Advertise with us
[November 02, 2012]
PUBLIC SERVICE CO OF NEW MEXICO - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) The following Management's Discussion and Analysis of Financial Condition and Results of Operations for PNMR is presented on a combined basis, including certain information applicable to PNM and TNMP. The MD&A for PNM and TNMP is presented as permitted by Form 10-Q General Instruction H (2). This report uses the term "Company" when discussing matters of common applicability to PNMR, PNM, and TNMP. A reference to a "Note" in this Item 2 refers to the accompanying Notes to Condensed Consolidated Financial Statements (Unaudited) included in Item 1, unless otherwise specified. Certain of the tables below may not appear visually accurate due to rounding.
MD&A FOR PNMR EXECUTIVE SUMMARY Company Overview and Strategy PNMR is a holding company with two regulated utilities serving approximately 739,000 residential, commercial, and industrial customers and end-users of electricity in New Mexico and Texas. In the latter part of 2011, PNMR exited both of its competitive businesses, First Choice and Optim Energy, and repositioned itself as a holding company solely operating its electric utilities, PNM and TNMP. Optim Energy had no impact on 2011 results of operations because it was written off in 2010 and PNMR had no further financial commitment to Optim Energy.
Strategic Goals PNMR is focused on achieving the following strategic goals: • Earning authorized returns on its regulated businesses • Continuing to improve credit ratings • Providing a top-quartile total return to investors PNMR's success in accomplishing these strategic goals is highly dependent on continued favorable regulatory treatment for its utilities. Both PNM and TNMP seek cost recovery for their investments through general rate cases and various rate riders. The PUCT has approved mechanisms that allow for recovery of capital invested in transmission and distribution projects without having to file a general rate case and allows for more timely recovery of amounts invested in TNMP's systems.
PNM and TNMP completed rate proceedings before their state regulators in 2011.
PNM has two rate cases pending before FERC. A settlement in one case is pending FERC approval and an agreement in principle has been reached in the other. In August 2012, the NMPRC approved PNM's application for a renewable energy rider to recover NMPRC approved renewable energy costs. Additional information about rate filings is provided in Note 17 of the Notes to Consolidated Financial Statements in the 2011 Annual Reports on Form 10-K and in Note 10. PNM previously announced that it intended to file a request for an increase in the rates charged to New Mexico retail customers in late 2012, but now anticipates this filing will occur in mid-2013, partially due to the lack of clarity around the timing and amount of capital that will be required for BART at SJGS, as discussed below.
Fair and timely rate treatment from regulators is crucial to achieving PNMR's strategic goals because it leads to PNM and TNMP earning their allowed returns.
PNMR believes that if the utilities earn their allowed returns, it would be viewed positively by rating agencies and would further improve credit ratings, which could lower costs to customers. Also, earning allowed returns should result in increased earnings for PNMR, which should lead to increased total returns to investors.
PNM's interest in PVNGS Unit 3 is permanently excluded from NMPRC jurisdictional rates. While PVNGS Unit 3's financial contribution is not calculated in the authorized returns on its regulated business, it impacts PNM's earnings and has demonstrated to be a valuable asset. Power generated from PNM's 134 MW interest in PVNGS Unit 3 is currently sold into the wholesale market and any earnings or losses are attributable to shareholders.
63-------------------------------------------------------------------------------- Table of Contents Exit from Competitive Businesses As a result of the exit from its competitive businesses, First Choice and Optim Energy, PNMR's business model is centered on its electric utilities. The elimination of the competitive businesses should reduce PNMR's risk and earnings volatility. Additional discussion about the exit from the competitive businesses is found in Notes 2 and 21 of the Notes to Consolidated Financial Statements in the 2011 Annual Reports on Form 10-K.
Business Principles In addition to its strategic goals, three principles drive PNMR's business strategy and decision-making: • Contribute to the economic vitality of the communities we serve • Demonstrate environmental stewardship • Exhibit social responsibility In support of these principles, PNMR works closely with customers, stakeholders, legislators, and regulators to ensure that our resource plans and infrastructure investments benefit from robust public dialogue and balance the diverse needs of our communities.
Economic Vitality PNMR and its utilities are keenly aware of the roles they play in enhancing economic vitality in their New Mexico and Texas service territories. We believe there is a direct connection between electric infrastructure and economic growth. When considering expanding or relocating to other communities, businesses consider energy affordability and energy reliability to be important factors. PNM and TNMP strive to balance service affordability with infrastructure investment to maintain a high level of electric reliability. The utilities also work to ensure that rates reflect actual costs of providing service.
Investing in PNM's and TNMP's infrastructure is critical to ensure reliability and meet future energy needs. Both utilities have long-established records of providing customers with top-tier electric reliability. In September 2011, TNMP began its deployment of smart meters in homes and businesses across its Texas service area. As part of the State of Texas' long-term initiative to create a smart electric grid, the smart meter rollout will ultimately give consumers more energy consumption data and help them make more informed decisions. TNMP's deployment is expected to be completed in 2016.
Environmental Stewardship For years, PNMR has demonstrated its commitment to environmental stewardship.
