacity under the PNMR Facility. Any borrowings made by First Choice under this sublimit are guaranteed by PNMR. At June 30, 2006, First Choice had no outstanding borrowings under the PNMR Facility. In addition, at June 30, 2006, First Choice had $5.5 million of letters of credit outstanding, which reduces the available capacity under the PNMR Facility. TNMP is also a borrower under the PNMR Facility (see “TNMP” below).
Financing Activities
On April 18, 2006,respectively. PNMR entered into a short-term bridge loan agreement for temporary financing of the Twin Oaks acquisition (see(See Note 2). UnderThe revolving credit facilities serve as support for the term loan agreement,commercial paper programs. Operationally, this means the aggregate borrowings under the commercial paper program and the revolving credit facility for each of PNMR was permitted to borrow up to $480.0 million in a single draw on or after April 18, 2006, to financeand PNM cannot exceed the acquisition of Twin Oaks and related expenses. Term loans made under this agreement bear interest at a base rate (the greatermaximum amount of the prime rate in effect and the Federal Funds rate plus ½ of 1%) or an adjusted Eurodollar rate (equal to the British Bankers Association LIBOR rate plus an additional percentage based on PNMR’s then current long-term senior unsecured non-credit enhancedrevolving credit facility for that entity.
Short-term debt rating). outstanding consists of:
| | | March 31, | | December 31, | |
Short-term Debt | | 2007 | | 2006 | |
| | | (In thousands) | |
| | | | | | |
| Commercial paper programs: | | | | | |
| PNMR | | $ | 244,150 | | $ | 263,550 | |
| PNM | | | 245,700 | | | 251,300 | |
| PNMR bridge loan | | | 249,495 | | | 249,495 | |
| | | | | | | | |
| | | $ | 739,345 | | $ | 764,345 | |
On April 18, 2006, PNMR borrowed $480.0 million under the term loan agreement. PNMR used the proceeds of the loan to make capital contributions totaling $480.0 million to Altura through the two wholly owned subsidiaries that are partners in Altura to provide the funds for the acquisition of Twin Oaks. PNMR must repay the loan by April 17, 2007, unless accelerated in accordancePNMR repaid the balance due on the bridge loan. To facilitate the repayment, PNMR borrowed $250.5 million under its revolving credit facility. Reflecting this borrowing, at May 1, 2007, PNMR and PNM had $48.8 million and $188.8 million of availability under their respective revolving credit facilities and local lines of credit, including reductions of availability due to outstanding letters of credit and amounts outstanding under the commercial paper programs.
As of March 31, 2007, TNMP had outstanding borrowings of $29.2 million from PNMR under their intercompany loan agreement.
PNMR has entered into three fixed-to-floating interest rate swaps with the termsan aggregate notional principal amount of the agreement or prepaid in whole or in part upon the issuance$150.0 million. The swaps are accounted for as fair-value hedges with a liability position of certain additional equity orapproximately $2.8 million at March 31, 2007, with a corresponding reduction of long-term debt.
PNMR has a universal shelf registration statement filed withoffers new shares of PNMR common stock through the SEC forPNM Direct Plan and an equity distribution agreement. For the issuance of debt securities and equity securities, preferred stock, purchase contracts, purchase contract units and warrants. As of June 30, 2006,three months ended March 31, 2007, PNMR had approximately $400.0sold a combined total of 22,704 shares of its common stock through the PNMR Direct Plan and the equity distribution agreement for net proceeds of $0.7 million. PNMR also issued 12,210 shares of its common stocks for $0.4 million of remaining unissued securities under this registration statement.through its ESPP during the three months ended March 31, 2007.
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(Unaudited)
PNMR has entered into three fixed-to-floating interest rate swaps with an aggregate notional principal amount of $150.0 million. Under these swaps, PNMR receives a 4.40% fixed interest payment on the notional principal amount on a semi-annual basis and pays a floating rate equal to the six month LIBOR plus 58.15 basis points (0.5815%) on the notional amount through September 15, 2008. The initial floating rate was 1.91% and will be reset every six months. The floating rate was reset on March 15, 2006, to a weighted average rate of 5.65%. The swaps are accounted for as fair-value hedges with a liability position of approximately $6.0 million at June 30, 2006, recorded in other current liabilities with a corresponding reduction of long-term debt. There was no hedge ineffectiveness for the three and six months ended June 30, 2006 or June 30, 2005.
During October 2004, PNMR entered into two forward starting floating-to-fixed rate interest rate swaps with an aggregate notional principal amount of $100.0 million. These swaps became effective August 1, 2005 with a termination date of November 15, 2009. Under these swaps, PNMR received a floating rate equal to the three month LIBOR rate on the notional principal amount which paid a fixed interest rate of 3.975% on the notional principal amount on a quarterly basis. The initial floating rate was set on August 1, 2005, at 3.693% to be reset every three months. As of the last adjustment date, the weighted average interest rate was 5.149%. From November 2004 through June 30, 2005, the swaps were accounted for as cash flow hedges against the PNMR Facility. Effective June 30, 2005, the swaps were de-designated as cash flow hedges. As such, changes in market valuations are marked-to-market and recorded as unamortized gains or losses in the appropriate period. Prior to the de-designation, the increase in fair market value of $0.4 million was recorded in accumulated other comprehensive income on PNMR’s Condensed Consolidated Balance Sheet at June 30, 2006 and December 31, 2005. For the three and six months ended June 30, 2006, $0.2 million and $1.4 million, respectively, was recognized in other income on PNMR’s Condensed Consolidated Statement of Earnings. No comparable amount was recognized for the three and six months ended June 30, 2005. These two interest rate swaps were sold on May 19, 2006. The current amount recorded in other comprehensive income will be recognized in income over a 3 year period ending in November 2009.
In March 2005, PNMR issued 3,910,000 shares of its common stock at $26.76 per share. PNMR received net proceeds from this offering, after deducting underwriting discounts, commissions and expenses, of approximately $101.0 million. In March 2005, PNMR also completed a public offering of 4,945,000 equity-linked units at 6.75%, yielding net proceeds after discounts, commissions and expenses of approximately $239.6 million. In October 2005, PNMR completed a private offering of 4,000,000 equity-linked units at 6.625%. PNMR received $100.0 million in proceeds from this transaction and there were no underwriting discounts or commissions.
Pursuant to the terms of the PNM Direct Plan, PNMR began offering new shares of PNMR common stock through the plan beginning June 1, 2006. PNMR may also waive the maximum investment limit upon request in individual cases pursuant to the terms of the plan. For the six months ended June 30, 2006, 371,725 new shares of PNMR common stock were sold for total proceeds of $9.3 million.
PNM
Long-Term Debt
On April 1, 2006, PNM remarketed its $46.0 million 2003 Series A and $100.0 million Series B pollution control revenue bonds resulting in an interest rate fixed to maturity on April 1, 2033 of 4.875% annually.
Revolving and Other Credit Facilities
PNM has a $400.0 million unsecured credit agreement (the “PNM Facility”). The PNM Facility was for a one-year term, which was to expire on August 17, 2006. On July 6, 2006, the NMPRC approved extending the maturity for this facility to August 17, 2010, which will become effective upon receipt of the NMPRC order by the agent bank. The PNM Facility also includes two one-year extension options, which were also approved by NMPRC. These additional extension options are still subject to approval by a majority of the lenders. There were no amounts outstanding under the PNM Facility as of June 30, 2006.
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At June 30, 2006, PNM also had $23.5 million in local lines of credit and a $20.0 million borrowing arrangement with PNMR. There were no outstanding borrowings under the local lines of credit or the borrowing arrangement with PNMR at June 30, 2006; however, $4.5 million of letters of credit were outstanding, which reduces the available capacity under the PNM Facility.
PNM has a commercial paper program under which PNM may issue up to $300.0 million in commercial paper for up to 365 days. The commercial paper is unsecured and the proceeds are used for short-term cash management needs. The PNM Facility serves as a backstop for the outstanding commercial paper. As of June 30, 2006, PNM had $100.2 million in commercial paper outstanding.
Financing Activities
PNM has a universal shelf registration statement filed with the SEC for the issuance of debt securities, equity securities, preferred stock, purchase contracts, purchase contract units and warrants. As of June 30, 2006, PNM had approximately $200.0 million of remaining unissued securities registered under its universal shelf registration statement.
TNMP
Revolving and Other Credit Facilities
TNMP is a borrower and can issue notes of up to $100.0 million under the PNMR Facility. Any borrowings made by TNMP under this sublimit are not guaranteed by PNMR. At June 30, 2006, TNMP had no outstanding borrowings under the PNMR Facility; however, TNMP had $2.4 million in letters of credit outstanding, which reduces the available capacity under the PNMR Facility.
(8) | Pension and Other Postretirement Benefit Plans |
PNMR and its subsidiaries maintain a qualified defined benefit pension plan, a plan providing medical and dental benefits to eligible retirees, and an executive retirement program (“PNM Plans”). PNMR maintains the legal obligation for the benefits owed to participants under these plans. TNMP also maintains a qualified defined benefit pension plan covering substantially all of its employees, a plan providing medical and death benefits to eligible retirees and an executive retirement program (“TNMP Plans”). Readers should refer to Note 12 of the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K/A (Amendment No. 1) for the year ended December 31, 2006 for additional information on these plans.
Participants in the PNM Plans include eligible employees and retirees of PNMR and other subsidiaries of PNMR. Participants in the TNMP Plans include eligible employees and retirees of TNMP, First Choice and other subsidiaries of TNP. The PNM pension plan was frozen at the end of 1997, with regard to new participants, salary levels and benefits. Additional credited service can be accrued under the PNM pension plan up to a limit determined by age and service. The TNMP pension plan was frozen at December 31, 2005, with regard to new participants, salary levels and benefits.
The totalfollowing table presents the components of the PNM Plans’ net periodic benefit cost or income from(income):
| | | Three Months Ended March 31, | |
| | | Pension Plan | | Other Postretirement Benefits | | Executive Retirement Program | |
| | | 2007 | | 2006 | | 2007 | | 2006 | | 2007 | | 2006 | |
| | | | | | | (In thousands) | | | | | |
Components of Net Periodic | | | | | | | | | | | | | |
Benefit Cost (Income) | | | | | | | | | | | | | |
| Service cost | | $ | 36 | | $ | 126 | | $ | 632 | | $ | 678 | | $ | 14 | | $ | 14 | |
| Interest cost | | | 7,953 | | | 7,710 | | | 1,928 | | | 1,842 | | | 272 | | | 264 | |
| Expected long-term return on assets | | | (10,194 | ) | | (10,138 | ) | | (1,463 | ) | | (1,354 | ) | | - | | | - | |
| Amortization of net (gain) loss | | | 971 | | | 1,210 | | | 1,460 | | | 1,670 | | | 24 | | | 25 | |
| Amortization of prior service cost | | | 79 | | | 79 | | | (1,422 | ) | | (1,422 | ) | | 3 | | | 3 | |
Net Periodic Benefit Cost (Income) | | $ | (1,155 | ) | $ | (1,013 | ) | $ | 1,135 | | $ | 1,414 | | $ | 313 | | $ | 306 | |
For the three months ended March 31, 2007 and 2006, PNM Plans, in additionmade contributions totaling $1.5 million and zero to trusts for other postretirement benefits. PNM expects to make contributions totaling $6.7 million during 2007 to trusts for other postretirement benefits. PNM does not anticipate making any contributions to the net periodic benefit cost from the TNMP Plans from the date of PNMR’s acquisition of TNP, or June 6, 2005, is included in the Condensed Consolidated Statements of Earnings of PNMR.pension plan during 2007.
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(Unaudited)
PNMTNMP Plans
The following table presents the components of PNMthe TNMP Plans’ net periodic benefit cost/cost (income) recognized in the Condensed Consolidated Statements of Earnings::
| | | Three Months Ended June 30, | |
| | | Pension Plan | | Other Postretirement Benefits | | Executive Retirement Program | |
| | | 2006 | | 2005 | | 2006 | | 2005 | | 2006 | | 2005 | |
| | | | | | | (In thousands) | | | | | |
| | | | | | | | | | | | | | |
| Service cost | | $ | 126 | | $ | 477 | | $ | 678 | | $ | 645 | | $ | 14 | | $ | 16 | |
| Interest cost | | | 7,710 | | | 7,567 | | | 1,842 | | | 1,648 | | | 264 | | | 295 | |
| Expected long-term return on assets | | | (10,139 | ) | | (10,042 | ) | | (1,355 | ) | | (1,318 | ) | | - | | | - | |
| Amortization of net loss | | | 1,210 | | | 892 | | | 1,670 | | | 1,490 | | | 25 | | | 43 | |
| Amortization of prior service cost | | | 79 | | | 79 | | | (1,422 | ) | | (1,702 | ) | | 3 | | | 34 | |
| Net periodic benefit cost/(income) | | $ | (1,014 | ) | $ | (1,027 | ) | $ | 1,413 | | $ | 763 | | $ | 306 | | $ | 388 | |
| | | Six Months Ended June 30, | | | Three Months Ended March 31, | |
| | | Pension Plan | | Other Postretirement Benefits | | Executive Retirement Program | | | Pension Plan | | Other Postretirement Benefits | | Executive Retirement Program | |
| | | 2006 | | 2005 | | 2006 | | 2005 | | 2006 | | 2005 | | | 2007 | | 2006 | | 2007 | | 2006 | | 2007 | | 2006 | |
| | | | | | | (In thousands) | | | | | | | | | | | (In thousands) | | | | | |
| | | | | | | | | | | | | | | |
Components of Net Periodic | | | | | | | | | | | | | | |
Benefit Cost (Income) | | | | | | | | | | | | | | |
| Service cost | | $ | 252 | | $ | 954 | | $ | 1,356 | | $ | 1,290 | | $ | 28 | | $ | 32 | | | $ | - | | $ | - | | $ | 98 | | $ | 106 | | $ | - | | $ | - | |
| Interest cost | | | 15,420 | | 15,134 | | 3,684 | | 3,296 | | 528 | | 590 | | | | 1,057 | | 1,085 | | 165 | | 178 | | 19 | | 19 | |
| Expected long-term return on assets | | | (20,277 | ) | | (20,084 | ) | | (2,709 | ) | | (2,636 | ) | | - | | - | | | | (1,710 | ) | | (1,754 | ) | | (114 | ) | | (114 | ) | | - | | - | |
| Amortization of net loss | | | 2,420 | | 1,784 | | 3,340 | | 2,980 | | 50 | | 86 | | |
| Amortization of net (gain) loss | | | | (2 | ) | | - | | (39 | ) | | - | | - | | - | |
| Amortization of prior service cost | | | 158 | | | 158 | | | (2,844 | ) | | (3,404 | ) | | 6 | | | 68 | | | | - | | | - | | | 15 | | | 15 | | | - | | | - | |
| Net periodic benefit cost/(income) | | $ | (2,027 | ) | $ | (2,054 | ) | $ | 2,827 | | $ | 1,526 | | $ | 612 | | $ | 776 | | |
Net Periodic Benefit Cost (Income) | | | $ | (655 | ) | $ | (669 | ) | $ | 125 | | $ | 185 | | $ | 19 | | $ | 19 | |
For the three months ended June 30, 2006March 31, 2007 and 2005, PNM contributed approximately $3.1 million and $1.5 million, respectively, to trusts for other postretirement benefits. For the six months ended June 30, 2006 and 2005, PNM contributed approximately $3.1 million and $3.1 million, respectively, to trusts for other postretirement benefits. PNM expects to make contributions totaling $6.4 million during 2006 to trusts for other postretirement benefits. PNM does not anticipate making any contributions to the pension plan during 2006.
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
TNMP Plans
The following tables present the components of TNMP net pension cost/(income) recognized in the Condensed Consolidated Statements of Earnings:
| | | Three Months Ended June 30, | |
| | | | | | | | | |
| | | Post- | | Post- | | | Pre- | |
| | | Acquisition | | Acquisition | | | Acquisition | |
| | | April 1- | | June 6- | | | April 1- | |
| | | June 30, | | June 30, | | | June 6, | |
| | | 2006 | | 2005 | | | 2005 | |
| | | (In thousands) | |
| | | | | | | | | |
| Service cost | | $ | - | | $ | 187 | | | $ | 343 | |
| Interest cost | | | 1,085 | | | 345 | | | | 759 | |
| Expected long-term rate of return on plan assets | | | (1,754 | ) | | (573 | ) | | | (966 | ) |
| Amortization of prior service cost | | | - | | | - | | | | (20 | ) |
| Net periodic pension benefit cost/(income) | | $ | (669 | ) | $ | (41 | ) | | $ | 116 | |
| | | Six Months Ended June 30, | |
| | | | | | | | | |
| | | Post- | | Post- | | | Pre- | |
| | | Acquisition | | Acquisition | | | Acquisition | |
| | | January 1- | | June 6- | | | January 1- | |
| | | June 30, | | June 30, | | | June 6, | |
| | | 2006 | | 2005 | | | 2005 | |
| | | (In thousands) | |
| | | | | | | | | |
| Service cost | | $ | - | | $ | 187 | | | $ | 848 | |
| Interest cost | | | 2,170 | | | 345 | | | | 1,875 | |
| Expected long-term rate of return on plan assets | | | (3,508 | ) | | (573 | ) | | | (2,387 | ) |
| Amortization of prior service cost | | | - | | | - | | | | (49 | ) |
| Net periodic pension benefit cost/(income) | | $ | (1,338 | ) | $ | (41 | ) | | $ | 287 | |
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables present the components of TNMP postretirement benefit cost recognized in the Condensed Consolidated Statements of Earnings:
| | | Three Months Ended June 30, | |
| | | | |
| | | Post- | | Post- | | | Pre- | |
| | | Acquisition | | Acquisition | | | Acquisition | |
| | | April 1- | | June 6- | | | April 1- | |
| | | June 30, | | June 30, | | | June 6, | |
| | | 2006 | | 2005 | | | 2005 | |
| | | (In thousands) | |
| | | | | | | | | |
| Service cost | | $ | 106 | | $ | 40 | | | $ | 79 | |
| Interest cost | | | 178 | | | 52 | | | | 114 | |
| Expected long-term rate of return on plan assets | | | (114 | ) | | (33 | ) | | | (55 | ) |
| Amortization of transition obligation | | | - | | | - | | | | 55 | |
| Amortization of prior service cost | | | 15 | | | - | | | | - | |
| Net periodic postretirement benefit cost | | $ | 185 | | $ | 59 | | | $ | 193 | |
| | | Six Months Ended June 30, | |
| | | | | | | | | |
| | | Post- | | Post- | | | Pre- | |
| | | Acquisition | | Acquisition | | | Acquisition | |
| | | January 1- | | June 6- | | | January 1- | |
| | | June 30, | | June 30, | | | June 6, | |
| | | 2006 | | 2005 | | | 2005 | |
| | | (In thousands) | |
| | | | | | | | | |
| Service cost | | $ | 212 | | $ | 40 | | | $ | 195 | |
| Interest cost | | | 356 | | | 52 | | | | 282 | |
| Expected long-term rate of return on plan assets | | | (228 | ) | | (33 | ) | | | (136 | ) |
| Amortization of transition obligation | | | - | | | - | | | | 136 | |
| Amortization of prior service cost | | | 30 | | | - | | | | - | |
| Net periodic postretirement benefit cost | | $ | 370 | | $ | 59 | | | $ | 477 | |
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables present the components of TNMP executive retirement program cost recognized in the Condensed Consolidated Statements of Earnings:
| | | Three Months Ended June 30, | |
| | | | | | | | | |
| | | Post- | | Post- | | | Pre- | |
| | | Acquisition | | Acquisition | | | Acquisition | |
| | | April 1- | | June 6- | | | April 1- | |
| | | June 30, | | June 30, | | | June 6, | |
| | | 2006 | | 2005 | | | 2005 | |
| | | (In thousands) | |
| | | | | | | | | |
| Service cost | | $ | - | | $ | - | | | $ | 16 | |
| Interest cost | | | 19 | | | 6 | | | | 32 | |
| Amortization of net loss | | | - | | | - | | | | 18 | |
| Amortization of prior service cost | | | - | | | - | | | | (14 | ) |
| Net periodic executive retirement program cost | | $ | 19 | | $ | 6 | | | $ | 52 | |
| | | Six Months Ended June 30, | |
| | | | | | | | | |
| | | Post- | | Post- | | | Pre- | |
| | | Acquisition | | Acquisition | | | Acquisition | |
| | | January 1- | | June 6- | | | January 1- | |
| | | June 30, | | June 30, | | | June 6, | |
| | | 2006 | | 2005 | | | 2005 | |
| | | (In thousands) | |
| | | | | | | | | |
| Service cost | | $ | - | | $ | - | | | $ | 40 | |
| Interest cost | | | 38 | | | 6 | | | | 78 | |
| Amortization of net loss | | | - | | | - | | | | 45 | |
| Amortization of prior service cost | | | - | | | - | | | | (35 | ) |
| Net periodic executive retirement program cost | | $ | 38 | | $ | 6 | | | $ | 128 | |
For the three months ended June 30, 2006 and 2005, TNMP contributed approximately $0.0 million and $0.3 million, respectively, for the other postretirement benefits. For the six months ended June 30, 2006, TNMP did not make any contributions to trusts for other postretirement benefits. For the three and six months ended June 30, 2005, TNMP contributed $0.4 million to trusts for other postretirement benefits. TNMP expects to make contributions totaling $1.2$0.7 million during 20062007 to trusts for other postretirement benefits. TNMP does not anticipate making any contributions to the pension plan during 2006.2007.
(9) | Commitments and Contingencies |
OVERVIEW
There are various claims and lawsuits pending against the Company. The Company is also subject to federal, state and local environmental laws and regulations, and is currently participating in the investigation and remediation of numerous sites. In addition, the Company periodically enters into financial commitments in connection with its business operations. It is not possible at this time for the Company to determine fully the effect of all litigation and other legal proceedings on its results of operations or financial position. It is the Company’s policy to accrue for expected legal costs in accordance with SFAS No. 5, “Accounting for Contingencies” (“SFAS 5”), when it is probable that a SFAS 5 liability has been incurred and the amount of expected legal costs of these items to be incurred is reasonably estimable. These estimates include costs for external counsel and other professional fees. The Company is also involved in various legal proceedings in the normal course of its business. The associated legal costs for these routine matters are accrued when the legal expenses are incurred. The Company does not expect that any known lawsuits, environmental costs and commitments will have a material adverse effect on its financial condition or results of operations, although the outcome of litigation, investigations and other legal proceedings is inherently uncertain.
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(Unaudited)
PNMCOMMITMENTS AND CONTINGENCIES RELATED TO THE ENVIRONMENT
Conflicts at San Juan Mine Involving Oil and Gas LeaseholdersPNM
Renewable Portfolio Standard
The SJCC, through leasesRenewable Energy Act of 2004 was enacted to encourage the development of renewable energy in New Mexico. As amended effective July 1, 2007, the act establishes a mandatory renewable energy portfolio standard requiring a utility to acquire a renewable energy portfolio equal to 5% of retail electric sales by January 1, 2006 and increasing to 10% by 2011, 15% by 2015 and 20% by 2020. The act provides for streamlined proceedings for approval of utilities’ renewable energy procurement plans, assures utilities recovery of costs incurred consistent with approved procurement plans and requires the NMPRC to establish a reasonable cost threshold for the procurement of renewable resources to prevent excessive costs being added to rates.
In August 2006, PNM filed its annual renewable energy portfolio report and 2007 renewable energy procurement plan. In its procurement plan, PNM stated that it would continue to procure renewable energy and RECs from wind and solar photovoltaic facilities and to capitalize the costs for recovery in its next rate case in accordance with a stipulation approved by the NMPRC in 2003. The procurement plan requested the NMPRC to amend PNM’s solar photovoltaic program to eliminate the annual ceiling on new customer subscriptions, to approve the procurement of renewable energy and RECs from a biomass facility under a 20-year PPA beginning in 2009 and to authorize recovery of the costs of procurement under the PPA, including costs related to imputed debt. The NMPRC issued a final order on December 14, 2006 which approved the amendment to the photovoltaic program, approved the procurement under the biomass PPA, and recognized a “disputable presumption” of the reasonableness of the costs of energy and capacity under the PPA. The NMPRC denied PNM’s request to recover imputed debt costs, but gave PNM leave to present the issue again in a rate case. On February 6, 2007, the NMPRC entered an order reopening the case with the federal governmentlimited purpose of reconsidering its determination that the act creates only a “disputable presumption” of the reasonableness of costs incurred under an approved procurement plan and invited briefs on that issue. PNM, the NMPRC staff, and the State of New Mexico owns coal interests with respect to the San Juan underground mine. Certain gas producers have leases in the area of the underground coal mine and have asserted claims against SJCC that its coal mining activities are interfering with gas production. The Company understands that SJCC has reached a settlement in principle with Western Gas for certain wells in the mine area. The Western Gas settlement however, does not resolve all potential claims by Western Gas in the larger San Juan underground mine area. SJCC has also reached a settlement with another gas leaseholder, Burlington Resources, for certain wells in the mine area. PNM cannot predict the outcome of any future disputes between SJCC and Western Gas or other gas leaseholders.Attorney General filed briefs. A decision is pending.
Asbestos CasesThe Clean Air Act
PNM was named in 2003 as one of a number of defendants in 21 personal injury lawsuits relating to alleged exposure to asbestos. All of these cases involve claims of individuals, or their descendents, who worked for contractors building, or working at, PNM power plants. Some of the claims relate to construction activities during the 1950s and 1960s, while other claims generally allege exposure during the last 30 years. PNM has never manufactured, sold or distributed products containing asbestos. PNM had previously been dismissed with prejudice from all but two of the remaining cases. On May 25, 2006, the matter was dismissed with prejudice as to all claims due to plaintiffs' non-compliance with the case management order and failure to prosecute.Regional Haze
In 2005, the EPA issued the final rule addressing regional haze and guidelines for BART determinations. The purpose of the regional haze regulations is to address regional haze visibility impairment in the United States’ national parks and wilderness areas. The rule calls for all states to establish goals and emission reduction strategies for improving visibility in these areas. In October 2006, the EPA issued the final BART alternatives rule which made revisions to the 2005 regional haze rules. In particular, the alternatives rule defines how an SO2 emissions trading program developed by the Western Regional Air Partnership, a voluntary organization of western states, tribes and federal agencies, can be used by western states. New Mexico will be participating in the SO2 program, which is a trading program that will be implemented if SO2 reduction milestones, which are still being developed, are not met. The NMED has requested a BART analysis for nitrogen oxides and particulate be done for each of the four units at SJGS. The Company is working to complete this analysis in early June 2007, and upon completion will submit the analysis to the NMED. Potentially, additional nitrogen oxide emission reductions could be required. The nature and cost of compliance with these potential requirements cannot be determined at this time.
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES
(Unaudited)
New Source Review Rules
In 2003, the EPA issued itsa rule regarding RMRR, clarifying what constitutes routine maintenance, repair, and replacement of damaged or worn equipment, subject to safeguards to assure consistency with the Clean Air Act. In March 2006, a panel of the Court of Appeals for the District of Columbia Circuit vacated this rule. The action by the court did not eliminate the NSR exclusion for routine maintenance, repair, and replacement work nor did the decision rule on what activities are physical changes. The EPA’s authority to write a rule based on the current NSPS hourly emission increase test remains in place.place, although the U.S. Supreme Court agreed to hear an appeal of the 4th U.S. Circuit Court of Appeals ruling in favor of Duke Energy Corp with respect to the hourly emission increase test being the appropriate method for calculating an emissions increase for PSD purposes. On April 2, 2007, the U.S. Supreme Court issued its decision. In a unanimous decision, the U.S. Supreme Court vacated the decision of the Fourth U.S. Circuit Court of Appeals and remanded for further proceedings consistent with the U.S. Supreme Court’s opinion. The decision precludes the use of an increase in the maximum hourly emission rate for determining an emissions increase for PSD purposes. The decision did not eliminate the NSR exclusion for routine maintenance, repair, or replacement, nor did it preclude the EPA from promulgating a regulation allowing an emission increase test for PSD purposes to be based on an increase in the maximum hourly emission rate. EPA has announced that it will proceed with revision of the NSR rules to specify that only activities that increase an emitting unit’s hourly rate of emissions triggers a major modification. The Company is unable to determine the impact of this matter on its results of operations and financial position.
Four Corners Federal Implementation Plan LitigationCitizen Suit Under the Clean Air Act
On July 26,PNM reached an impasse with the Grand Canyon Trust and Sierra Club (“Plaintiffs”) and with the NMED with respect to certain matters under the Consent Decree of May 10, 2005. As a result, PNM filed petitions with the United States District Court for the District of New Mexico on October 6 and 12, 2006, seeking a determination that PNM had complied with the Rio Grande ChapterConsent Decree with respect to the matters at issue. The controversies related to PNM’s reports on NOX controls and demisters at SJGS. PNM reached an agreement with the Plaintiffs and the NMED concerning these issues which was set forth in a Stipulated Order. The Court entered the Stipulated Order approving the settlement on December 27, 2006. The settlement does not require any additional material expenditures with respect to the implementation of the Sierra Club suedConsent Decree. Counsel for Plaintiffs has submitted statements to PNM for payment of attorneys fees and costs incurred with respect to post-decree administration and disputes. PNM is presently reviewing these statements. If no agreement is reached on the fee and cost request, Plaintiffs have until May 29, 2007 to file an application for an award of fees and costs.
The Consent Decree includes a provision whereby stipulated penalties are assessed for non-compliance with specified emissions limits. Stipulated penalty amounts are placed in escrow on a quarterly basis pending review of SJGS’s emissions performance for each quarter. For the years 2005 and 2006, PNM has placed $1.2 million into escrow as potential stipulated penalties. By letter dated March 20, 2007, the NMED and Plaintiffs requested information concerning PNM’s calculation of potential stipulated penalty amounts and the amounts held in escrow. PNM is presently formulating its response to the March 20, 2007 letter.
Navajo Nation Environmental Issues
Four Corners is located on the Navajo Reservation and is held under an easement granted by the federal government as well as a lease from the Navajo Nation. APS is the Four Corners operating agent and PNM owns a 13.0% ownership interest in Units 4 and 5 of Four Corners.
The Navajo Acts, enacted in 1995, purport to give the Navajo Nation EPA in Federal District Court in New Mexico in an attemptauthority to force the EPA to adopt a federal implementation plan to limit emissionspromulgate regulations covering air quality, drinking water, and pesticide activities, including those activities that occur at Four Corners. In October 1995, the Four Corners participants filed a lawsuit in the District Court of the Navajo Nation, Window Rock District, challenging the applicability of the Navajo Acts as to Four Corners. The relief soughtDistrict Court stayed these proceedings pursuant to a request by the Sierra Club, in part, is for an order directingparties and the EPAparties are seeking to issuenegotiate a final federal implementation plan forsettlement.
In 2000, the Navajo Tribal Council approved operating permit regulations under the Navajo Nation Air Pollution Prevention and Control Act. The Four Corners participants believe that the regulations fail to recognize that the Navajo Nation did not intend to assert jurisdiction over Four Corners. Each of the Four Corners participants filed a petition with all expedition, but in no event later than 60 days. APS owns three units at the power plant, whileNavajo Supreme Court for review of the two other units are owned in varying percentages by Southern California Edison, APS, PNM, Salt River Project, Tucson Electric Power and EPE. The Company is unable to predictoperating permit regulations. Those proceedings have been stayed, pending the outcome of this matter at this time.the settlement negotiations mentioned above.
SESCO Matter
TCEQ is conducting a site investigation of SESCO, a former electrical equipment repair and sales company located in San Angelo, Texas and the SESCO site has been referred to the Superfund Site Discovery and Assessment Program. The primary concern appears to be polychlorinated biphenyls in soil and groundwater on and adjacent to
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(Unaudited)
In May 2005, APS and the Navajo Nation signed a Voluntary Compliance Agreement which would resolve the dispute regarding the Air Pollution and Control Act portion of the lawsuit for the term of the Voluntary Compliance Agreement. On March 21, 2006, the EPA determined that the Navajo Nation was eligible for “treatment as a state” for the purpose of entering into a supplemental delegation agreement with the EPA to administer the Clean Air Act Title V, Part 71 federal permit program over Four Corners. The EPA entered into the supplemental delegation agreement with the Navajo Nation on the same day. Because the EPA’s approval was consistent with the requirements of the Voluntary Compliance Act, SRP and APS sought and obtained dismissal of the pending litigation in the Navajo Nation Supreme Court, as well as the pending litigation in the Navajo Nation District Court to the extent the claims relate to the Clean Air Act. The agreement does not address or resolve any dispute relating to other Navajo Acts.
The Company cannot currently predict the outcome of these matters.
Four Corners Federal Implementation Plan Litigation
In September 1999, the EPA proposed a FIP to set air quality standards at certain power plants, including Four Corners. On July 26, 2006, the Sierra Club sued the EPA in an attempt to force the EPA to issue a final FIP to limit emissions at the Four Corners. On September 12, 2006, the EPA proposed a revised FIP to establish air quality standards at Four Corners.
APS, the Four Corners operator, intervened in the proceeding as a defendant in order to protect the interests of the participants. The Sierra Club and the EPA reached a settlement over the timing of the issuance of the FIP and a Consent Decree was lodged with the Court on December 13, 2006 and notice of the lodging of the Consent Decree was published in the March 15, 2007 Federal Register. Under the terms of the proposed Consent Decree, the EPA on April 30, 2007, issued the final FIP for Four Corners. The FIP essentially federalizes the requirements contained in the New Mexico State Implementation Plan, which Four Corners has historically followed. In the case of sulfur dioxide, the FIP includes an emission limit that Four Corners has achieved following a successful program to determine if additional reductions could be made with the existing controls. The FIP also includes a requirement to control fugitive dust within 18 months after the FIP becomes effective. The Company is unable to determine the impact of these matters on its results of operations and financial position.
In addition, on August 21, 2006, the EPA proposed a FIP to implement “minor New Source Review” on Tribal reservations. The FIP, if finalized, would apply to Four Corners and would require preconstruction review and permitting of plant projects that meet specified criteria. PNM does not currently expect this FIP to have a material adverse effect on its financial position, results of operations, cash flows or liquidity.
Santa Fe Generating Station
PNM and the NMED conducted investigations of gasoline and chlorinated solvent groundwater contamination detected beneath PNM’s former Santa Fe Generating Station site to determine the source of the contamination pursuant to a 1992 settlement agreement between PNM and the NMED.
PNM believes that the data compiled indicates observed groundwater contamination originated from off-site sources. However, in 2003, PNM elected to enter into a fifth amendment to the 1992 Settlement Agreement with the NMED to avoid a prolonged legal dispute, whereby PNM agreed to supplement remediation facilities by installing an additional extraction well and two new monitoring wells to address remaining gasoline contamination in the groundwater at and in the vicinity of the site. These wells were completed in 2004. PNM will continue to operate the remediation facilities until the groundwater is cleaned up to applicable federal standards or until such time as the NMED determines that additional remediation is not required, whichever is earlier. The City of Santa Fe, the NMED and PNM entered into an amended Memorandum of Understanding relating to the continued operation of the well and the remediation facilities called for under the latest amended Settlement Agreement. The well continues to operate and meets federal drinking water standards. PNM is classified as a de minimis potentially responsible party. not able to assess the duration of this project.
