ML041330417
| ML041330417 | |
| Person / Time | |
|---|---|
| Site: | Palo Verde  |
| Issue date: | 03/11/2004 |
| From: | PNM Resources |
| To: | Office of Nuclear Reactor Regulation |
| References | |
| Download: ML041330417 (100) | |
Text
PNM' onthebasics:
integrity andfairnessinallour dealingswithpeople;responsible
_"_. stewardshipforourenvironment andthenaturalresources weuse,
_.:-_the
_,_._ common itiesweserve,and
_"_'__"_-,_?_
thecorporate assetswe manage; engagement inmakinga difference
- mughinnmr_ion, cmativly, service
_ andteamwork. Ourstrategic planis slmighffonMa_l.Ourphilosophyis
- _ simple: delivering valuetocustomers buildsvalueforshareholder.
F,,owSHAREHOLDERS While 2002 was the most turbulent year in the energy industry's history, PNM Resources succeeded in laying a strong foundation for future growth, both 'n our core electric and gas utility and in our wholesale power marketing business.
,!_t;;_ We negotiated an agreement setting PNM retail electric rates in New Mexico for the next five years.
.... This agreement provides PNM with a predictable revenue stream and allows us to efficiently combine all of our generating resourcesto serve both retail and wholesale customers. If New Mexico decides to continue the existing system of public utility regulation, PNM will remain the sole supplier of electricity in our home territory.
We expect the reduced revenues under the new, lower electric rates to be offset by lower fuel costs
..... .. at our San Juan Generating Station. The shift from a surface to an underground mine is now complete,
_ giving us accessto a higher quality coal at lower cost. Sincethe plant burns more than 6 million tons of
!:._!!ii coal a year, these savingsshould be substantial over the life of the mine.
"_ :_ With new electric rates in place, we are now taking steps to improve the rate of return in our gas utility.
I know that no one, includingme, likes to pay more for anything. Butwe need the opportunity to earn an
- appropriate return on our gas business.In January 2003, PNM filed a request for a $37.6 million increasein
. * ,,. the fees we charge customersfor natural gas service. If approved by regulators, that increase will take
'" effect at the end of 2003.
We expectthat eamingsgrowthonthe utili_ sideof our businesswillflowfromthe continuedeconomicgrowth in New Mexico andfrom the costreductionsad_ievedby makingour operationsmore efficientandproductive.
_:..-i; Despite weakness in the national economy, PNM retail electric revenues rose nearly 2 percent in 2002.
- ._.= The growth in our local service territory has exceeded the national average in each of the last 10 years,
_i_._ and we expect this pattern will continue in 2003 and beyond.
,_
- A ROCKY YEAR IN THE WHOLESALE MARKET In sharpcontrast to the growth in our utility business, PNM wholesale power revenues plunged more than 60 percent in 2002. Because of low prices and slack activity in that market, the wholesale power business contributedjust 28 percent of total operating revenues in 2002, compared to about 60 percent in 2001.
Painfulas it has been, I believe this steep downturn will ultimately benefit both PNM and the market as
- ": a whole. What we saw in 2002 was the necessarycorrection to the excessesbred by the temporary bubble
- "_ 'rn2001. Today,wholesale prices and activity remain depressed as the industry slowly absorbs all the new
" " generating capacity added over the last two years. But as supply and demand come back into balance,
- .'i the wholesale power market can return to what it should have been all along: an efficient means of
- . matching sellers and buyers to the benefit of both.
- ": ":i
- " :,.i @
"Our vision Is to build America's Best Merchant Utility, a company that serves both electric and gas customers as a regulated utility and sells power in the competitive wholesale market. To get there, we're taking a systematic approach to improving every aspect of our business."
JEFFRYE.STERBA Chairman, Presidentand CEO PNM Resources
"IWo-thousand six hundred employees, one shared vision: Build America's Best Merchant Utility. [n 2002 we made measurable pro_ess toward that goal.