PNMR's environmental objectives focus on four areas: • Deploying renewable energy • Reducing emissions from existing fossil-fueled power plants • Increasing energy efficiency participation • Reducing waste In 2011, PNM completed its $95 million investment in a utility-owned renewable energy project when five utility-scale solar facilities went online. The five solar sites located in Alamogordo, Deming, Los Lunas, Las Vegas, and Albuquerque provide a combined 22 MW of power. A sixth facility, the 500-KW PNM Prosperity Energy Storage Project, uses advanced batteries to store solar power and dispatch the energy either during high-use periods or when solar production is limited. The project features one of the largest combinations of battery storage and PV energy in the nation and involves extensive research and development of smart grid concepts with the Electric Power Research Institute, East Penn Manufacturing Co., Northern New Mexico College, Sandia National Laboratories, and the University of New Mexico. When the facility went online in September 2011, it was the nation's first solar storage facility fully integrated into a utility's power grid.
In addition, PNM's resource portfolio includes the purchase of 200 MW of wind power. PNM also purchases power from a customer-owned distributed solar generation program having an installed capacity of 14 MW at the end of 2011, which capacity is expected to increase to 21 MW by the end of 2012. Distributed generation, wind, and solar power are key means for PNM to meet the RPS established by the REA and related regulations issued by the NMPRC. These rules require a utility to achieve prescribed levels of energy sales from renewable sources within its generation mix, if that can be accomplished without exceeding the RCT cost limit set by the NMPRC, which aims to moderate the cost to consumers when utilities use more renewable resources.
64-------------------------------------------------------------------------------- Table of Contents PNM sought and received a waiver from the NMPRC excusing it from meeting the RPS in 2012 because the cost to achieve the full RPS would exceed the RCT. However, PNM will continue to procure renewable resources while balancing the bill impact to customers in order to meet New Mexico's escalating RPS requirements.
On April 30, 2012, PNM filed its 2013 Renewable Energy Plan, which calls for: • 20 MW of PNM-owned solar facilities to be in service by the end of 2013 • A 20-year PPA for the output of a 10-MW geothermal facility to be in service by January 1, 2014 • Limited wind and solar REC purchases in 2013 The proposed plan would achieve RPS quantity compliance in 2013, but likely will be slightly below the 20% solar renewable energy diversity requirement. However, the plan would achieve full quantity and diversity compliance in 2014 and will be beneath the RCT for both years. A hearing on the proposed plan was held in September 2012 before the NMPRC and a decision is expected by November 30, 2012.
PNM's SJGS near Farmington, New Mexico, is one of the top performers in the nation with respect to mercury removal. The plant outperforms the mercury limit imposed by EPA in the 2011 Mercury and Air Toxics Standards. Major environmental upgrades on each of the four units at SJGS, which were completed in early 2009, have significantly reduced emissions of NOx, SO2, particulate matter, and mercury. PNM's share of the costs of these upgrades was $161 million. Since 2006, SJGS has reduced NOx emissions by 38%, SO2 by 69%, particulate matter by 65%, and mercury by 99%.
In order to keep costs to customers as low as possible while also reducing visibility impairment related to regional haze, PNM has supported the installation of SNCRs at SJGS, a technology also proposed by the State of New Mexico to meet the regional haze regulations. However, EPA issued its FIP requiring SCRs to be installed at SJGS, which PNM estimates would significantly exceed the cost of installing SNCRs. Due to the compliance deadline under the FIP, PNM is preparing to install SCRs at SJGS while simultaneously pursuing two other paths regarding BART at SJGS. PNM is pursuing legal relief in the Tenth Circuit and administrative relief from the EPA regarding the FIP. PNM is also participating in discussions with stakeholders regarding an alternative to the FIP and SIP. See Note 9.
PNM is challenging EPA's proposal in the courts and administratively within EPA.
Oral arguments on the court challenge were held October 23, 2012, but no decision has been issued. There is no deadline for a court decision. In July 2012, the NMED established a process to explore whether stakeholders could reach agreement on an alternative to SCRs and SNCRs. PNM supported that process and advocated for alternatives that would cost consumers less than the FIP while also achieving environmental benefits and considering economic impact to New Mexico. In September 2012, NMED proposed an alternative to EPA suggesting the closure of Units 1 and 2 at SJGS and the installation of SNCRs on Units 3 and 4 by the end of 2017. The NMED also suggested replacement of PNM's share of the capacity from the two closed units with gas-fired generation. The Company views the NMED proposal as an important step in meeting the objectives of addressing the environmental needs of the regional haze program at a lower cost to customers while balancing the economic impact to the "four corners" region. In order for the NMED proposal to proceed, there would need to be an agreement in principle among EPA, NMED, and PNM. The proposal would also be subject to approval by the other owner of SJGS Units 1 and 2, as well as various regulatory agencies. The proposal could also be subject to administrative and judicial challenge by others.