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES
(Unaudited)
PNM has agreed to settle for a premium payment of $0.3 million, including past contribution credits, to release PNM from further project economic and risk liability with certain exceptions. The settlement offer is contingent upon final approvalbeen verbally informed that the Superfund Oversight Section of the administrative orderNMED is conducting an investigation into the chlorinated solvent contamination in the vicinity of the former Santa Fe Generating Station site. The investigation will study possible sources for the chlorinated solvents in the groundwater. The NMED investigation is ongoing.
Coal Combustion Waste Disposal
SJCC currently disposes of coal combustion products consisting of fly ash, bottom ash, and gypsum from SJGS in the surface mine pits adjacent to the plant. PNM and SJCC have been participating in various sessions sponsored by EPA to consider rulemaking for the disposal of coal combustion products. The rulemaking would be pursuant to the Bevill Amendment of the Resource Conservation and Recovery Act. PNM cannot predict the outcome of this matter but does not believe currently that it will have a material adverse impact on its results of operations or financial position.
OTHER COMMITMENTS AND CONTINGENCIES
PNM
PVNGS Liability and Insurance Matters
The PVNGS participants have financial protection for public liability resulting from nuclear energy hazards to the full limit of liability under federal law. This potential liability is covered by primary liability insurance provided by commercial insurance carriers in the amount of $300.0 million and the balance by an industry-wide retrospective assessment program. If losses at any nuclear power plant covered by the TCEQ.programs exceed the primary liability insurance limit, PNM could be assessed retrospective adjustments. The maximum assessment per reactor under the program for each nuclear incident is approximately $101.0 million. The retrospective assessment is subject to an annual limit of $15.0 million per reactor per incident. Based upon PNM’s 10.2% interest in the three PVNGS units, PNM’s maximum potential assessment per incident for all three units is approximately $31.0 million, with an annual payment limitation of approximately $4.5 million. If the funds provided by this retrospective assessment program prove to be insufficient, Congress could impose revenue-raising measures on the nuclear industry to pay claims.
San Juan River Adjudication
In 1975, the State of New Mexico filed an action entitled “State of New Mexico v. United States, et al.”, in the District Court of San Juan County, New Mexico, to adjudicate all water rights in the San Juan River Stream System. The Company was made a defendant in the litigation in 1976. The action is expected to adjudicate water rights used at Four Corners and at SJGS (see “Water Supply” above). The Navajo Nation and various parties announced a settlement of the Nation’s reserved surface water rights. Congressional legislation as well as other approvals will be required to implement the settlement. The Company cannot at this time anticipate the effect, if any, of any water rights adjudication on the present arrangements for water at SJGS and Four Corners. It is PNM’s understanding that final resolution of the case cannot be expected for several years. PNM is unable to predict the ultimate outcome atof this time. As discussed below, TNMP is also involved in the SESCO matter.
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES
(Unaudited)
Conflicts at San Juan Mine Involving Oil and Gas Leaseholders
SJCC, through leases with the federal government and the State of New Mexico, owns coal interests with respect to the San Juan underground mine. Certain gas producers have leases in the area of the underground coal mine and have asserted claims against SJCC that its coal mining activities are interfering with gas production. The Company understands that SJCC has reached a settlement with Western Gas for certain wells in the mine area. The Western Gas settlement however, does not resolve all of Western Gas’ potential claims in the larger San Juan underground mine area. SJCC has also reached a settlement with another gas leaseholder, Burlington Resources, for certain wells in the mine area. PNM cannot predict the outcome of any future disputes between SJCC and Western Gas or other gas leaseholders.
Western United States Wholesale Power Market
Various circumstances, including electric power supply shortages, weather conditions, gas supply costs, transmission constraints and alleged market manipulation by certain sellers, resulted in the well-publicized California energy crisis and in the bankruptcy filings of the Cal PX and of PG&E. As a result of the conditions in the western market, the FERC and other federal and state governmental authorities initiated investigations, litigation and other proceedings relevant to the Company and other sellers. The more significant of these in relation to the Company are summarized below.
California Refund Proceeding
SDG&E and other California buyers filed a complaint with the FERC in 2000 against sellers into the California wholesale electric market. In 2002, the FERC ALJ issued the Proposed Findings on California Refund Liability, in which it determined that the Cal ISO and Cal PX had, for the most part, correctly calculated the amounts of the potential refunds owed by most sellers and identified ballpark figuresapproximations for the amount of refunds due. In 2003, the FERC issued an order substantially adopting the findings from the ALJ’s 2002 decision, but requiring a change to the formula used to calculate refunds, which had the effect of increasing the refund amounts owed by most sellers. In August 2005, the FERC issued an order setting out the process by which sellers into the Cal ISO and Cal PX markets could make their cost recovery filings pursuant to the FERC’s prior orders that indicated sellers would get the opportunity to submit evidence demonstrating that the refund methodology creates a revenue shortfall for their transactions during the refund period.period (October 2, 2000 through June 20, 2001). Included in PNM'sPNM’s submittal were objections to the limited amount of time the FERC allowed for sellers to complete their respective submittals, and the FERC’s arbitrary decision to allow only marketers, and not load serving entities such as PNM, to include a return component in their cost filings. PNM participated with certain other competitive sellers to request rehearing of these issues before the FERC. In September 2005, PNM made its cost recovery filing identifying its costs associated with sales into the Cal ISO and Cal PX markets during the refund period. In January 2006, the FERC issued its order on the cost recovery filings, acting on 23 filings that were made by multiple sellers. The FERC accepted that portion of PNM’s filing submitted as prescribed by the FERC’s August 2005 order, but rejected the alternative filings that included a return component for PNM as a load serving entity. The effect of the FERC’s order is that PNM’s allowed cost offset against its refund liability is zero. In February 2006, PNM filed a petition for rehearing requesting FERC to reconsider its order and allow PNM to include a return on equity. While PNM believes it has meritorious legal arguments, the Company cannot predict the outcome of this cost recovery proceeding at this time. In addition, the Company has engaged in settlement discussions with California parties based upon a template provided by the FERC, but is unable to predict whether settlement will be reached.
As previously reported, there have been a number of additional appeals pending before the United States Court of Appeals for the Ninth Circuit (“Ninth Circuit”) with regard to FERC’s orders issued in the various California market refund dockets and PNM has participated in various appeals as one of the members of the competitive sellers group. One such case, involved the issues regarding the scopeCompetitive Sellers Group. The Ninth Circuit has held a number of transactions subject to refundmediation conferences in these, and the timeframemultiple other appeals pending before it, to assess the opportunities for settlement, in which FERC couldPNM has participated. The Ninth Circuit issued an order refundsdeclaring a 45-day time out period to allow parties the opportunity to assess the recent court decisions and the potential for sales into the CAISO and CalPX markets. On August 2,settlement of cases. In October 2006, the Ninth Circuit extended the time out period in several of the cases. In September 2006, a mediation conference was convened at the California Public Utilities Commission to assess the potential settlement of the refund proceedings. The conference was attended by, among others, PNM, the other buyers and sellers, FERC personnel, a settlement judge and mediator from the Ninth Circuit, and a former FERC ALJ (whose help was enlisted by the Ninth Circuit) to aid in the mediation process. Representatives of PNM continue to attend and participate in the mediation sessions being hosted by the Ninth Circuit. By notice issued in January 2007, the parties to the appeals were advised that the former FERC ALJ will no longer participate in the mediation efforts. The Company cannot predict the ultimate outcome of FERC proceedings that may result from the decisions in these appeals, or whether PNM will be ultimately directed to make any additional future refunds as the result of these court decisions, or whether settlement will be reached in the case.
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES
(Unaudited)
Pacific Northwest Refund Proceeding
Puget Sound Energy, Inc. filed a complaint at the FERC alleging that spot market prices in the Pacific Northwest wholesale electric market were unjust and unreasonable. In 2003, the FERC issued an order recommending that no refunds should be ordered. Several parties in the proceeding filed requests for rehearing and the FERC denied rehearing and reaffirmed its decisionprior ruling that refunds were not appropriate for spot market sales in the Pacific Northwest during the first half of 2001. The Port of Seattle then filed an appeal of the FERC’s order denying rehearing in the Ninth Circuit, which is still pending. As a participant in the proceedings before the FERC, PNM is also participating in the appeal proceedings. Oral argument in the case was held on January 8, 2007. The Company is unable to predict the ultimate outcome of this appeal, or whether PNM will ultimately be directed to make any refunds for these transactions.
FERC Gaming Partnerships Order
In 2003, in the Gaming Partnerships Order, the FERC asserted that certain entities, including PNM, acted in concert with Enron Corporation and other market participants to engage in activities that constitute gaming and/or anomalous market behavior in violation of the Cal ISO and Cal PX tariffs during 2000 and 2001. In 2003, PNM filed its responses to the Gaming Partnerships Order indicating that it did not engage in the alleged partnerships, alliances or other arrangements.
In 2004, the FERC issued an order granting the FERC staff’s motion to dismiss seven of the thirteen PNM customers on grounds that there was no evidence to conclude that these companies used their commercial relationship with PNM to game the Cal ISO and Cal PX markets. The FERC approved the settlements entered into by two of the 13 PNM customers and dismissed another of PNM’s customers from the proceeding. Of the three remaining PNM customers in the docket, the FERC staff entered into settlement agreements with two of them. In 2004, the FERC staff filed a motion to dismiss PNM from the docket and to enter into a settlement of certain parking and lending transactions. The staff’s motion stated that after investigation and review there was no evidence that PNM either engaged in a gaming practice that violated the Cal ISO or Cal PX tariffs. Additionally, PNM entered into a settlement of certain matters outside the scope of the docket related to historic parking and lending transactions, under which itPNM agreed not to provide parking and lending services prospectively without first meeting certain requirements agreed to with the FERC staff. Additionally, PNM agreed to pay $1.0 million in settlement to the FERC to obtain satisfaction of all issues related to any potential liability stemming from the provision of parking and lending services historically. In July 2005, the FERC issued its order granting the staff’s motion to dismiss PNM from the Gaming Partnerships docket. In its order, the FERC found that PNM did not engage in prohibited gaming practices as defined in the FERC’s Gaming Partnership Order and also approved the settlement on the parking and lending services. The FERC also denied the California Parties'parties’ request to include bilateral energy transactions, i.e., those that took place outsidekeep the established CAISOdocket open as to PNM and CalPX organized markets, as those eligible for refund interminated the refund proceedings at FERC. The court’s decision did grant, however, requests byPNM docket. Subsequently, the California parties to include transactions of greater than 24 hours and energy exchange transactions as eligiblefiled their petition for refund inrehearing at the refund proceedings (such transactions were previously excluded). The California parties had also sought to have FERC apply the mitigated price remedy to transactions in the May-September 2000 time period, based on allegations of pervasive tariff violations. The court concluded that FERC did not provide a reasoned responseobjecting to the arguments raised byFERC’s dismissal of PNM from the Gaming Partnership investigation and objecting to the settlement reached with the FERC staff. The petition for rehearing is pending before FERC and PNM cannot predict the ultimate outcome of the rehearing petition. In August 2005, Enron, the final of the original 13 PNM customers, entered into a settlement agreement with the FERC staff, the California parties and others that was contested by several parties. In November 2005, the FERC issued an order approving the joint offer of settlement. Various parties have either objected to the settlement or otherwise sought efforts to stay or overturn FERC’s order. The Enron settlement proceedings continue to be ongoing at FERC. PNM cannot predict the final outcome of this proceeding.
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES
(Unaudited)
California Power Exchange and Pacific Gas and Electric Bankruptcies
In 2001, Southern California Edison Company and the major purchasers of power from the Cal ISO and Cal PX defaulted on payments due to the Cal ISO for power purchased from the Cal PX in 2000. These defaults caused the Cal PX to seek bankruptcy protection. PG&E subsequently also sought bankruptcy protection. PNM has filed its proofs of claims in the Cal PX and PG&E bankruptcy proceedings. Amounts due to PNM from the Cal ISO or Cal PX for power sold to them in 2000 and 2001 total approximately $7.9 million. Both the PG&E and Cal PX bankruptcy cases have confirmed plans of reorganization in which the claims of various creditors have been specially classified and are waiting a final determination by the FERC before the claims are actually paid. The PG&E bankruptcy case has an escrow account and the Cal PX bankruptcy has established a settlement account, both of which are awaiting final determination by the FERC setting the level of claims and allocating the funds.
California Attorney General Complaint
In 2002, the California Attorney General filed a complaint with the FERC against numerous sellers, including PNM, regarding prices for wholesale electric sales into the Cal ISO and Cal PX markets and to the California Department of Water Resources. In 2002, the FERC entered an order denying the California Attorney General’s request to initiate a refund proceeding, but directed sellers, including PNM, to comply with additional reporting requirements with regard to certain wholesale power transactions. The California Attorney General filed a petition for review in the Ninth Circuit has required FERC to reconsider whether to order remedies for transactions resulting from tariff violations that occurred prior to October 2, 2000.Circuit. The court order remands the matter to FERC to further consider these arguments on the merits. Additionally, as previously reported, in September 2004, the Ninth Circuit issued itsa decision in the anothercase in which the Ninth Circuit upheldupholding the FERC’s authority to establish the market-based rate framework under the Federal Power Act, but held that the FERC violated its administrative discretion by declining to investigate whether it should order refunds from sellers who failed to provide transaction-specific reports to the FERC as required by its rules. The Ninth Circuit determined that the FERC has the authority to order refunds for these transactions if it elects to do so and
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
remanded the case back to the FERC for further proceedings, including a determination as to whether additional refunds are appropriate. In December 2006, PNM participated with other competitivejoined a group of sellers requesting rehearingin filing a petition for writ of certiorari in the United States Supreme Court challenging the decision by the Ninth Circuit of its decision. At the end of July 2006, the Ninth Circuit denied the competitive sellers’ petition for rehearing.Circuit. The Company cannot predict the ultimate outcome of the FERC proceedings that may result from the decisions in these appeals,proceeding on remand, or whether PNM will be ultimately directed to make any additional future refunds as the result of these court decisions.the decision.
California Antitrust Litigation
In May 2005, the California Attorney General filed a lawsuit in California state court against PNM, PowerEx, and the Colorado River Commission alleging that PNM and PowerEx conspired to engage in unfair trade practices involving overcharges for electricity in violation of California state antitrust laws. In April 2006, the Federal District Court issued its decision denying the California Attorney General’s motion to remand the case back to the state court, and granted PNM’s and PowerEx’s motions to dismiss the case. The California Attorney General has appealed the case to the Ninth Circuit Court of Appeals.Circuit. Briefs have been filed in the case by the parties, but oral argument has not yet been scheduled. The Company cannot predict the final outcome of this litigation nor whether PNM will be required to make refunds or pay damages under these claims.
Generation MarketWholesale Power FilingsMarketing Antitrust Suit
In its order on PNM’s 2001 triennial market-based rate filing,2004, PNM received notice that it was included in a list of 56 defendants that were sued by the FERC initiated an investigation to determine if PNM’s mitigation measureCity of Tacoma Department of Public Utilities in northern New Mexico is sufficiently adequate to prevent the exercise of market power and also required additional explanation of PNM’s revised wholesale market share calculation. The FERC determined that rates reviewed under this proceeding for transactions completedFederal District Court in the Northern New MexicoState of Washington. PNM was listed in a class of defendants referred to as the Trading Defendants, who allegedly engaged in buying, selling and EPE control areasmarketing power in California and other locations in the western United States. The complaint alleged the Trading Defendants acted in concert among themselves and with Non-Defendant Trading Co-Conspirators and engaged in conduct that amounted to market manipulation. The complaint identified specific conduct that allegedly amounted to market manipulation, including the submission of false information and misrepresentation regarding load schedules, bids, power supply, transmission congestion, source and destination of energy, the supply and provision of energy and ancillary services. The complaint alleged the activities of the Trading Defendants, along with Generator Defendants and the Co-Conspirators, resulted in substantially increased prices for energy in the Pacific Northwest spot market in
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES
(Unaudited)
excess of what otherwise would be subjecthave been the price and asserted damages in excess of $175.0 million from the multiple defendants. There have been three Ninth Circuit decisions that, collectively, appear to refund effectivemake the plaintiff’s case more difficult to prevail. As such, PNM joined a motion to dismiss the City of Tacoma Department of Public Utilities complaint given Ninth Circuit precedent. In February 2005, the district court judge in the case granted defendants’ motion to dismiss. As a result, the antitrust lawsuit against PNM filed by the City of Tacoma Department of Public Utilities was dismissed. In March 6, 2005. In its July 2005, compliance filing at the FERC,City of Tacoma Department of Public Utilities filed an appeal in the Ninth Circuit contesting the district court’s decision to dismiss the complaint. PNM indicated that,participated in the appeal in support of the dismissal and joined in defendants’ brief filed in the Ninth Circuit, as well as a resultmotion for summary affirmance. The defendants’ motion for summary affirmance of the completion of its analysisdistrict court was denied and the case was assigned to a merits panel for argument. Subsequently, the defendants were notified that plaintiffs were willing to enter a stipulation dismissing the appeal if defendants were willing to bear their own costs. PNM joined the numerous other defendants and agreed to the stipulation. In March 2007, the Ninth Circuit dismissed the appeal with prejudice pursuant to the FERC’s order, PNM did show failures in its own control area, but did not show failures instipulation of the EPE control area,parties. The case has been terminated with the exception of one measure. PNM maintained its position that when the historical data is considered, it is clear that PNM does not possess generation market power in either the PNM or EPE control area destination markets and PNM should maintain its market-based sales authority in those markets.
In April 2006, the FERC issued its order in which it determined that PNM rebutted the presumption of market power in its home control area and terminated the investigation regarding PNM’s home control area and terminated the refund period; therefore, PNM can continueno liability to charge market-based rates in its home control area in central and northern New Mexico. The FERC also determined that PNM’s analysis could rebut the presumption of market power in EPE’s control area, but that it needed additional information regarding periods of transmission constraint. The FERC order gave PNM 60 days to file additional information regarding market power during periods of transmission constraint or, alternatively, propose cost-based mitigation measures for the EPE control area during periods of transmission constraint. In June 2006, PNM filed a proposed cost-based mitigated rate proposal to apply in the EPE control area during periods of transmission constraints. No comments have been filed objecting to PNM's filing. PNM's filing is pending before the FERC and PNM cannot predict the outcome of this proceeding at this time.PNM.
FERC Office of Market Oversight and InvestigationsRegional Transmission Issues
Transmission Services
In NovemberJuly 2005, PNM received notice that the FERC Division of Operational Auditsissued an order terminating its proceeding on standard market design, stating that since issuance of the Officestandard market design notice of Market Oversightproposed rulemaking, the electric industry has made significant progress in the development of voluntary RTOs and Investigations would perform a compliance audit of PNM. The audit covers the period from January 2004 to the present and will examine PNM’s compliance withISOs. In September 2005, the FERC standardsissued a Notice of conductInquiry on Preventing Undue Discrimination and OASIS requirements, compliance of PNM’s transmission practices withPreference in Transmission Services seeking information from the FERC regulations and applicable OATT, and compliance of PNM’s wholesale electricity marketing operation with its market-based rate tariff. This audit is part of a series of routine, mandatory audits of allindustry regarding the provisions of the utilitiesOATT for possible revision in a future rulemaking. On May 18, 2006, FERC issued a NOPR to reform its pro forma OATT. FERC emphasized that its purpose for the NOPR was not to create new market structures, redesign approved RTO or ISO markets, require transmission owners to divest control over transmission, impinge on state jurisdiction, or weaken the protection of native load customers. Core OATT elements were retained, including comparability requirements, protection of native load, state’s jurisdiction over bundled retail load, functional unbundling to address undue discrimination, and reciprocity. PNM and TNMP have filed Comments and Supplemental Comments in this proceeding. In February 2007, FERC issued Order 890 setting out the new OATT rule, which will become effective in May 2007. Order 890 addressed several elements of transmission service, including: (1) requiring greater consistency and transparency in calculating available transfer capacity for transmission; (2) requiring transparent transmission planning and customer access to transmission plans; (3) reform of rollover rights; and (4) clarification of various ambiguities in transmission rights under FERC oversight, focused onthe new OATT. Order 890 also required numerous compliance withfilings to be made by transmission providers. Order 890 also attempted to clarify certain elements of transmission service utilized for network generation resources, but still left uncertain the FERC’s rules and regulations. Similar auditstransmission used for such resources that pre-dated transmission open access. PNM filed a petition for rehearing seeking clarification of this issue in regards to one such generation resource that PNM has under contract. Numerous other entities also filed petitions for rehearing and/or clarification. Additionally, a number of entities, including EEI, have been conductedrequested extensions of other regional utilities. The FERC will issue its findings upon conclusiontime for making several of the audit, which could take from six months to a year, or more to complete.compliance filings due under the order issued in the NOPR. Order 890 is still pending before the FERC. The Company cannot predict what impact the final rule will have on its operations.
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(Unaudited)
In preparingNovember 2005, the FERC issued a NOPR titled Promoting Transmission Investment through Pricing Reform. In the proposed rulemaking, the FERC noted declining investment in the national transmission grid and proposed certain incentive actions it is considering to increase transmission investment to improve the reliability of the national transmission grid. In addition to the incentive proposals, the FERC would implement additional reporting requirements for public utilities that operate transmission systems. In July 2006, FERC issued its Final Rule 679 to promote transmission investment through pricing reform. With its rule, FERC provided various incentives intended to promote transmission investment within the context of existing procedural requirements, with some flexibility. The FERC did not grant outright incentives to any public utility, but rather, identified incentives that it would allow when justified in the context of individual utility petitions for declaratory orders or rate filings made pursuant to existing rate change requirements. Under the FERC’s rule, each applicant must demonstrate a nexus between the incentive sought and the transmission investment being made. In August 2006, various entities, including EEI, filed requests for rehearing requesting the FERC to modify its rule. PNM supported EEI’s position in the filing. On December 22, 2006, FERC issued its order on rehearing and retained its proposed rate treatments for transmission incentives, but modified the way in which theses incentives are applied in three principal respects to address the comments received on the rule. Initially, the order on rehearing will require each applicant to explain whether any siting process being relied upon for a rebuttable presumption that the project is necessary to ensure reliability or reduce congestion does contain such review. The rehearing order also clarified that this rebuttable presumption applies only to whether the project reduces congestion or encourages reliability, not the additional requirements of the Final Rule. Additionally, the rehearing order requires applicants to demonstrate that the total package of incentives being proposed is tailored to address the demonstrable risks or challenges faced by the transmission provider in undertaking the project. As such, if some of the incentives in the package reduce the risks of the project, that fact will be taken into account in any request for an on-site visitenhanced return on equity. The rehearing order also clarified that the FERC does not intend to grant incentive returns “routinely” or that, when granted, they will always be at the “top” of the zone of reasonableness. Rather, each transmission provider will, first, be required to justify a higher ROE under the required nexus test and, second, to justify where in the zone of reasonableness that return should lie. The rehearing order indicated the FERC will entertain requests for a specific return on equity determination in a petition for declaratory order. PNM intends to continue to monitor and participate in additional developments in these FERC notices and rulemakings.
Natural Gas Royalties Qui Tam Litigation
In 1999, a private relator served a complaint alleging violations of the False Claims Act by OMOI as partPNM and its wholly owned subsidiaries, Sunterra Gas Gathering Company and Sunterra Gas Processing Company (collectively, the “Company” for purposes of its audit,this discussion), by purportedly failing to properly measure natural gas from federal and duringtribal properties in New Mexico, and consequently, underpaying royalties owed to the visit itself,federal government. The complaint seeks actual damages, treble damages, costs and attorneys fees, among other relief.
The Company joined with other defendants in a motion to dismiss on the ground that the relator does not meet certain jurisdictional requirements for bringing suit under the False Claims Act. On October 20, 2006, the United States District Court for the District of Wyoming issued an order granting the motion and dismissing some of the defendants, including the Company. The relator has appealed to the U.S. Court of Appeals for the Tenth Circuit.
The Company has reached an agreement in principle with the private relator pursuant to which the relator will move to dismiss his appeal, the Company discovered computer system paths that could have permitted unauthorized Company personnelwill forego any efforts to access certain real-time transmission information concerningseek attorney fees, costs and expenses, and the PNM and TNMP transmission systems. The Company immediately reported to OMOI its discovery and disabled the paths. In preparation for a second on-site visit by OMOI,parties will provide mutual releases. When fully implemented, the Company discovered an additional computer system path that couldwill have permitted unauthorized Company personnel to access certain real-time transmission information concerning the no further potential liability from this litigation.
PNM and TNMP transmission systems. The Company immediately reported its discovery to OMOI and disabled the path. The Company’s preliminary examination has not revealed any evidence that unauthorized access to transmission information was, in fact, obtained by use of these paths.RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES
(Unaudited)
Biomass Project
PNM has been cooperating,entered into a 20-year contract for the purchase of 35 MW of capacity from a renewable biomass power generation facility in central New Mexico to commence in 2009. The purchase power agreement is contingent upon the satisfaction of certain conditions precedent as outlined in the purchase power agreement. The contract contains several conditions that must be met, including obtaining permits, completion of financial closing by April 2, 2007 and will continue to cooperate, fully with the FERCstart of construction by July 2, 2007. The biomass project owner was unable to complete the audit. The Company cannot predictfinancial closing on April 2, 2007. As a result, PNM delivered a Remediable Event of Default letter to the outcome ofbiomass project owner and is currently evaluating the audit or whether the FERC will make any adverse findings relatedresponse to PNM’s compliance with the FERC’s rules and regulations.
TNMPthat letter.
SESCO MatterValencia Energy Facility
As discussed above in theOn April 18, 2007, PNM “SESCO Matter,” TNMP is classified asentered into a de minimis potentially responsible party in this matter. TNMP has agreedpower purchase agreement to settle for a premium payment of $0.3 million, including past contribution credits, to release TNMP from further project economic and risk liability with certain exceptions. The settlement offer is contingent upon final approvalpurchase all of the administrative order byelectric capacity and energy from the TCEQ. TNMPValencia Energy Facility, a proposed natural gas-fired power plant to be constructed near Albuquerque, New Mexico. A third-party will build, own and operate the facility while PNM will be the sole purchaser of the electricity generated. The total projected construction cost for the facility is unablefrom $100 million to predict$105 million. The term of the outcome at this time.proposed power purchase agreement would be for 20 years beginning June 1, 2008, with the full output of the plant estimated up to an average of 150 MW. PNM will have the option to purchase and own up to 50% of the plant after it reaches commercial operation. PNM estimates that the plant will typically operate during peak periods of energy demand in summer (less than 18% of the time on an annual basis). The Company is evaluating the accounting treatment for the purchase power agreement.
(10) | Regulatory and Rate Matters |
PNMR
Price-to-Beat Base Rate Reset
Based on the terms of the Texas stipulation related to the acquisition of TNP, First Choice made a filing to reset its price-to-beat base rates in December 2005. First Choice’s price-to-beat base rate case was consolidated with TNMP’s 60-day rate review (see “60-Day Rate Review” below). First Choice requested that the PUCT recognize in its new price-to-beat base rates the TNMP rate reduction and the synergy savings credit provided for in the TNP acquisition stipulation. In May 2006, TNMP, First Choice, the PUCT Staffstaff and other parties filed a non-unanimous settlement agreement. The parties have presented evidence and briefs related to approval of the settlement.agreement (“NUS”). On July 20, 2006, the ALJ reopened the record to accept argument concerning the provisions for accumulated deferred federal income taxes and the carrying charges on stranded costs. IfSubsequently, on August 24, 2006, the settlement isALJ issued a Proposal For Decision urging the PUCT to reject the NUS. After the parties filed exceptions to the Proposal For Decision, the PUCT unanimously rejected the ALJ’s proposal and approved new rates will be effective with energy delivered October 1,the NUS on November 2, 2006. The Company is unablePUCT made First Choice’s new price-to-beat base rates effective on December 1, 2006, as First Choice had requested. As price-to-beat rates expired on December 31, 2006, the approved rates are no longer applicable. In January 2007, TNMP’s 60-Day Rate Review proceeding, and the underlying NUS, was appealed by various Texas cities to predict the outcome of this matter at this time.district court, in Austin, Texas. TNMP and FCP have intervened and will defend the PUCT’s Final Order approving the NUS.
Energy Agreement
In 2003, First Choice and Constellation executed a power supply agreement that resulted in Constellation being the primary supplier of power for First Choice’s customers through the end of 2006. Additionally, Constellation has agreed to supply power in certain transactions under the agreement beyond the date when that commitment expires.expired.
In 2004, FCPSP, a bankruptcy remote entity, was created pursuant to the agreement with Constellation to hold all customer contracts, wholesale power contracts, and certain natural gas contracts previously held by First Choice. Constellation received a lien against the assets of FCPSP to cover the settlement exposure and the mark-to-
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(Unaudited)
marketIn 2004, FCPSP, a bankruptcy remote entity, was created pursuant to the agreement with Constellation to hold all customer contracts previously held by First Choice. Constellation received a lien against the assets of FCPSP to cover the settlement exposure and the mark-to-market exposure rather than requiring FCPSP to post alternate collateral for the purchase of power supply. In addition, FCPSP is restricted by covenants that limit the size of FCPSP'sFCPSP’s unhedged market positions and require that sales by FCPSP retain a positive retail margin. The agreement does not, however, permit Constellation to demand additional collateral irrespective of its credit exposure under the agreement. If, however, a change in electricity or gas forward prices increases Constellation'sConstellation’s credit exposure to FCPSP beyond a limit based on Constellation'sConstellation’s liens in cash and accounts receivable, Constellation will have no obligation to supply additional power to customers of FCPSP unless FCPSP provides letters of credit or other collateral acceptable to Constellation, and FCPSP will be constrained in its ability to sign up additional customers until that credit shortfall is corrected. The existing pricing mechanism under the Constellation power supply agreement expiresexpired on December 31, 2006, and2006. In addition, Constellation has agreed to supply power in certain transactions under the PSA beyond the date when that commitment expired. The obligations of Constellation to act as a qualified scheduling entity continue until the expiration of the agreement on December 31, 2007.
FCPSP may terminate the agreement upon 30 days'days prior written notice to Constellation for any reason, but the agreement and all liens securing the agreement remain in effect with respect to transactions entered into prior to the termination until both parties have fulfilled all of their obligations with respect to such transactions or such transactions have been terminated for default or reasons related to regulatory changes.
PNM
Gas Rate Case
On May 30, 2006, PNM filed a general gas rate case that asked the PRCNMPRC to approve an increase in the service fees charged to its 481,000 natural gas customers. The proposal would increase the set monthly fee, the charge tied to monthly usage, and miscellaneous on-demand service fees. Those fees are separate from the cost of gas charged to customers. The monthly cost of gas charge would not be affected by the fee increase. The petition requests an increase in base gas service rates of $20.5 million and an increase in miscellaneous on-demand service rates of approximately $0.2 million. The request is designed to provide PNM’s gas utility an opportunity to earn an 11% return on equity, which is consistent with the average return allowed ten comparable natural gas utilities. The petition also requests approval of a line item that provides a true-up mechanism for operational costs when system-wide gas consumption is lower or higher than what is designed in the rates. PNM anticipates that aA hearing on the case will bewas conducted before a hearing examiner in December 2006. On January 25, 2007, the Commission voted to extend the suspension period for the new rates from March 25 for up to ninety days. A final order is expected from the NMPRC in the second quarter of 2007.
TransmissionElectric Rate Case
In March 2005,On February 21, 2007, PNM filed a notice withgeneral electric rate case that asked the FERCNMPRC to approve an increase its wholesale electric transmission revenues. If approved, the rate increase would applyin service fees to all of PNM's wholesale electric transmission servicePNM’s retail customers which includes other utilities, electric co-operatives and entities, including Wholesale, that purchase wholesale transmission service from PNM. In May 2005, the FERC issuedexcept those formerly served by TNMP. The application requests an order in the case suspending the new rates for the standard five-month period and made the new rates effective November 1, 2005, subject to refund. In April 2006, PNM and parties in the case filed an uncontested settlement agreement with the FERC settlement judge that, if approved, would result in anannual increase in electric transmissionservice revenues of $68.9 million effective January 1, 2008, an increase of approximately $4.6 million annually.12.3% over test period revenues. The FERC staff took issue with one elementrequest is designed to provide PNM’s electric utility an opportunity to earn a 10.75% return on equity. The application also requests authorization to implement a Fuel and Purchased Power Adjustment Clause through which changes in the cost of settlement regardingfuel and purchased power, above or below the standard by whichcosts included in base rates, will be passed through to customers on a monthly basis. The NMPRC has suspended the FERC oroperation of the proposed new rates through December 23, 2007 and has scheduled a non-partyhearing to begin September 5, 2007. A motion of the settlement could challengeNew Mexico Attorney General requesting an extension of the settlement. PNM responded to the FERC staff’s expression of its issue and identified that the FERC had previously approved settlements containing the standard of review language reflected in PNM’s settlement. In June 2006, the FERC ALJ certified the settlement to the FERC as a contested settlement. The settlementsuspension period for an additional three months is now pending for action before the FERC. PNM cannot predict the outcome of this proceeding at this time.NMPRC.
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(Unaudited)
Complaint Against Southwestern Public Service CompanyTNMP
In September 2005, PNM filed a complaint under the Federal Power Act against SPS. PNM believes that through its fuel cost adjustment clause, SPS has been overcharging PNM for deliveries of energy under three contracts, and continues to do so. PNM requested that the FERC investigate charges from SPS under its fuel clause for the period 2001 through 2004. PNM’s complaint also alleges that SPS’ demand charge rates for interruptible power sales are excessive and requested that the FERC set a refund effective date of September 13, 2005 for these rates. Settlement conferences were held before a FERC settlement judge throughout the first quarter of 2006. Upon the failure of the parties to reach a settlement, the judge recommended the case proceed to hearing. Fuel cost charges for 2005 and 2006 are being addressed in a separate fuel charge adjustment clause case currently pending before the FERC, in which PNM is an intervenor. The hearing has been held in that case and in May 2006, the ALJ issued an initial decision in that proceeding recommending that SPS make refunds to customers, including PNM, for misapplication of charges in its fuel cost adjustment clause. The parties in that proceeding are currently filing their exceptions to the initial decision, which will go to the FERC for review. Additionally, in November 2005, SPS filed an electric transmission rate case proposing to raise rates charged to customers effective July 2006. PNM has intervened in the case and objected to the proposed rate increase. While PNM and SPS continue to engage in settlement discussions in this docket, PNM cannot predict if settlement will be reached in the SPS rate case docket or the outcome of the remaining SPS proceedings at the FERC.