POWER .INNUMBERS In that revived market. PNM will be well positioned to build on our past success.For more than a decade, our strategyhas focusednot on short-term ups and downs in the manet but on building long-term, stable relationshipsby meeting the needs of smaller utilities and other customers.
For example, at the end of 2002 PNM agreed to provide 80 megawatts of power to the U.S. Navy in San Diego, California. This contract, which will bring us $42 million in annual revenues, represents the kind of solid base we are building in our wholesale business.Including our obligation to serve retail customers in New Mexico, about three quarters of PNM generating capacity is now committed under tong term agreements.
ADDING GENERATION RESOURCES Our continued participat on in the wholes_e power market, together with growth in our home territory, requires us to invest in serving those new customers.
_- One of my personal h!ghlights in 2002 came on a trip to a West Texas "wind farm," where we climbed a
_, _, _ ladder 210 feet into the air to inspecta generating tixbine attached to three giant blades. That visit was in preparation for announcing PNM's commitment to the New Mexico Wind Energy Center. When it's operationallaterthis year,thiswind farm will be one of the largestsuchprojectsinthe nation,with 136turbines generating200 megawattsof electricity- enough power to suRNynearly 100,000homes in the Southwest.
PNM has agreed tobuy all that power under a long-term contract. The wind farm will be a competitively priced source of clean, renewable energy both for our retail customers and for PNM wholesale customers throughout the region. While coal, natural gasand nuclear energy will continue to supply the majority of PNM's power for years to come, this project representsa historicstep forward in reducing our reliance on fossil fuel generation. This positions our company as a leader in the move toward "green energy."
Our wind energy commitment was just one of three additions to the PNM generating portfolio in 2002.
The other two are cleanburning natural gas-fired power plants in southern New Mexico. Together they produce about 221 megawatts, increasing PNM net generating capacity by about 13 percent.
_I _v<I_S_ i_i<{_i d!_i_,_t_ Oi__i_i__i_
]_!<:i< : '<i IN RELI
\VUI.I K PLACE EXCELLENCE RECOGNIZE GOOD ENT GR HONESTY, INTEGRITY AND SOUND BUSINESS PRACTICES Di._cussingthe wholesale energy market brings up a Fainful subject: the scandalsthat have undermined investor confidence =ncorporate America over the past year. I want to assureyou that PNM Resources did not engage in any of the misconductthat has recently tarnished our industry'sreputation. In fact, most of the reforms now being adopted by others have long been standard practice for your comperty.
Our "Do the RightThing"business ethics program, for instance, has been in place since 1995 and has been updated several times sincethen. All employees engage in refreshertraining to make sure that our dealings with customers, co-workers, business partners and shareholders are above reproach.
We have equally high standards in corporate governance. YourBoard of Directors is actively involved in setting strategic direction and holding management accountable for our performance. Except for myselfthe board ismade up entirelyof independent directors. Their combinedwealth of industryexpertise, broad experience and sound businessjudgment isan invaluable resourcefor our company.All of usshare
!_t t__-to an unwaveringcommitment to serving the best interestsof shareholders.
- t _ c_,_t i,u_.i_
_1_! _, lti__ You'll find moredetails about the PNM Resources Board, including a description of the key committees that oversee our accounting practices, disclosure standards and executive compensation, in the 2003 proxy statement.
CONTINUOUS IMPROVEMENT TOW_kRD A BOLD GOAL Cur vision is1o build America'sBest Merchant Utility,a companythat servesboth electric and gas customers as a regulated utility and sells power in the competitive wholesale market. To get there, we're taking a systematicapproach to improving even/aspect cf our business.
We have established a set of high-level goals in customer satisfaction, workplace excellence, process improvement, being a good neighbor and driving profitable growth. Each of these goals aims to deliver improved value to our key stakeholders. Performance measuresbuilt around each goal help us find and close the gaps between where we are and where we want to be. Through this processwe engage everyone 'n the company, from top executives to front-line workers, in aligning their personal efforts with the goals we have all agreed on.