In order to be able to install SCRs on all four units of SJGS by the compliance deadline set forth in the FIP, PNM obtained bids for the installation of SCR technology. PNM entered into a contract on October 31, 2012 with an engineering, procurement, and construction contractor to install SCRs and is negotiating a contract with an engineering firm for construction management services on behalf of the SJGS owners. The construction contract includes termination provisions in the event that SCRs are determined in the future to be unnecessary. The construction contract contains a cost estimate, which will be refined through an "open book" subcontractor bidding process with final costs to be determined by June 30, 2013. Based on the indicative bid for construction, PNM estimates the total cost to install SCRs on all four units of SJGS will be between approximately $824 million and $910 million, which amounts include costs for construction management, gross receipts taxes, AFUDC, and other PNM costs. PNM's share of the costs would be about 46.3% based upon its SJGS ownership interest.
Energy efficiency also plays a significant role in helping to keep customers' electricity costs low and meeting their energy needs. PNM's and TNMP's energy efficiency and load management portfolios continue to be robust. In 2011, annual energy saved as a result of PNM's portfolio of energy efficiency programs was approximately 58,900 MWh. This is equivalent to the consumption of approximately 7,700 homes in PNM's service territory. PNM's load management and energy efficiency programs also help lower peak demand requirements. TNMP's energy efficiency programs in 2011 resulted in energy savings totaling an estimated 13,435 MWh.
65-------------------------------------------------------------------------------- Table of Contents In 2008, PNMR established a three-year waste-reduction goal in which all facilities were to maintain recycling programs and identify significant waste streams. The target called for at least 75% of facilities to implement plans to reduce a minimum of one waste stream by 15% below 2009 levels. By the end of 2011, more than 87% of PNMR facilities had achieved the waste-reduction goal.
Social Responsibility Through outreach, collaboration, and various community-oriented programs, PNMR continues to make significant progress in two of its key focus areas of low-income assistance and energy efficiency support in New Mexico and Texas.
Building off work that began in 2008, continuing outreach efforts include numerous community events that connected low-income customers with non-profit community service providers offering support and help with such needs as utility bills, food, clothing, medical programs, services for seniors, and weatherization. Additionally, four of the largest grants awarded in 2011 by PNMR supported nonprofits in various areas such as: • Adult literacy • Assistance for families trying to emerge from poverty • Food rescue from restaurants and grocers to help feed those in need • Assistance for low-income individuals to build a home, start a small business, or pursue higher education In 2011, the PNM Good Neighbor Fund provided $1.2 million of assistance with utility bills to 9,907 families. Further, as part of the settlement in its 2010 Electric Rate Case, PNM agreed to voluntarily contribute an additional $1.3 million to the Good Neighbor Fund. This fund, along with additional collaboration with various other agencies, has helped to reduce the electricity affordability gap for many vulnerable customer groups such as seniors, young families, and medically challenged households.
The PNM Resources Foundation helps nonprofits become more energy efficient through Reduce Your Use grants. For 2012, the foundation awarded $0.3 million to 55 New Mexico nonprofits for such projects as shade structure installations, window replacements, and efficient appliance purchases. In 2011, the foundation gave more than $0.3 million to support 87 projects in New Mexico and Texas that helped purchase energy efficiency appliances and install high-performance windows and solar panels. Since the program's inception in 2008, Reduce Your Use grants have provided nonprofit agencies in New Mexico and Texas with a total of $1.3 million of support.
Economic Factors In the three months ended September 30, 2012, PNM experienced a decrease in weather-normalized, retail load of 0.3% and TNMP experienced an increase in weather-normalized, retail load of 3.7% compared to the three months ended September 30, 2011. In the nine months ended September 30, 2012, PNM and TNMP experienced increases in weather-normalized, retail load of 0.2% and 4.1% compared to the nine months ended September 30, 2011. In recent years, New Mexico and Texas have fared better than the national average in unemployment.
However, New Mexico's figures may be misleading due to people dropping out of the work force. Employment growth is much more telling, as Texas leads the way with growth rates well above the national rate while New Mexico's employment is relatively flat.
Rate Base Potential Growth Based on the 5-year capital plan announced in December 2011, PNM expects rate base to grow at a 2% compound annual rate through 2013. That growth figure could be 7% from 2011 through 2016 through additional potential capital investments.
The largest of these involves possibly being required to install SCRs to reduce emissions at SJGS and Four Corners. The addition of other facilities, such as renewable resources and peaking capacity, could also expand rate base. TNMP's compound annual rate base growth rate through 2013 is estimated at 8%, predicated on the utility's 5-year capital plan announced in December 2011. A significant portion of TNMP's capital additions should be recovered through expedited transmission and distribution cost recovery mechanisms authorized by the PUCT. PNMR will continue to carefully balance the potential rate base growth for PNM and TNMP with customer rate impacts.