TNMP
TNMP Competitive Transition Charge True-Up Proceeding
The purpose of the true-up proceeding was to quantify and reconcile the amount of stranded costs that TNMP may recover from its transmission and distribution customers. A 2004 PUCT decision established $87.3 million as TNMP’s stranded costs.
In April 2005, the PUCT ruled that TNMP be allowed recovery of $39.2 million of carrying charges on stranded costs for the period January 1, 2002 through July 21, 2004. TNMP was limited under GAAP in its recognition for income statement purposes to only the debt related portion of the carrying charges, and TNMP was prohibited from income statement recognition of the equity portion of the carrying charges until the actual receipt of those amounts from customers. As of June 30, 2006, the debt-related portion totaled $37.9 million and is included in Carrying Charges on Stranded Costs in TNMP’s Condensed Consolidated Balance Sheet. As of June 30, 2006, the equity-related portion of carrying costs totaled $29.5 million. TNMP expects to collect its total carrying costs from customers.
In July 2005, the PUCT issued a final order confirming the calculation of carrying costs and the amount of stranded costs allowed for recovery. TNMP and other parties appealed the July PUCT order. On July 24, 2006, the district court in Austin, Texas affirmed the PUCT order. TNMP has appealed that decision to the Texas Third Court of Appeals in Austin, Texas and has filed its briefs. Oral argument is considering an appeal of that decision. Additionally, the PUCT has adopted an amended rule that will reduce the amount of carrying charges recognized in earnings by TNMPscheduled for May 9, 2007.
Interest Rate for Calculating Carrying Charges on a prospective basis. TNMP’s Stranded Cost
The PUCT approved an amendment to the true-up rule at theits June 29, 2006 open meeting. The amendment will result in a lower interest rate that TNMP is allowed to collect on the unsecuritized true-up balance through a Competition Transition Charge (CTC).stranded cost. The CommissionPUCT concluded that the correct rate at which a utility should accrue carrying costs through a CTCstranded cost is the weighted average of an adjusted form of its marginal cost of debt and its unadjusted historical cost of debt, with the weighting based on the utility’s most recently authorized capital structure. The marginal cost of debt will be based upon the average yield for long-term public utility bonds of the utility's credit rating published in Moody's Credit Perspectives, and will be grossed-up to account for the effects of federal income taxes. The new rate is yet to be determined, but this change will effectaffect TNMP by lowering the current approved interestcarrying cost rate of 10.93%. This change in carrying charges will affect the rates set in TNMP's CTCTNMP’s stranded cost filing. The rule went into effect on July 20, 2006, and TNMP is requiredhas made its compliance filing. Because the PUCT staff disagrees with TNMP’s calculation of the interest rate, the matter was referred to makeSOAH for a compliance filing within thirty days.hearing on the merits. The parties have filed and submitted testimony. Initial briefs were filed on April 6, 2007 with reply briefs filed on April 16, 2007. At this time, the Company cannot predict the outcome of this matter.
60-Day Rate Review
In November 2005, TNMP made its required 60-day rate review filing. TNMP’s case establishes a competition transition charge for recovery of the true-up balance. As noted above, TNMP’s 60-day rate review, along with First Choice’s price-to-beat rate reset filing, were consolidated. See "Price-To-Beat“Price-To-Beat Base Rate Reset"Reset” above for further updates. On November 2, 2006, the PUCT issued a signed order which would allow TNMP to begin collecting its true-up balance, which includes carrying charges over a 14 year period. The order also allows TNMP to collect expenses associated with several cases over a three year period. The PUCT allowed TNMP to begin collecting its competition transition charge and its rate case expenses on December 1, 2006. In January 2007, this proceeding was appealed by various Texas cities to the district court, in Austin, Texas. TNMP and First Choice have intervened and will defend the PUCT’s Final Order in this proceeding.
(11) | EnergyCo Joint Venture |
In January 2007, PNMR and ECJV, a wholly owned subsidiary of Cascade, created a new unregulated energy company, temporarily named EnergyCo, which will serve expanding U.S. markets throughout the Southwest, Texas and the West. Under the terms of the agreement, PNMR and ECJV each have a 50 percent ownership interest in EnergyCo, a limited liability company. To fund startup expenses, both members contributed $2.5 million to EnergyCo in the three months ended March 31, 2007. In February 2007, the EnergyCo Board of Directors formed ECMT. ECMT is the subsidiary of EnergyCo that is expected to perform future marketing and trading activity for the joint venture.
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES
(Unaudited)
PNMR, ECJV and EnergyCo have signed a non-binding letter of intent which provides for PNMR to contribute to EnergyCo its ownership of the subsidiaries that hold Twin Oaks at fair market value of approximately $554 million, for ECJV to make a related cash contribution to EnergyCo equal to 50% of the Twin Oaks contribution amount and for EnergyCo to make a related cash distribution to PNMR equal to 50% of the Twin Oaks contribution amount. PNMR expects to contribute Twin Oaks to EnergyCo on or about June 1, 2007.
PNMR accounts for its investment in EnergyCo using the equity method of accounting. PNMR records as income its percentage share of earnings or loss and distributions of EnergyCo and carries its investment at cost, adjusted for its share of undistributed earnings or losses.
(12) | Related Party Transactions |
PNMR, PNM and TNMP are considered related parties as defined in SFAS 57. PNMR Services Company provides corporate services to PNMR and its subsidiaries. Additional information concerning the Company’s related party transactions is contained in Note 20 of the Notes to Consolidated Financial Statements in the Annual Reports on Form 10-K/A (Amendment No.1).
See Note 14 for information concerning the transfer of operations from TNMP to PNM. The table below summarizes the nature and amount of other transactions among PNMR, PNM and TNMP:
| | | Three Months Ended | |
| | | March 31, | |
| | | 2007 | | 2006 | |
| | | (In thousands) | |
| Electricity, transmission and related services billings: | | | | | |
| PNM to TNMP | | $ | 126 | | $ | 15,232 | |
| TNMP to PNMR | | | 16,513 | | | 15,287 | |
| | | | | | | | |
| Shared services billings from PNMR to: | | | | | | | |
| PNM | | $ | 25,800 | | $ | 31,617 | |
| TNMP | | | 5,512 | | | 9,340 | |
| | | | | | | | |
| Capital expenditures fee billings from PNMR to: | | | | | | | |
| PNM | | $ | 99 | | $ | - | |
| TNMP | | | 18 | | | - | |
| | | | | | | | |
| Income tax sharing payments from: | | | | | | | |
| PNM to PNMR | | $ | - | | $ | - | |
| TNMP to PNMR | | | - | | | - | |
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(Unaudited)
(11)(13)
| Variable Interest EntitiesNew Accounting Pronouncements
|
PNMR and PNM
PNM has evaluated its PPAs underPlease refer to Note 21 of the provisions of FASB InterpretationConsolidated Financial Statements in the Company's Annual Reports on Form 10-K/A (Amendment No. 46, “Consolidation of Variable Interest Entities” (Revised December 2003) (“FIN 46R”), and determined that one purchase contract entered into prior to1) for the year ended December 31, 2003 qualifies2006 for information regarding recently issued accounting pronouncements that could have a material impact on the Company. No accounting pronouncements issued since that report are expected to have a material impact on the Company's Consolidated Financial Statements. See Note 15 for discussion concerning the adoption of FIN 48 as a variable interest. Although PNM has continued to make ongoing efforts to obtain information, PNM was unable to obtain the necessary information needed to determine if PNM was the primary beneficiary and if consolidation was needed despite efforts including a formal written request to the operator of the entity supplying power under the PPA. The operator cited legal and competitive reasons for refusing to provide the information.
This variable interest PPA is a contract under an operating lease to purchase 132 MW of capacity and energy expiring in June 2020. The contract contains a fixed capacity charge, a fixed O&M charge, and a variable energy charge that subjects PNM to the changes in the cost of fuel and O&M. For the three months ended June 30, 2006 and 2005, the capacity and O&M charge was $1.9 million and $1.6 million, respectively, and the energy charges were $0.5 million and $0.2 million, respectively. For the six months ended June 30, 2006 and 2005, the capacity and O&M charge was $3.7 million and $3.3 million, respectively, and the energy charges were $0.4 million and $0.6 million, respectively. The contract is for the full output of a specific gas generating plant and is currently accounted for as an operating lease by PNM. Under this contract PNM is exposed to changes in the costs to produce energy and operate the plant.
PNM also has interests in other variable interest entities created before January 31, 2003, for which PNM is not the primary beneficiary. These arrangements include PNM’s investment in a limited partnership and certain PNM leases. The aggregate maximum loss exposure at June 30, 2006, that PNM could be required to record in its Condensed Consolidated Statement of Earnings as a result of these arrangements totals approximately $4.6 million. The creditors of these variable interest entities do not have recourse to the general credit of PNM or PNMR in excess of the aggregate maximum loss exposure.1, 2007.
(12)(14)
| Related Party TransactionsDiscontinued Operations
|
In connection with the acquisition of TNP and its principal subsidiaries, TNMP and First Choice, the NMPRC stipulated that all TNMP’s New Mexico operations would transfer to the ownership of PNM. This transfer took place on January 1, 2007 when TNMP transferred its New Mexico operational assets and liabilities to PNMR PNMthrough a redemption of TNMP’s common stock. PNMR contemporaneously contributed the TNMP New Mexico operational assets and liabilities to PNM.
In accordance with SFAS 144 and EITF 03-13, the Company determined that the New Mexico operations component of TNMP areis required to be reported as discontinued operations in the TNMP Condensed Consolidated Statements of Operations for the period January 1, 2006 through March 31, 2006. Due to the fact the net assets were distributed to TNMP’s parent, PNMR, the assets and liabilities were considered related parties as defined in SFAS No. 57, “Related Party Disclosures.” TNMP became a related party effective on“held and used” up until the date of PNMR’s acquisitiontransfer and, according to SFAS 144, are not classified as “held for sale” within TNMP’s Consolidated Balance Sheet at December 31, 2006. No gain or loss or impairments were recognized on the disposition due to the fact the transfer was among entities under common control. Furthermore, the TNMP New Mexico operations are subject to traditional rate of TNP.return regulation. Subsequent to the transfer, the NMPRC regulates these operations in the same manner as prior to the transfer. Under SFAS 71, the assets and liabilities were recorded by PNM at TNMP’s carrying amounts, which represent their fair value within the regulatory environment.
PNMR Services Company provides corporate services to PNMRUnder SFAS 154, the asset transfer did not meet the definition of a “change in reporting entity” since PNM’s financial statement composition remained unchanged after the transfer. The assets and its subsidiaries including PNM, Avistar, TNP,operations transferred from TNMP First Choice and Alturaare in accordance with shared services agreements. These services are billed at cost on a monthly basis and allocated to the subsidiaries. In addition, PNMR pays certain expenses forsame line of business as PNM and TNMP that are then reimbursedimmaterial to PNMR.both PNM’s assets and net earnings.
PNMR files a consolidated federal income tax return with its affiliated companies. A tax allocation agreement exists between PNMR and eachThe following table summarizes the results classified as discontinued operations in TNMP’s Condensed Consolidated Statements of its affiliated companies. These agreements provide that the subsidiary company will compute its taxable income on a stand-alone basis. If the result is a net tax liability, such amount shall be paid to PNMR. If there are net operating losses and/or tax credits, the subsidiary shall receive payment for the tax savings from PNMR to the extent that PNMR is able to utilize those benefits. For the three and six months ended June 30, 2006, PNM and TNMP made no tax-sharing payments to PNMR. For the three and six months ended June 30, 2005, PNMR made $18.2 million of tax-sharing payments to PNM. For the period June 6 through June 30, 2005, TNMP made no tax-sharing payments to PNMR.Earnings:
| | | Three Months | |
| | | Ended | |
| | | March 31, 2006 | |
| | | (In thousands) | |
| | | | |
| Operating revenue | | $ | 27,137 | |
| Operating expenses and other income | | | 25,663 | |
| Earnings from operations of discontinued operations, before income tax | | | 1,474 | |
| Income tax expense | | | 1,003 | |
| Earnings from discontinued operations | | $ | 471 | |
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(Unaudited)
The following table summarizes the TNMP New Mexico assets and liabilities transferred to PNM:
| | | January 1, | |
| | | 2007 | |
| | | (In thousands) | |
| Utility plant, net | | $ | 96,610 | |
| Other property and investments | | | 12 | |
| Current assets | | | 15,444 | |
| Goodwill | | | 102,562 | |
| Deferred charges | | | 1,794 | |
| Total assets transferred to PNM | | | 216,422 | |
| | | | | |
| Long-term debt | | | 1,065 | |
| Current liabilities | | | 17,313 | |
| Deferred credits and other liabilities | | | 31,060 | |
| Total liabilities transferred to PNM | | | 49,438 | |
| | | | | |
| Net assets transferred between entities | | $ | 166,984 | |
In February 2006, the Board approved affiliate borrowing arrangements between PNMR and its subsidiaries that would authorize each subsidiary to borrow up to $50.0 million from PNMR. Neither PNM nor TNMP has any amounts outstanding under this borrowing agreement as of June 30, 2006 and December 31, 2005.
PNM and TNMP have engaged in, and may in the future engage in, affiliate transactions in the normal course of business. These transactions primarily consist of power and transmission purchases and certain shared planning and design services billed to TNMP from PNM. Transactions between affiliates are reported separately on their financial statements, but are eliminated in the consolidation of PNMR’s financial statements.
PNM
Pursuant to an affiliate borrowing agreement, PNM has issued a promissory note for $20.0 million to PNMR payable on or before September 30, 2006. Under the agreement, PNM agrees to pay all applicable interest on the outstanding balance at the interest rates provided in the agreement. As of June 30, 2006 and December 31, 2005, there is no outstanding balance on the promissory note.
PNM sells electricity and energy-scheduling services to TNMP under a long-term wholesale power contract.
The tables below describe the nature and amount of material transactions PNM has with PNMR and TNMP. TNMP became a related party effective on the date of PNMR’s acquisition of TNP, or June 6, 2005; therefore, the related party transaction amounts between PNMR, PNM and TNMP are reported after that date.
| | | Three Months Ended | | Six Months Ended | |
| | | June 30, | | June 30, | |
| | | 2006 | | 2005 | | 2006 | | 2005 | |
| | | | | (In thousands) | | | |
PNMR Transactions with PNM | | | | | | | | | |
| Shared services billings from PNMR to PNM | | $ | 30,759 | | $ | 25,754 | | $ | 62,376 | | $ | 51,290 | |
| | | | | | | | | | | | | | |
PNM Transactions with TNMP | | | | | | | | | | | | | |
| Electricity & energy-scheduling | | | | | | | | | | | | | |
| billings to TNMP | | $ | 12,358 | | $ | 2,904 | | $ | 27,371 | | $ | 2,904 | |
| | | | | | | | | | | | | | |
| | | June 30, 2006 | | December 31, 2005 | |
| | | (In thousands) | |
| PNM payable to PNMR | | $61,274 | | $50,070 | |
| | | | | | |
| PNM receivable from TNMP net of transmission purchases | | $ 8,613 | | $ 4,130 | |
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY(15) AND SUBSIDIARIESIncome Taxes
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
TNMP
Effective with the close of the acquisition of TNP on June 6, 2005, all TNMP employees who were providing corporate support to TNP and First Choice became employees of PNMR Services Company. PNMR Services Company provides corporate services to TNMP per a shared services agreement.
TNMP purchases all the electricity for its New Mexico customers’ needs (except for one major customer) and energy-scheduling services under the long-term wholesale power contract with PNM described above.
TNMP sells transmission services to First Choice.
The tables below describe the nature and amount of transactions TNMP has with PNMR and PNM. TNMP became a related party effective on the date of PNMR’s acquisition of TNP, or June 6, 2005; therefore, the related party transaction amounts between TNMP, PNMR and PNM are reported after that date.
| | | Three Months Ended | | Six Months Ended | |
| | | June 30, | | June 30, | |
| | | 2006 | | 2005 | | 2006 | | 2005 | |
| | | | | (In thousands) | | | |
TNMP Transactions with PNMR | | | | | | | | | |
| Shared services billings from PNMR | | $ | 8,948 | | $ | 1,145 | | $ | 18,288 | | $ | 1,145 | |
| | | | | | | | | | | | | | |
TNMP Transactions with PNM | | | | | | | | | | | | | |
| Electricity & energy-scheduling billings from PNM | | $ | 12,358 | | $ | 2,904 | | $ | 27,371 | | $ | 2,904 | |
| | | | | | | | | | | | | | |
TNMP Transactions with First Choice | | | | | | | | | | | | | |
| Transmission service billing to First Choice | | $ | 17,880 | | $ | 7,502 | | $ | 33,167 | | $ | 7,502 | |
| | | June 30, 2006 | | December 31, 2005 |
| | | (In thousands) |
| TNMP payable to PNMR | | $ 8,932 | | $3,043 |
| | | | | |
| TNMP payable to PNM net of transmission sales | | $ 8,613 | | $4,130 |
| | | | | |
| TNMP receivable from First Choice | | $10,809 | | $9,565 |
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(13)
| New Accounting Pronouncements
|
In July 2006, the FASB issued Interpretation No.FIN 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48which requires that the Company recognize only the impact of tax positions that, based on their technical merits, are more likely than not to be sustained upon IRS audit. It also requires expanded financial statement disclosure of such positions.an audit by the taxing authority. FIN 48 is effectivealso specifies standards for the 2007 fiscal year. recognizing interest income and expense.
The Company is currently evaluatingadopted the impactprovisions of FIN 48 if any, on January 1, 2007. As a result of the implementation of FIN 48, PNMR established a liability under FIN 48 of $33.9 million, reduced its financial statements.
In February 2006,previously recorded tax liabilities by $39.9 million, increased the FASB issued SFAS No. 155,“Accounting for Certain Hybrid Instruments," (an AmendmentJanuary 1, 2007 balance of FASB Statements No. 133retained earnings by $1.6 million, increased interest payable by $3.2 million, and 140)” (“SFAS 155”). The standard allows financial instruments that have embedded derivatives to be accounted for as a whole, eliminatingdecreased goodwill by $1.2 million. PNM established an asset under FIN 48 of $3.6 million, reduced its previously recorded tax liabilities by $3.6 million, increased the need to bifurcateJanuary 1, 2007 balance of retained earnings by $0.6 million, and increased interest receivable by $0.6 million. TNMP established no liability under FIN 48, recorded interest receivable of $3.3 million, increased the derivative from its host, if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 also establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. The standard is effective for all financial instruments acquired or issued after the beginningJanuary 1, 2007 balance of an entity’s first fiscal year that begins after September 15, 2006. The Company is currently evaluating the effect that the adoption of SFAS 155 will have on its results of operationsretained earnings by $2.0 million, and financial condition, but does not expect it will have a material impact.decreased goodwill by $1.3 million.
As of January 1, 2007 under FIN 48, PNMR had $33.9 million of unrecognized tax benefits, all of which would affect the effective tax rate if recognized; PNM had $3.6 million of unrecognized tax expense, none of which would affect the effective tax rate if recognized; and TNMP had no unrecognized tax benefits. There have been no significant changes to these amounts during the quarter ended March 31, 2007. The Company has agreed to a tentative agreement with the IRS regarding substantially all of the unrecognized tax benefits. This agreement must be approved by the Joint Committee on Taxation. The issue will be considered settled once the Joint Committee review process is complete. While it cannot be assured, it is anticipated that approximately $31.3 million of unrecognized tax benefits of PNMR and $3.3 million of unrecognized tax expense of PNM will reverse by March 31, 2008.
Estimated interest income related to refunds expected to be received is included in Other Income and estimated interest expense and penalties are included in Interest Expense in the Consolidated Statement of Operations. Interest income under FIN 48 for the three months ended March 31, 2007 was $1.0 million for PNMR. At March 31, 2007, PNMR had accumulated accrued interest expense and penalties of $2.2 million.
The Company files a Federal consolidated and several consolidated and separate state income tax returns. The tax years prior to 2001 are closed to examination by either Federal or state taxing authorities. The years 2001-2004 are currently under Federal income tax examination. Additionally, the reporting years 2003-2006 are currently under Texas franchise tax examination. Based on the status and the process involved in finalizing these examinations, it is not possible to estimate the impact, if any, upon the Company’s previously recorded uncertain tax positions.
(16) Restatement
Subsequent to the issuance of the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2007 (“Original Filing”), the management of PNMR and PNM determined that the deferred gains related to certain sale-leaseback transactions had not been amortized over the correct period.
In 1985 and 1986, PNM entered into 11 separate transactions through which it sold all of its interest in Units 1 and 2 of the PVNGS and related common facilities to institutional investors. At the same time, PNM entered into agreements to lease back the facilities that were sold. These transactions resulted in gains, which in accordance with GAAP were deferred and amortized over the lives of the leases, approximately 30 years.
In 1990, the New Mexico Public Service Commission (“NMPSC”), the predecessor to the NMPRC, ordered that the portion of the gain on the sale-leasebacks attributable to PNM’s New Mexico customers was to reduce electric rates over 15 years. Accordingly, under GAAP, the amortization period for the portion of the gain on the sale-leasebacks remaining at that time and attributable to New Mexico customers should have been changed to match the rate-making treatment, which would have resulted in that portion of the gain being completely amortized by 2001. However, PNM continued to amortize the gain over the lives of the leases for financial reporting purposes, which was longer than the 15 years determined by the NMPSC. The portion of the gain not attributable to PNM’s New Mexico customers was not affected by the NMPSC order and has continued to be amortized over the lives of the leases in accordance with GAAP.
Management of PNMR and PNM determined that in accordance with SAB 108 the Original Filing for PNMR and PNM should be restated to correct this error.
Effects of Restatement
To correct this error, PNMR and PNM have increase the January 1, 2004 retained earnings balance by $15.5 million and restated the Condensed Consolidated Balance Sheets as of March 31, 2007. In addition, the Condensed Consolidated Statements of Earnings, Condensed Consolidated Statements of Cash Flows and Condensed Consolidated Statements of Comprehensive Income (Loss) have been restated for the quarterly periods ended March 31, 2007 and 2006 and the Notes to the Condensed Consolidated Financial Statements for such periods, as appropriate. This restatement does not impact the Consolidated Financial Statements of TNMP.
The following is a summary of the corrections described above:
PNMR
| | | Three Months Ended March 31, 2007 | | | Three Months Ended March 31, 2006 | |
| | | As Previously Reported | | | As Restated | | | As Previously Reported | | | As Restated | |
| | | (In thousands, except per share amounts) | (In thousands, except per share amounts) | |
| | | | | | | | | | | | | |
Consolidated Statements of Earnings | | | | | | | | | | | | |
| Energy production costs | | $ | 47,500 | | | $ | 47,824 | | | $ | 37,587 | | | $ | 37,911 | |
| Income taxes | | | 13,969 | | | | 13,948 | | | | 10,247 | | | | 10,247 | |
| Net earnings* | | | 29,969 | | | | 29,666 | | | | 26,325 | | | | 26,001 | |
| Net earnings per share | | | | | | | | | | | | | | | | |
| Basic | | | 0.39 | | | | 0.39 | | | | 0.38 | | | | 0.38 | |
| Diluted | | | 0.38 | | | | 0.38 | | | | 0.38 | | | | 0.37 | |
| | | | | | | | | | | | | | | | | |
Consolidated Statements of Cash Flows | | | | | | | | | | | | | | | | |
| Accrued interest and taxes | | | (6,008 | ) | | | (6,029 | ) | | | 24,751 | | | | 24,751 | |
| Deferred credits | | | (5,783 | ) | | | (5,459 | ) | | | (5,436 | ) | | | (5,112 | ) |
| | | | | | | | | | | | | | | | | |
Consolidated Statements of Comprehensive Income (Loss) | | | | | | | | | | | | | |
| Total comprehensive income | | | 14,915 | | | | 14,612 | | | | 21,313 | | | | 20,989 | |
| | | | | | | | | | | | | | | | | |
| * Net earnings also appears in the Consolidated Statements of Cash Flows and Consolidated Statements of Comprehensive Income (Loss) | |
| | | March 31, 2007 | |
| | | As Previously Reported | | | As Restated | |
| | | (In thousands) | |
Consolidated Balance Sheets | | | | | | |
| Retained earnings | | $ | 637,907 | | | $ | 649,218 | |
| Accrued interest and taxes | | | 55,269 | | | | 55,248 | |
| Accumulated deferred income taxes | | | 582,501 | | | | 591,341 | |
| Regulatory liabilities | | | 400,101 | | | | 391,261 | |
| Other deferred credits | | | 161,364 | | | | 150,074 | |
PNM
| | | Three Months Ended March 31, 2007 | | | Three Months Ended March 31, 2006 | |
| | | As Previously Reported | | | As Restated | | | As Previously Reported | | | As Restated | |
| | | (In thousands) | | | (In thousands) | |
| | | | | | | | | | | | | |
Consolidated Statements of Earnings | | | | | | | | | | | | |
| Energy production costs | | $ | 40,505 | | | $ | 40,829 | | | $ | 37,587 | | | $ | 37,911 | |
| Income taxes | | | 14,832 | | | | 14,862 | | | | 14,962 | | | | 14,962 | |
| Net earnings* | | | 29,234 | | | | 28,880 | | | | 30,428 | | | | 30,104 | |
| Net earnings available for common stock** | | | 29,102 | | | | 28,748 | | | | 30,296 | | | | 29,972 | |
| | | | | | | | | | | | | | | | | |
Consolidated Statements of Cash Flows | | | | | | | | | | | | | | | | |
| Accrued interest and taxes | | | 9,388 | | | | 9,418 | | | | 36,804 | | | | 36,804 | |
| Deferred credits | | | (4,570 | ) | | | (4,246 | ) | | | (2,855 | ) | | | (2,531 | ) |
| | | | | | | | | | | | | | | | | |
Consolidated Statements of Comprehensive Income (Loss) | | | | | | | | | | | | | |
| Total comprehensive income | | | 33,082 | | | | 32,728 | | | | 27,951 | | | | 27,627 | |
| | | | | | | | | | | | | | | | | |
| * Net earnings also appears in the Consolidated Statements of Cash Flows | | | | | | | | | |
| ** Net earnings available for common stock also appears in the Consolidated Statements of Comprehensive Income (Loss) | |
| | | March 31, 2007 | | | | |
| | | As Previously Reported | | | As Restated | |
| | | (In thousands) | |
Consolidated Balance Sheets | | | | | | |
| Retained earnings | | $ | 434,004 | | | $ | 445,264 | |
| Accrued interest and taxes | | | 41,949 | | | | 41,979 | |
| Accumulated deferred income taxes | | | 390,836 | | | | 399,676 | |
| Regulatory liabilities | | | 358,829 | | | | 349,989 | |
| Other deferred credits | | | 122,520 | | | | 111,230 | |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations for PNMR, PNM and TNMP is presented both on a combined basis as applicable, and on a separate basis. For discussion purposes, this report will use the term “Company” when discussing matters of common applicability to PNMR, PNM and TNMP. Discussions regarding specific contractual obligations generally reference the entity that is legally obligated. In the case of contractual obligations of PNM and TNMP, these obligations are consolidatedcombined with PNMR and its subsidiaries under GAAP.subsidiaries. A reference to a “Note” in this Item 2 refers to the accompanying Notes to Condensed Consolidated Financial Statements included in Item 1. Management’s Discussion and Analysis gives effect to the restatement discussed in Note 16.
RESULTS OF OPERATIONS - EXECUTIVE SUMMARY
During the first six monthsquarter of 2006, the Company2007, PNMR experienced higher earnings fromover the prior year primarily due to increased price margins on First Choice Power customer sales, the TNP and Twin Oaks acquisitions.acquisition, the effects of colder weather and increased performance at PVNGS. However, 2006the first quarter results were negatively impacted by plant outages at PVNGS, the last phaseabsence of a 2003 agreed upon retail electric rate reduction, higher purchased power costs, consumer conservationthe PNM Wholesale forward sale of first-quarter excess resources used in response to high natural gas prices and charges for financing. Strong2006, lower levels of plant performance at PNM's SJGS and Four Corners, plants helpedincreased coal costs, higher interest expense due to offsethigher short-term borrowings, and the impactremarketing of the Unit 1 extended outage at PVNGS. The TNP acquisition was accretive to earnings during the first full year of operation after the transaction was completed. Twin Oaks contributed $5.2 million, net of income taxes year-to-date.Pollution Control Revenue Bonds. The Company cannot predict what impact the increasechanges in market prices for power and natural gas will have on its future results of operations.
PVNGS Operations
PNM is a participant of PVNGS, of which APS is the operating agent. APS operated PVNGS Unit 1 at reduced power levels from December 25, 2005 through March 18, 2006, due to a vibration in the PVNGS Unit 1 shutdown cooling lines. As a result, PNM received approximately 24 MW of power from PVNGS Unit 1 of capacity rated load of 130 MW during this period, based on its 10.2% undivided interest in PVNGS. On March 18, 2006, APS shut down PVNGS Unit 1 completely to perform inspectionsBusiness and tests, after which APS determined that certain work could be performed to assure that PVNGS Unit 1 will be operating during the peak summer months. APS moved the valve which was vibrating closer to the reactor vessel. APS then restarted the unit and performed testing documenting that the vibrations were no longer a problem. Tests also confirmed that the new fuel load was performing as designed, that the new steam generators were operating satisfactorily, and that the new low-pressure steam turbine internals were performing safely. APS reconnected Unit 1 to the electrical grid on July 7, 2006. The Unit achieved full power on July 16, 2006.
The operation of PVNGS not only affected PNM’s ability to make off-system sales, but also caused PNM to purchase power to serve its retail electric customers. PNM estimates that the shut-down of PVNGS Unit 1 resulted in a reduction in consolidated gross margin, or operating revenues minus cost of energy sold, of $22.5 million before income taxes for the six months ended June 30, 2006.Strategy
Business and StrategyOverview
The Company is positioned as a merchant utility, primarilyprincipally operating as a regulated energy service provider. The Company is engaged in the sale and marketing of electricity in the competitive wholesale energy marketplace. In addition, through First Choice, the CompanyPNMR is a retail electric provider in Texas under legislation that established retail competition. PNM and TNMP are under the jurisdiction of the FERC. PNM is under the jurisdiction of the NMPRC while TNMP operates under the jurisdiction of the PUCT in TexasTexas.
PNMR intends to enhance and diversify its presence in the NMPRCsouthwest region through the acquisition or development of quality generation assets, including renewable or clean technology resources, to serve the Company’s retail and wholesale load while maintaining diversity of fuel mix. PNMR also plans to increase long-term sales contracts in New Mexico.tandem with increases in its generation capacity. As in the past, PNMR intends to continue a disciplined approach to any acquisition, to match acquisitions to demand and to hedge capacity with long-term contracts.
EnergyCo Joint Venture
The Company intends to develop both its retailEnergyCo joint venture with ECJV is a new unregulated energy company that will serve expanding U.S. markets throughout the Southwest, Texas and wholesale business by expanding its current operations and by acquiring additional value-enhancing assets. On April 18, 2006, PNMR’sthe West. ECJV is a wholly owned subsidiary Altura, purchased Twin Oaks, a 305 MW coal-fired power plant located 150 miles south of Dallas, Texas, from subsidiaries of SempraCascade, which is PNMR’s second-largest shareholder.
PNMR’s strategy for $480.0 million in cash. The Twin Oaks purchase agreement also includes the development rights for a possible 600 MW expansionunregulated operations is focused on some of the plant. The necessary permitsnation’s growing power markets. PNMR intends to capitalize on the growth opportunities in these markets through its participation and ownership in EnergyCo. In particular, it is anticipated that ECJV will commit capital for the expansion are being obtained, which are expectedacquisition of assets and that Cascade will make significant guarantees of certain EnergyCo debt obligations to increase EnergyCo’s scale in 2007. An additionalits anticipated business lines:
| · | Competitive retail electricity sales; |
| · | Development, operation and ownership of diverse generation assets; and |
| · | Wholesale marketing and trading to optimize its assets. |
To fund startup expenses, both members contributed $2.5 million payment will be made to Sempra uponEnergyCo in the issuance of an air permit for the expansion and an additional $2.5 million will be paid if and when Altura begins construction of the expansion. PNMR has not made a decision regarding the Twin Oaks expansion, but it is considering a variety of options, including self development or sale to a third party.three months ended March 31, 2007.
In February 2007, the EnergyCo Board of Directors formed ECMT. ECMT is the subsidiary of EnergyCo that is expected to perform future marketing and trading activity for the joint venture.
PNMR , ECJV and EnergyCo have signed a non-binding letter of intent which provides for PNMR to contribute to EnergyCo its ownership of the subsidiaries that hold Twin Oaks at fair market value of approximately $554 million, for ECJV to make a related cash contribution to EnergyCo equal to 50% of the Twin Oaks contribution amount and for EnergyCo to make a related cash distribution to PNMR equal to 50% of the Twin Oaks contribution amount. PNMR expects to contribute Twin Oaks on or about June 1, 2007 and its impact is expected to reduce PNMR’s 2007 earnings per diluted share by approximately $0.05.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSTNMP Asset Transfer to PNM
Also in April 2006, constructionIn connection with the acquisition of Luna,TNP, the NMPRC approved a combined-cycle power plant near Deming,stipulation that called for the integration of TNMP’s New Mexico was completedassets into PNM. The asset transfer occurred as of January 1, 2007 at which time the transferred New Mexico assets and operations became reportable under the plant became operational. PNM owns one-third of the plant and managed the construction project. Luna will operate as a PNM merchant facility and PNM's 190 MW share of its power will be sold into the wholesale market.
PNM reached agreement in July 2006 with an unaffiliated supplier to purchase up to 32 MW of renewable power and energy from a biomass-fueled generating plant to be constructed in New Mexico. The contract for purchasing power extends for 20 years. Biomass fuel consists of resources such as agricultural waste, woody vegetation and small diameter timber. The agreement is subject to approval by the NMPRC.Electric segment rather than TNMP Electric.
Segment Information
The following discussion is based on the segment methodology that the Company’s management uses for making operating decisions and assessing performance of its various business activities; therefore, operating results for each segment are presented without regard to the effect of accounting or regulatory changes and similar other items not related to normal operations. Except for the section “Results of Operation - TNMP,” references to 2006 amounts in the following discussion are to 2006 information as previously reported and have not been adjusted to reflect the transfer of TNMP’s New Mexico operations that are discussed above. See Note 3 for a detailed description ofmore information on the Company’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” in this Item 2 and to Part II, Item 1A. “Risk Factors.”