O
"We're building homes today that are more energy ell]dent, more comfortable, more affordable and healthier than was possible 10-15 years ago. With the special meters PNM has installed in 30 of our new homes, we're learning more mid more about how to build a better home."
JERRY WADE -Ara, a_ Homes, Albuquerque, NM EATONES.
9000 I*t 0 [H e S Ninety-seven thotL_and New Mexico homes could be served by the power generated by the New Mexico Vvqnd EtmrD, Center. "_Vhen complete later
_hi_ yem. the third largest wind farm in thc natiou Mll aid 200 me_wa_
of renewable energy to the PNM generation portfolio.
PROTECTING THE EARTH ISNOTJUST A,JOB. _.
IT'SA For instance, identifying and improving the processes in our customer service call center has allowed us to cut the average time a customer waits on hold to just 26 seconds. That's one of the reasons a 2002 national survey ranked PNM first among the utilities surveyed in customer call satisfaction. The same systematic approach has helped us reduce the number and length of outages. In another survey last year, your company ranked number one in the nation for system reliability.
We measure ourselves against the industry's top performers because our goal is to be an industry leader. We want to rank number one. This is what we mean by America's "best" merchant utility.
Continual improvement is making us more flexible in adapting to change, more responsive to customers and more tightly focused on transforming customer needs into shareholder value.
"PNM is bui]ding 13esting plaff,:)r.3_.s am]
pcrche_,;, hiss:ailing saf'ety devices throughou_ our system and working widl wildlife preservation groups _o help safeguard New Mexico habitat. Kree, a Swainsons _la_k, is part oi: a HawkV%tch progl:am that uses birds not suitable for rei_abilkation m the wild to teach school children abot, t raptors.
0
P R I_ C i,IS S () U A L !" _'
47%
l'CJ) O!) klS [O il!St'_llI Flew electt'ic _liqd g'as ser_:kc _;.Iv IJley were complex-ely suds;fled x_ith PNM I_lstyear - m<,re dl_;)_double the i_ul_/1)er who g'ave us t}m highest grade thcee yca-s ago. We've streamlined *.:l_e proc,_'ssand madeit easierR_rthe customer {,y providil_g kme si-op shoplfing' fi_r utility, pf;one and cable TV hookup.
PROCESS OUR COMMITMENT TO YOU Your company earned $1.61 per diluted share in 2002, down from $3.77 per share in 2001, primarily due to lower prices and reduced activity in the wholesale power market. Includingthe 86 centsper sharepaid in common stock dividends, total return on PNM Resourcesstock was a negative 11.7 percent in 2002.
By comparison, the stocks in the S&P 500 index posted a negative 22.1 percent total return in 2002, while the stocksin a peer group of electric and gas utilities posted a negative 18.0 percent total return.
Over the past three years, PNM total return has been +60.9 percent compared to -37.4 percent for the S&P500 and +13.8 percent for our peer group.
letic,. t<, [ believe our performance relative to our peers sayssomething about the folks who run your company.
II _,R I" il _t I i) E R Y;
( ,,,_ti_H_e,t) We're conservative, we're cautious.
As a result, PNM Resourcestoday has a continuing strong cashflow and a healthy financial position.
At the end of 2002, your company not only renewed but expanded our line of credit, adding four new banks to the pool of participantsand increasingthe company'sborrowing limitfrom $150 million to $195 million.
We are committedto maintainingour investmentgrade credit rating in 2003.
In a challenging year, your company emerged more efficient and productive and financially stronger than many other companies in our industry.In February 2003, at a time when some other utilities were being forced to reduce or even eliminate their dividend to shareholders,we were able to increase the PNM Resourcesdividend by 4.5 percent, to an annual rate of 92 cents per share.