66-------------------------------------------------------------------------------- Table of Contents Results of Operations A summary of net earnings attributable to PNMR is as follows: Three Months Ended September 30, Nine Months Ended September 30, 2012 2011 Change 2012 2011 Change (In millions, except per share amounts) Net earnings $ 57.9 $ 43.7 $ 14.2 $ 96.5 $ 64.4 $ 32.1 Average diluted common and common equivalent shares 80.4 91.7 (11.4 ) 80.4 92.0 (11.6 ) Net earnings per diluted share $ 0.72 $ 0.48 $ 0.24 $ 1.20 $ 0.70 $ 0.50 The components of the change in earnings attributable to PNMR are: Three Months Ended Nine Months Ended September 30, 2012 September 30, 2012 (In millions) PNM Electric $ 12.5 $ 44.7 TNMP Electric 0.2 3.0 First Choice (0.6 ) (20.7 ) Corporate and Other 2.1 5.0 Net change $ 14.2 $ 32.1 PNMR's operational results were affected by the following: • Exit from unregulated businesses - PNMR sold First Choice in 2011; therefore 2012 results of operations do not include First Choice • Rate increases for PNM and TNMP - Additional information about these rate increases is provided in Note 17 of the Notes toConsolidated Financial Statements in the 2011 Annual Reports on Form 10-K • Decrease in the number of common and common equivalent shares primarily due to PNMR's purchase of its equity described in Note 6 of the Notes to Consolidated Financial Statements in the 2011 Annual Reports on Form 10-K • Other factors impacting results of operation for each segment are discussed under Results of Operations below Liquidity and Capital Resources During 2011, PNMR and PNM replaced their revolving credit facilities with new facilities. The new facilities provide capacities for short-term borrowing and letters of credit of $300.0 million for PNMR and $400.0 million for PNM. In addition, TNMP has a $75.0 million revolving credit facility. Total availability for PNMR on a consolidated basis was $653.5 million at October 26, 2012. The Company utilizes these credit facilities and cash flows from operations to provide funds for both construction and operational expenditures. PNMR also has intercompany loan agreements with each of its subsidiaries.
The Company projects that its total capital requirements, consisting of construction expenditures and dividends, will total $1,526.9 million for 2012-2016, including amounts expended through September 30, 2012. This estimate does not include amounts for environmental upgrades at SJGS or Four Corners that may be required by EPA to address regional haze or other environmental compliance requirements, additional renewable resources that may be required to meet the RPS, or additional peaking resources that may be needed to meet needs outlined in PNM's current IRP. In addition to internal cash generation, the Company anticipates that it will be necessary to obtain additional long-term financing in the form of debt refinancing, new debt issuances, and/or new equity in order to fund its capital requirements through 2016. The Company currently believes that its internal cash generation, existing credit arrangements, and access to public and private capital markets will provide sufficient resources to meet the Company's capital requirements.
67-------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS Segment Information The following discussion is based on the segment methodology that PNMR's management uses for making operating decisions and assessing performance of its various business activities. See Note 2 for more information on PNMR's operating segments.
The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto. Trends and contingencies of a material nature are discussed to the extent known. Refer also to Disclosure Regarding Forward Looking Statements and to Part II, Item 1A. Risk Factors.
PNM Electric The following table summarizes the operating results for PNM Electric: Three Months Ended September 30, Nine Months Ended September 30, 2012 2011 Change 2012 2011 Change (In millions) Electric operating revenues $ 321.7 $ 323.8 $ (2.1 ) $ 832.2 $ 797.2 $ 35.0 Cost of energy 99.2 108.7 (9.5 ) 263.0 279.4 (16.4 ) Margin 222.5 215.1 7.4 569.2 517.8 51.4 Operating expenses 101.1 102.1 (1.0 ) 311.5 329.5 (18.0 ) Depreciation and amortization 24.4 25.1 (0.6 ) 72.0 71.7 0.3 Operating income 97.0 87.9 9.1 185.7 116.6 69.1 Other income (deductions) 8.4 (1.8 ) 10.2 19.1 16.2 3.0 Net interest charges (19.2 ) (18.5 ) (0.7 ) (56.7 ) (54.6 ) (2.1 ) Earnings before income taxes 86.1 67.6 18.5 148.2 78.2 70.0 Income (taxes) (31.2 ) (25.1 ) (6.2 ) (51.9 ) (26.6 ) (25.4 ) Valencia non-controlling interest (4.0 ) (4.1 ) 0.1 (10.7 ) (10.8 ) 0.1 Preferred stock dividend requirements (0.1 ) (0.1 ) - (0.4 ) (0.4 ) - Segment earnings $ 50.8 $ 38.3 $ 12.5 $ 85.2 $ 40.5 $ 44.7 The following table summarizes the significant changes to electric operating revenues, cost of energy, and margin: 2011/2012 Change Three Months Ended September 30, Nine Months Ended September 30, Electric Electric Operating Cost of Operating Cost of Revenues Energy Margin Revenues Energy Margin (In millions) Retail rate increases $ 5.6 $ - $ 5.6 $ 40.3 $ - $ 40.3 Wholesale rate increases 1.4 - 1.4 2.8 - 2.8 Retail load, fuel, and transmission (11.7 ) (9.1 ) (2.6 ) (13.7 ) (17.4 ) 3.7 Energy efficiency rider 7.2 - 7.2 17.1 - 17.1 Renewable energy rider 1.5 0.6 0.9 1.5 0.6 0.9 Unregulated margin (1.4 ) (0.1 ) (1.3 ) (5.5 ) 0.7 (6.2 ) Net unrealized economic hedges (4.7 ) (0.9 ) (3.8 ) (7.5 ) (0.3 ) (7.2 ) Net change $ (2.1 ) $ (9.5 ) $ 7.4 $ 35.0 $ (16.4 ) $ 51.4 68-------------------------------------------------------------------------------- Table of Contents The following table shows electric operating revenues by customer class and average number of customers: Three Months Ended September 30, Nine Months Ended September 30, 2012 2011 Change 2012 2011 Change (In millions, except customers) Residential $ 126.1 $ 124.8 $ 1.3 $ 318.9 $ 291.4 $ 27.5 Commercial 120.4 115.7 4.7 317.1 287.8 29.3 Industrial 29.4 28.0 1.4 77.6 71.3 6.3 Public authority 8.1 7.4 0.7 19.3 17.8 1.5 Other retail 2.3 2.7 (0.4 ) 9.5 7.3 2.2 Transmission 10.8 14.3 (3.5 ) 29.3 35.3 (6.0 ) Firm requirements wholesale 10.5 8.1 2.4 28.8 25.1 3.7 Other sales for resale 15.8 19.8 (4.0 ) 35.4 57.4 (22.0 ) Mark-to-market activity (1.7 ) 3.0 (4.7 ) (3.7 ) 3.8 (7.5 ) $ 321.7 $ 323.8 $ (2.1 ) $ 832.2 $ 797.2 $ 35.0 Average retail customers (thousands) 505.6 503.8 1.8 505.3 503.7 1.6 The following table shows GWh sales by customer class: Three Months Ended September 30, Nine Months Ended September 30, 2012 2011 Change 2012 2011 Change Residential 975.7 1,006.0 (30.3 ) 2,573.3 2,587.2 (13.9 ) Commercial 1,103.5 1,130.0 (26.5 ) 3,064.1 3,060.2 3.9 Industrial 471.6 429.4 42.2 1,313.0 1,187.8 125.2 Public authority 84.0 84.1 (0.1 ) 211.1 214.1 (3.0 ) Firm requirements wholesale 162.0 154.6 7.4 485.8 481.0 4.8 Other sales for resale 536.9 580.4 (43.5 ) 1,263.4 1,709.9 (446.5 ) 3,333.7 3,384.5 (50.8 ) 8,910.7 9,240.2 (329.5 ) On August 21, 2011, PNM implemented a $72.1 million annual non-fuel rate increase for its retail customers. This rate increase improved revenues and margin by $5.6 million and $40.3 million for the three and nine months ended September 30, 2012. Lower retail loads, driven by weather, reduced revenues and margin for the three and nine months ended September 30, 2012 by $4.7 million and $0.8 million, as milder weather in the third quarter was partially offset by warmer weather in the second quarter. The average number of retail customers and usage per customer have stayed relatively flat during 2012. The increase in fuel costs and the reduction in off-system sales volumes resulting from the fire incident at the mine providing coal to SJGS are recovered through PNM's FPPAC and did not negatively impact 2012 results. See Note 9 for more discussion on the SJGS mine fire incident.
PNM implemented new rates, subject to refund, for one of its firm-requirements wholesale customers in April 2012, which improved revenues and margin by $1.4 million and $2.8 million for the three and nine months ended September 30, 2012.
See Note 10.
PNM offers several energy efficiency programs and initiatives to its retail customers regulated by the NMPRC. In addition, PNM is allowed to earn adders on these programs, based on energy savings of the programs. PNM recovers these energy efficiency program costs via a rate rider. For the three and nine months ended September 30, 2012, revenues and margin improved by $7.2 million and $17.1 million, of which $0.3 million and $0.8 million is adder revenues and the remaining $6.9 million and $16.3 million is offset by an increase in operating expense for energy efficiency program costs.
On August 20, 2012, PNM implemented its renewable energy rider, a mechanism approved by NMPRC, which will recover renewable energy procurement costs, including the investment in and an allowed return on the 22 MW PNM-owned solar PV facilities incurred to meet PNM's RPS. See Note 10. For the three and nine months ended September 30, 2012, PNM revenues 69-------------------------------------------------------------------------------- Table of Contents increased by $1.5 million and cost of energy for the purchase of RECs increased by $0.6 million. Revenues included a return on investment of $0.3 million and the remaining revenues recover renewable energy operating expenses and depreciation.
For the three and nine months ended September 30, 2012, lower unregulated revenues of $1.4 million and $5.5 million and margin of $1.3 million and $6.2 million resulted from lower market power prices on sales from and increases in nuclear fuel costs associated with PNM's share of PVNGS Unit 3, which is excluded from retail regulation.
Changes in unrealized mark-to-market gains and losses are based on economic hedges in place for sales and fuel costs not covered under the FPPAC, primarily associated with PVNGS Unit 3. Unrealized losses of $1.1 million for the three months ended September 30, 2012 compared to unrealized gains of $2.7 million for the three months ended September 30, 2011, decreased margin by $3.8 million.
Unrealized losses of $3.1 million for the nine months ended September 30, 2012 compared to unrealized gains of $4.1 million for the nine months ended September 30, 2011, decreased margin by $7.2 million.