RESULTS OF OPERATIONS - PNMR
THREE MONTHS ENDED JUNE 30, 2006MARCH 31, 2007
COMPARED TO THREE MONTHS ENDED JUNE 30, 2005MARCH 31, 2006
PNMR’s net earnings for the three months ended June 30, 2006March 31, 2007 were $16.3$29.7 million, or $0.23$0.38 per diluted share of common stock, compared to $1.5$26.0 million, or $0.02$0.37 per diluted share of common stock for the three months ended June 30, 2005.March 31, 2006. The Company experienced higherincrease in earnings was driven primarily due toby increased price margins on First Choice operations, which PNMR did not have untilPower customer sales, the TNP acquisition in June 2005 and the addition of Twin Oaks, which PNMR acquiredthe effects of colder weather, and improved performance at PVNGS. These increases were partially offset by the absence of the PNM Wholesale forward sale of first-quarter excess resources used in April 2006. Earnings were negatively impacted by below normal2006, lower levels of plant performance at SJGS and Four Corners, increased coal costs, higher interest expense due to higher short-term borrowings, and the outages at PVNGS which reduced the amountremarketing of electricity PNM could sell into the wholesale market and forced PNMPollution Control Revenue Bonds. Net earnings per diluted share of common stock remained flat due to purchase power to meet its jurisdictional and contractual wholesale needs. Also affecting PNMR's earnings was the last phase of an agreed upon 2003 rate reduction which went into effect September 2005 and charges for financing. The Company expects to request an increase in current PNM electric rates,the average number of shares of common stock outstanding during the first three months of 2007 compared to become effective January 1, 2008.the same period in 2006, due primarily to the public offering of 5,750,000 shares in December 2006.
As noted above, theThe following discussion is based on the segment methodology that management uses for making operating decisions and assessing performance of its various business activities. In addition, adjustmentsSee Note 3 for additional information regarding these results and the Consolidated Financial Statements.
Adjustments related to EITF 03-11 are excluded from the Wholesale segment and are instead included in the Corporate and Other segment.Other. This accounting pronouncement requires a net presentation of all realized gains and losses for certain non-trading derivatives.on non-normal derivative transactions that do not physically deliver and that are offset by similar transactions during settlement. Management evaluates Wholesale operations on a gross presentation basis due to its primarily net-asset-backednet asset-backed marketing strategy and the importance it places on PNM’sthe Company’s ability to repurchase and remarket previously sold capacity. The other segments are not affected by EITF 03-11.
Corporate costs, incomeIncome taxes and non-operating items are discussed on a consolidated basis for PNMR and are in conformity with the presentationas presented in PNMR’s Condensed Consolidated Financial Statements.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Regulated Operations
PNM Electric
The table below sets forth the operating results for PNM Electric:
| | | Three Months Ended | | | |
| | | June 30, | | | |
| | | 2006 | | 2005 | | Variance | |
| | | (In thousands) | |
Operating revenues | | $ | 146,336 | | $ | 138,781 | | $ | 7,555 | |
| Less: Cost of energy | | | 43,308 | | | 44,998 | | | (1,690 | ) |
| Intersegment energy transfer | | | 8,524 | | | (3,412 | ) | | 11,936 | |
Gross margin | | | 94,504 | | | 97,195 | | | (2,691 | ) |
| Energy production costs | | | 30,874 | | | 31,800 | | | (926 | ) |
| Transmission and distribution O&M | | | 8,723 | | | 7,240 | | | 1,483 | |
| Customer related expense | | | 4,228 | | | 4,679 | | | (451 | ) |
| Administrative and general | | | (1,054 | ) | | 2,723 | | | (3,777 | ) |
Total non-fuel O&M | | | 42,771 | | | 46,442 | | | (3,671 | ) |
| Corporate allocation | | | 18,515 | | | 14,753 | | | 3,762 | |
| Depreciation and amortization | | | 14,316 | | | 17,495 | | | (3,179 | ) |
| Taxes other than income taxes | | | 5,278 | | | 4,591 | | | 687 | |
| Income taxes | | | 1,852 | | | 2,155 | | | (303 | ) |
Total non-fuel operating expenses | | | 82,732 | | | 85,436 | | | (2,704 | ) |
Operating income | | $ | 11,772 | | $ | 11,759 | | $ | 13 | |
| | | Three Months Ended | | | | |
| | | March 31, | | | | |
| | | 2007 | | | 2006 | | | Variance | |
| | | (In thousands) | |
| Total revenues | | $ | 170,113 | | | $ | 138,778 | | | $ | 31,335 | |
| Cost of energy | | | 66,502 | | | | 45,474 | | | | 21,028 | |
| Intersegment energy transfer | | | (5,658 | ) | | | (5,178 | ) | | | (480 | ) |
| Gross margin | | | 109,269 | | | | 98,482 | | | | 10,787 | |
| Energy production costs | | | 31,258 | | | | 29,567 | | | | 1,691 | |
| Transmission and distribution O&M | | | 9,679 | | | | 7,645 | | | | 2,034 | |
| Customer related expense | | | 4,503 | | | | 3,730 | | | | 773 | |
| Administrative and general | | | 4,380 | | | | 2,691 | | | | 1,689 | |
| Total non-fuel O&M | | | 49,820 | | | | 43,633 | | | | 6,187 | |
| Corporate allocation | | | 16,977 | | | | 17,648 | | | | (671 | ) |
| Depreciation and amortization | | | 16,385 | | | | 14,972 | | | | 1,413 | |
| Taxes other than income taxes | | | 5,839 | | | | 6,197 | | | | (358 | ) |
| Income taxes | | | 4,129 | | | | 2,943 | | | | 1,186 | |
| Total non-fuel operating expenses | | | 93,150 | | | | 85,393 | | | | 7,757 | |
| Operating income | | $ | 16,119 | | | $ | 13,089 | | | $ | 3,030 | |
The following table shows electricPNM Electric revenues by customer class, including intersegment revenues, which are eliminated within the presentation of the PNMR Condensed Consolidated Statements of Earnings and shown in the PNMR Segment Information in Note 3, and average number of customers:
PNM Electric Revenues| | | Three Months Ended | | | |
| | | March 31, | | | |
| | | 2007 | | 2006 | | Variance | |
| | | (In thousands, except customers) | |
| Residential | | $ | 67,797 | | $ | 55,328 | | $ | 12,469 | |
| Commercial | | | 64,707 | | | 57,079 | | | 7,628 | |
| Industrial | | | 23,450 | | | 14,741 | | | 8,709 | |
| Transmission | | | 8,866 | | | 7,045 | | | 1,821 | |
| Other | | | 5,293 | | | 4,585 | | | 708 | |
| | | $ | 170,113 | | $ | 138,778 | | $ | 31,335 | |
| | | | | | | | | | | |
| Average customers | | | 487,001 | | | 425,919 | | | 61,082 | |
| | | Three Months Ended | | | |
| | | June 30, | | | |
| | | 2006 | | 2005 | | Variance | |
| | | (In thousands, except customers) | |
| Residential | | $ | 52,026 | | $ | 50,044 | | $ | 1,982 | |
| Commercial | | | 65,572 | | | 63,723 | | | 1,849 | |
| Industrial | | | 15,588 | | | 15,340 | | | 248 | |
| Transmission | | | 7,193 | | | 4,574 | | | 2,619 | |
| Other | | | 5,957 | | | 5,100 | | | 857 | |
| | | $ | 146,336 | | $ | 138,781 | | $ | 7,555 | |
| | | | | | | | | | | |
| Average customers | | | 428,626 | | | 416,231 | | | 12,395 | |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table shows electricPNM Electric MWh sales by customer class:
PNM Electric Sales
| | | Three Months Ended | | | | | Three Months Ended | | | |
| | | June 30, | | | | | March 31, | | | |
| | | 2006 | | 2005 | | Variance | | | 2007 | | 2006 | | Variance | |
| | | (Megawatt hours) | | | (Megawatt hours) | |
| Residential | | | 647,422 | | | 606,419 | | | 41,003 | | | | 820,630 | | | 688,472 | | | 132,158 | |
| Commercial | | | 929,221 | | | 872,242 | | | 56,979 | | | | 876,954 | | | 803,700 | | | 73,254 | |
| Industrial | | | 332,579 | | | 317,672 | | | 14,907 | | | | 470,277 | | | 314,008 | | | 156,269 | |
| Other | | | 71,558 | | | 62,147 | | | 9,411 | | | | 56,367 | | | 54,863 | | | 1,504 | |
| | | | 1,980,780 | | | 1,858,480 | | | 122,300 | | | | 2,224,228 | | | 1,861,043 | | | 363,185 | |
Operating revenues increased $7.6$31.3 million, or 5.4%22.6%, for the three months ended June 30, 2006March 31, 2007, compared to the same period of 2005. Retail electricity sales increased 6.6%, to 1.98 million MWh in the second quarter of 2006 compared to 1.86 million MWh for the same period in 2005. Customer growth was 3.0%2006. Average customers grew 14.3% quarter over quarter and weather-normalized retail electricMWh sales increased 19.5%. The increases in revenues, customers and MWhs sales were primarily due to the transfer of southern New Mexico operations from TNMP. Such operations had $27.1 million in revenues, 49,480 customers and 0.3 million MWhs in the first quarter 2006 results of TNMP. In addition to the transfer of these operations, PNM Electric revenues increased $4.2 million generally driven by load growth for the second quarter of 2006 was 5.5%. Customer load growth, when normalized for the impact of weather, increased revenues by $6.2 million. Increased usage due to warmer weather increased revenues $1.6 million. In addition, increased transmission revenues, primarily from point-to-point customers, increased revenues $2.4 million. These revenue increases were partially offset by a decrease in revenues of $3.4 million due to a 2.5% rate reduction that was effective beginning September 2005.and colder weather.
The gross margin, or operating revenues minus cost of energy sold and intersegment energy transfer, decreased $2.7increased $10.8 million, or 2.8%11.0%, for the three months ended June 30, 2006 primarilyMarch 31, 2007, compared to the same period in 2006. The increase to margin was mainly due to the reduction in power plant availability and the rate decrease. Plant outagestransfer of southern New Mexico operations from TNMP of $6.4 million, improved performance at PVNGS during the quarter created an increase in purchased power expenseof $5.3 million, and increased usage due to serve load.load growth and colder weather of $3.8 million. These decreasesincreases were partially offset by higher generation costs of $2.8 million, largely as a result of increased revenues associated with retail load growthcoal costs at SJGS, and warmer weather.decreased performance at Four Corners and SJGS of $1.3 million and $1.2 million, respectively.
Total non-fuel O&M expenses decreased $3.7increased $6.2 million, or 7.9%14.2%, for the three months ended June 30, 2006March 31, 2007, compared to the same period of 2005.2006. Energy production costs decreased $0.9increased $1.7 million, or 2.9%. Reduced plant outages5.7%, due to increased outage costs of $1.0 million, primarily at SJGS, Four Corners and Reeves decreased expenses $2.1 million. These decreases were partially offset by plant outage costs atthe absence of a $0.7 million PVNGS which increased expenses $1.1 milliondecommissioning and decontamination credit received in the secondfirst quarter of 2006. Transmission and distribution O&M expenses increased $1.5$2.0 million, or 20.5% primarily26.6%, mainly due to the transfer of southern New Mexico operations from TNMP of $1.0 million and increased maintenancelabor costs for outage restoration and reliability purposes.of $0.8 million. Customer related expenses decreased $0.5increased $0.8 million, or 9.6% primarily due to a transfer of employees to the corporate level (and allocated through the corporate allocation). Administrative and general expenses decreased $3.8 million due to higher capitalized costs of $2.2 million for increased construction activity, lower legal and consulting costs of $0.8 million related to routine business matters, and several immaterial items.
Depreciation and amortization decreased $3.2 million, or 18.2%20.7%, primarily due to an increase in labor costs of $0.4 million and the estimated usefultransfer of southern New Mexico operations from TNMP of $0.3 million. Administrative and general expenses increased $1.7 million, or 62.8%, primarily due to an increase in pension and benefit costs of $3.5 million, as costs were recorded as part of administrative and general expenses in 2007 versus recorded as corporate allocation charges in 2006, as discussed below. These increases to expense were partially offset by higher capitalized costs of $1.9 million related to increased construction activity, largely as a result of environmental work at SJGS and expansion of the Afton plant.
Corporate allocation charges decreased $0.7 million, or 3.8%, primarily due to lower pension and benefit costs of $3.5 million, as costs were recorded as part of administrative and general expenses in 2007 versus recorded through the corporate allocation in 2006, as discussed above. This decrease was mostly offset by the transfer of southern New Mexico operations from TNMP of $1.6 million and an increase in incentive-based compensation. Depreciation and amortization increased $1.4 million, or 9.4%, mainly due to the transfer of southern New Mexico operations from TNMP of $1.6 million, the transfer of the Afton plant to a jurisdictional resource of $0.5 million, which is offset in the Wholesale segment, and an increase in asset base of $0.4 million. These increases were partially offset by reduced depreciation at Four Corners due to assets that fully depreciated of $0.6 million and a life at SJGS.extension of the plant of $0.5 million. Taxes other than income increased $0.7decreased $0.4 million, or 15.0% primarily5.8%, due to adjustments to reflecta reduction of prior year Native American taxes of $0.9 million, partially offset by the property values in 2005.transfer of southern New Mexico operations from TNMP of $0.4 million.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TNMP Electric
PNMR acquired TNP, the parent of TNMP, on June 6, 2005, and results in this section are presented from the acquisition date forward only. Comparable results from 2005 are not presented.
The table below sets forth the operating results for TNMP Electric:
| | | Three Months Ended | | For the Period | | | Three Months Ended | | | |
| | | June 30, | | June 6 - June 30, | | | March 31, | | | |
| | | 2006 | | 2005 | | | 2007 | | 2006 | | Variance | |
| | | (In thousands) | | | (In thousands) | |
Operating revenues | | $ | 61,456 | | $ | 19,235 | | | $ | 40,928 | | $ | 62,685 | | $ | (21,757 | ) |
| Less: Cost of energy | | | 22,652 | | | 6,702 | | |
| Cost of energy | | | | 7,171 | | | 27,172 | | | (20,001 | ) |
Gross margin | | | 38,804 | | | 12,533 | | | | 33,757 | | | 35,513 | | | (1,756 | ) |
| Transmission and distribution O&M | | | 5,399 | | | 1,150 | | |
| Energy production costs | | | | 4,923 | | | 4,713 | | | 210 | |
| Customer related expense | | | 1,396 | | | 302 | | | | 971 | | | 1,204 | | | (233 | ) |
| Administrative and general | | | (114 | ) | | 288 | | | | 2,231 | | | 398 | | | 1,833 | |
Total non-fuel O&M | | | 6,681 | | | 1,740 | | | | 8,125 | | | 6,315 | | | 1,810 | |
| Corporate allocation | | | 8,404 | | | 1,461 | | | | 5,700 | | | 9,610 | | | (3,910 | ) |
| Depreciation and amortization | | | 7,831 | | | 2,085 | | | | 7,000 | | | 7,731 | | | (731 | ) |
| Taxes other than income taxes | | | 5,872 | | | 1,885 | | | | 4,825 | | | 5,607 | | | (782 | ) |
| Income taxes | | | 1,239 | | | 1,175 | | | | 352 | | | (673 | ) | | 1,025 | |
Total non-fuel operating expenses | | | 30,027 | | | 8,346 | | | | 26,002 | | | 28,590 | | | (2,588 | ) |
Operating income | | $ | 8,777 | | $ | 4,187 | | | $ | 7,755 | | $ | 6,923 | | $ | 832 | |
The following table shows electricTNMP Electric revenues by customer class, including intersegment revenues, which are eliminated within the presentation of the PNMR Condensed Consolidated Statements of Earnings and shown in the PNMR Segment Information in Note 3, and average number of customers:
TNMP Electric Revenues| | | Three Months Ended | | | |
| | | March 31, | | | |
| | | 2007 | | 2006(1) | | Variance | |
| | | (In thousands, except customers) | |
| Residential | | $ | 14,760 | | $ | 19,271 | | $ | (4,511 | ) |
| Commercial | | | 15,969 | | | 20,599 | | | (4,630 | ) |
| Industrial | | | 1,744 | | | 13,319 | | | (11,575 | ) |
| Other | | | 8,455 | | | 9,496 | | | (1,041 | ) |
| | | $ | 40,928 | | $ | 62,685 | | $ | (21,757 | ) |
| | | | | | | | | | | |
Average customers(2) | | | 225,380 | | | 271,103 | | | (45,723 | ) |
| | | Three Months Ended | | For the Period | |
| | | June 30, | | June 6 - June 30, | |
| | | 2006 | | 2005 | |
| | | (In thousands, except customers) | |
| Residential | | $ | 20,651 | | $ | 7,857 | |
| Commercial | | | 22,661 | | | 6,522 | |
| Industrial | | | 8,576 | | | 2,607 | |
| Other | | | 9,568 | | | 2,249 | |
| | | $ | 61,456 | | $ | 19,235 | |
| | | | | | | | |
| Average customers * | | | 262,268 | | | 258,251 | |
*(2) Under TECA, customers of TNMP Electric in Texas have the ability to choose First Choice or any other REP to provide energy. However, TNMP Electric delivers energy to customers within its service area regardless of the REP chosen. Therefore, TNMP Electric earns revenue for the delivery of energy to First Choice and First Choice earns revenue on the usage of that energy by its customers. The average customers reported above include 146,549135,707 and 157,813149,014 customers of TNMP Electric at June 30,March 31, 2007 and 2006, and 2005, respectively, who have chosen First Choice as their REP. These TNMP Electric customers are also included below in the First Choice segment. For PNMR consolidated reporting purposes, these customers are included only once in the consolidated customer count.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table shows electricTNMP Electric MWh sales by customer class:
TNMP Electric Sales *| | | Three Months Ended | | | |
| | | March 31, | | | |
| | | 2007 | | 2006 (2) | | Variance | |
| | | (Megawatt hours(1)) | |
| Residential | | | 538,462 | | | 527,880 | | | 10,582 | |
| Commercial | | | 459,149 | | | 480,586 | | | (21,437 | ) |
| Industrial | | | 407,345 | | | 556,056 | | | (148,711 | ) |
| Other | | | 24,122 | | | 28,959 | | | (4,837 | ) |
| | | | 1,429,078 | | | 1,593,481 | | | (164,403 | ) |
| | | Three Months Ended | | For the Period | |
| | | June 30, | | June 6 - June 30, | |
| | | 2006 | | 2005 | |
| | | (Megawatt hours) | |
| Residential | | | 806,148 | | | 275,271 | |
| Commercial | | | 931,064 | | | 189,767 | |
| Industrial | | | 401,524 | | | 144,791 | |
| Other | | | 31,756 | | | 8,590 | |
| | | | 2,170,492 | | | 618,419 | |
*(1) The MWh sales reported above include 635,125473,014 and 257,770474,841 MWh used by customers of TNMP Electric at June 30,March 31, 2007 and 2006, and 2005, respectively, who have chosen First Choice as their REP. These MWh are also included below in the First Choice segment.
(2) The customer class sales presented above for the three months ended March 31, 2006 have been reclassified from prior year presentation in order to be consistent with current year presentation, as a result of changes in customer classifications.
The PUCT issued a signed order on November 2, 2006 related to the stranded costs incurred by TNMP Electric’s grossas part of the deregulation of the Texas energy market and the associated carrying charges. As part of this order, TNMP will recover approximately $160 million over 14 years to recover the CTC and related carrying costs and approximately $5 million over the course of three years to recover rate case expenses. Also as part of this order, TNMP will return approximately $4 million to customers over the course of one year related to industrial fuel costs. The recovery of the CTC and rate case expenses, net of the industrial fuel credit, will result in increases to revenues in the period that these charges are billed or credited to customers.
TNMP also recorded regulated assets and liabilities to account for the customer collections and credits. As these charges are collected from and credited to customers, the amount of the assets and liabilities will be amortized through the income statement. The amortization of these assets and liabilities will result in an increase in administrative and general expenses related to the rate case expenses, and an increase in depreciation and amortization costs related to the net of the CTC asset and industrial fuel credit liability amortizations.
Operating revenues decreased $21.8 million, or 34.7%, for the three months ended March 31, 2007, compared to the same period of 2006. Average customers fell 16.9% quarter over quarter and retail electricity sales decreased 10.3% to 1.4 million MWhs in the first quarter of 2007, compared to 1.6 million MWhs in the same period of 2006. The decreases in revenues, customers and sales MWhs were primarily due to the transfer of southern New Mexico operations from TNMP, which resulted in the transfer of $27.1 million in revenues, 49,480 customers and 0.3 million MWhs that were included in the first quarter 2006 results of TNMP to PNM. After consideration of the transfer of southern New Mexico operations to PNM, TNMP Electric revenues increased $5.4 million. TNMP collected $4.0 million in additional revenues during the first three months of 2007 related to the PUCT order discussed above, which consists of the net of a $4.6 million increase for the collection of the CTC, a $0.4 million increase for the collection of rate case expenses, and a $1.0 million decrease related to a industrial fuel credit to customers. In addition, revenues increased due to load growth and colder weather.
Gross margin was $38.8decreased $1.8 million, or 4.9%, for the three months ended March 31, 2007, compared to the same period of 2006, mainly due to the transfer of southern New Mexico operations to PNM Electric of $6.4 million and a $0.7 million increase in transmission expenses from third-party providers, which were partially offset by the $4.0 million increase in revenues associated with the PUCT signed order discussed above and increases due to load growth and colder weather.
Total non-fuel O&M expenses increased $1.8 million, or 28.7%, for the three months ended March 31, 2007, compared to the same period of 2006. Administrative and general expenses increased $1.8 million, or 460.6%, primarily due to $2.3 million of pension and benefit costs and regulatory costs that were recorded in administrative and general expenses in the first quarter of 2007 versus recorded through the corporate allocation in 2006, as discussed below. In addition, administrative and general expenses increased $0.4 million related to the recognition of rate case expenses that are recovered in revenues by the PUCT signed order discussed above. These increases were partially offset by a $0.4 million decrease in pension and benefit costs and the transfer of $0.2 million of expenses related to southern New Mexico operations to PNM Electric.
Corporate allocation charges decreased $3.9 million, or 40.7%, for the three months ended March 31, 2007, compared to the same period of 2006, primarily due to the transfer of southern New Mexico operations to PNM Electric of $1.6 million and $2.3 million of pension and benefit costs and regulatory expenses that were recorded in administrative and general expenses in the first quarter of 2007 versus being recorded through the corporate allocation in 2006, as discussed above. Depreciation and amortization expense decreased $0.7 million, or 9.5%, to $7.0 million for the three months ended June 30, 2006.March 31, 2007. The significant factors that impacted gross margin include atransfer of southern New Mexico operations to PNM Electric decreased depreciation and amortization expenses by $1.6 million. This decrease was partially offset by the $0.5 million net increase in revenuesamortization of CTC and industrial fuel credit assets and liabilities related to the PUCT order discussed above and an increase in expense of $0.3 million due to rate reductionsan increase in both Texas andthe asset base. Taxes other than income decreased $0.8 million, or 13.9%, mainly due to the transfer of southern New Mexico lower revenues dueoperations to PNM Electric of $0.4 million and a reduction in operations of a major customerTexas franchise tax, which was recorded to taxes other than income in New Mexico and increased transmission costs. These decreases were partially offset by customer growth and weather impacts.2006 versus being included in operating income taxes in 2007, resulting in no net impact to earnings.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PNM Gas
The table below sets forth the operating results for PNM Gas:
| | | Three Months Ended | | | | | Three Months Ended | | | |
| | | June 30, | | | | | March 31, | | | |
| | | 2006 | | 2005 | | Variance | | | 2007 | | 2006 | | Variance | |
| | | (In thousands) | | | (In thousands) | |
Operating revenues | | $ | 68,961 | | $ | 82,384 | | $ | (13,423 | ) | | $ | 216,532 | | $ | 207,525 | | $ | 9,007 | |
| Less: Cost of energy | | | 42,168 | | | 53,292 | | | (11,124 | ) | |
| Cost of energy | | | | 161,713 | | | 157,691 | | | 4,022 | |
Gross margin | | | 26,793 | | | 29,092 | | | (2,299 | ) | | | 54,819 | | | 49,834 | | | 4,985 | |
| Energy production costs | | | 615 | | | 569 | | | 46 | | | | 485 | | | 488 | | | (3 | ) |
| Transmission and distribution O&M | | | 7,186 | | | 6,672 | | | 514 | | | | 7,939 | | | 6,668 | | | 1,271 | |
| Customer related expense | | | 4,609 | | | 5,038 | | | (429 | ) | | | 3,601 | | | 3,538 | | | 63 | |
| Administrative and general | | | (233 | ) | | 1,384 | | | (1,617 | ) | | | 2,720 | | | 1,501 | | | 1,219 | |
Total non-fuel O&M | | | 12,177 | | | 13,663 | | | (1,486 | ) | | | 14,745 | | | 12,195 | | | 2,550 | |
| Corporate allocation | | | 11,559 | | | 8,514 | | | 3,045 | | | | 8,819 | | | 10,755 | | | (1,936 | ) |
| Depreciation and amortization | | | 5,994 | | | 5,596 | | | 398 | | | | 6,181 | | | 5,920 | | | 261 | |
| Taxes other than income taxes | | | 2,145 | | | 2,057 | | | 88 | | | | 2,048 | | | 2,140 | | | (92 | ) |
| Income taxes | | | (3,236 | ) | | (1,442 | ) | | (1,794 | ) | | | 7,922 | | | 6,266 | | | 1,656 | |
Total non-fuel operating expenses | | | 28,639 | | | 28,388 | | | 251 | | | | 39,715 | | | 37,276 | | | 2,439 | |
Operating income/(loss) | | $ | (1,846 | ) | $ | 704 | | $ | (2,550 | ) | |
| Operating income | | | $ | 15,104 | | $ | 12,558 | | $ | 2,546 | |
The following table shows gasPNM Gas revenues by customer class, including intersegment revenues, which are eliminated within the presentation of the PNMR Condensed Consolidated Statements of Earnings and shown in the PNMR Segment Information in Note 3, and average number of customers:
PNM Gas Revenues| | | Three Months Ended | | | |
| | | March 31, | | | |
| | | 2007 | | 2006 | | Variance | |
| | | (In thousands, except customers) | |
| Residential | | $ | 152,331 | | $ | 141,637 | | $ | 10,694 | |
| Commercial | | | 45,186 | | | 44,021 | | | 1,165 | |
| Industrial | | | 583 | | | 737 | | | (154 | ) |
Transportation(1) | | | 5,014 | | | 4,659 | | | 355 | |
| Other | | | 13,418 | | | 16,471 | | | (3,053 | ) |
| | | $ | 216,532 | | $ | 207,525 | | $ | 9,007 | |
| | | | | | | | | | | |
| Average customers | | | 491,995 | | | 480,655 | | | 11,340 | |
| | | Three Months Ended | | | |
| | | June 30, | | | |
| | | 2006 | | 2005 | | Variance | |
| | | (In thousands, except customers) | |
| Residential | | $ | 38,514 | | $ | 43,350 | | $ | (4,836 | ) |
| Commercial | | | 13,363 | | | 13,418 | | | (55 | ) |
| Industrial | | | 1,514 | | | 282 | | | 1,232 | |
| Transportation* | | | 2,827 | | | 3,129 | | | (302 | ) |
| Other | | | 12,743 | | | 22,205 | | | (9,462 | ) |
| | | $ | 68,961 | | $ | 82,384 | | $ | (13,423 | ) |
| | | | | | | | | | | |
| Average customers | | | 480,502 | | | 469,797 | | | 10,705 | |
*(1) Customer-owned gas.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table shows gasPNM Gas throughput by customer class:
PNM Gas Throughput| | | Three Months Ended | | | |
| | | March 31, | | | |
| | | 2007 | | 2006 | | Variance | |
| | | (Thousands of Decatherms) | |
| Residential | | | 13,944 | | | 11,962 | | | 1,982 | |
| Commercial | | | 4,634 | | | 4,166 | | | 468 | |
| Industrial | | | 63 | | | 72 | | | (9 | ) |
Transportation(1) | | | 10,800 | | | 11,031 | | | (231 | ) |
| Other | | | 1,326 | | | 1,566 | | | (240 | ) |
| | | | 30,767 | | | 28,797 | | | 1,970 | |
| | | Three Months Ended | | | |
| | | June 30, | | | |
| | | 2006 | | 2005 | | Variance | |
| | | (Thousands of decatherms) | |
| Residential | | | 3,058 | | | 3,946 | | | (888 | ) |
| Commercial | | | 1,391 | | | 1,576 | | | (185 | ) |
| Industrial | | | 195 | | | 45 | | | 150 | |
| Transportation* | | | 9,371 | | | 9,102 | | | 269 | |
| Other | | | 1,501 | | | 3,194 | | | (1,693 | ) |
| | | | 15,516 | | | 17,863 | | | (2,347 | ) |
*(1) Customer-owned gas.
Operating revenues decreased $13.4 million, or 16.3%, for the three months ended June 30, 2006, compared to the same period of 2005, primarily due to decreased sales volumes due to warmer weather and customer conservation resulting from higher natural gas prices. These decreases were partially offset by higher natural gas prices and customer growth. PNM Gas purchases natural gas in the open market and resells it at no profit to its sales-service customers. As a result, increases or decreases in gas revenues driven by gas costs do not impact the consolidated gross margin or earnings of PNM Gas. Total gas sales volumes decreased 13.1% and customer growth increased 2.3% quarter over quarter.
The gross margin or operating income of PNM Gas. Operating revenues minus cost of energy sold, decreased $2.3increased $9.0 million, or 7.9%4.3%, for the three months ended June 30, 2006March 31, 2007, compared to the same period of 2005. Warmer2006, primarily due to $23.9 million of increased usage due to colder weather and $4.9 million due to customer growth. These increases were partially offset by lower gas prices of $9.2 million, $8.7 million of decreased usage due to customer conservation, and $1.9 million of reduced off-system sales transactions resulting from a lack of market activity. Sales volumes increased 6.8% as a result of colder weather and a 2.4% increase in average customer counts, partially offset by customer conservation.
Gross margin increased $5.0 million, or 10.0%, for the three months ended March 31, 2007, compared to the same period of 2006. Increased customer usage whichresulting from colder weather caused gross margin to decrease $1.8increase $4.2 million and conservation reduced usage $1.7customer growth increased gross margin by $1.8 million. These decreasesincreases were partially offset by decreased customer growth, which increased margin $1.5usage due to conservation of $0.9 million.
Total non-fuel O&M expenses decreased $1.5increased $2.6 million, or 10.9%20.9%, for the three months ended June 30, 2006March 31, 2007, compared to the same period of 2005.2006. Transmission and distribution O&M expenses increased $1.3 million, or 19.1%, largely due to increased repair and maintenance costs and a $0.7 million increase in labor costs, as costs were recorded to transmission and distribution O&M expenses in 2007 versus administrative and general expenses in 2006, as discussed below. Administrative and general expenses increased $1.2 million, or 81.2%, mainly due to $2.1 million of pension and benefit expenses that were included in administrative and general expenses in the first quarter of 2007 versus being recorded through the corporate allocation in the first quarter of 2006, as discussed below. This increase was partially offset by a decrease in labor costs, as costs were recorded to transmission and distribution O&M expenses in 2007 versus being included in administrative and general expenses in 2006, as discussed above.
Corporate allocation charges decreased $1.6$1.9 million, or 18.0%, for the three months ended March 31, 2007, compared to the same period of 2006, primarily due to higher capitalized$2.3 million of costs resulting from higher construction activity.
that were recorded to administrative and general expenses in 2007 versus being recorded through the corporate allocation in 2006, as discussed above, primarily related to pension and benefit costs. This decrease was partially offset by a $0.3 million increase in incentive-based compensation. Depreciation and amortization increased $0.3 million, or 4.4%, largely due to an increase in asset base.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unregulated Operations
Wholesale
The table below sets forth the operating results for Wholesale:
| | | Three Months Ended | | | | | Three Months Ended | | | |
| | | June 30, | | | | | March 31, | | | |
| | | 2006 | | 2005 | | Variance | | | 2007 | | 2006 | | Variance | |
| | | (In thousands) | | | (In thousands) | |
Operating revenues | | $ | 154,494 | | $ | 142,282 | | $ | 12,212 | | | $ | 134,551 | | $ | 179,488 | | $ | (44,937 | ) |
| Less: Cost of energy | | | 119,869 | | | 119,653 | | | 216 | | |
| Cost of energy | | | | 76,347 | | | 142,877 | | | (66,530 | ) |
| Intersegment energy transfer | | | (8,524 | ) | | 3,412 | | | (11,936 | ) | | | 5,658 | | | 5,178 | | | 480 | |
Gross margin | | | 43,149 | | | 19,217 | | | 23,932 | | | | 52,546 | | | 31,433 | | | 21,113 | |
| Energy production costs | | | 12,238 | | | 7,447 | | | 4,791 | | | | 16,117 | | | 7,898 | | | 8,219 | |
| Transmission and distribution O&M | | | 31 | | | 13 | | | 18 | | | | 50 | | | 19 | | | 31 | |
| Customer related expense | | | 304 | | | 104 | | | 200 | | | | 423 | | | 258 | | | 165 | |
| Administrative and general | | | 1,853 | | | 1,689 | | | 164 | | | | 2,179 | | | 1,441 | | | 738 | |
Total non-fuel O&M | | | 14,426 | | | 9,253 | | | 5,173 | | | | 18,769 | | | 9,616 | | | 9,153 | |
| Corporate allocation | | | 1,882 | | | 1,016 | | | 866 | | | | 3,182 | | | 1,193 | | | 1,989 | |
| Depreciation and amortization | | | 7,155 | | | 4,041 | | | 3,114 | | | | 7,759 | | | 3,161 | | | 4,598 | |
| Taxes other than income taxes | | | 2,072 | | | 811 | | | 1,261 | | | | 3,750 | | | 976 | | | 2,774 | |
| Income taxes | | | 3,219 | | | 44 | | | 3,175 | | | | 3,937 | | | 5,014 | | | (1,077 | ) |
Total non-fuel operating expenses | | | 28,754 | | | 15,165 | | | 13,589 | | | | 37,397 | | | 19,960 | | | 17,437 | |
Operating income | | $ | 14,395 | | $ | 4,052 | | $ | 10,343 | | | $ | 15,149 | | $ | 11,473 | | $ | 3,676 | |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table shows Wholesale revenues by customer class:class of sales transactions, including intersegment revenues, which are eliminated within the presentation of the PNMR Condensed Consolidated Statements of Earnings and shown in the PNMR Segment Information in Note 3:
Wholesale Revenues| | | Three Months Ended | | | |
| | | March 31, | | | |
| | | 2007 | | 2006 | | Variance | |
| | | (In thousands) | |
| Long-term contracts | | $ | 75,494 | | $ | 31,234 | | $ | 44,260 | |
| Short-term sales | | | 59,057 | | | 148,254 | | | (89,197 | ) |
| | | $ | 134,551 | | $ | 179,488 | | $ | (44,937 | ) |
| | | Three Months Ended | | | |
| | | June 30, | | | |
| | | 2006 | | 2005 | | Variance | |
| | | (In thousands) | |
| Long-term contracts | | $ | 73,924 | | $ | 37,897 | | $ | 36,027 | |
| Short-term sales | | | 80,570 | | | 104,385 | | | (23,815 | ) |
| | | $ | 154,494 | | $ | 142,282 | | $ | 12,212 | |
The following table shows Wholesale MWh sales by customer class:
Wholesale Sales
| | | Three Months Ended | | | | | Three Months Ended | | | |
| | | June 30, | | | | | March 31, | | | |
| | | 2006 | | 2005 | | Variance | | | 2007 | | 2006 | | Variance | |
| | | (Megawatt hours) | | | (Megawatt hours) | |
| Long-term contracts | | | 1,102,365 | | | 563,482 | | | 538,883 | | | | 1,162,214 | | | 578,544 | | | 583,670 | |
| Short-term sales | | | 1,569,151 | | | 1,949,416 | | | (380,265 | ) | | | 1,440,366 | | | 2,220,752 | | | (780,386 | ) |
| | | | 2,671,516 | | | 2,512,898 | | | 158,618 | | | | 2,602,580 | | | 2,799,296 | | | (196,716 | ) |
Operating revenues increased $12.2decreased $44.9 million, or 8.6%25.0%, for the three months ended June 30, 2006, compared to the same period of 2005, primarily due to the acquisition of Twin Oaks. Twin Oaks increased revenue by $32.8 million of which $15.7 million related to an existing power agreement and $16.9 million for the amortization of the fair value of a sales contract existing as of the date of the acquisition (see Note 2). Wholesale sold 2.67 million MWh of electricity in the second quarter of 2006 compared to 2.51 million MWh for the same period in 2005, an increase of 6.3%. These increases were partially offset by a decrease in short-term sales of $23.8 million resulting from decreased marketing activity due to reduced plant availability.
The gross margin, or operating revenues minus cost of energy sold and intersegment energy transfer, increased $23.9 million for the three months ended June 30, 2006 compared to the same period of 2005 primarily due to the addition of Twin Oaks.
The long-term sales margin increased $19.6 million for the three months ended June 30, 2006, compared to the same period of 2005, due to the addition of Twin Oaks, which increased margin $21.6 million. This increase was partially offset by plant outage costs of $1.6 million. Short-term margin increased $4.4 million due to a decrease in purchase prices, partially offset by lower plant availability and increased retail loads, which caused a decrease in energy available to sell in the wholesale market. PNM Wholesale's mark-to-market position decreased $2.4 million in the second quarter of 2006, from a $0.1 million decrease for the same period in 2005.
Total non-fuel O&M expenses increased $5.2 million, or 55.9%, for the three months ended June 30, 2006. Energy production costs increased $4.8 million, or 64.3%, primarily due to PVNGS increased outage costs of $3.0 million and the addition of Twin Oaks costs of $1.6 million and Luna costs of $0.8 million, which the Company did not have in 2005. These increases were partially offset by the elimination of a regulatory liability, which decreased expenses $0.6 million.
Depreciation and amortization increased $3.1 million, or 77.1%, for the three months ended June 30, 2006 primarily due to the addition of Twin Oaks, which increased expense $4.0 million, partially offset by changes in the depreciation rates at the Afton and Lordsburg plants, which decreased expense $0.6 million. Taxes other than income increased $1.3 million primarily due to the addition of Twin Oaks.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
First Choice
PNMR acquired TNP on June 6, 2005, and results in this section are presented from the acquisition date forward only. Comparable results from 2005 are not presented.
The table below sets forth the operating results for First Choice:
| | | Three Months Ended | | For the Period | |
| | | June 30, | | June 6 - June 30, | |
| | | 2006 | | 2005 | |
| | | (In thousands) | |
Operating revenues | | $ | 154,908 | | $ | 43,031 | |
| Less: Cost of energy | | | 118,073 | | | 34,083 | |
Gross margin | | | 36,835 | | | 8,948 | |
| Customer related expense | | | 2,411 | | | 466 | |
| Administrative and general | | | 8,444 | | | 1,089 | |
Total non-fuel O&M | | | 10,855 | | | 1,555 | |
| Corporate allocation | | | 3,156 | | | 1,130 | |
| Depreciation and amortization | | | 510 | | | 105 | |
| Taxes other than income taxes | | | 1,356 | | | 512 | |
| Income taxes | | | 7,363 | | | 2,020 | |
Total non-fuel operating expenses | | | 23,240 | | | 5,322 | |
Operating income | | $ | 13,595 | | $ | 3,626 | |
The following table shows electric revenues by customer class and average customers:
First Choice Electric Revenues
| | | Three Months Ended | | For the Period | |
| | | June 30, | | June 6 - June 30, | |
| | | 2006 | | 2005 | |
| | | (In thousands, except customers) | |
| Residential | | $ | 89,181 | | $ | 29,265 | |
| Mass-market | | | 23,789 | | | 6,615 | |
| Mid-market | | | 33,866 | | | 5,864 | |
| Other | | | 8,072 | | | 1,287 | |
| | | $ | 154,908 | | $ | 43,031 | |
| | | | | | | | |
| Average customers * | | | 217,162 | | | 215,965 | |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table shows electric sales by customer class:
First Choice Electric Sales *
| | | Three Months Ended | | For the Period | |
| | | June 30, | | June 6 - June 30 | |
| | | 2006 | | 2005 | |
| | | (Megawatt hours) | |
| Residential | | | 636,662 | | | 246,332 | |
| Mass-market | | | 161,019 | | | 55,424 | |
| Mid-market | | | 308,420 | | | 67,420 | |
| Other | | | 13,183 | | | 2,949 | |
| | | | 1,119,284 | | | 372,125 | |
*See note above in the TNMP Electric segment discussion about the impact of TECA.
First Choice’s gross margin was $36.8 million for the three months ended June 30, 2006. The significant factors that impacted gross margin included increases in price margins driven by increased competitive and price to beat sales prices and an increase in mark-to-market gains. These increases were partially offset by customer attrition and amortization of the fair value of sales and purchase contracts existing as of the date of the acquisition. As part of the acquisition of TNP, PNMR determined the fair value of a First Choice contractual obligation to purchase power and an obligation to sell power that are being amortized over the contract lives, or approximately three years.
Corporate and Other
Corporate Administrative and General Expenses
Corporate administrative and general expenses, which represent costs that are driven primarily by corporate-level activities, are allocated to the business segments and are presented in the corporate allocation line item in the segment statements. These costs increased $9.3 million, or 26.6%, to $44.3 million for the three months ended June 30, 2006 compared to the same period of 2005. This increase was primarily due to $5.7 million in additional expenses for insurance, benefits and corporate support activities for TNP, which PNMR did not incur until the acquisition of TNP in June 2005. Wages and benefit costs increased $3.8 million due to a transfer of employees to corporate and increases in projected payout of employee incentive programs. Maintenance fees for software increased $2.1 million. Legal and consulting expenses increased $1.1 million for routine business matters. Stock-based compensation expense increased $0.6 million, primarily due to the adoption of SFAS 123R (see Note 6). These increases were partially offset by a decrease of $3.3 million of acquisition related costs.
Depreciation Expense
Corporate and other depreciation expense decreased $4.2 million, or 66.0%, to $2.1 million, primarily due to the write-off of software costs in the second quarter of 2005.
Taxes Other Than Income
Corporate and other taxes other than income increased $0.8 million to $1.5 million primarily due to an increase in payroll taxes resulting from a transfer of employees to corporate and a higher tax base from the TNP acquisition.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PNMR Consolidated
Other Income and Deductions
Interest income decreased $2.7 million, or 23.3%, for the three months ended June 30, 2006 due primarily to interest earned on the investment of proceeds related to the sale of hybrid income term securities invested from March 31, 2005 until the TNP acquisition on June 6, 2005.
Other income decreased $0.7 million or 27.0% from the prior year quarter primarily due to lower returns on investments.
Carrying charges on regulatory assets were $2.0 million for the three months ended June 30, 2006.year. This represents interest income on TNMP regulatory assets.
Other deductions increased approximately $1.0 million or 61.9% for the three months ended June 30, 2006 due primarily to an increase in investment losses.
Interest Charges
PNMR’s consolidated interest charges increased by $15.0 million for the three months ended June 30, 2006, compared to the same period of 2005, primarily due to $5.1 million of interest charges related to debt from the TNP acquisition, which PNMR did not incur until the acquisition of TNP in June 2005, interest and refinancing costs of $1.3 million related to the equity-linked units issued in March and October of 2005, $5.7 million of interest charges related to the bridge loan associated with the Altura purchase of Twin Oaks, which occurred on April 18, 2006, and $4.4 million of interest charges related to commercial paper borrowings. These increased charges were partially offset by $0.8 million of interest capitalized in connection with capital construction projects.
Income Taxes
PNMR’s consolidated income tax expense was $10.0 million for the three months ended June 30, 2006, compared to $1.3 million for the same period of 2005. PNMR’s effective operating income tax rates for the three months ended June 30, 2006 and 2005 were 38.4% and 40.5%, respectively. PNMR’s effective non-operating income tax rates for the three months ended June 30, 2006 and 2005 were 37.1% and 35.3%, respectively.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - PNMR
SIX MONTHS ENDED JUNE 30, 2006
COMPARED TO SIX MONTHS ENDED JUNE 30, 2005
PNMR’s net earnings for the six months ended June 30, 2006 were $42.6 million, or $0.61 per diluted share of common stock, compared to $32.1 million or $0.50 per diluted share of common stock for the six months ended June 30, 2005 primarily due to the First Choice operations and the addition of Twin Oaks. As discussed above, PNM experienced below normal levels of plant performance due to unexpected plant outages at PVNGS, which reduced the amount of electricity PNM sold in the wholesale market and forced PNM to purchase power to meet jurisdictional and contractual wholesale needs. Also affecting PNMR's earnings was the last phase of an agreed upon 2003 rate reduction which went into effect September 2005 and charges for financing.
As noted above, the following discussion is based on the segment methodology that management uses for making operating decisions and assessing performance of its various business activities. In addition, adjustments related to EITF 03-11 are excluded from the Wholesale segment and are instead included in the Corporate and Other segment. This accounting pronouncement requires a net presentation of realized gains and losses for certain non-trading derivatives. Management evaluates Wholesale on a gross presentation basis due to its primarily net-asset-backed marketing strategy and the importance it places on PNM’s ability to repurchase and remarket previously sold capacity. The other segments are not affected by EITF 03-11.
Corporate costs, income taxes and non-operating items are discussed on a consolidated basis for PNMR and are in conformity with the presentation in PNMR’s Condensed Consolidated Financial Statements.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Regulated Operations
PNM Electric
The table below sets forth the operating results for PNM Electric:
| | | Six Months Ended | | | |
| | | June 30, | | | |
| | | 2006 | | 2005 | | Variance | |
| | | (In thousands) | |
Operating revenues | | $ | 285,114 | | $ | 272,963 | | $ | 12,151 | |
| Less: Cost of energy | | | 88,782 | | | 92,401 | | | (3,619 | ) |
| Intersegment energy transfer | | | 3,346 | | | (17,535 | ) | | 20,881 | |
Gross margin | | | 192,986 | | | 198,097 | | | (5,111 | ) |
| Energy production costs | | | 60,117 | | | 60,281 | | | (164 | ) |
| Transmission and distribution O&M | | | 16,368 | | | 14,625 | | | 1,743 | |
| Customer related expense | | | 7,958 | | | 8,700 | | | (742 | ) |
| Administrative and general | | | 1,637 | | | 5,290 | | | (3,653 | ) |
Total non-fuel O&M | | | 86,080 | | | 88,896 | | | (2,816 | ) |
| Corporate allocation | | | 36,163 | | | 30,209 | | | 5,954 | |
| Depreciation and amortization | | | 29,288 | | | 35,053 | | | (5,765 | ) |
| Taxes other than income taxes | | | 11,475 | | | 10,018 | | | 1,457 | |
| Income taxes | | | 4,924 | | | 6,654 | | | (1,730 | ) |
Total non-fuel operating expenses | | | 167,930 | | | 170,830 | | | (2,900 | ) |
Operating income | | $ | 25,056 | | $ | 27,267 | | $ | (2,211 | ) |
The following table shows electric revenues by customer class and average customers:
PNM Electric Revenues
| | | Six Months Ended | | | |
| | | June 30, | | | |
| | | 2006 | | 2005 | | Variance | |
| | | (In thousands, except customers) | |
| Residential | | $ | 107,354 | | $ | 104,058 | | $ | 3,296 | |
| Commercial | | | 122,651 | | | 119,889 | | | 2,762 | |
| Industrial | | | 30,329 | | | 30,543 | | | (214 | ) |
| Transmission | | | 14,238 | | | 9,038 | | | 5,200 | |
| Other | | | 10,542 | | | 9,435 | | | 1,107 | |
| | | $ | 285,114 | | $ | 272,963 | | $ | 12,151 | |
| | | | | | | | | | | |
| Average customers | | | 427,273 | | | 415,028 | | | 12,245 | |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table shows electric sales by customer class:
PNM Electric Sales
| | | Six Months Ended | | | |
| | | June 30, | | | |
| | | 2006 | | 2005 | | Variance | |
| | | (Megawatt hours) | |
| Residential | | | 1,335,894 | | | 1,260,512 | | | 75,382 | |
| Commercial | | | 1,732,921 | | | 1,639,618 | | | 93,303 | |
| Industrial | | | 646,587 | | | 633,488 | | | 13,099 | |
| Other | | | 126,421 | | | 114,016 | | | 12,405 | |
| | | | 3,841,823 | | | 3,647,634 | | | 194,189 | |
Operating revenues increased $12.2 million, or 4.5%, for the six months ended June 30, 2006 compared to the same period of 2005. Retail electricity sales increased 5.3%, to 3.84 million MWh in the first six months of 2006 compared to 3.65 million MWh for the same period in 2005. Customer growth was 3.0% year over year and weather-normalized retail electric load growth for the first six months of 2006 was 4.8%. Customer load growth, when normalized for the impact of weather, increased revenues by $11.7 million. Increased usage due to warmer weather increased revenues $1.5 million. In addition, increased transmission revenues, primarily from point-to-point customers, increased revenues $5.2 million. These revenue increases were partially offset by a decrease in revenues of $6.9 million due to a 2.5% rate reduction which was effective beginning September 2005.
The gross margin, or operating revenues minus cost of energy sold and intersegment energy transfer, decreased $5.1 million, or 2.6%, for the six months ended June 30, 2006 primarily due to the reduction of power plant availability and the rate decrease. Plant outages at PVNGS during the first six months created an increase in purchased power requirements to serve load. These decreases were partially offset by increased revenues associated with retail load growth.
Total non-fuel O&M expenses decreased $2.8 million, or 3.2%, for the six months ended June 30, 2006 compared to the same period of 2005. Energy production costs were relatively unchanged in the second quarter of 2006. Reduced plant outages at Reeves ($1.6 million), Four Corners ($0.6 million), and SJGS ($0.2 million), were mostly offset by increased plant outage costs of $1.3 million at PVNGS. In addition, a new water sharing agreement at SJGS with the Jicarilla Apache Tribe, which started in January 2006, increased energy production costs by $0.3 million. Transmission and distribution O&M expenses increased $1.7 million or 11.9% primarily due to increased maintenance costs for outage restoration and reliability purposes. Customer related expenses decreased $0.7 million, or 8.5%, primarily due to a transfer of employees to the corporate level and allocated through the corporate allocation. Administrative and general expenses decreased $3.7 million, or 69.1%, due to higher capitalized costs of $2.1 million and lower legal and consulting costs of $1.2 million related to routine business matters.
Depreciation and amortization decreased $5.8 million, or 16.4%, primarily due to an increase in the estimated useful life at SJGS, partially offset by asset additions placed in service during 2005. Taxes other than income increased $1.5 million or 14.5% due to a general increase in property taxes from various taxing authorities.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TNMP Electric
PNMR acquired TNP, the parent of TNMP, on June 6, 2005, and results in this section are presented for 2006 only, comparable results from 2005 are not presented.
The table below sets forth the operating results for TNMP Electric:
| | | Six Months Ended | | For the Period | |
| | | June 30, | | June 6 - June 30, | |
| | | 2006 | | 2005 | |
| | | (In thousands) | |
Operating revenues | | $ | 124,141 | | $ | 19,235 | |
| Less: Cost of energy | | | 49,823 | | | 6,702 | |
Gross margin | | | 74,318 | | | 12,533 | |
| Transmission and distribution O&M | | | 10,112 | | | 1,150 | |
| Customer related expense | | | 2,600 | | | 302 | |
| Administrative and general | | | 284 | | | 288 | |
Total non-fuel O&M | | | 12,996 | | | 1,740 | |
| Corporate allocation | | | 18,014 | | | 1,461 | |
| Depreciation and amortization | | | 15,563 | | | 2,085 | |
| Taxes other than income taxes | | | 11,479 | | | 1,885 | |
| Income taxes | | | 566 | | | 1,175 | |
Total non-fuel operating expenses | | | 58,618 | | | 8,346 | |
Operating income | | $ | 15,700 | | $ | 4,187 | |
The following table shows electric revenues by customer class and average customers:
TNMP Electric Revenues
| | | Six Months Ended | | For the period | |
| | | June 30, | | June 6 - June 30, | |
| | | 2006 | | 2005 | |
| | | (In thousands, except customers) | |
| Residential | | $ | 39,931 | | $ | 7,857 | |
| Commercial | | | 43,507 | | | 6,522 | |
| Industrial | | | 21,640 | | | 2,607 | |
| Other | | | 19,063 | | | 2,249 | |
| | | $ | 124,141 | | $ | 19,235 | |
| | | | | | | | |
| Average customers * | | | 261,602 | | | 258,251 | |
* Under TECA, customers of TNMP Electric in Texas have the ability to choose First Choice or any other REP to provide energy. However, TNMP Electric delivers energy to customers within its service area regardless of the REP chosen. Therefore, TNMP Electric earns revenue for the delivery of energy to First Choice and First Choice earns revenue on the usage of that energy by its customers. The average customers reported above include 147,782 and 157,813 customers of TNMP Electric at June 30, 2006 and 2005, respectively, who have chosen First Choice as their REP. These TNMP Electric customers are also included below in the First Choice segment. For PNMR consolidated reporting purposes, these customers are included only once in the consolidated customer count.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table shows electric sales by customer class:
TNMP Electric Sales *
| | | Six Months Ended | | For the period | |
| | | June 30, | | June 6 - June 30, | |
| | | 2006 | | 2005 | |
| | | (Megawatt hours) | |
| Residential | | | 1,334,494 | | | 275,271 | |
| Commercial | | | 1,426,121 | | | 189,767 | |
| Industrial | | | 942,643 | | | 144,791 | |
| Other | | | 60,715 | | | 8,590 | |
| | | | 3,763,973 | | | 618,419 | |
* The MWh reported above include 1,109,966 and 257,770 MWh used by customers of TNMP Electric at June 30, 2006 and 2005, respectively, who have chosen First Choice as their REP. These MWh are also included below in the First Choice segment.
TNMP Electric’s gross margin was $74.3 million for the six months ended June 30, 2006. The significant factors that impacted gross margin include a decrease in revenues due to rate reductions in both Texas and New Mexico, lower revenues due to a reduction in operations of a major customer in New Mexico and increased transmission costs. These decreases were partially offset by customer growth year over year.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PNM Gas
The table below sets forth the operating results for PNM Gas:
| | | Six Months Ended | | | |
| | | June 30, | | | |
| | | 2006 | | 2005 | | Variance | |
| | | (In thousands) | |
Operating revenues | | $ | 276,486 | | $ | 247,670 | | $ | 28,816 | |
| Less: Cost of energy | | | 199,859 | | | 167,727 | | | 32,132 | |
Gross margin | | | 76,627 | | | 79,943 | | | (3,316 | ) |
| Energy production costs | | | 1,103 | | | 1,197 | | | (94 | ) |
| Transmission and distribution O&M | | | 13,854 | | | 13,367 | | | 487 | |
| Customer related expense | | | 8,147 | | | 9,313 | | | (1,166 | ) |
| Administrative and general | | | 1,268 | | | 2,561 | | | (1,293 | ) |
Total non-fuel O&M | | | 24,372 | | | 26,438 | | | (2,066 | ) |
| Corporate allocation | | | 22,314 | | | 17,881 | | | 4,433 | |
| Depreciation and amortization | | | 11,914 | | | 11,172 | | | 742 | |
| Taxes other than income taxes | | | 4,285 | | | 4,006 | | | 279 | |
| Income taxes | | | 3,030 | | | 5,787 | | | (2,757 | ) |
Total non-fuel operating expenses | | | 65,915 | | | 65,284 | | | 631 | |
Operating income | | $ | 10,712 | | $ | 14,659 | | $ | (3,947 | ) |
The following table shows gas revenues by customer class and average customers:
PNM Gas Revenues
| | | Six Months Ended | | | |
| | | June 30, | | | |
| | | 2006 | | 2005 | | Variance | |
| | | (In thousands, except customers) | |
| Residential | | $ | 180,151 | | $ | 151,619 | | $ | 28,532 | |
| Commercial | | | 57,384 | | | 45,349 | | | 12,035 | |
| Industrial | | | 2,251 | | | 925 | | | 1,326 | |
| Transportation* | | | 7,486 | | | 7,117 | | | 369 | |
| Other | | | 29,214 | | | 42,660 | | | (13,446 | ) |
| | | $ | 276,486 | | $ | 247,670 | | $ | 28,816 | |
| | | | | | | | | | | |
| Average customers | | | 480,579 | | | 470,066 | | | 10,513 | |
*Customer-owned gas.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table shows gas throughput by customer class:
PNM Gas Throughput
| | | Six Months Ended | | | |
| | | June 30, | | | |
| | | 2006 | | 2005 | | Variance | |
| | | (Thousands of decatherms) | |
| Residential | | | 15,020 | | | 16,704 | | | (1,684 | ) |
| Commercial | | | 5,557 | | | 5,885 | | | (328 | ) |
| Industrial | | | 267 | | | 130 | | | 137 | |
| Transportation* | | | 20,402 | | | 17,252 | | | 3,150 | |
| Other | | | 3,067 | | | 5,985 | | | (2,918 | ) |
| | | | 44,313 | | | 45,956 | | | (1,643 | ) |
*Customer-owned gas.
Operating revenues increased $28.8 million, or 11.6%, for the six months ended June 30, 2006, compared to the same period of 2005, primarily due to higher natural gas prices in 2006. PNM Gas purchases natural gas in the open market and resells it at no profit to its sales-service customers. As a result, increases or decreases in gas revenues driven by gas costs do not impact the consolidated gross margin or earnings of PNM Gas. Total gas sales volumes decreased 3.6% primarily due to customer conservation resulting from higher natural gas prices and warmer weather in 2006. Customer growth increased 2.2% year over year.
The gross margin, or operating revenues minus cost of energy sold, decreased $3.3 million, or 4.1%, for the six months ended June 30, 2006 compared to the same period of 2005. Reduced customer usage resulting from customer conservation caused gross margin to decrease $5.6 million and warmer weather reduced margin $1.6 million. These decreases were offset by customer growth discussed above, which increased margin $4.1 million.
Total non-fuel O&M expenses decreased $2.1 million, or 7.8% for the six months ended June 30, 2006 compared to the same period of 2005. Customer related expenses decreased $1.2 million, or 12.5%, primarily due to a reduction in labor costs, which were charged to the business segments in 2005 but were recorded at the corporate level (and allocated through the corporate allocation) in 2006. Administrative and general expenses decreased $1.3 million primarily due to higher capitalized costs resulting from an increase in construction activity.
Depreciation and amortization increased $0.7 million, or 6.6%, primarily due to asset and software additions placed in service during 2005.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unregulated Operations
Wholesale
The table below sets forth the operating results for Wholesale:
| | | Six Months Ended | | | |
| | | June 30, | | | |
| | | 2006 | | 2005 | | Variance | |
| | | (In thousands) | |
Operating revenues | | $333,982 | | $ 274,286 | | $ 59,696 | |
| Less: Cost of energy | | | 262,746 | | | 208,965 | | | 53,781 | |
| Intersegment energy transfer | | | (3,346 | ) | | 17,535 | | | (20,881 | ) |
Gross margin | | | 74,582 | | | 47,786 | | | 26,796 | |
| Energy production costs | | | 20,136 | | | 14,402 | | | 5,734 | |
| Transmission and distribution O&M | | | 50 | | | 21 | | | 29 | |
| Customer related expense | | | 562 | | | 382 | | | 180 | |
| Administrative and general | | | 3,294 | | | 3,383 | | | (89 | ) |
Total non-fuel O&M | | | 24,042 | | | 18,188 | | | 5,854 | |
| Corporate allocation | | | 3,075 | | | 2,053 | | | 1,022 | |
| Depreciation and amortization | | | 10,316 | | | 8,028 | | | 2,288 | |
| Taxes other than income taxes | | | 3,048 | | | 1,727 | | | 1,321 | |
| Income taxes | | | 8,233 | | | 3,875 | | | 4,358 | |
Total non-fuel operating expenses | | | 48,714 | | | 33,871 | | | 14,843 | |
Operating income | | $ | 25,868 | | $ | 13,915 | | $ | 11,953 | |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table shows revenues by customer class:
Wholesale Revenues
| | | Six Months Ended | | | |
| | | June 30, | | | |
| | | 2006 | | 2005 | | Variance | |
| | | (In thousands) | |
| Long-term contracts | | $ | 105,158 | | $ | 75,372 | | $ | 29,786 | |
| Short-term sales | | | 228,824 | | | 198,914 | | | 29,910 | |
| | | $ | 333,982 | | $ | 274,286 | | $ | 59,696 | |
The following table shows sales by customer class:
Wholesale Sales
| | | Six Months Ended | | | |
| | | June 30, | | | |
| | | 2006 | | 2005 | | Variance | |
| | | (Megawatt hours) | |
| Long-term contracts | | | 1,680,909 | | | 1,288,885 | | | 392,024 | |
| Short-term sales | | | 3,789,903 | | | 4,074,439 | | | (284,536 | ) |
| | | | 5,470,812 | | | 5,363,324 | | | 107,488 | |
Operating revenues increased $59.7 million, or 21.8%, for the six months ended June 30, 2006 compared to the same period of 2005. This increase in wholesale electric sales was primarily due to increaseddecreased short-term sales of $29.9$89.2 million, or 15.0%, resulting from a 15.9% increase60.2%. The decrease in short-term sales is mainly due to lower mark-to-market revenues of $27.2 million, an 11.4% decrease in average short-term prices in 2006 compared to 2005. In addition, long-term contracts increased $29.8 million, or 39.5%, primarily due to the acquisition of Twin Oaks. Twin Oaks increased revenue by $32.8 million of which $15.7 million related to an existing power agreementsales price, and $16.9 million for the amortization of the fair value of a sales contract existing as of the date of the acquisition (see Note 2). Wholesale sold 5.47 million MWh of electricity in 2006 compared to 5.36 million MWh in 2005, an increase of 2.0%. These increases were partially offset by a decrease in revenues from PNM long-term contractsmarketing activity, including the absence of $3.0 million in 2006 due primarily to the expiration of a customer contract in March 2005, partially offset by growth in other long-term contracts and increases in contract pricing.
The gross margin, or operating revenues minus cost of energy sold and intersegment energy transfer, increased $26.8 million, or 56.1%,market opportunities that allowed for the six months ended June 30, 2006, compared to the same period of 2005, primarily due to the addition of Twin Oaks, which increased margin $21.6 million. In addition, margin increased due to the forward sale of first quarter 2006 excess resources in September 2005 when market prices were high. When prices fell in early 2006, PNM Wholesale covered the forward sales with lower-priced market purchases and utilized the excess resources to create additional sales opportunities. This strategy resultedShort-term revenues were further decreased by a decrease in an increasesales of $4.7 million to a large industrial customer in gross margin of approximately $10.8 million. This increase wasNew Mexico. These decreases were partially offset by a $9.7 million decrease due to reducednet increase in plant availability, as increased outages at SJGS and increased retail load,Four Corners were more than offset by significantly stronger performance at PVNGS, which reducedincreased the availability of less expensive excess energy for saleavailable to be sold in the wholesale market. In addition,The decreases in short-term sales were partially offset by an increase in long-term contracts of $44.3 million, or 141.7%. The acquisition of Twin Oaks, which took place in April 2006, increased long-term revenue by $36.8 million, of which $16.4 million related to an existing power agreement and $20.0 million for the net lossamortization of the fair value of a sales contract existing as of the date of the acquisition (see Note 2). Long-term revenues also increased as a result of a new customer contract causedof $9.3 million. Wholesale sold 2.6 million MWh of electricity in the first quarter of 2007 compared to 2.8 million MWh for the same period in 2006, a decrease of $1.5 million in gross margin.7.0%.
The long-term salesGross margin increased $16.4$21.1 million, or 67.2%, for the sixthree months ended June 30, 2006,March 31, 2007, compared to the same period of 2005, due to the addition of Twin Oaks margin of $21.6 million, partially offset by plant outage costs of $3.9 million. Short-term margin increased $10.4 million2006, primarily due to the forward sale discussed aboveacquisition of Twin Oaks, which increased margin $24.6 million. The increase in revenues due to an increase in plant availability, net of the associated increase in generation costs, increased margin by $4.1 million. The change in PNM Wholesale’s mark-to-market positions increased $4.1 million during the three months ended March 31, 2007, compared to increases of $0.5 million during the same period of 2006 and higher market prices,resulting in a $3.6 million increase to gross margin. These increases were partially offset by lower plant availabilitythe absence of first quarter 2006 forward sales discussed above of $10.8 million and increased retail loads, which caused a decrease in energy available to sell in the Wholesale market. PNM Wholesale's mark-to-market position decreased $2.0 million in 2006, from a $0.8$0.5 million increase in 2005.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Total non-fuel O&M expenses increased $5.9$9.2 million, or 32.2%95.2%, for the sixthree months ended June 30,March 31, 2007, compared to the same period of 2006. Energy production costs increased $5.7$8.2 million, or 39.8%104.1%, due primarily to the addition of the Twin Oaks and Luna power plants of $7.0 million and $0.7 million, respectively, both of which were not operational under PNMR in the first quarter of 2006. Costs also increased planned outagedue to the absence of a $0.4 million PVNGS decommissioning and decontamination credit received in the first quarter of 2006. Administrative and general costs increased $0.7 million, or 51.2%, mainly due to a reduction of $3.9 million atprior-year PVNGS Unit 3 andpayroll expenses in the first quarter of 2006, the addition of Twin Oaks costs, and an increase in pension and benefit costs that were recorded as administrative and general expenses in the first quarter of $1.6 million and Luna cost of $0.8 million, which2007 versus recorded through the Company did not havecorporate allocation in 2005. These increases were partially offset by the write-off of a regulatory liability, which decreased expenses $0.6 million.2006, as discussed below.
Depreciation and amortizationCorporate allocation charges increased $2.3$2.0 million, or 28.5%166.7%, for the sixthree months ended June 30,March 31, 2007, compared to same period of 2006, primarily due to the addition of Twin Oaks, and depreciation expense for assets placed in service during 2005,which was partially offset by changespension and benefit costs that were recorded as administrative and general expenses in the depreciation rates atfirst quarter of 2007 versus being recorded in the corporate allocation line item in 2006, as discussed above. Depreciation and amortization increased $4.6 million, or 145.5%, mainly due to the addition of Twin Oaks and Luna operations of $4.6 million and $0.5 million, respectively, which was partially offset by the transfer of the Afton and Lordsburg plants.plant to a jurisdictional resource of $0.5 million. Taxes other than income increased $1.3$2.8 million or 76.5% primarily284.2%, mainly due to the addition of Twin Oaks.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
First Choice
PNMR acquired TNP on June 6, 2005, and results in this section are presented from the acquisition date forward only.
The table below sets forth the operating results for First Choice:
| | | Six Months Ended | | For the Period | | | Three Months Ended | | | |
| | | June 30, | | June 6 - June 30 | | | March 31, | | | |
| | | 2006 | | 2005 | | | 2007 | | 2006 | | Variance | |
| | | (In thousands) | | | (In thousands) | |
Operating revenues | | $ | 259,990 | | $ | 43,031 | | | $ | 135,565 | | $ | 105,082 | | $ | 30,483 | |
| Less: Cost of energy | | | 208,408 | | | 34,083 | | |
| Cost of energy | | | | 110,816 | | | 90,335 | | | 20,481 | |
Gross margin | | | 51,582 | | | 8,948 | | | | 24,749 | | | 14,747 | | | 10,002 | |
| Customer related expense | | | 5,988 | | | 466 | | | | 3,864 | | | 3,577 | | | 287 | |
| Administrative and general | | | 12,056 | | | 1,089 | | | | 9,145 | | | 3,612 | | | 5,533 | |
Total non-fuel O&M | | | 18,044 | | | 1,555 | | | | 13,009 | | | 7,189 | | | 5,820 | |
| Corporate allocation | | | 7,965 | | | 1,130 | | | | 1,914 | | | 4,809 | | | (2,895 | ) |
| Depreciation and amortization | | | 1,008 | | | 105 | | | | 471 | | | 498 | | | (27 | ) |
| Taxes other than income taxes | | | 2,536 | | | 512 | | | | 234 | | | 1,180 | | | (946 | ) |
| Income taxes | | | 7,663 | | | 2,020 | | | | 3,407 | | | 300 | | | 3,107 | |
Total non-fuel operating expenses | | | 37,216 | | | 5,322 | | | | 19,035 | | | 13,976 | | | 5,059 | |
Operating income | | $ | 14,366 | | $ | 3,626 | | | $ | 5,714 | | $ | 771 | | $ | 4,943 | |
The following table shows First Choice electric operating revenues by customer class, including intersegment revenues, which are eliminated within the presentation of the PNMR Condensed Consolidated Statements of Earnings and averageshown in the PNMR Segment Information in Note 3, and number of customers:
First Choice Electric Revenues| | | Three Months Ended | | | |
| | | March 31, | | | |
| | | 2007 | | 2006(1) | | Variance | |
| | | (In thousands, except customers) | |
| Residential | | $ | 85,552 | | $ | 59,601 | | $ | 25,951 | |
| Mass-market | | | 16,169 | | | 18,821 | | | (2,652 | ) |
| Mid-market | | | 30,557 | | | 19,447 | | | 11,110 | |
Trading(4) | | | 1,134 | | | 1,836 | | | (702 | ) |
| Other | | | 2,153 | | | 5,377 | | | (3,224 | ) |
| | | $ | 135,565 | | $ | 105,082 | | $ | 30,483 | |
| | | | | | | | | | | |
Actual customers (2,3) | | | 256,931 | | | 219,071 | | | 37,860 | |
| | | Six Months Ended | | For the Period | |
| | | June 30, | | June 6 - June 30 | |
| | | 2006 | | 2005 | |
| | | (In thousands, except customers) | |
| Residential | | $ | 148,782 | | $ | 29,265 | |
| Mass-market | | | 42,730 | | | 6,615 | |
| Mid-market | | | 53,313 | | | 5,864 | |
| Other | | | 15,165 | | | 1,287 | |
| | | $ | 259,990 | | $ | 43,031 | |
| | | | | | | | |
| Average customers * | | | 212,958 | | | 215,965 | |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table shows electric sales by customer class:
First Choice Electric Sales *
| | | Six Months Ended | | For the period | |
| | | June 30, | | June 6 - June 30, | |
| | | 2006 | | 2005 | |
| | | (Megawatt hours) | |
| Residential | | | 1,064,206 | | | 246,332 | |
| Mass-market | | | 282,789 | | | 55,424 | |
| Mid-market | | | 486,063 | | | 67,420 | |
| Other | | | 25,445 | | | 2,949 | |
| | | | 1,858,503 | | | 372,125 | |
*(2) See note above in the TNMP Electric segment discussion about the impact of TECA.