For the three months ended September 30, 2012, operating expenses decreased by $1.0 million. For the nine months ended September 30, 2012, operating expenses decreased by $18.0 million, primarily due to a regulatory disallowance of $17.5 million recorded in the second quarter of 2011. See Note 17 of the Notes to Consolidated Financial Statements in the 2011 Annual Reports on Form 10-K. PNM incurred $1.0 million and $2.7 million in the three and nine months ended September 30, 2011 to implement several process improvement activities, which did not recur in 2012 resulting in lower operating expenses. The benefits of these process improvement initiatives and labor savings further reduced operating expenses by $3.0 million and $4.9 million for the three and nine months ended September 30, 2012. Lower incentive compensation of $1.8 million and $1.9 million reduced operating expenses for the three and nine months ended September 30, 2012. Adjustments of $4.4 million and $6.1 million for additional taxes other than income, primarily gross receipts taxes, were recorded in the three and nine months ended September 30, 2011 with no such adjustments recorded in 2012, resulted in reduced operating expenses in 2012 compared to 2011. For the nine months ended September 30, 2012, improved plant performance at SJGS and PVNGS reduced maintenance expenses by $2.4 million compared to 2011. Also, the timing of a planned outage at a gas facility in 2011 of $1.4 million and lower vegetation management costs of $1.0 million reduced expenses for the nine months ended September 30, 2012. For the three and nine months ended September 30, 2012, these savings were offset by increases of $6.9 million and $16.3 million of energy efficiency program costs, which are recovered through revenues discussed above.
For the three months ended September 30, 2012, other income (deductions) was $10.2 million higher than 2011, primarily related to improved performance of the NDT assets of $10.8 million. PNM incurred net losses, including impairments of the NDT investments of $4.1 million, in the third quarter of 2011, compared to net gains of $5.7 million in the third quarter 2012. In addition, the equity portion of AFUDC of $0.9 million improved other income. For the nine months ended September 30, 2012, other income (deductions) was $3.0 million higher, primarily related to improved performance of the NDT assets of $2.8 million, higher equity portion of AFUDC of $3.0 million, offset by lower interest income on the PVNGS lessor notes of $2.1 million due to lower outstanding balances.
For the three and nine months ended September 30, 2012, interest expense increased $2.2 million and $6.6 million due to the issuance of $160.0 million of 5.35% long-term debt in October 2011, which increases were partially offset by $0.5 million and $2.0 million increases in the debt portion of AFUDC and $0.7 million and $2.8 million of interest charges on PNM's investment in renewable resources that are deferred for recovery through the renewable energy rider. As discussed above, PNM implemented its renewable energy rider in August 2012 and interest costs associated with its investment in renewable energy are included in amounts being recovered through the rider.
70-------------------------------------------------------------------------------- Table of Contents TNMP Electric The following table summarizes the operating results for TNMP Electric: Three Months Ended September 30, Nine Months Ended September 30, 2012 2011 Change 2012 2011 Change (In millions) Total electric operating revenues $ 68.7 $ 67.0 $ 1.7 $ 187.4 $ 180.8 $ 6.6 Cost of energy 11.6 10.3 1.3 34.3 30.7 3.6 Margin 57.1 56.7 0.4 153.1 150.1 3.0 Operating expenses 22.3 22.5 (0.1 ) 64.2 67.4 (3.2 ) Depreciation and amortization 13.8 12.7 1.1 37.2 33.7 3.5 Operating income 21.0 21.6 (0.6 ) 51.7 49.0 2.7 Other income (deductions) 0.4 0.3 0.1 1.2 0.9 0.4 Net interest charges (7.0 ) (7.3 ) 0.2 (21.2 ) (21.9 ) 0.7 Earnings before income taxes 14.3 14.6 (0.3 ) 31.7 28.0 3.7 Income (taxes) (5.2 ) (5.7 ) 0.5 (11.6 ) (10.8 ) (0.7 ) Segment earnings $ 9.1 $ 8.9 $ 0.2 $ 20.1 $ 17.1 $ 3.0 The following table summarizes the significant changes to total electric operating revenues, cost of energy, and margin: 2011/2012 Change Three Months Ended September 30, Nine Months Ended September 30, Electric Electric Operating Cost of Operating Cost of Revenues Energy Margin Revenues Energy Margin (In millions) Rate increases $ - $ - $ - $ 0.7 $ - $ 0.7 Customer usage/load (1.1 ) - (1.1 ) (2.6 ) - (2.6 ) Transmission cost recovery 1.4 1.3 0.1 3.4 3.6 (0.2 ) AMS surcharge 2.1 - 2.1 5.4 - 5.4 Other (0.7 ) - (0.7 ) (0.3 ) - (0.3 ) Net change $ 1.7 $ 1.3 $ 0.4 $ 6.6 $ 3.6 $ 3.0 The following table shows total electric operating revenues by retail tariff consumer class, including intersegment revenues, and average number of consumers: Three Months Ended September 30, Nine Months Ended September 30, 2012 2011 Change 2012 2011 Change (In millions, except consumers) Residential $ 33.2 $ 34.5 $ (1.3 ) $ 79.9 $ 77.8 $ 2.1 Commercial 22.7 21.7 1.0 65.1 62.0 3.1 Industrial 3.2 3.3 (0.1 ) 10.1 9.5 0.6 Other 9.6 7.5 2.1 32.3 31.5 0.8 $ 68.7 $ 67.0 $ 1.7 $ 187.4 $ 180.8 $ 6.6 Average consumers (thousands) (1) 233.6 232.2 1.4 232.7 231.3 1.4 (1) TNMP provides transmission and distribution services to REPs that provide electric service to consumers in TNMP's service territories.
The number of consumers above represents the customers of these REPs.
Under TECA, consumers in Texas have the ability to choose any REP to provide energy. The average consumers reported above include 71-------------------------------------------------------------------------------- Table of Contents 66,273 and 67,549 consumers for the three and nine months ended September 30, 2011, who had chosen First Choice as their REP. These consumers are also included as customers in the First Choice segment.
The following table shows GWh sales by retail tariff consumer class: Three Months Ended September 30, Nine Months Ended September 30, 2012 2011 Change 2012 2011 Change Residential 930.4 1,015.0 (84.6 ) 2,173.4 2,319.4 (146.0 ) Commercial 692.5 703.7 (11.2 ) 1,796.7 1,825.7 (29.0 ) Industrial 695.4 675.2 20.2 2,025.6 1,931.1 94.5 Other 26.5 28.7 (2.2 ) 78.0 82.5 (4.5 ) 2,344.8 2,422.6 (77.8 ) 6,073.7 6,158.7 (85.0 ) (1) The GWh sales reported above include 324.1 and 775.3 GWhs for the three and nine months ended September 30, 2011 used by consumers who had chosen First Choice as their REP. These GWhs are also included below in the First Choice segment.
For the three months ended September 30, 2012, temperatures were cooler compared to the extremely warm summer in 2011 reducing revenues and margin. The reductions in revenues and margin were partially offset by an increase in the average number of consumers and higher usage per consumer, excluding impacts from weather. For the nine months ended September 30, 2012, milder weather compared to 2011, also reduced revenues and margin. An increase in the number of consumers, increased usage per consumer, and an increase in rates partially offset the weather impacts. For the three and nine months ended September 30, 2012, the AMS surcharge improved revenues and margin by $2.1 million and $5.4 million, including a return on investment of $0.2 million and $0.8 million. The remaining surcharge revenues offset increases in operating expenses and depreciation. On September 27, 2012, TNMP implemented a $2.5 million annual increase in its transmission cost of service rates to recover additional investment in transmission plant and associated costs. See Note 10.
For the three months ended September 30, 2012, savings from process improvement initiatives and labor efficiencies of $1.0 million reduced operating expenses.
These reductions are offset by $1.1 million costs associated with the implementation of AMS, which are recovered via the surcharge described above.
For the nine months ended September 30, 2012, operating expenses are lower compared to the same period in 2011, primarily due to a regulatory disallowance of $3.9 million recorded in the second quarter of 2011. See Note 10. In addition, operating expenses for the nine months ended September 30, 2012 reflect reductions due to process improvement initiatives and labor efficiencies of $2.6 million and lower maintenance costs of $1.1 million due to a spike in reliability related costs caused by severe drought conditions in 2011. An increase of $2.1 million of AMS related costs, which are recovered via a surcharge, offset these savings.
Increases in depreciation and amortization expenses for the three and nine months ended September 30, 2012 are mainly due to the AMS investment, which is recovered through the surcharge discussed above. In addition, increases in transmission plant also increased depreciation expense.
Interest expense decreased in 2012 as a result of TNMP refinancing its term loan in September 2011.
72 -------------------------------------------------------------------------------- Table of Contents First Choice As discussed in Note 14, PNMR sold First Choice on November 1, 2011. The table below summarizes the operating results for First Choice for the three and nine months ended September 30, 2011: Three Months Ended Nine Months Ended September 30, 2011 September 30, 2011 (In millions) Total electric operating revenues $ 171.0 $ 405.5 Cost of energy 144.0 303.3 Margin 27.0 102.2 Operating expenses 25.1 67.7 Depreciation and amortization 0.3 1.0 Operating income 1.5 33.5 Other income (deductions) (0.1 ) (0.4 ) Net interest charges (0.2 ) (0.5 ) Earnings before income taxes 1.2 32.6 Income (taxes) (0.6 ) (11.8 ) Segment earnings $ 0.6 $ 20.7 The following table shows total electric operating revenues by customer class and actual number of customers: Three Months Ended Nine Months Ended September 30, 2011 September 30, 2011 (In millions, except customers) Residential $ 104.2 $ 241.9 Commercial 62.5 152.2 Other 4.3 11.4 $ 171.0 $ 405.5 Actual customers (thousands) (1,2) 223.1 223.1 (1) See note above in the TNMP Electric segment discussion about the impact of TECA.
(2) Due to the competitive nature of First Choice's business, actual customer counts are presented in the table above as a more representative business indicator than the average consumers that are shown in the table for TNMP.
The following table shows GWh electric sales by customer class(1): Three Months Ended Nine Months Ended September 30, 2011 September 30, 2011 Residential 812.8 1,871.5 Commercial 569.5 1,397.8 1,382.3 3,269.3 (1) See note above in the TNMP Electric segment discussion about the impact of TECA.