(3) Due to the competitive nature of First Choice’s gross margin was $51.6 millionbusiness, actual customer count at March 31 is presented in the table above as a more representative business indicator than the average customers that are shown in the table for TNMP customers. First Choice had 256,465 average customers and 220,525 average customers for the sixthree months ended June 30,March 31, 2007 and 2006, respectively. The 220,525 average customers for the three months ended March 31, 2006 have been reclassified from prior year presentation in order to be consistent with the current year presentation for the ESI ID customer count methodology used by the ERCOT.
(4) Includes gas trading.
The following table shows First Choice MWh electric sales by customer class:
| | | Three Months Ended | | | |
| | | March 31, | | | |
| | | 2007 | | 2006(2) | | Variance | |
| | | (Megawatt hours(1)) | |
| Residential | | | 614,908 | | | 427,544 | | | 187,364 | |
| Mass-market | | | 99,866 | | | 121,027 | | | (21,161 | ) |
| Mid-market | | | 259,876 | | | 177,643 | | | 82,233 | |
| Other | | | 9,279 | | | 13,005 | | | (3,726 | ) |
| | | | 983,929 | | | 739,219 | | | 244,710 | |
(1)See note above in the TNMP Electric segment discussion about the impact of TECA.
(2)The customer class sales presented above for the three months ended March 31, 2006 have been reclassified from prior year presentation in order to be consistent with current year presentation, as a result of changes in customer classifications.
Operating revenues increased $30.5 million, or 29.0%, for the three months ended March 31, 2007, compared to the same period of 2006. The significant factors that impacted gross margin include increases in price margins driven by increased competitive and price to beat sales prices, an increase in mark-to-market gainsrevenues was primarily due to $28.2 million in increased usage due to colder weather and an amortization benefit ofcustomer growth as well as $5.4 million due to increased sales and purchase contracts existing at the time of the acquisition. As part of the acquisition of TNP, PNMR determined the fair value of a First Choice contractual obligation to purchase power and an obligation to sell power that are being amortized over the contract lives, or approximately three years.prices. These increases were partially offset by lower mark-to-market gains.
Gross margin increased $10.0 million, or 67.8%, for the three months ended March 31, 2007, compared to the same period of 2006, primarily due to improved price margins on customer attrition.sales of $12.8 million, which was partially offset by a decrease in the net change of mark-to-market positions.
Total non-fuel O&M expenses increased $5.8 million, or 81.0%, for the three months ended March 31, 2007, compared to the same period of 2006. Customer related expenses increased $0.3 million, or 8.0%, due to an increase in bad debt expense. Administrative and general expenses increased $5.5 million, or 153.2%, mainly due to an increase in costs related to the outsourcing of customer service operations to Alliance Data Systems of $2.6 million and higher incentive-based compensation expenses of $1.2 million. In addition, advertising costs and the costs to acquire customers increased as a result of efforts to grow the customer base.
Corporate allocation charges decreased $2.9 million, or 60.2%, for the three months ended March 31, 2007, compared to the same period of 2006, primarily due to a decrease in the percentage of costs allocated to First Choice in the first quarter of 2007 compared to the same period in 2006 to better align shared service costs with the services provided. Taxes other than income decreased $0.9 million, or 80.2%, largely due to lower gross receipts tax related to Price-to-Beat customer revenues.
Corporate and Other
Corporate Administrative and General ExpensesAllocations
Corporate administrative and general expenses,allocations, which represent costs that are driven primarily by corporate-levelshared service activities, are allocated to the business segments and are presented in the corporate allocation line item in each of the business segment statements. Thesefinancial summaries. In total, these costs increased $25.3decreased $7.4 million, or 40.6%,16.8% to $87.6$36.6 million for the sixthree months ended June 30, 2006March 31, 2007, compared to the same period of 2005.2006. This increasedecrease was primarily due to $17.8$9.1 million of costs recorded directly to each business segment’s administrative and general costs in additional expenses for insurance, benefits and2007, versus being recorded through the corporate support activities for TNP, which PNMR did not incur until the acquisition of TNPallocation line item in June 2005. Stock-based compensation expense increased $4.6 million due2006, primarily related to the adoption of SFAS 123R (see Note 6). Legal and consulting expenses increased $2.5 million for audit fees, SEC compliance, tax matters and integration charges. Wagespension and benefit costs increased $3.5and regulatory expenses, and a $0.5 million duenet decrease in consulting costs related to a transfer of employees to corporateinternal audits, legal services, Sarbanes-Oxley and increases in projected payouts of employee incentive programs.tax compliance costs. These increasesdecreases were partially offset by a $0.9 million increase in incentive-based compensation, a $0.7 million increase in depreciation expense for shared service software, and an increase in costs allocated to the business segments in the first quarter of 2007 versus held at Corporate and Other in 2006, as discussed below.
Administrative and General Expenses
As discussed above, costs that are driven by shared service activities are allocated to the business segments through the corporate allocation. Costs related to corporate-level activities are retained in the Corporate and Other segment. These costs increased $1.3 million for the three months ended March 31, 2007 compared to the same period of 2006, primarily due to an increase in non-recurring costs related to the formation of EnergyCo and a net change of legal liabilities, partially offset by a decrease in costs allocated to the business segments in the first quarter of $2.4 million of acquisition related costs.2007 versus held at Corporate and Other in 2006, as discussed above.
Depreciation Expense
Corporate and otherOther depreciation expense decreased $3.8increased $0.6 million, or 47.7%29.3%, to $4.2$2.6 million for the three months ended March 31, 2007, primarily due to an increase in asset base as a result of new software implementation for shared services. These expenses were allocated to the write-off of software costs inbusiness segments through the second quarter of 2005.corporate allocation.
Taxes Other Than Income
Corporate and otherOther taxes other than income increased $1.1 million, or 85.6%123.0%, to $2.4$1.9 million for the three months ended March 31, 2007, primarily due to a $0.5 million increase in tax liabilities, a $0.2 million increase in FICA taxes in 2007 associated with the prior year, and an increase in payroll taxes resulting from a transfer of employeesdue to Corporateincreased labor costs and a higher tax base from the TNP acquisition.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PNMR Consolidated
Other Income and Deductions
Interest income decreased $1.9increased $0.6 million, or 8.9% for the six months ended June 30, 20066.3%, primarily due primarily to interest income of $1.0 million on tax assets recorded under FIN 48, which was partially offset by a lower level of interest income earned on the investment of proceeds relatedPVNGS lessor notes due to the sale of hybrid income term securities, invested from March 31, 2005 until the TNP acquisition on June 6, 2005.lower principal balances.
Other incomeGains on investment securities decreased $1.3$0.9 million, or 19.8%92.8%, primarily due to lower returns on investments. realized gains related to PVNGS decommissioning trust assets.
Carrying charges on regulatory assets were $4.0decreased $2.0 million fordue to the six months ended June 30, 2006. This representsabsence of interest income earned on TNMP regulatory assets.stranded costs in 2006 based on the collection of costs ordered by the PUCT, as discussed in the TNMP Electric segment.
Interest Charges
PNMR’s consolidated interest charges increased by $29.2$9.3 million for the sixthree months ended June 30, 2006,March 31, 2007, compared to the same period of 2005,2006. The increase is primarily due to $12.6 million of interest charges related to debt from the TNP operations, which PNMR did not incur until the acquisition of TNP in June 2005, interest and refinancing costs of $5.6 million related to the equity-linked units issued in March and October of 2005, $5.7$5.3 million of interest charges related to the bridge loan associated with the Altura purchase of Twin Oaks, which occurred on April 18, 2006, $1.0increased interest on short-term borrowings of $3.2 million, and the remarketing of $146 million of interest charges for pollution control bonds duePollution Control Revenue Bonds from a 2.1% variable rate to increased interest rates, $1.4a 4.875% fixed rate of $1.3 million, of interest charges related to rate increases on PNMR swaps, $3.0 million of interest for hybrid income term securities and $7.8 million of interest charges related to commercial paper borrowings. These increased charges werewhich was partially offset by $2.4 millionreduced interest expense on tax liabilities of interest capitalized in connection with capital construction projects and $2.0 million of TNMP debt retirement in connection with the purchase of TNMP in June 2005.$0.7 million.
Income Taxes
PNMR’s consolidated income tax expense was $25.4$17.9 million for the sixthree months ended June 30, 2006,March 31, 2007, compared to $18.6$15.3 million for the same period in 2006. The increase in consolidated income tax expense was due to an increase in pre-tax earnings and an increase in the overall effective income tax rate, due partially to the inclusion of 2005.Texas franchise taxes in operating income tax in 2007 versus taxes other than income in 2006, as discussed in the TNMP Electric segment, resulting in no impact to net earnings. PNMR’s effective operating income tax rates for the sixthree months ended June 30,March 31, 2007 and 2006 were 38.2% and 2005 were 37.2% and 34.9%37.0%, respectively. PNMR’s effective non-operating income tax rates for the sixthree months ended June 30,March 31, 2007 and 2006 were 35.2% and 2005 were 37.0% and 35.5%, respectively.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - PNM
THREE AND SIX MONTHS ENDED JUNE 30, 2006MARCH 31, 2007
COMPARED TO THREE AND SIX MONTHS ENDED JUNE 30, 2005MARCH 31, 2006
PNM’s segments are PNM Electric, PNM Gas and PNM Wholesale. The PNM Electric and PNM Gas segments are identical to the segments presented above in “Results of Operations” for PNMR. The PNM Wholesale segment reported for PNM does not include Altura (see Note 2 and Note 3).
PNM’s operating revenues decreased $24.1by $62.1 million, or 6.8%12.0%, for the three months ended June 30, 2006,March 31, 2007, compared withto the same period of 2005.2006. Gross margin decreased $2.7increased $12.2 million, or 1.9%6.8%, compared withto the prior year quarter. These decreases werePNM Electric segment gross margins increased $10.8 million from the prior year quarter, while PNM Gas segment gross margins increased $5.0 million from the prior year quarter, as discussed above. PNM Wholesale segment gross margins decreased $3.5 million, resulting predominately from the absence of marketing opportunities that allowed for the forward sale of excess energy in the first quarter of 2006, which was partially offset by increases in plant performance, primarily at PVNGS, and an increase in mark-to-market gains.
Total operating expenses decreased $64.1 million, or 13.3%, from the prior year quarter, of which $74.4 million is a decrease in cost of energy included in gross margin above.
Administrative and general costs increased $3.3 million, or 7.9%, primarily due to a decreasethe transfer of southern New Mexico operations from TNMP to PNM, an increase in the Electric segment gross margin of $2.7 millionlegal liabilities, and the Gas segment gross margin of $2.3 million discussed above. These decreasesan increase in incentive-based compensation, which were partially offset by an increase in capitalized costs related to construction activity at the PNM Wholesale segment gross margin of $2.3 million, which increased primarily due to a decrease in purchase prices, partially offset by lower plant availabilitySJGS and increased retail loads, which caused a decrease in energy available to sell in the market.Afton plants.
Total operating expenses decreased $25.8Energy production costs increased $2.9 million, or 7.6%7.7%, for the three months ended June 30, 2006, compared with the same period of 2005, due primarily to a decrease in cost of energy of $21.4 million. Administrative and general expenses decreased $2.0 million primarily due to higher capitalized costs of $1.1 million and lower legal and consulting costs of $0.8 million. Depreciation expenses decreased $8.1 million as a result of increased plant outage costs, largely at SJGS, the addition of Luna operations, which began in April 2006, and the absence of a write-off of software costs of $4.5 millionPVNGS decommissioning and decontamination credit received in the secondfirst quarter of 2005,2006.
Depreciation and amortization expenses increased $1.5 million, or 6.0%, primarily due to the transfer of southern New Mexico operations from TNMP, the addition of Luna operations, and an overall increase in the estimated useful life at SJGS and some fully depreciated plantasset base. These increases were partially offset by reduced depreciation at Four Corners of $0.7 million due to a group of assets that fully depreciated during the last year and $0.6 million due to a life extension.
Transmission and distribution costs increased $3.3 million, or 23.3%, mainly due to the transfer of southern New Mexico operations from TNMP as well as higher repairs and maintenance costs.
Taxes other than income decreased $0.6 million, or 6.7%, due to a reduction in Native American taxes caused by a true-up in the first quarter of 2006, which was partially offset by additions to fixed assets.the transfer of southern New Mexico operations from TNMP.
PNM’s consolidated income tax expense was $2.2$18.3 million for the three months ended June 30, 2006,March 31, 2007, compared to $2.5$19.0 million for the same period of 2005.2006. PNM’s effective operating income tax benefit rates for the three months ended June 30,March 31, 2007 and 2006 were 39.2% and 2005 were 37.3% and 44.8%38.6%, respectively. PNM’s effective non-operating income tax rates for the three months ended June 30,March 31, 2007 and 2006 were 37.6% and 2005 were 38.8% and 40.5%, respectively.
PNM’s operating revenues increased $67.2 million, or 8.6%, for the six months ended June 30, 2006, compared with the same period of 2005. Gross margin decreased $3.3 million, or 1.0%, compared with the prior year. These decreases were primarily due to a decrease in the Electric segment gross margin of $5.1 million and the Gas segment gross margin of $3.3 million discussed above. These decreases were partially offset by an increase in the PNM Wholesale segment gross margin of $5.2 million, which increased primarily due to a first quarter forward sale, partially offset by lower plant availability and increased retail loads, which caused a decrease in energy available to sell in the market.
Total operating expenses increased $66.7 million, or 9.1%, for the six months ended June 30, 2006, compared with the same period of 2005, due primarily to an increase in cost of energy of $70.5 million. Administrative and general expenses decreased $1.3 million primarily due to higher capitalized cost of $2.1 million and lower legal and consulting costs of $1.2 million. Depreciation expenses decreased $11.2 million as a result of a write-off of software costs of $4.5 million in the second quarter of 2005, an increase in the estimated useful life at SJGS and some fully depreciated plant at Four Corners, partially offset by additions to fixed assets.
PNM’s consolidated income tax expense was $21.2 million for the six months ended June 30, 2006, compared to $21.0 million for the same period of 2005. PNM’s effective operating income tax rates for the six months ended June 30, 2006 and 2005 were 38.4% and 36.1%, respectively. PNM’s effective non-operating income tax rates for the six months ended June 30, 2006 and 2005 were 38.8% and 37.1%, respectively.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - TNMP
THREE AND SIX MONTHS ENDED JUNE 30, 2006MARCH 31, 2007
COMPARED TO THREE AND SIX MONTHS ENDED JUNE 30, 2005MARCH 31, 2006
TNMP operates in only one reportable segment, “TNMP Electric.” Results include the effect of purchase accounting on June 6, 2005. Amounts for the periodthree months ended March 31, 2006 present TNMP’s New Mexico operations as discontinued operations, as these operations were transferred to PNM on January 1, 2007. The impacts of the discontinued operations are not included in the changes discussed below.
The PUCT issued an order on November 2, 2006 related to the stranded costs incurred by TNMP as part of the deregulation of the Texas energy market and the associated carrying charges. As part of this order, TNMP will recover approximately $160 million over 14 years to recover the CTC and their related carrying costs and approximately $5 million over the course of three years to recover rate case expenses. Also as part of this order, TNMP will return approximately $4 million to customers over the course of one year related to industrial fuel costs. The recovery of the CTC and rate case expenses, net of the industrial fuel credit, will result in increases to revenues in the period that these charges are billed or credited to customers.
TNMP also recorded regulated assets and liabilities to account for the customer collections and credits. As these charges are collected from and credited to customers, the amount of the assets and liabilities will be amortized through June 6, 2005 are pre-acquisitionthe income statement. The amortization of these assets and amounts after June 6, 2005 are post-acquisition. See Note 1.liabilities will result in an increase in administrative and general expenses related to the rate case expenses, and an increase in depreciation and amortization costs related to the net of the CTC asset and industrial fuel credit liability amortizations.
TNMP’s operating revenues decreased $4.7from continuing operations increased by $5.4 million, or 7.2%15.1%, for the three months ended June 30, 2006,March 31, 2007, compared withto the same period of 2005.2006. Gross margin decreased $3.9increased $4.7 million, or 9.1%16.0%, compared withto the prior year quarter. The significant factors that impactedTNMP collected $4.0 million in additional revenues during the first three months of 2007 related to the PUCT order discussed above, which consists of the net of a $4.6 million increase for the collection of CTC, a $0.4 million increase for the collection of rate case expenses, and a $1.0 million decrease related to a industrial fuel credit to customers. Revenues and gross margin include a decrease in revenuesalso increased due to rate reductions in conjunction with the acquisition in both Texas and New Mexico, lower revenues due to a reduction in operations of a major customer in New Mexico and increased transmission costs. These decreases were partially offset by customerload growth and weather impacts.colder weather.
Total operating expenses increased $4.1 million, or 14.0%, from the prior year quarter, of which $0.7 million is an increase in cost of energy included in gross margin above.
Administrative and general costs decreased $0.3 million, or 3.4%, primarily due to lower pension and benefit costs.
Depreciation and amortization expenses increased $0.8 million, or 1.6%13.4%, fordue to the three months ended June 30, 2006, compared with$0.5 million net increase in amortization of CTC and industrial fuel credit assets and liabilities related to the same periodPUCT order discussed above and an increase in expense of 2005,$0.3 million due primarily to an increase in non-fuel operating expenses of $1.8 million. Administrativethe asset base.
Transmission and general expensesdistribution costs increased $2.9$1.2 million, or 31.5%, primarily due to increased labor, employee benefits, consulting and insurance expenses, including expenses allocated to TNMP from PNMR. Thean increase in administrativelabor and general expensefleet vehicle expenses.
Taxes other than income decreased $0.4 million, or 7.0%, due to a reduction in Texas franchise tax, which was partially offset by decreasedrecorded to taxes other than income in 2006 versus included in operating income tax expenses of $2.7 million. Depreciation expenses increased as a result of additionstaxes in 2007, resulting in no net impact to fixed assets.earnings.
TNMP’s consolidated income tax expense was $2.1$0.4 million for the three months ended June 30, 2006,March 31, 2007, compared to $5.0a benefit of $0.8 million for the same period of 2005.2006. TNMP’s effective operating income tax rates for the three months ended June 30,March 31, 2007 and 2006 were 34.2% and 2005 were 45.1% and 35.1%68.3%, respectively. TNMP’s effective non-operating income tax rates for the three months ended June 30,March 31, 2007 and 2006 were 22.6% and 2005 were 38.9% and 38.3%38.2%, respectively.
TNMP’s operating revenues decreased $7.9 million, or 6.0%, for the six months ended June 30, 2006, compared with the same period of 2005. Gross margin decreased $7.2 million, or 8.8%, compared with the prior year first and second quarters. The significant factors that impacted gross margin include a decrease in revenues due to rate reductions in conjunction with the acquisition in both Texas and New Mexico, lower revenues due to a reduction in operations of a major customer in New Mexico and increased transmission costs. These decreases were partially offset by customer growth.76
Total operating expenses increased $2.0 million, or 1.9%, for the six months ended June 30, 2006, compared with the same period of 2005, due primarily to an increase in non-fuel operating expenses of $3.4 million. Administrative and general expenses increased $7.7 million primarily due to increased labor, employee benefits, consulting and insurance expenses, including expenses allocated to TNMP from PNMR. The increase in administrative and general expense was partially offset by decreased operating income tax expenses of $5.7 million. Depreciation expenses increased as a result of additions to fixed assets.
TNMP’s consolidated income tax expense was $2.3 million for the six months ended June 30, 2006, compared to $6.3 million for the same period of 2005. TNMP’s effective operating income tax rates for the six months ended June 30, 2006 and 2005 were 31.9% and 34.8%, respectively. TNMP’s effective non-operating income tax rates for the six months ended June 30, 2006 and 2005 were 38.6% and 40.1%, respectively.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with GAAP requires Company management to select and apply accounting policies that best provide the framework to report the results of operations and financial position for PNMR, PNM and TNMP. The selection and application of those policies requires management to make difficult, subjective and/or complex judgments concerning reported amounts of revenue and expenses during the reporting period and the reported amounts of assets and liabilities at the date of the financial statements. As a result, there exists the likelihood that materially different amounts would be reported under different conditions or using different assumptions.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As of June 30, 2006,March 31, 2007, there have been no significant changes with regard to the critical accounting policies disclosed in PNMR’s, PNM’s and TNMP’s Annual Reports on Forms 10-K/A (Amendment No. 2)1) for the year ended December 31, 2005.2006. The policies disclosed included the accounting for revenue recognition, regulatory assets and liabilities, asset impairment, goodwill and other intangible assets, purchase accounting, pension and postretirement benefits, decommissioning costs, financial instruments and financial instruments. Effectivemarket risk. See Note 15 for discussion concerning the adoption of FIN 48 as of January 1, 2006, the Company adopted SFAS 123R, utilizing the modified prospective approach. See Note 6 for a comprehensive discussion of the accounting for stock-based compensation expense, including a discussion of the assumptions used to estimate the fair market value of awards.2007.
LIQUIDITY AND CAPITAL RESOURCES
Statements of Cash Flow
PNMR
At June 30, 2006,March 31, 2007, PNMR had cash and short-term investments of $73.9$45.0 million compared to $68.2$123.4 million in cash and short-term investments at December 31, 2005.2006.
Cash provided by operating activities for the sixthree months ended June 30, 2006March 31, 2007 was $111.6$43.6 million compared to $113.4$32.4 million for the sixthree months ended June 30, 2005. PNMR's netMarch 31, 2006. The increase was primarily due to increases in First Choice Power earnings due to customer and sales growth combined with reduced purchased power prices, PNM utility gross margins driven by load growth and colder weather and improved plant performance, which were partially offset by higher coal costs, decreases in wholesale marketing activity, and increased interest charges on higher short-term debt borrowings. This increase was partially offset by payments of higher current liabilities outstanding at December 31, 2006 due to increase incentive based compensation for the six months ended June 30, 2006 increased 33.0%,year compared to $42.6 million from $32.1 million, for the six months ended June 30, 2005. The slight2005 and higher interest payables related to higher short-term borrowings. Other significant decreases in cash flows included a decrease in cash collections from operating activities was duecustomer receivables compared to 2006, resulting from higher than normal gas and market prices in December 2005 that were collected during the first three months of 2006, and a decrease in accounts payable resulting from PNM’s decreased gas purchases andaccrued taxes. These decreases were partially offset by reduced payments for gas purchased in prior periods for the 2005-2006 winter heating season. The slight decrease in cash from operating activities was offset in part higher net earnings.purchases due to lower gas prices.
Cash used for investing activities for the sixthree months ended June 30, 2006March 31, 2007 was $596.4$76.1 million compared to cash used of $31.5$39.8 million for the sixthree months ended June 30, 2005.March 31, 2006. The increase in cash used for investing activities in the current period was due primarily to $37.8 million of increased cash payments for utility plant additions and the purchase of the Twin Oaks business.
Cash provided from financing activities for the six months ended June 30, 2006 was $490.5 million compared to cash provided from financing activities of $123.8 million for the six months ended June 30, 2005. During the six months ended June 30, 2006, PNMR borrowed $480 million in short term debt and used the proceeds to acquire the Twin Oaks business. During the six months ended June 30, 2005, PNMR issued equity-linked units for $239.8 million and common stock for $101.2 million and repaid $74.0 million of short-term debt, as well as the repaying of $110.5 million of long-term debt related to the acquisition of TNP, which did not recur in 2006.
PNM
At June 30, 2006, PNM had cash and short-term investments of $2.7 million compared to $12.7 million in cash and short-term investments at December 31, 2005.
Cash provided by operating activities for the six months ended June 30, 2006 was $100.7 million compared to $83.2 million for the six months ended June 30, 2005. PNM's net earnings for the six months ended June 30, 2006 decreased 7.9 %, to $33.7 million from $36.6 million, for the six months ended June 30, 2005. The increase in cash from operations was due primarily to a decrease in accounts receivable and unbilled revenues resulting from the collection of the higher levels of accounts receivable balances during the 2005-2006 winter heating season, an increase in cash from current regulatory assets due to lower levels of PGAC accounts receivable resulting from collections of PGAC balances from customers and lower levels of billings to customers and an increase in accrued interest and taxes due to higher current income taxes resulting from collections of PGAC balances from customers and property tax accruals. The increase in cash from operations was offset in part by a decrease in accounts payable resulting from decreased gas purchases and the payment of outstanding gas purchases as of December 31, 2005.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cash used for investing activities for the six months ended June 30, 2006 was $82.5 million compared to $49.5 million for the six months ended June 30, 2005. The increase in cash flows used for investing activities was due primarily to higher levels of utility plant additions.
Cash used for financing activities for the sixthree months ended June 30, 2006March 31, 2007 was $28.2$46.0 million compared to $42.4$15.1 million for the sixthree months ended June 30, 2005.March 31, 2006. During the three months ended March 31, 2007, PNMR made short-term debt repayments of $25.0 million, $11.6 million of purchases of common stock to satisfy stock awards, and $16.9 million of dividends paid, compared to $1.2 million of short-term debt payments, $2.9 million of purchases of common stock to satisfy stock awards, and $13.8 million of dividends paid during the first three months ended March 31, 2006.
PNM
At March 31, 2007, PNM had cash and short-term investments of $6.4 million compared to $11.9 million in cash and short-term investments at December 31, 2006.
Cash provided by operating activities increased 46.7% to $67.5 million for the three months ended March 31, 2007 compared to $46.0 million for the three months ended March 31, 2006. This increase was largely due to increases in gross margins driven by load growth and colder weather and improved plant performance, partially offset by increased coal costs, decreased wholesale marketing activity, and increased interest charges on higher short-term debt borrowings. Significant decreases in cash flows included a decrease in cash collections from customer receivables compared to 2006, resulting from higher than normal gas and market prices in December 2005 that were collected during the first three months of 2006, and a decrease in accrued taxes. These decreases were more than offset by reduced payments for gas purchases due to lower gas prices and increased payments received on affiliate receivables from TNMP related to purchased power and transmission of energy.
Cash used for investing activities for the three months ended March 31, 2007 was $67.8 million compared to $27.1 million for the three months ended March 31, 2006, a decrease of $40.8 million due to a $41.5 million increase in cash used for utility plant additions.
Cash used for financing activities for the three months ended March 31, 2007 was $5.1 million compared to $25.0 million for the three months ended March 31, 2006. The decrease in cash used for financing activities was due primarily to lower levels of short-term debt repayments.
TNMP
At June 30, 2006,March 31, 2007, TNMP had cash and short-term investments of $18.7$0.1 million compared to $16.2$2.5 million in cash and short-term investments at December 31, 2005.2006.
Cash provided byused for operating activities for the sixthree months ended June 30, 2006March 31, 2007 was $20.5$23.8 million compared to $22.0 million for the six months ended June 30, 2005. TNMP's net earnings for the six months ended June 30, 2006 decreased 66.2%, to $4.0 million from $11.8 million, for the six months ended June 30, 2005, which contributed to the decrease in cash provided by operating activities of $8.0 million for the sixthree months ended June 30,March 31, 2006. TNMP’s net earnings decreased due to the transfer of its New Mexico operations to PNM on January 1, 2007. In addition to the decrease in net earnings, TNMP used $18.4 million of cash to settle affiliate liabilities to First Choice Power and other REPs related to retail competition in Texas as ordered under TECA. Other increased uses of cash during the three months ended March 31, 2007 included payments on 2006 year-end current liabilities, as costs related to the purchased power and transmission of energy increased over the prior year, including payments for purchased power to PNM.
Cash used for investing activities for the sixthree months ended June 30, 2006March 31, 2007 was $18.1$7.8 million compared to $22.4$7.2 million for the sixthree months ended June 30, 2005.March 31, 2006. The decreaseincrease in cash used for investing activities resulted from lowerhigher levels of utility plant additions for the sixthree months ended June 30, 2006 and the absence in 2006 of costs related to PNMR's acquisition of TNMP.March 31, 2007.
Cash fromprovided by financing activities for the sixthree months ended June 30, 2006 was relatively unchanged, as compared to the same period of 2005.March 31, 2007 included $29.2 million received from an intercompany loan provided by PNMR.
Capital Requirements
PNMR
Total capital requirements includeconsist of construction expenditures as well as other major capital requirements and cash dividend requirements for both common and preferred stock.stock, subject to board review or approval. The main focus of the Company’sPNMR’s current construction program is upgrading generation resources, including those relating to pollution control, upgrading and expanding the electric and gas transmission and distribution systems, and purchasing nuclear fuel. Projections for total capital requirements for 2006,2007 are $457.5 million, including TNMP and First Choice, are $397.1 million with projections for construction expenditures for 2006 constituting $358.0 million of that total.$386.5 million. Total capital requirements including TNMP and First Choice,for the years 2007-2011 are projected to be $1,649.7$2,406.2 million, andincluding construction expenditures are projected to be $1,421.0of $1,980.8 million. This projection includes $56.0 million for 2006-2010.completion of the expansion at Afton. These estimates are under continuing review and subject to on-going adjustment. This projection includes $147.0 million for PNM’s expansion at Afton. In November 2005, PNM filed a joint stipulation with the NMPRC that would allow PNM to convert Afton to a combined cycle plant and bring Afton into retail rates effective January 1, 2008. The stipulation is subject to approval by the NMPRC. This projection is subject to on-going adjustment.
The Company continues to look for appropriately priced generation acquisition and expansion opportunities to support retail electric load growth, for the continued expansion of its long-term contract business, and to supplement its natural transmission position in the southwest and west areas of the United States.
During the six months ended June 30, 2006,first quarter of 2007, the Company utilized cash generated from operations and cash on hand, as well as its liquidity arrangements, to cover its capital requirements and construction expenditures, including the acquisitionexpenditures. On April 18, 2006, PNMR borrowed $480.0 million under a bridge loan facility for temporary financing of the Twin Oaks business. It is expectedacquisition. On April 17, 2007, PNMR repaid the remaining principal balance of $249.5 million under the bridge loan at its maturity through a borrowing of $250.5 million under the PNMR Facility, PNMR’s $600.0 million revolving credit facility. In addition to the $250.5 million borrowing by PNMR, PNMR and PNM have an aggregate of $486.2 million of commercial paper outstanding as of May 1, 2007. PNMR, including its subsidiaries, also has $716.6 million in senior unsecured notes and $347.3 million in equity-linked units (which include a debt component) that will come due through 2011, none of which are due within the permanent financing for the $480.0 million purchase price for thenext twelve months.
As discussed under “Results of Operations - Executive Summary” above, PNMR has entered into a non-binding letter of intent under which Twin Oaks businesswould be transferred to EnergyCo and PNMR would receive a cash distribution from EnergyCo of approximately $277 million. PNMR anticipates this transaction will comeoccur on or about June 1, 2007. If this cash distribution does occur, PNMR expects the above borrowing on the PNMR Facility will be repaid from the proceeds.
The equity-linked units contain mandatory obligations under which the holders are required to purchase $347.3 million of PNMR equity securities in 2008. The equity-linked units also provide that prior to settlement of those purchase obligations the debt, which is scheduled to mature in 2010, will be remarketed. If the remarketing is successful, the debt may be extended to dates selected by PNMR and the interest rates will be adjusted to the current rates at that date. If the remarketing of the debt is not successful, the holders of the equity-linked units may satisfy their obligations to purchase PNMR equity securities by tendering the debt to PNMR. The effect of these terms is that, if the remarketing is successful, PNMR would receive $347.3 million in cash for its equity securities and the debt would continue to mature in 2010 or such later date selected by PNMR in the remarketing. If the remarketing is not successful, the issuance of PNMR equity securities would offset the retirement of the debt without requiring payment in cash by PNMR. PNMR expects the remarketing of the debt will be successful.
In addition to cash anticipated to be received from the EnergyCo distribution and equity structured to maintain PNMR’s investment grade rating. Thethe equity-linked units, described above, and its internal cash generation, the Company anticipates that internal cash generation and current debt capacity in combination with the Twin Oaksit will be necessary to obtain additional permanent financing will be sufficientin the form of debt refinancing, new debt, and/or new equity in order to meet all offund its capital requirements and construction expendituresthe repayment of senior unsecured notes during the 2007-2011 period. To the extent the cash anticipated to be received from the EnergyCo distribution and the equity-linked units is not received, the need for new financing will be increased. Although the years 2006 through 2010.Company currently has no specific plans or commitments for additional permanent financing, it believes that its internal cash generation, credit arrangements, and access to capital markets will provide sufficient resources to meet the Company’s capital requirements and retire its senior unsecured notes at maturity. To cover the difference in the amounts and timing of cash generation and cash requirements, the Company intends to use short-term borrowings under its current and future liquidity arrangements.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSPNM
PNM
The main focus of PNM’s current construction program, subject to board review or approval, is to upgrade generation resources, to upgrade and expand the electric and gas transmission and distribution systems and to purchase nuclear fuel. Projections for total capital requirements for 20062007 are $267.0$318.5 million, with projections forincluding construction expenditures for 2006 constituting $288.4 million of that total.$318.0 million. Total capital requirements for the years 2007 through 2011 are projected to be $978.7$1,670.9 million, andincluding construction expenditures are projected to be $1,109.4of $1,668.3 million. This includes $56.0 million for PNM’s expansion of Afton and $116.0 million for the years 2006 through 2010.SJGS environmental project to install low NOX combustion control and mercury reduction technologies, as well as equipment to increase SO2 controls. Also included in PNM’s capital requirements are $24.0 million for the Rio Puerco second phase loop, which will install approximately 15 miles of gas pipeline, and $38.0 million to add a 345,000 volt switching station to Rio Puerco. These estimates are under continuing review and subject to on-going adjustment. This projection includes $147.0 million for PNM’s expansion at Afton, as discussed above.
No amounts are outstanding under the PNM Facility, PNM’s $400.0 million revolving credit facility. In addition to $221.6 million of commercial paper outstanding as of May 1, 2007, PNM has $300.0 million in senior unsecured notes that will come due in September 2008.
In addition to its internal cash generation, PNM anticipates that it will be necessary to obtain additional capital in the form of debt refinancing, new debt, and/or equity infusions from PNMR in order to fund its capital requirements and the repayment of senior unsecured notes during the 2007-2011 period. Although PNM currently has no specific plans or commitments for additional permanent financing, it believes that its internal cash generation, credit arrangements, and access to capital markets will provide sufficient resources to meet PNM’s capital requirements and retire its senior unsecured notes at maturity. To cover the difference in the amounts and timing of cash generation and cash requirements, PNM intends to use short-term borrowings under its current and future liquidity arrangements.
TNMP
The main focus of TNMP’s current construction program, subject to board review or approval, is to upgrade and expand its electric transmission and distribution systems. Projections for total capital requirements for 20062007 are $42.5$46.8 million. Total capital requirements are projected to be $231.9$219.0 million for the years 20062007 through 2010.2011. These estimates are under continuing review and subject to on-going adjustment.
As previously reported, in 2005,After receipt of required regulatory approvals, including approval from the NMPRC approved a stipulation in connection with the acquisition of TNP which called for the integration of TNMP's New Mexico assets into PNM effective January 1, 2007. On August 8, 2006, PNMR, PNM, TNMP and TNP filed an application with FERC, requesting necessary approvals under the Federal Power Act for the transfer of TNMP'sTNMP’s New Mexico and Arizona assets were transferred to PNM effective January 1, 2007. In accordance with conditions imposed by the FERC on the earlier issuance of debt previously issued by TNMP, the applicantsCompany committed that an appropriate proportion of debt issued under those FERC conditions would be retired with cash contributed by PNMR. The application statedPNMR and that the retired TNMP debt would be equal to,result in, at a minimum, the ratio of TNMP New Mexico and Arizona property additions to Texas property additions funded by such debt. The applicantsCompany also committed that TNMP debt would be retired to the extent necessary or advisable to maintain a TNMP equity to debt capitalization ratio in excess of 30%, to maintain any required interest rate coverage ratios, and to maintain TNMP'sTNMP’s credit rating. No TNMP debt has yet been retired as a result of the asset transfer.
Liquidity
PNMR
At August 1, 2006, PNMR had $615.0In addition to $29.2 million of liquidity arrangements. The liquidity arrangements consistborrowings from PNMR as of $600.0May 1, 2007, TNMP has $248.9 million from an unsecured revolving credit facility, referred to as the PNMR Facility for purposes of this discussion, and $15.0 million in local lines of credit. As of August 1, 2006, there were no amounts borrowed under the PNMR Facility and no amounts borrowed under the local lines of credit. PNMR had $107.7$167.7 million of letters of credit outstanding.
At August 1, 2006, First Choice had up to $300.0 million of borrowing capacity under the PNMR Facility. Any borrowings made by First Choice under this sublimit are guaranteed by PNMR. At August 1, 2006, First Choice had no borrowings outstanding under the PNMR Facility; however, First Choice had $1.8 million of letters of credit outstanding, which reduces the available capacity under the PNMR Facility. TNMP is also a borrower under the PNMR Facility, see “TNMP” detail below.senior unsecured notes that become due in June 2008 and January 2009, respectively.
In addition to its internal cash generation, TNMP anticipates that it will be necessary to obtain additional capital in the form of debt refinancing, new debt, and/or equity infusions from PNMR in order to fund its capital requirements and the repayment of senior unsecured notes during the 2007-2011 period. Although TNMP currently has no specific plans or commitments for additional permanent financing, it believes that its internal cash generation, credit arrangements, and access to capital markets will provide sufficient resources to meet TNMP’s capital requirements and retire its senior unsecured notes at maturity. To cover the difference in the amounts and timing of cash generation and cash requirements, TNMP intends to use short-term borrowings under its current and future liquidity arrangements.
Liquidity
Borrowing Arrangements Between PNMR and Subsidiaries
In February 2006, the Board approved affiliate borrowing arrangements between PNMR and its subsidiaries that would authorize each subsidiary to borrow up to $50.0 million from PNMR.
Pursuant to a separate borrowing arrangement, PNM has issued a $20.0 million promissory note to PNMR. Initially this promissory note was payable on or before September 30, 2006. The agreement was extended prior to its expiration and is now payable on or before September 30, 2007. As of May 1, 2007 there were no outstanding borrowings on the promissory note.
PNMR
At May 1, 2007, PNMR, exclusive of PNM, had $615.0 million of liquidity arrangements. The liquidity arrangements consist of $600.0 million from the PNMR Facility that primarily expires in 2011 and $15.0 million in local lines of credit. As of May 1, 2007, PNMR had $250.5 borrowed under the PNMR Facility and no amounts borrowed under the local lines of credit. PNMR had $49.2 million of letters of credit outstanding.
PNMR has established a commercial paper program under which it may issue up to $400.0 million in commercial paper for up to 270 days. The commercial paper is unsecured and the proceeds are used for short-term cash management needs. The PNMR Facility serves as a backstop for the outstanding commercial paper. Operationally, this means the aggregate borrowings under the commercial paper program and the revolving credit facility for PNMR cannot exceed the maximum amount of the PNMR Facility. At AugustMay 1, 2006,2007, there were $126.3$264.6 million of borrowings outstanding under this program.
PNMR’s ability, if required, to access the capital markets at a reasonable cost and to provide for other capital needs is largely dependent upon its ability to earn a fair return on equity, its results of operations, its credit ratings, its ability to obtain required regulatory approvals and conditions in the financial and wholesale markets. Financing flexibility is enhanced by providing a high percentage of total capital requirements from internal sources and having the ability, if necessary, to issue long-term securities and to obtain short-term credit.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On April 16, 2007, Moody’s consideredchanged the rating of PNMR's credit outlook stable andto negative from stable. S&P considered PNMR’s outlook negative as of the date of this report. As of June 30, 2006,March 31, 2007, S&P and Moody’s rated PNMR’s senior unsecured notes issued in March 2005 (see “Financing Activities” below) as BBB- and Baa3, respectively. PNMR's commercial paper program, which is discussed above, has been rated P-3 by Moody's and A-3 by S&P. The Company is committed to maintaining or improving its investment grade ratings.
Investors are cautioned that a security rating is not a recommendation to buy, sell or hold securities, that it is subject to revision or withdrawal at any time by the assigning rating organization, and that each rating should be evaluated independently of any other rating.
PNM
At AugustMay 1, 2006,2007, PNM had $423.5$413.5 million of liquidity arrangements. The liquidity arrangements consist of $400.0 million from an unsecured revolving credit facility, referred to as the PNM Facility for purposes of this discussionthat primarily expires in 2011 and $23.5$13.5 million in local lines of credit. At AugustMay 1, 2006,2007, there were no amounts borrowed against the local lines of credit or the PNM Facility; however, $4.5$3.1 million of letters of credit were outstanding, which reduces the available capacity under the PNM Facility.
At August 1, 2006, PNM also had a $20.0 million borrowing arrangement with PNMR, which is not included in the $423.5 million of liquidity arrangements discussed above. At August 1, 2006 there were no amounts outstanding under this arrangement.
PNM has a commercial paper program under which PNM may issue up to $300.0 million in commercial paper for up to 365 days. The commercial paper is unsecured and the proceeds are used for short-term cash management needs. The PNM Facility serves as a backstopsupport for PNM's outstanding commercial paper. Operationally, this means the aggregate borrowings under the commercial paper program and the revolving credit facility for PNM cannot exceed the maximum amount of the PNM Facility. At AugustMay 1, 2006,2007, PNM had $98.2$221.6 million in commercial paper outstanding under this program.
PNM’s ability, if required, to access the capital markets at a reasonable cost and to provide for other capital needs is largely dependent upon its ability to earn a fair return on equity, its results of operations, its credit ratings, its ability to obtain required regulatory approvals and conditions in the financial and wholesale markets. Financing flexibility is enhanced by providing a high percentage of total capital requirements from internal sources and having the ability, if necessary, to issue long-term securities and to obtain short-term credit.
On April 16, 2007, Moody’s considered PNM'schanged the rating of PNM’s credit outlook stable andto negative from stable. S&P considered PNM’s outlook negative as of the date of this report. As of June 30, 2006,March 31, 2007, S&P rated PNM’s business position as six and its senior unsecured notes as BBB. As of June 30, 2006,March 31, 2007, Moody’s rated PNM’s senior unsecured notes as Baa2 and its preferred stock as Ba1. PNM's commercial paper program has been rated P-2 by Moody's and A-3 by S&P. The Company is committed to maintaining or improving its investment grade ratings.
TNMP
TNMP is a borrower and can issue notes of up to $100.0 million under the PNMR Facility. Any borrowings made by TNMP under this sublimit are not guaranteed by PNMR. At AugustMay 1, 2006,2007, TNMP had no outstanding borrowings under the PNMR Facility, but did have $2.4$1.9 million letters of credit outstanding, which reduces available capacity under the PNMR Facility.
TNMP’s ability, if required, to access the capital markets at a reasonable cost and to provide for other capital needs is largely dependent upon its ability to earn a fair return on equity, its results of operations, its credit ratings, its ability to obtain required regulatory approvals and conditions in the financial and wholesale markets. Financing flexibility is enhanced by providing a high percentage of total capital requirements from internal sources and having the ability, if necessary, to issue long-term securities and to obtain short-term credit.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On April 16, 2007, Moody’s considered TNMP'schanged the rating of TNMP’s credit outlook stable andto negative from stable. S&P considered TNMP’s outlook negative as of the date of this report. As of June 30, 2006,March 31, 2007, S&P rated TNMP’s senior unsecured notes at BBB. As of June 30, 2006,March 31, 2007, Moody’s rated TNMP’s senior unsecured notes at Baa3. The Company is committed to maintaining or improving its investment grade ratings.
Off-Balance Sheet Arrangements
The Company’s off-balance sheet arrangements primarily consist of PNM’s operating lease obligations for PVNGS Units 1 and 2, the EIP transmission line, and the entire output of Delta, a gas-fired generating plant. These arrangements help ensure PNM the availability of lower-cost generation needed to serve customers. In addition, PNMR’s investment in EnergyCo is accounted for under the equity method of accounting. See Note 15 for further discussion of this arrangement.
As of June 30, 2006,March 31, 2007, there have been no significant changes to the Company’s off-balance sheet arrangements reported in the 20052006 Annual Reports on Form 10-K/A (Amendment No. 2)1).
Commitments and Contractual Obligations
PNMR, PNM and TNMP have contractual obligations for long-term debt, operating leases, purchase obligations and certain other long-term liabilities that were summarized in a table of contractual obligations in the 20052006 Annual Reports on Form 10-K/A (Amendment No. 2)1). AsThe adoption of June 30, 2006, there have been no significant changesFIN 48, effective January 1, 2007, was not material to the Company’s contractual obligations. Under FIN 48, certain liabilities related to uncertain tax positions were recognized. See Note 15 for a discussion of these obligations from December 31, 2005 except forand timing of the Twin Oaks acquisition.payments.
Contingent Provisions of Certain Obligations
PNMR, PNM and TNMP have a number of debt obligations and other contractual commitments that contain contingent provisions. Some of these, if triggered, could affect the liquidity of the Company. PNMR, PNM or TNMP could be required to provide security, immediately pay outstanding obligations or be prevented from drawing on unused capacity under certain credit agreements if the contingent requirements were to be triggered. The most significant consequences resulting from these contingent requirements are detailed in the discussion below.
PNMR
The committed PNMR Facility contains a “ratings trigger,” for pricing purposes only. If PNMR is downgraded or upgraded by the ratings agencies, the result would be an increase or decrease in interest cost, respectively. In addition, the PNMR Facility contains a contingent requirement that requires PNMR to maintain a debt-to-capital ratio, inclusive of off-balance sheet debt, of less than 65%. If PNMR’s debt-to-capital ratio, inclusive of off-balance sheet debt, were to exceed 65%, it could be required to repay all borrowings under the PNMR Facility, be prevented from drawing on the unused capacity under the PNMR Facility, and be required to provide security for all outstanding letters of credit issued under the PNMR Facility.
PNMR’s term loan agreement for financing the acquisition of Twin Oaks in April 2006 (see Note 2 and Note 7) includes customary covenants, including requirements that PNMR maintain a debt-to-capital ratio, inclusive of off-balance sheet debt, of less than 65%. The term loan agreement includes customary events of default, including a cross default provision and a change in control provision. If an event of default occurs, the administrative agent may, or upon the request and direction of lenders holding more than 50% of the outstanding term loan shall, declare the unpaid principal and interest on the term loan to be due and payable. Such acceleration will occur automatically in the event of an insolvency or bankruptcy default.
PNM
PNM's standard purchase agreement for the procurement of gas for its retail customers contains a contingent requirement that could require PNM to provide security for its gas purchase obligations if the seller were to reasonably believe that PNM was unable to fulfill its payment obligations under the agreement.
The master agreement for the sale of electricity in the WSPP contains a contingent requirement that could require PNM to provide security if its debt were to fall below investment grade rating. The WSPP agreement also contains a contingent requirement, commonly called a material adverse change provision, which could require PNM to provide security if a material adverse change in its financial condition or operations were to occur.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The committed PNM Facility contains a “ratings trigger,” for pricing purposes only. If PNM is downgraded or upgraded by the ratings agencies, the result would be an increase or decrease in interest cost, respectively. In addition, the PNM Facility contains a contingent provision that requires PNM to maintain a debt-to-capital ratio, inclusive of off-balance sheet debt, of less than 65%. If PNM’s debt-to-capital ratio, inclusive of off-balance sheet debt, were to exceed 65%, PNM could be required to repay all borrowings under the PNM Facility, be prevented from drawing on the unused capacity under the PNM Facility, and be required to provide security for all outstanding letters of credit issued under the PNM Facility.
If a contingent requirement were to be triggered under the PNM Facility resulting in an acceleration of the outstanding loans under the PNM Facility, a cross-default provision in the PVNGS leases could occur if the accelerated amount is not paid. If a cross-default provision is triggered, the lessors have the ability to accelerate their rights under the leases, including acceleration of all future lease payments.
TNMP
TNMP’s borrowing availability under the committed PNMR Facility contains a “ratings trigger,” for pricing purposes only. If TNMP is downgraded or upgraded by the ratings agencies, the result would be an increase or decrease in interest cost, respectively. In addition, the PNMR Facility contains a contingent requirement that requires TNMP to maintain a debt-to-capital ratio, inclusive of off-balance sheet debt, of less than 65%. If TNMP’s debt-to-capital ratio, inclusive of off-balance sheet debt, were to exceed 65%, TNMP could be required to repay all borrowings under the PNMR Facility, be prevented from drawing on the unused capacity under the PNMR Facility, and be required to provide security for all outstanding letters of credit issued under the PNMR Facility.
Financing Activities
PNMR
On April 18, 2006,17, 2007, PNMR entered into a short-term loan agreement for temporary financing ofrepaid the Twin Oaks acquisition (see Note 2). Underbalance due on the term loan agreement, PNMR was permitted to borrow up to $480.0 million in a single draw on or after April 18, 2006, to financebridge loan. To facilitate the acquisition of Twin Oaks and related expenses. Term loans made under this agreement bear interest at a base rate (the greater of the prime rate in effect and the Federal Funds rate plus ½ of 1%) or an adjusted Eurodollar rate (equal to the British Bankers Association LIBOR rate plus an additional percentage based on PNMR’s then current long-term senior unsecured non-credit enhanced debt rating). On April 18, 2006,repayment, PNMR borrowed $480.0$250.5 million under the term loan agreement.its revolving credit facility. As of May 1, 2007, PNMR must repay the loan by April 17, 2007, unless accelerated in accordance with the terms of the agreement or prepaid in whole or in part upon the issuance of certain additional equity or debt. It is expected that the permanent financing for the $480.0and PNM had $48.8 million Twin Oaks purchase price will come from the issuance of debt and equity structured to maintain PNMR’s investment grade rating. On August 3, 2006, $20.0$188.8 million of the term loan was repaid.availability under their respective revolving credit facilities and local lines of credit, including reductions of availability due to outstanding letters of credit.
PNMR has a universal shelf registration statement filed with the SEC for the issuance of debt securities and equity securities, preferred stock, purchase contracts, purchase contract units and warrants. As of June 30, 2006,March 31, 2007, PNMR had approximately $400.0 million of remaining unissued securities under this universal registration statement.
In addition, in August 2006, PNMR filed a new shelf registration statement with the SEC. This new registration statement can be amended at any time to include additional securities of PNMR. As a result, this new shelf registration statement has entered into three fixed-to-floating interest rate swaps with an aggregate notional principal amount of $150.0 million. Under these swaps, PNMR receives a 4.40% fixed interest payment on the notional principal amount on a semi-annual basisunlimited availability, subject to certain restrictions and pays a floating rate equal to the six month LIBOR plus 58.15 basis points (0.5815%) on the notional amount through September 15, 2008. The initial floating rate was 1.91% and will be reset every six months. The floating rate was reset on March 15, 2006, to a weighted average rate of 5.65%. The swaps are accounted for as fair-value hedges with a liability position of approximately $6.0 million at June 30, 2006 with a corresponding reduction of long-term debt. There was no hedge ineffectiveness for the three and six months ended June 30, 2006 or June 30, 2005.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During October 2004, PNMR entered into two forward starting floating-to-fixed rate interest rate swaps with an aggregate notional principal amount of $100.0 million. These swaps became effective August 1, 2005 with a termination date of November 15, 2009. Under these swaps, PNMR received a floating rate equal to the three month LIBOR rate on the notional principal amount which paid a fixed interest rate of 3.975% on the notional principal amount on a quarterly basis. The initial floating rate was set on August 1, 2005, at 3.693% to be reset every three months. As of the last adjustment date, the weighted average interest rate was 5.149%. From November 2004 through June 30, 2005, the swaps were accounted for as a cash flow hedge against the PNMR Facility. Effective June 30, 2005, the swaps were de-designated as cash flow hedges. As such, changes in market valuations were marked-to-market and recorded as unamortized gains or losses in the appropriate period. Prior to the de-designation, the increase in fair market value of $0.4 million was recorded in accumulated other comprehensive income on PNMR’s Condensed Consolidated Balance Sheet at June 30, 2006 and December 31, 2005. For the three and six months ended June 30, 2006, $0.2 and $1.4 million, respectively, was recognized in other income on PNMR’s Condensed Consolidated Statement of Earnings. No comparable amount was recognized for the three and six months ended June 30, 2005. These two interest rate swaps were sold on May 19, 2006. The current amount recorded in other comprehensive income will be recognized in income over a 3 year period ending in November 2009.
In March 2005, PNMR issued 3,910,000 shares of its common stock at $26.76 per share. PNMR received net proceeds from this offering, after deducting underwriting discounts, commissions and expenses, of approximately $101.0 million. In March 2005, PNMR also completed a public offering of 4,945,000 equity-linked units at 6.75%, yielding net proceeds after deducting discounts, commissions and expenses of approximately $239.6 million. In October 2005, PNMR completed a private offering of 4,000,000 equity-linked units at 6.625%. PNMR received $100.0 million in proceeds from this transaction and there were no underwriting discounts or commissions.limitations.
Pursuant to the terms of the PNM Direct Plan, PNMR began offering new shares of PNMR common stock through the plan beginning June 1, 2006. PNMR may also waive the maximum investment limit upon request in individual cases pursuant to the terms of the plan. For the quarter ended June 30,In August 2006, 371,725 newPNMR entered into an equity distribution agreement to offer and sell up to 8 million shares of PNMR common stock werefrom time to time. The agreement provides that PNMR will not sell more shares than needed for the aggregate gross proceeds from such sales to reach $200.0 million. From January 1, 2007 through May 1, 2007, PNMR had sold a combined total of 26,798 shares of its common stock through the PNMR Direct Plan and the equity distribution agreement for totalnet proceeds of $9.3 million. From June 30, 2006 through August 1, 2006, 375,526 shares of common stock were issued at a weighted average price of $25.93. The total proceeds from the issuance were $9.7$0.8 million.
PNM
PNM has a universal shelf registration statement filed with the SEC for the issuance of debt securities, equity securities, preferred stock, purchase contracts, purchase contract units and warrants. As of June 30, 2006,March 31, 2007, PNM had approximately $200.0 million of remaining unissued securities registered under its shelf registration statement.
TNMP
Depending on TNMP’s future business strategy, capital needs and market conditions, TNMP could enter into additional long-term financings for the purpose of strengthening TNMP’s balance sheet, funding growth and reducing its cost of capital. The Company continues to evaluate its investment and debt retirement options to optimize its financing strategy and earnings potential. The amount of senior unsecured notes that may be issued is not limited by the senior unsecured notes indenture. However, debt-to-capital requirements in certain of TNMP’s financial instruments and regulatory agreements would ultimately limit the amount of additional debt TNMP would issue.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Structure
PNMR
PNMR’s capitalization, including current maturities of long-term debt, at June 30, 2006March 31, 2007 and December 31, 20052006 is shown below:
| | | June 30, | | December 31, | |
| | | 2006 | | 2005 | |
| | | | | | |
| Common Equity | | | 42.9 | % | | 42.3 | % |
| Preferred Stock | | | 0.4 | % | | 0.4 | % |
| Long-term Debt | | | 56.7 | % | | 57.3 | % |
| Total Capitalization | | | 100.0 | % | | 100.0 | % |
| | | March 31, | | December 31, | |
| | | 2007 | | 2006 | |
| | | | | | |
| Common equity | | | 48.9 | % | | 49.0 | % |
| Preferred stock | | | 0.3 | % | | 0.3 | % |
| Long-term debt | | | 50.8 | % | | 50.7 | % |
| Total capitalization | | | 100.0 | % | | 100.0 | % |
Total capitalization does not include as debt the present value of PNM’s operating lease obligations for PVNGS Units 1 and 2, EIP and the Delta operating lease, which was approximately $168.0 million as of June 30, 2006 and $170.9 million as of December 31, 2005.obligations.
PNM
PNM’s capitalization, including current maturities of long-term debt, at June 30, 2006March 31, 2007 and December 31, 20052006 is shown below:
| | | June 30, | | December 31, | |
| | | 2006 | | 2005 | |
| | | | | | |
| Common Equity | | | 51.0 | % | | 50.2 | % |
| Preferred Stock | | | 0.6 | % | | 0.6 | % |
| Long-term Debt | | | 48.4 | % | | 49.2 | % |
| Total Capitalization | | | 100.0 | % | | 100.0 | % |
| | | March 31, | | December 31, | |
| | | 2007 | | 2006 | |
| | | | | | |
| Common equity | | | 58.2 | % | | 54.4 | % |
| Preferred stock | | | 0.5 | % | | 0.5 | % |
| Long-term debt | | | 41.3 | % | | 45.1 | % |
| Total capitalization | | | 100.0 | % | | 100.0 | % |
TNMP
TNMP’s capitalization, including current maturities of long-term debt, at June 30, 2006March 31, 2007 and December 31, 20052006 is shown below:
| | | June 30, | | December 31, | |
| | | 2006 | | 2005 | |
| | | | | | |
| Common Equity | | | 54.7 | % | | 54.6 | % |
| Long-term Debt | | | 45.3 | % | | 45.4 | % |
| Total Capitalization | | | 100.0 | % | | 100.0 | % |
| | | March 31, | | December 31, | |
| | | 2007 | | 2006 | |
| | | | | | |
| Common equity | | | 45.6 | % | | 55.0 | % |
| Long-term debt | | | 54.4 | % | | 45.0 | % |
| Total capitalization | | | 100.0 | % | | 100.0 | % |
The tables for PNM and TNMP above reflect the transfer of TNMP’s New Mexico operations as of January 1, 2007, which decreased the common equity of TNMP and increased the common equity of PNM. This transfer had no impact on PNMR. See Note 14.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OTHER ISSUES FACING THE COMPANY
See Notes 9 and 10 for a discussion of commitments and contingencies and rate and regulatory matters facing the Company.
NEW ACCOUNTING STANDARDS
There have been no new accounting standards issued that materially affected PNMR, PNM or TNMP this period; however, see Note 615 for discussion of SFAS 123R.FIN 48 implementation.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Statements made in this filing that relate to future events or PNMR’s, PNM’s or TNMP’s expectations, projections, estimates, intentions, goals, targets and strategies, are made pursuant to the Private Securities Litigation Reform Act of 1995. Readers are cautioned that all forward-looking statements are based upon current expectations and estimates and PNMR, PNM and TNMP assume no obligation to update this information.
Because actual results may differ materially from those expressed or implied by these forward-looking statements, PNMR, PNM and TNMP caution readers not to place undue reliance on these statements. PNMR’s, PNM’s and TNMP’s business, financial condition, cash flow and operating results are influenced by many factors, which are often beyond their control, that can cause actual results to differ from those expressed or implied by the forward-looking statements. These factors include:
| · | The risk that EnergyCo is unable to identify and implement profitable acquisitions or that the contribution of assets to EnergyCo by PNMR may not be implemented as expected, |
| · | The potential unavailability of cash from PNMR’s subsidiaries due to regulatory, statutory and contractual restrictions, |
| · | The outcome of any appeals of the PUCT order in the stranded cost true-up proceeding, |
| · | The ability of First Choice to attract and retain customers, |
| · | Changes in ERCOT protocols, |
| · | Changes in the cost of power acquired by First Choice, |
| · | Collections experience, |
| · | Insurance coverage available for claims made in litigation, |
| · | Fluctuations in interest rates, |
· | The risk that the Twin Oaks power plant will not be successfully integrated into PNMR, |
| · | Conditions inaffecting PNMR’s ability to access the financial markets, affecting PNMR’s permanent financing for the Twin Oaks power plant acquisition, |
| · | Weather, including impacts on PNMR and its subsidiaries of the hurricanes in the Gulf Coast region, |
| · | Availability of fuel supplies, |
| · | The effectiveness of risk management and commodity risk transactions, |
| · | Seasonality and other changes in supply and demand in the market for electric power, |
��· | Variability of wholesale power prices and natural gas prices, |
| · | Volatility and liquidity in the wholesale power markets and the natural gas markets, |
| · | Changes in the competitive environment in the electric and natural gas industries, |
| · | The performance of generating units, including PVNGS, SJGS and Four Corners, and transmission systems, |
· | The market for electrical generating equipment, |
| · | The ability to secure long-term power sales, |
| · | The risk that the Company and its subsidiaries may have to commit to substantial capital investments and additional operating costs to comply with new environmental control requirements including possible future requirements to address concerns about global climate change, |
| · | The risks associated with completion of generation, including pollution control equipment at SJGS and the expansion of the Afton Generating Station, transmission, distribution and other projects, including construction delays and unanticipated cost overruns, |
| · | State and federal regulatory and legislative decisions and actions, |
| · | The outcome of legal proceedings, |
| · | Changes in applicable accounting principles, and |
| · | The performance of state, regional and national economies. |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Any material changes to risk factors occurring after the filing of PNMR’s, PNM’s or TNMP’s 20052006 Annual Report on Form 10-K/A (Amendment No. 2)1) are disclosed in Item 1A, Risk Factors, in Part II of this Form 10-Q.10-Q/A.
For information about the risks associated with the use of derivative financial instruments see Item 3. “Quantitative and Qualitative DisclosureDisclosures About Market Risk.”
SECURITIES ACT DISCLAIMER
Certain securities, including commercial paper described in this report, have not been registered under the Securities Act of 1933, as amended, or any state securities laws and may not be reoffered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act of 1933 and applicable state securities laws. This Form 10-Q10-Q/A does not constitute an offer to sell or the solicitation of an offer to buy any securities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSUREDISCLOSURES ABOUT MARKET RISK
The Company uses derivative financial instruments to manage risk as it relates to changes in natural gas and electric prices, changes in interest rates and, historically, adverse market changes for investments held by the Company’s various trusts. The Company also uses certain derivative instruments for wholesale power marketing and natural gas transactions in order to take advantage of favorable price movements and market timing activities in these energypower markets. The following additional information is provided.
PNMR controls the scope of its various forms of risk through a comprehensive set of policies and procedures and oversight by senior level management and the PNMR Board. The Board’s Finance Committee sets the risk limit parameters. The RMC, comprised of corporate and business segment officers and other managers, oversees all of the activities, which include commodity price, credit, equity, interest rate and business risks. The RMC has oversight for the ongoing evaluation of the adequacy of the risk control organization and policies. PNMR has a risk control organization, headed by an Executive Director of Financial Risk Management, which is assigned responsibility for establishing and enforcing the policies, procedures and limits and evaluating the risks inherent in proposed transactions, on an enterprise-wide basis.
The RMC’s responsibilities specifically include: establishment of a general policy regarding risk exposure levels and activities in each of the business segments; authority to approve the types of instruments traded; authority to establish a general policy regarding counterparty exposure and limits; authorization and delegation of transaction limits; review and approval of controls and procedures; review and approval of models and assumptions used to calculate mark-to-market and risk exposure; authority to approve and open brokerage and counterparty accounts; review of hedging and risk activities; and quarterly reporting to the Finance Committee and the PNMR Board on these activities.
The RMC also proposes risk limits, such as VaR and EaR, to the Finance Committee. The Finance Committee ultimately sets the Company's risk limits.
It is the responsibility of each business segment to create its own control procedures and policies within the parameters established by the Finance Committee. The RMC reviews and approves these policies, which are created with the assistance of the Corporate Controller, Director of Internal Audit and the Executive Director of Financial Risk Management. Each business segment’s policies address the following controls: authorized risk exposure limits; authorized instruments and markets; authorized personnel; policies on segregation of duties; policies on mark-to-market accounting; responsibilities for deal capture; confirmation procedures; responsibilities for reporting results; statement on the role of derivative transactions; and limits on individual transaction size (nominal value).
To the extent an open position exists, fluctuating commodity prices can impact financial results and financial position, either favorably or unfavorably. As a result, the Company cannot predict with certainty the impact that its risk management decisions may have on its businesses, operating results or financial position.
Accounting for Derivatives
Under the derivative accounting rules and the related accounting rules for energy contracts, the Company accounts for its various financial derivative instruments for the purchase and sale of energy differently based on the contract terms. Energy contracts that meet the definition of a derivative under SFAS 133 and do not qualify for a normal sales and purchase or sale designationexceptions are recorded on the balance sheet at fair market value at each period end. The changes in fair market value are recognized in earnings unless transactions are designated as cash flow hedges and specific hedge accounting criteria are met. Should an energy transaction qualify as a cash flow hedge under SFAS 133, fair market value changes from periodyear to periodyear are recognized on the balance sheet with a corresponding charge to other comprehensive income.income to the extent effective. Gains or losses are reclassified from accumulated other comprehensive incomerecognized when the hedged transaction settles and impactsaffects earnings. Derivatives that meet the normal sales and purchases exceptions within SFAS 133 are not marked to market but rather recorded in results of operations when the underlying transaction settles.
Commodity Risk
Marketing and procurement of energy often involve market risks associated with managing energy commodities and establishing open positions in the energy markets, primarily on a short-term basis. These risks fall into three different categories: price and volume volatility, credit risk of counterparties and adequacy of the control environment. The Company’s operations subject to market risk routinely enter into various derivative instruments such as forward contracts, option agreements and price basis swap agreements to hedge price and volume risk on their purchase and sale commitments, fuel requirements and to enhance returns and minimize the risk of market fluctuations.
PNM’s wholesale operations, including long-term contracts and short-term sales, are managed primarily through a net asset-backed marketing strategy, whereby PNM’s aggregate net open forward contract position is covered by its forecasted excess generation capabilities. PNM iswould be exposed to market risk if its generation capabilities were to be disrupted or if its retail load requirements were to be greater than anticipated. If PNM were required to cover all or a portion of its net open contract position as a result of the aforementioned unexpected situations, it would have to meet its commitments through market purchases. As such, PNM is exposed to risks related to fluctuations in the market price of energy that could impact the sales price or purchase price of energy. In addition, the wholesale operations utilize discrete market-based transactions to take advantage of opportunities that present themselves in the ordinary course of business. These positions are subject to market risk that is not mitigated by PNM’s generation capabilities.
First Choice is responsible for energy supply related to the sale of electricity to retail customers in Texas. TECA contains no provisions for the specific recovery of fuel and purchased power costs. First Choice operates within a competitive marketplace; however, to the extent that it serves former TNMP customers under the provisions of the price-to-beat service, it has the ability to file with the PUCT to change the price-to-beat fuel factor twice each year, in the event of significant changes in natural gas prices. The rates charged to new customers acquired by First Choice outside of TNMP’s service territory are not regulated by the PUCT, but are negotiated with each customer. As a result, changes in fuel and purchased power costs will affect First Choice’s operating results. First Choice is exposed to market risk to the extent that its retail rates or cost of supply fluctuates with market prices. Additionally, fluctuations in First Choice retail load requirements greater than anticipated may subject First Choice to market risk. First Choice’s basic strategy is to minimize its exposure to fluctuations in market energy prices by matching fixed price sales contracts with fixed price supply. In addition, First Choice utilizes discrete market-based transactions to take advantage of opportunities that present themselves in the ordinary course of business. These positions are subject to market risk that is not mitigated by First Choice's retail operations.
Additionally, in connection with the issuance of a final stranded cost true-up order for TNMP, the PUCT will adjust First Choice’s fuel factor portion of the price-to-beat downward if natural gas prices are below the prices embedded in the then-current rates.
The acquisition of TNP occurred on June 6, 2005. Therefore, in the following tables First Choice activity is included in the PNMR activity from June 6, 2005 only.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following table shows the net fair value of mark-to-market energy contracts for First Choice and PNM Wholesale included in PNMR’s Condensed Consolidated Balance Sheet:
| | | June 30, | | December 31, | | | March 31, | | December 31, | |
| | | 2006 | | 2005 | | | 2007 | | 2006 | |
| | | (In thousands) | | | (In thousands) | |
| Mark-to-Market Energy Contracts: | | | | | | | | |
| Mark-to-market energy contracts: | | | | | | |
| Current asset | | $ | 38,949 | | $ | 21,884 | | | $ | 39,913 | | $ | 43,680 | |
| Long-term asset | | | 4,760 | | | 21,265 | | | | 19,697 | | | 10,982 | |
| Total mark-to-market assets | | | 43,709 | | | 43,149 | | | | 59,610 | | | 54,662 | |
| Current liability | | | (36,784 | ) | | (17,777 | ) | | | (39,929 | ) | | (42,020 | ) |
| Long-term liability | | | (4,261 | ) | | (20,844 | ) | | | (12,420 | ) | | (9,176 | ) |
| Total mark-to-market liabilities | | | (41,045 | ) | | (38,621 | ) | | | (52,349 | ) | | (51,196 | ) |
| | | | | | | | | | | | | | | |
| Net fair value of mark-to-market energy contracts | | $ | 2,664 | | $ | 4,528 | | | $ | 7,261 | | $ | 3,466 | |
The mark-to-market energy transactions represent net assets at June 30, 2006March 31, 2007 and December 31, 20052006 after netting all applicable open purchase and sale contracts.