During the three and nine months ended September 30, 2011, favorable weather and increases in both MWh sales and number of customers, which were partially offset by a decrease in average revenue rates, favorably impacted operating revenues.
Due to extreme temperatures during the three months ended September 30, 2011, First Choice incurred significantly higher purchased power costs per MWh which negatively impacted the total amount of cost of energy.
First Choice managed its exposure to fluctuations in market energy prices by matching sales contracts with supply instruments designed to preserve targeted margin. Accordingly, First Choice had forward contracts for the purchase of energy to cover the future load requirements for most of its fixed price sales contracts. Gains or losses on unrealized economic hedges 73-------------------------------------------------------------------------------- Table of Contents represent changes in unrealized fair value estimates related to these forward supply contracts. Changes in the fair value of supply contracts that were not designated or were not eligible for hedge or normal purchase or sales accounting were marked to market through current period earnings as required by GAAP. During 2011, market energy prices increased, which resulted in unrealized mark-to-market gains on certain of First Choice's forward supply contracts.
First Choice was not required to mark the related fixed price sales contracts to market, which would likely show offsetting gains and losses as market energy prices fluctuate. Gains on unrealized economic hedges increased segment earnings by $1.7 million in the nine months ended September 30, 2011.
The allowance for uncollectible accounts and related bad debt expense was based on collections and write-off experience. Lower customer departures, lower default rates, and an increase in commercial customers reduced bad debts in 2011 compared to previous years. Initiatives to reduce bad debts included efforts to reduce the default rate experienced for customers switching to another REP and increased focus on identifying new customer prospects that were more likely to demonstrate desired payment behavior. First Choice focused its marketing efforts on commercial customers and customers with established payment patterns. First Choice also increased the credit score required to become a customer and expanded the circumstances where customers were required to provide advance deposits to obtain service, or both. Bad debt expense was $7.6 million and $17.9 million for the three and nine months ended September 30, 2011.
During 2011, increases in marketing and operational costs were partially offset by a decrease in incentive compensation expense. The increases in operational costs were primarily related to developing a pre-pay option for customers and establishing local office locations. Interest expense decreased in 2011 primarily due to lower short-term debt.
Corporate and Other The table below summarizes the operating results for Corporate and Other: Three Months Ended September 30, Nine Months Ended September 30, 2012 2011 Change 2012 2011 Change (In millions) Total revenues $ - $ (12.2 ) $ 12.2 $ - $ (30.8 ) $ 30.8 Cost of energy - (12.2 ) 12.2 - (30.6 ) 30.6 Margin - - - - (0.1 ) 0.1 Operating expenses (4.8 ) (1.6 ) (3.2 ) (12.7 ) (7.2 ) (5.5 ) Depreciation and amortization 4.6 4.3 0.3 13.1 12.8 0.3 Operating income (loss) 0.2 (2.7 ) 2.9 (0.4 ) (5.7 ) 5.3 Other income (deductions) (0.9 ) (1.7 ) 0.8 (4.9 ) (5.0 ) 0.1 Net interest charges (4.2 ) (5.1 ) 0.9 (12.4 ) (15.2 ) 2.8 Earnings (loss) before income taxes (4.9 ) (9.6 ) 4.7 (17.8 ) (26.0 ) 8.2 Income (taxes) benefit 2.9 5.4 (2.5 ) 8.9 12.0 (3.1 ) Segment earnings (loss) $ (2.0 ) $ (4.1 ) $ 2.1 $ (8.9 ) $ (14.0 ) $ 5.0 The Corporate and Other segment includes consolidation elimination of revenue and cost of energy between business segments, primarily related to TNMP's sale of transmission services to First Choice prior to November 1, 2011, when PNMR sold First Choice. Accordingly, there was no elimination of intersegment revenue in 2012.
Operating expense decreased primarily due to legal and consulting expenses incurred in 2011 related to assessment of strategic alternatives for PNMR's competitive businesses that did not recur in 2012.
Depreciation expense increased $1.0 million and $2.6 million in the three and nine months ended September 30, 2012 compared to 2011 due to accelerated amortization of leasehold improvements for part of its corporate headquarters.
The accelerated amortization is offset by lower depreciation on software applications of $0.9 million and $2.5 million for the three and nine months ended September 30, 2012 compared to 2011. Changes in depreciation and amortization are offset in operating expenses as a result of allocation of these costs to other business segments. PNM and TNMP defer their allocations of the accelerated amortization of leasehold improvements as regulatory assets to be recovered through rates.
74-------------------------------------------------------------------------------- Table of Contents Other income and deductions increased for the three months ended September 30, 2012 compared to 2011 as a result of recording an additional pre-tax gain of $1.0 million on the sale of First Choice (Note 14). This gain was offset by lower performance on other investments for the nine months ended September 30, 2012 compared to 2011.
Interest charges decreased $1.2 million and $3.5 million for the three and nine months ended September 30, 2012 compared to 2011 due to the re-acquisition of $50.0 million of PNMR 9.25% senior unsecured notes in November 2011.
Back To NFVZone's Homepage