The market prices used to value PNMR mark-to-market energy contracts are based on available market data, including index prices and broker quotations. These valuations can be limited by the availability of market data. When market data is unavailable or lacks sufficient granularity to develop reliable pricing, the Company utilizes internally developed pricing data. As a result, the Company records liquidity reserves on these contracts for the unrealized market gains and losses in this illiquid period. Generally, the liquid period on which the Company’s valuations are based is up to 18 months for option type contracts and from three to five years for gas and electric commodities. The Company regularly assesses the validity and availability of pricing data for the illiquid period of its derivative transactions and adjusts its liquidity reserves, accordingly.
The following table details the changes in the net asset or liability balance sheet position from one period to the next for mark to market energy transactions for the operations of First Choice and PNM Wholesale:
| | | Six Months Ended | | | Three Months Ended | |
| | | June 30, | | | March 31, | |
| | | 2006 | | 2005 | | | 2007 | | 2006 | |
| | | (In thousands) | | | (In thousands) | |
| Sources of Fair Value Gain/(Loss): | | | | | | |
| Fair value at beginning of period | | $ | 4,528 | | $ | 2,073 | | |
| | | | | | | | | |
| Sources of fair value gain (Loss): | | | | | | | | |
| Fair value at beginning of year | | | $ | 3,466 | | $ | 3,619 | |
| Amount realized on contracts delivered during period | | | (4,108 | ) | | (254 | ) | | | 499 | | | 1,202 | |
| | | | | | | | | |
| Changes in fair value | | | 2,244 | | | 1,066 | | | | 3,296 | | | 1,501 | |
| | | | | | | | | |
| Net fair value at end of period | | $ | 2,664 | | $ | 2,885 | | | $ | 7,261 | | $ | 6,322 | |
| | | | | | | | | | | | | | | |
| Net change recorded as mark-to-market | | $ | (1,864 | ) | $ | 812 | | | $ | 3,795 | | $ | 2,703 | |
The net change in fair value on PNMR’s commodity derivative instruments designated as hedging instruments is summarized as follows:
| | | Three Months Ended | |
| | | March 31, | |
| | | 2007 | | 2006 | |
Type of Derivative | | Hedge Instruments | |
| | | (In thousands) | |
| Change in fair value of energy contracts | | $ | (35,718 | ) | $ | (7,541 | ) |
| Change in fair value of gas fixed for float swaps | | | 8,118 | | | (19,740 | ) |
| Change in the fair value of options | | | 109 | | | 1,008 | |
| Net change in fair value | | $ | (27,491 | ) | $ | (26,273 | ) |
The following table provides the maturity of the net assets/assets (liabilities) of PNMR, giving an indication of when these mark-to-market amounts will settle and generate/generate (use) cash. The following values were determined using broker quotes:
Fair Value at June 30, 2006March 31, 2007
Maturities | Maturities | Maturities |
Less than | | | | | | | | | | | | |
1 year | | 1-3 Years | | 4+ Years | | Total | | 1-3 Years | | 4+ Years | | Total |
| | | (In thousands) | | | | (In thousands) | | |
| $2,165 | | $272 | | $227 | | $2,664 | |
| $(16) | | | $4,113 | | $3,164 | | $7,261 |
As of June 30, 2006,March 31, 2007, a decrease in market pricing of PNMR’s mark-to-market energy transactions by 10% would have resulted in a decrease in net earnings of less than 1%. Conversely, an increase in market pricing of these transactions by 10% would have resulted in an increase in net earnings of less than 1%.
The following table shows the net fair value of mark-to-market energy contracts for PNM in PNM’s Condensed Consolidated Balance Sheet:
| | | March 31, | | December 31, | |
| | | 2007 | | 2006 | |
| | | (In thousands) | |
| Mark-to-market energy contracts: | | | | | |
| Current asset | | $ | 18,117 | | $ | 21,310 | |
| Long-term asset | | | 14,969 | | | 10,592 | |
| Total mark-to-market assets | | | 33,086 | | | 31,902 | |
| Current liability | | | (18,494 | ) | | (20,623 | ) |
| Long-term liability | | | (8,115 | ) | | (8,694 | ) |
| Total mark-to-market liabilities | | | (26,609 | ) | | (29,317 | ) |
| | | | | | | | |
| Net fair value of mark-to-market energy contracts | | $ | 6,477 | | $ | 2,585 | |
The mark-to-market energy transactions represent net assets at March 31, 2007 and December 31, 2006 after netting all applicable open purchase and sale contracts.
The market prices used to value PNM mark-to-market energy contracts are based on available market data, including index prices and broker quotations. These valuations can be limited by the availability of market data. When market data is unavailable or lacks sufficient granularity to develop reliable pricing, the Company utilizes internally developed pricing data. As a result, the Company records liquidity reserves on these contracts for the unrealized market gains and losses in this illiquid period. Generally, the liquid period on which the Company’s valuations are based is up to 18 months for option type contracts and from three to five years for gas and electric commodities. The Company regularly assesses the validity and availability of pricing data for the illiquid period of its derivative transactions and adjusts its liquidity reserves, accordingly.
The following table details the changes in the net asset or liability balance sheet position from one period to the next for mark-to-market energy transactions for the operations of PNM:
| | | Three Months Ended | |
| | | March 31, | |
| | | 2007 | | 2006 | |
| | | (In thousands) | |
| Sources of fair value gain (Loss): | | | | | |
| Fair value at beginning of year | | $ | 2,585 | | $ | 2,258 | |
| Amount realized on contracts delivered during period | | | (1,452 | ) | | 572 | |
| Changes in fair value | | | 5,344 | | | (68 | ) |
| Net fair value at end of period | | $ | 6,477 | | $ | 2,762 | |
| | | | | | | | |
| Net change recorded as mark-to-market | | $ | 3,892 | | $ | 504 | |
The net change in fair value on PNM’s commodity derivative instruments designated as hedging instruments is summarized as follows:
| | | Three Months Ended | |
| | | March 31, | |
| | | 2007 | | 2006 | |
Type of Derivative | | Hedge Instruments | |
| | | (In thousands) | |
| Change in fair value of energy contracts | | $ | (2,905 | ) | $ | (7,541 | ) |
| Change in fair value of gas fixed-for-float swaps | | | 6,991 | | | (14,763 | ) |
| Change in the fair value of options | | | - | | | - | |
| Net change in fair value | | $ | 4,086 | | $ | (22,304 | ) |
The following table provides the maturity of the net assets (liabilities) of PNM, giving an indication of when these mark-to-market amounts will settle and generate (use) cash. The following values were determined using broker quotes:
Risk Management ActivitiesFair Value at March 31, 2007
Maturities |
Less than | | | | | | |
1 year | | 1-3 Years | | 4+ Years | | Total |
| | | (In thousands) | | |
| $(377) | | $3,690 | | $3,164 | | $6,477 |
As of March 31, 2007, a decrease in market pricing of PNM’s mark-to-market energy transactions by 10% would have resulted in a decrease in net earnings of less than 1%. Conversely, an increase in market pricing of these transactions by 10% would have resulted in an increase in net earnings of less than 1%.
Risk Management Activities
PNM Wholesale Operations measuremeasures the market risk of its long-term contracts and wholesale activities using a VaR calculation to maintain the Company’s total exposure within management-prescribed limits. The Company’s VaR calculation reports the possible market loss for the respective transactions. This calculation is based on the transaction’s fair market value on the reporting date. Accordingly, the VaR calculation is not a measure of the potential accounting mark-to-market loss. The Company utilizes the Monte Carlo simulation model of VaR. The Monte Carlo model utilizes a random generated simulation based on historical volatility to generate portfolio values. VaR models are relatively sophisticated. The quantitative risk information, however, is limited by the parameters established in creating the model. The instruments being evaluated may trigger a potential loss in excess of calculated amounts if changes in commodity prices exceed the confidence level of the model used. The VaR methodology employs the following critical parameters: volatility estimates, market values of open positions, appropriate market-oriented holding periods and seasonally adjusted correlation estimates. The Company’s VaR calculation considers the Company’s forward position for the next eighteen months. The Company uses a holding period of three days as the estimate of the length of time that will be needed to liquidate the positions. The volatility and the correlation estimates measure the impact of adverse price movements both at an individual position level as well as at the total portfolio level. The two-tailed confidence level established is 99%. For PNM's wholesale operations,example, if VaR is calculated at $10.0 million, it is estimated that in 990 out of 1000 market simulations the CompanyCompany’s pre-tax gain or loss in liquidating the portfolio would not exceed $10.0 million in the three days that it would take to liquidate the portfolio.
PNM Wholesale measures VaR for all transactions that are not directly asset related and have economic risk. The VaR limit established for these transactions is $5.0 million. For the three months ended
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
June 30, 2006, March 31, 2007, the average VaR amount for these transactions was $0.9$2.0 million, with high and low VaR amounts for the period of $1.9$3.5 million and $0.5$0.8 million, respectively. The VaR amount for these transactions at June 30, 2006March 31, 2007 was $1.6$3.5 million. For the three months ended June 30, 2005,March 31, 2006, the average VaR amount for these transactions was $0.3$1.8 million, with high and low VaR amounts for the period of $1.0$3.7 million and $0.1$0.8 million, respectively. The total VaR amount for these transactions at June 30, 2005March 31, 2006 was $1.0$0.9 million.
First Choice measures the market risk of its activities using an EaR calculation to maintain the Company’sPNMR’s total exposure within management-prescribed limits. Because of its obligation to serve customers, First Choice must take its obligations to settlement. Accordingly, a measure that evaluates the settlement of First Choice’s positions against earnings provides management with a useful tool to manage its portfolio. First Choice’s EaR calculation reports the possible losses against forecasted earnings for its retail load and supply portfolio. This calculation is based on First Choice’s forecasted earnings on the reporting date. The Company utilizes a Delta/Gamma approximation model of EaR. The Delta/Gamma model calculates a price change within a given time frame, correlation and volatility parameters for each price curve utilized in valuing the mark-to-market of each position to develop a change in value for any position. This process is repeated multiple times to calculate a standard deviation, which is used to arrive at an EaR amount based on a certain confidence level. First Choice utilizes the one-tailed confidence level at 95%. EaR models are relatively sophisticated. The quantitative risk information, however, is limited by the parameters established in creating the model. The instruments being evaluated may trigger a potential loss in excess of calculated amounts if changes in commodity prices exceed the confidence level of the model used. The EaR calculation considers the Company’s forward position for the next twelve months and holds each position to settlement. The volatility and the correlation estimates measure the impact of adverse price movements both at an individual position level as well as at the total portfolio level. For example, if EaR is calculated at $10.0 million, it is estimated that in 950 out of 1000 market scenarios calculated by the model the losses against the Company’s forecasted earnings over the next twelve months would not exceed $10.0 million.
The EaR limit established for First Choice’s transactions is $25.0 million. For the sixthree months ended June 30, 2006,March 31, 2007, the average EaR amount was $9.1$15.5 million, with high and low EaR amounts for the period of $11.9$20.5 million and $6.8$9.3 million, respectively. The total EaR amount at June 30, 2006March 31, 2007 was $9.8$16.3 million.
In addition, the Company adoptedutilizes two new VaR measures to monitor themanage its market based mitigation strategies of First Choice management.risk. The first VaR limit is based on the same total retail load and supply portfolio as the EaR measure; however, the VaR measure is intended to capture the effects of changes in market prices over a 10 day holding period. This VaR limit was establishedholding period is considered appropriate given the nature of First Choice’s supply portfolio and the constraints faced by First Choice in the ERCOT market. The calculation utilizes the same Monte Carlo simulation approach described above at $7.5 million.a 95% confidence level. The VaR amount for these transactions was $2.75$4.9 million at June 30, 2006.March 31, 2007. For the sixthree months ended June 30, 2006,March 31, 2007, the high, low and average mark-to-market VaR amounts were $4.3$6.2 million, $2.1 million and $3.1$4.5 million, respectively.
The second VaR limit was established for First Choice transactions that are subject to mark-to-market accounting as defined by SFAS 133 and SFAS 149“Amendment of Statement 133 on Derivative Instruments and HedgingActivities.”. The VaR limit established for these transactions is $3.0 million.This calculation captures the effect of changes in market prices over a three-day holding period and utilizes the same Monte Carlo simulation approach described above at a 95% confidence level. The VaR amount for these transactions was $0.9$1.9 million at June 30, 2006.March 31, 2007. For the sixthree months ended June 30, 2006,March 31, 2007, the high, low and average mark-to-market VaR amounts were $1.2$2.4 million, $0.3$0.7 million and $0.7$1.7 million, respectively.
The Company's risk measures are regularly monitored by the Company's RMC. The RMC has put in place procedures to ensure that increases in risk measures that exceed the prescribed limits are reviewed and, if deemed necessary, acted upon to reduce exposures. The VaR and EaR limits represent an estimate of the potential gains or losses that could be recognized on the Company’s portfolios, subject to market risk, given current volatility in the market, and are not necessarily indicative of actual results that may occur, since actual future gains and losses will differ from those estimated. Actual gains and losses may differ due to actual fluctuations in market prices, operating exposures, and the timing thereof, as well as changes to the underlying portfolios during the year.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKCredit Risk
Credit Risk
The Company uses derivative financial instruments to manage risk as it relates to changes in natural gas and electric prices, changes in interest rates and, historically, adverse market changes for investments held by the Company’s various trusts. The Company also uses certain derivative instruments for wholesale power marketing transactions in order to take advantage of favorable price movements and market timing activities in the wholesale power markets. The Company’s use of derivatives and the resulting credit risk is regularly monitored by the RMC.
In addition, counterparties expose the Company to credit losses in the event of non-performance or non-payment. The Company manages credit on a consolidated basis and uses a credit management process to assess and monitor the financial conditions of counterparties. Credit exposure is regularly monitored by the RMC. The RMC has put procedures in place to ensure that increases in credit risk measures that exceed the prescribed limits are reviewed and, if deemed necessary, acted upon to reduce exposures.
PNM Wholesale
The following table provides information related to PNM Wholesale’s credit exposure as of June 30, 2006. The Company does not hold any credit collateral as of June 30, 2006.March 31, 2007. The table further delineates that exposure by the credit worthiness (credit rating) of the counterparties and provides guidance as to the concentration of credit risk to individual counterparties PNM Wholesale may have. Also provided is an indication of the maturity of a Company’s credit risk by credit ratings of the counterparties.
PNM Wholesale
Schedule of Credit Risk Exposure
June 30, 2006March 31, 2007
| | | | | | | Net | | | | | | | Net | |
| | | (b) | | Number | | Exposure | | | (b) | | Number | | Exposure | |
| | | Net | | of | | of | | | Net | | of | | of | |
| | | Credit | | Counter | | Counter- | | | Credit | | Counter | | Counter- | |
| | | Risk | | -parties | | parties | | | Risk | | -parties | | parties | |
Rating (a) | | Exposure | | >10% | | >10% | | | Exposure | | >10% | | >10% | |
| | | (Dollars in thousands) | | | (Dollars in thousands) | |
| | | | | | | | | | | | | | | |
| Investment grade | | $ | 96,865 | | | 4 | | $ | 64,619 | | | $ | 82,300 | | | 2 | | $ | 48,719 | |
| Non-investment grade | | | 901 | | | - | | | - | | |
| Internal ratings | | | | | | | | | | | | | | | | | | | | |
| Investment grade | | | 315 | | | - | | | - | | | | 91 | | | - | | | - | |
| Non-investment grade | | | 6,308 | | | - | | | - | | | | 537 | | | - | | | - | |
| Total | | $ | 104,389 | | | | | $ | 64,619 | | | $ | 82,928 | | | | | $ | 48,719 | |
| (a) | The Rating included in “Investment Grade” is for counterparties with a minimum S&P rating of BBB- or Moody's rating of Baa3. If the counterparty has provided a guarantee by a higher rated entity (e.g., its parent), determination is based on the rating of its guarantor. The category “Internal Ratings - Investment Grade” includes those counterparties that are internally rated as investment grade in accordance with the guidelines established in the Company’s credit policy. |
| (b) | The Net Credit Risk Exposure is the net credit exposure to PNM from PNM Wholesale operations. This includes long-term contracts, forward sales and short-term sales. The exposure captures the net amounts due to PNM from receivables/payables for realized transactions, delivered and unbilled revenues, and mark-to-market gains/losses (pursuant to contract terms). Exposures are offset according to legally enforceable netting arrangements and reduced by credit collateral. Credit collateral includes cash deposits, letters of credit and performance bonds received from counterparties. Amounts are presented before those reserves that are determined on a portfolio basis. |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKThe following table provides an indication of the maturity of credit risk by credit ratings of the counterparties.
PNM Wholesale
Maturity of Credit Risk Exposure
June 30, 2006March 31, 2007
| | | | | | | | | Total | | | | | | | Greater | | Total | |
| | | Less than | | | | | | Net | | | Less than | | | | than | | Net | |
Rating | | 2 Years | | 2-5 Years | | >5 Years | | Exposure | | | 2 Years | | 2-5 Years | | 5 Years | | Exposure | |
| | | | | (In thousands) | | | | | | | (In thousands) | | | |
| | | | | | | | | | | | | | | | | | | |
| Investment grade | | $ | 90,770 | | $ | 5,455 | | $ | 639 | | $ | 96,864 | | | $ | 61,232 | | $ | 17,747 | | $ | 3,321 | | $ | 82,300 | |
| Non-investment grade | | | 901 | | | - | | | - | | | 901 | | |
| Internal ratings | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment grade | | | 315 | | | - | | | - | | | 315 | | | | 91 | | | - | | | - | | | 91 | |
| Non-investment grade | | | 6,308 | | | - | | | - | | | 6,308 | | | | 537 | | | - | | | - | | | 537 | |
| Total | | $ | 98,294 | | $ | 5,455 | | $ | 639 | | $ | 104,388 | | | $ | 61,860 | | $ | 17,747 | | $ | 3,321 | | $ | 82,928 | |
The Company provides for losses due to market and credit risk. Credit risk for PNM Wholesale's largest counterparty as of June 30, 2006March 31, 2007 and December 31, 20052006 was $27.4$34.6 million and $20.5$29.7 million, respectively.
First Choice
First Choice is subject to credit risk from non-performance by its supply counterparties to the extent these contracts have a mark-to-market value in the favor of First Choice. The Constellation power supply agreement established FCPSP, a bankruptcy remote special purpose entity, to hold all of First Choice's customer contracts and wholesale power and gas contracts. Constellation received a lien on accounts receivable, customer contracts, cash, and the equity of FCPSP as security for FCPSP’s performance under the power supply agreement. The provisions of this agreement severely limit FCPSP’s ability to secure power from alternate sources. Additionally, the terms of the security agreement do not require Constellation to post collateral for any mark-to-market balances in FCPSP’s favor. At June 30, 2006,March 31, 2007, the supply contracted with Constellation was in ana unfavorable mark-to-market position for FCPSP. When netted against amounts owed to Constellation, this exposure was approximately $68.3$30.1 million. The Constellation power supply agreement collateral provisions will continue as long as FCPSP is purchasing power from Constellation to serve retail customers. The existing pricing mechanism under the Constellation power supply agreement expiresexpired on December 31, 2006, and the obligations of Constellation to act as a qualified scheduling entity continue until the expiration of the agreement on December 31, 2007. First Choice's credit exposure to other counterparties at June 30, 2006 and DecemberMarch 31, 20052007 was $11.7 million and $14.6$1.1 million and the tenor of these exposures was less than two years. extends through 2010.
First Choice’s retail bad debt expense for the three months ended June 30, 2006March 31, 2007 was $2.4$3.9 million. First Choice expects bad debt expense to decrease in subsequent periods as the impacts from the Gulf Coast hurricanes, including waiver of customer deposits for hurricane victims, diminish. In addition, aA reduction in bad debt expense from retail customers is expected due to reduced customer receivables resulting partially from effective disconnect policies, increased collection activity and refined consumer credit and securitization policies.
Interest Rate Risk
PNMR’s senior notesdebt issued as part of the equity-linked units sold in March and October 2005 will be remarketed in 2008. If the remarketing is successful, the interest rate on the senior notesdebt may change to a rate selected by the remarketing agent, and the maturity of the senior notesdebt may be extended to a date selected by PNMR. If the remarketing of the senior notesdebt is not successful, the maturity and interest rate of the senior notesdebt will not change and holders of the equity-linked units will have the option of putting their senior notesdebt to PNMR to satisfy their obligations under the purchase contracts. PNMR expects that the remarketing of the senior notesdebt will be successful.
PNM has long-term debt which subjects it to the risk of loss associated with movements in market interest rates. The majority of PNM’s long-term debt is fixed-rate debt, and therefore, does not expose PNM’s earnings to a major risk of loss due to adverse changes in market interest rates. However, the fair value of all long-term debt instruments would increase by approximately 4.0%1.8%, or $39.6 million, if interest rates were to decline by 50 basis
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
points from their levels at June 30, 2006. At June 30, 2006, the fair value of PNM's long-term debt was approximately $987.0 billion as compared to a book value of $985.9 million.March 31, 2007. In general, an increase in fair value would impact earnings and cash flows to the extent not recoverable in rates if PNM were to re-acquirereacquire all or a portion of its debt instruments in the open market prior to their maturity.
PNM’s $146.0 million, 2.1% pollution control bonds with a maturity date of April 1, 2033, were required to be remarketed in April 2006. Following the remarketing, the interest rate on the pollution control bonds was changed to a fixed rate of 4.875% annually.
During the three and six months ended June 30, 2006,March 31, 2007, PNM did not contributecontributed cash of approximately $1.5 million to fund other post retirement benefits. PNM also contributed cash of approximately $4.9 million to the PVNGS nuclear decommissioning pension and other postretirement benefitstrust for the plan year 2006. The securities held by the trusts had an estimated fair value of $638.5$693.8 million at June 30, 2006,March 31, 2007, of which approximately 24.12%24.9% were fixed-rate debt securities that subject PNM to risk of loss of fair value with movements in market interest rates. If rates were to increase by 50 basis points from their levels at June 30, 2006,March 31, 2007, the decrease in the fair value of the fixed-rate securities would be approximately 3.5%3.4%, or $5.4$5.9 million. PNM does not currently recover or return through rates any losses or gains on these securities. PNM, therefore, is at risk for shortfalls in its funding of its obligations due to investment losses. PNM does not believe that long-term market returns over the period of funding will be less than required for PNM to meet its obligations. However, this belief is based on assumptions about future returns that are inherently uncertain.
TNMP has long-term debt which subjects it to the risk of loss associated with movements in market interest rates. The majority of TNMP’s long-term debt is fixed-rate debt, and therefore, does not expose TNMP’s earnings to a major risk of loss due to adverse changes in market interest rates. However, the fair value of all long-term debt instruments would increase by approximately 1.0%0.5%, or $4.2 million, if interest rates were to decline by 50 basis points from their levels at June 30, 2006. At June 30, 2006, the fair value of TNMP's long-term debt was approximately $424.5 million as compared to a book value of $425.0 million.March 31, 2007. In general, an increase in fair value would impact earnings and cash flows to the extent not recoverable in rates if TNMP were to re-acquire all or a portion of its debt instruments in the open market prior to their maturity.
During the three and six months ended June 30, 2006,March 31, 2007, TNMP did not contribute cash to fund pension and other postretirement benefits for plan year 2006.2007. The securities held by the trusts had an estimated fair value of $86.1$89.5 million at June 30, 2006,March 31, 2007, of which approximately 27.8%23.2% were fixed-rate debt securities that subject TNMP to risk of loss of fair value with movements in market interest rates. If rates were to increase by 50 basis points from their levels at June 30, 2006,March 31, 2007, the decrease in the fair value of the fixed-rate securities would be approximately 2.9%4.2%, or $0.7$0.9 million. TNMP, therefore, is at risk for shortfalls in its funding of its obligations due to investment losses. TNMP does not believe that long-term market returns over the period of funding will be less than required for TNMP to meet its obligations. However, this belief is based on assumptions about future returns that are inherently uncertain.
Equity Market Risk
The trusts established to fund PNM’s share of the decommissioning costs of PVNGS and pension and other postretirement benefits hold certain equity securities at June 30, 2006.March 31, 2007. These equity securities also expose the CompanyPNM to losses in fair value. Approximately 62.6%61.0% of the securities held by the various trusts were equity securities as of June 30, 2006.March 31, 2007. Similar to the debt securities held for funding decommissioning and certain pension and other postretirement costs, PNM does not recover or earn a return through rates on any losses or gains on these equity securities.
The trusts established to fund TNMP’s pension and other postretirement benefits hold certain equity securities at June 30, 2006.March 31, 2007. These equity securities also expose the Company to losses in fair value. Approximately 59.8%55.4% of the securities held by the various trusts were equity securities as of June 30, 2006.March 31, 2007. TNMP does not recover or earn a return through rates on any losses or gains on these equity securities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
PNMR
Disclosure Controlsof controls and Proceduresprocedures
PNMR maintains disclosure controls and procedures designed to ensure that it is able to collect the information it is required to disclose in the reports it files with the SEC, and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Concurrently with this restatement on Form 10-Q/A for period ended March 31, 2007, PNMR’s management, with the participation of the Chief Executive and Chief Financial Officers, re-evaluated PNMR’s disclosure controls and procedures and believe that these controls and procedures are still effective to ensure that PNMR meets the requirements of SEC Regulation 13A, Rule 13a-15(e) and Rule 15d-15(e).
Changes in internal controls
The following material changes in internal controls occurred during the first quarter of 2007:
| · | Expanded the functionality of an existing module of an accounting application at TNMP to record accounts receivable and billing activities for Texas market ERCOT electronic data interchange transactions and modified the related business process controls. |
| · | PNMR is currently engaged in a diligent effort to integrate Twin Oaks' and PNMR’s internal control activities to ensure that PNMR maintains its compliance with Section 404 of the Sarbanes-Oxley Act of 2002. It is expected that this effort will continue through the end of 2007. |
Except as described above, there have been no other changes in PNMR’s internal controls over financial reporting for the quarter ended March 31, 2007, that have materially affected, or are reasonably likely to materially affect, PNMR’s internal control over financial reporting.
PNM
Disclosure of controls and procedures
PNM maintains disclosure controls and procedures designed to ensure that it is able to collect the information it is required to disclose in the reports it files with the SEC, and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Concurrently with this restatement on Form 10-Q/A for period ended March 31, 2007, PNM’s management, with the participation of the Chief Executive and Chief Financial Officers, re-evaluated PNM’s disclosure controls and procedures and believe that these controls and procedures are still effective to ensure that PNM is able to meet the requirements of SEC Regulation 13A, Rule 13a-15(e) and Rule 15d-15(e).
Changes in internal controls
There have been no changes in PNM’s internal controls over financial reporting for the quarter ended March 31, 2007, that have materially affected, or are reasonably likely to materially affect, PNM’s internal control over financial reporting.
TNMP
Disclosure of controls and procedures
TNMP maintains disclosure controls and procedures designed to ensure that it is able to collect the information it is required to disclose in the reports it files with the SEC, and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Based on an evaluation of its disclosure controls and procedures as of the end of the period covered by this report conducted by management, with the participation of the Chief Executive and Chief Financial Officer, the Chief Executive and Chief Financial Officer believe that these controls and procedures are effective to ensure that PNMR meets the requirements of SEC Regulation 13A, Rule 13a-15(e) and Rule 15d-15(e).
Changes in Internal Controls
The following material changes in internal controls occurred during the second quarter of 2006:
o | Implemented a new application to process accounts payable activities and modified the related business process controls. |
o | Implemented a new application to process gas purchasing and miscellaneous accounts receivable and billing activities and modified the related business process controls for one of its subsidiaries, PNM. |
o | Upgraded the general ledger system to enhance existing functionality and to add new functionality for use in analysis and financial reporting. |
TNP Acquisition
PNMR is currently undergoing a diligent effort to ensure TNP’s compliance with Section 404 of the Sarbanes-Oxley Act of 2002. As integration activities occur, PNMR continues to integrate PNMR’s internal controls into TNP’s operations.
Twin Oaks Acquisition
PNMR is currently undergoing a diligent effort to integrate Twin Oaks' and PNMR’s internal control activities to ensure that PNMR maintains its compliance with Section 404 of the Sarbanes-Oxley Act of 2002. It is expected that this effort will continue during the remainder of 2006 and into 2007.
Except as described above, there were no other changes in internal control over financial reporting that occurred during the second quarter of 2006 that have materially affected, or are reasonably likely to materially affect PNMR’s internal control over financial reporting.
PNM
Disclosure Controls and Procedures
PNM maintains disclosure controls and procedures designed to ensure that it is able to collect the information it is required to disclose in the reports it files with the SEC, and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Based on an evaluation of its disclosure controls and procedures as of the end of the period covered by this report conducted by management, with the participation of the Chief Executive and Chief Financial Officer, the Chief Executive and Chief Financial Officer believe that these controls and procedures are effective to ensure that PNM meets the requirements of SEC Regulation 13A, Rule 13a-15(e) and Rule 15d-15(e).
Changes in Internal Controls
The following material changes in internal controls occurred during the second quarter of 2006:
o | Implemented a new application to process accounts payable activities and modified the related business process controls. |
o | Implemented a new application to process gas purchasing and miscellaneous accounts receivable and billing activities and modified the related business process controls. |
o | Upgraded the general ledger system to enhance existing functionality and to add new functionality for use in analysis and financial reporting. |
Except as described above, there were no other changes in internal control over financial reporting that occurred during the second quarter of 2006 that have materially affected, or are reasonably likely to materially affect PNM’s internal control over financial reporting.
TNMP
Disclosure Controls and Procedures
TNMP maintains disclosure controls and procedures designed to ensure that it is able to collect the information it is required to disclose in the reports it files with the SEC, and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Based on an evaluation of its disclosure controls and procedures as of the end of the period covered by this report conducted by management, with the participation of the Chief Executive and Principal Financial Officer, the Chief Executive and Principal Financial Officer believe that these controls and procedures are effective to ensure that TNMP meets the requirements of SEC Regulation 13A, Rule 13a-15(e) and Rule 15d-15(e).
Changes in Internal Controlsinternal controls
The following material changes in internal controls occurred during the secondfirst quarter of 2006:2007:
o· | Implemented a newExpanded the functionality of an existing module of an accounting application to processrecord accounts payablereceivable and billing activities for Texas market ERCOT electronic data interchange transactions and modified the related business process controls. |
o | Upgraded the general ledger system to enhance existing functionality and to add new functionality for use in analysis and financial reporting. |
Except as described above, there werehave been no other changes in TNMP’s internal controlcontrols over financial reporting that occurred duringfor the second quarter of 2006ended March 31, 2007, that have materially affected, or are reasonably likely to materially affect, TNMP’s internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Notes 9 and 10 in the Notes to Condensed Consolidated Financial Statements for information related to the following matters, for PNMR, PNM and TNMP, incorporated in this item by reference.
| · | Asbestos CasesCitizen Suit Under the Clean Air Act |
| · | SESCO Matter (for both PNM and TNMP)Navajo Nation Environmental Issues |
| · | California Refund ProceedingFour Corners Federal Implementation Plan Litigation |
| · | Wholesale Power Marketing Antitrust Suit |
| · | Legal Proceedings discussed under the caption, “Western United States Wholesale Power Market” |
| · | Natural Gas Royalties Qui Tam Litigation |
| · | TNMP Competitive Transition Charge True-Up Proceeding |
| · | San Juan River Adjudication |
ITEM 1A. RISK FACTORS
As of the date of this report, there have been no material changes with regard to the Company’s Risk Factors disclosed in PNMR’s, PNM’s and TNMP’s Annual Reports on FormsForm 10-K/A (Amendment No. 2)1) for the year ended December 31, 2005.2006.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Annual Meeting
The annual meeting of shareholders was held on May 16, 2006. The matters voted on at the meeting and the results were as follows:
The election of the following nominees to serve as directors as follows:
Director | | Votes For | | Votes Against or Withheld | |
| Terms expiring in 2007: | | | | | |
| Adelmo E. Archuleta | | | 61,731,760 | | | 192,210 | |
| Julie A. Dobson | | | 61,723,253 | | | 200,717 | |
| Woody L. Hunt | | | 61,730,796 | | | 193,174 | |
| C. E. McMahen | | | 61,729,836 | | | 194,134 | |
| M. T. Pacheco | | | 61,719,470 | | | 204,500 | |
| R. M. Price | | | 57,915,087 | | | 4,008,883 | |
| B. S. Reitz | | | 61,718,240 | | | 205,730 | |
| Jeffry E. Sterba | | | 57,936,128 | | | 3,987,842 | |
| Joan B. Woodard | | | 61,731,251 | | | 192,719 | |
The approval of the selection by the Company’s Board of Deloitte & Touche LLP as independent auditors for the fiscal year ending December 31, 2006, was voted on, as follows:
Votes For | Votes Against or Withheld | Abstentions |
| 61,778,325 | 90,648 | 54,996 |
The approval of an amendment to the Restated Articles of Incorporation of PNM Resources, Inc. to eliminate the authority of the Board to classify itself by amending the bylaws, was voted on, as follows:
Votes For | Votes Against or Withheld | Abstentions |
| 60,059,637 | 1,714,389 | 149,943 |
ITEM 5. OTHER EVENTS
None
ITEM 6. EXHIBITS
3.110.3 | PNMR | ArticlesSecond Amendment to Credit Agreement dated as of Incorporation ofDecember 20, 2006 among PNM Resources, First Choice Power, L.P. and TNMP, as amended through June 21, 2006.borrowers, the lenders party thereto and Bank of America, N.A., as administrative agent |
| | | |
10.410.89 | PNMRPNM | Term LoanAmendment Four to Underground Coal Sales Agreement dated as of April 17, 2006,effective March 7, 2007 among San Juan Coal Company, PNM Resources, as borrower, the lenders identified therein and Lehman Commercial Paper Inc., as administrative agent. |
| | |
10.43** | PNMR | PNMR Fourth Amendment to the PNM Resources Non-Union Severance Pay Plan executed April 19, 2006.Tucson Electric Power Company |
| | | |
| 12.1 | PNMR | Ratio of Earnings to Fixed Charges |
| | | |
| 12.2 | PNMR | Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends |
| | | |
| 31.1 | PNMR | Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| 31.2 | PNMR | Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| 31.3 | PNM | Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| 31.4 | PNM | Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| 31.5 | TNMP | Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| 31.6 | TNMP | Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| 32.1 | PNMR | Chief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | | |
| 32.2 | PNMR | Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | | |
| 32.3 | PNM | Chief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | | |
| 32.4 | PNM | Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | | |
| 32.5 | TNMP | Chief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | | |
| 32.6 | TNMP | Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
** designates each management contract or compensatory plan or arrangement required to be identified.
SignatureSIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.
| | PNM RESOURCES, INC. PUBLIC SERVICE COMPANY OF NEW MEXICO TEXAS-NEW MEXICO POWER COMPANY |
| | (Registrants) |
| | |
| | |
Date: August 9, 200614, 2007 | /s/ Thomas G. Sategna |
| | Thomas G. Sategna |
| | Vice President and Corporate Controller |
| | (Officer duly authorized to sign this report) |