\,_ithm 3-5 days after receMng the petunias, a PNM crew, like _e one Melton 'vVebbis a part of, is on site to install electric and gas lhaesfor a new home or business,
Lastyear we rolled out a new ad campaagn,"A PersonalCommitment to New Mexico," with commercials, billboards and print ads featuring not actors but real PNM workers. I was pleased and proud to see the way that slogan was so enthusiasticallyadopted by everyone in our organization. The message strikesa chord with oiJr employees as a natural expressionof what they do every day in providing reliable and affordable energy services.
It'sthat level of commitment that gives me confidence in the future of PNM Resources.Our commitment is not just to customers,to employees and to the communitieswe serve, but to the shareholderswhose investmenthas made our company what it is today.
We have.manythingson ourtable to manage in2003. Butin closinglet me listour fryetop prioritiesfor the year:.
- Continue progress toward our performance objectives;
- Achieveanacceptablereturnon our gasbusinessthrougha successful outcome fromthe pending ratecase;
- Continueour incrementalexpansionin the wholesaleelectricitymarketby makingadditionallong-termsales;
- Expand our efforts in environmental stewardship through renewable energy and our company-wide emphasis on environmental awareness;and
- Pursue new growth opportunities as our marketplace changes.
We willdemonstrateour commitmentto shareholdervalue by continuing to improve our balance sheet strength,provide a securedividend, and find ways to provide earnings growth over the next few years, It is a pleasure to lead your company forward into 2003.
J_ffry E. Sterba Chairman, President and CEO The underlying growth rate in our home service territory has exceeded the national average for most of the past decade.
]
- i PNMpeakelectricloadin the summerof 2002rose4 percentto
..oPLAN
/
1 10.00%
1S00 ....................................................................................
/
1450 ............................................... ILO0%
1400 ............................................... (kOOe_
1350 ...................................... 4.00%
1300 .................... 2.00%
12S0 ............... 0.00%
YEAR-TO-YEAR
% GROWTH-SUMMER SUMMER S-YEAR SYSTEM PEAK DEMAND (for retail and firm requirement customers) 7600 ....................................................................................
7400 ......................................................
'_ 7200 I i
'99 '00 '01 '02 RETAIL ELECTRIC SALES (total MWh in thousands) megawatts
PN.,YI R _ so v _c_,.s INC. - 2002 BO.-\R D O_' DLRI<CTORS SEEK KNOWLEDGE, TRUST
EXPERIENCE.
.?!_ . L:-.. ? *_'*-2*_ .... --_
- ' C Oi_i_ "]II "_1'_ i':i-"i, r' "="= :;I')._'_',',[1_
3.110 1.50 100 0.SO
'911 '99 'O0 "0t '03 ,98 ,99 "00 "01 "02 DIVIDENDS _ EARNINGS FINANCIAL STRENGTH EARNINGS & DIVIDENDS PAIID (retained earnings in millions) (per share of common stock, diluted)
PNM Resources, Inc. (the "Company") considers this annual report to conntin "forward-loo!dng statements" under Federal securities law. It is pubfished to assist shareholders in evaluating the Company and its securities. This report does not contain all of the information material to an evaluation and should be read in coniunction with its periodic reports, proxy statement and other information the Company files _vith the Securities and Exchange Counnissiou. *Please refer to "Disclosure
- Regarding Forward-Looking Statements," for a listing of the factors which could ca_ase die Company's actual financial resltlts to differ materially from die prospective information provided by the Company in _brward-tooking statements.
I 0
SELECTED FINANCIALDATA (In thousands except per share amounts andratios)
$1,168,996 $1,611,274 $1,157,543 $1,092,445
$ 64,272 79,614 $ 95,119
$ 64,272 $ 150,433 S 100,946 $ 83,155 $ 82,682
$ 1.63 $ 3.83 $ 2.54 $ ,_ 1.93 " $ 2.27
$ 1.63 $ 3,83 ; 2.0_ $ 1,97 Diluted $ 1.61 $ 3.77 $ 2.01 $ 1.95
$ 97,251 $ 327+346 +$ 239,515 $ 213045 $ 210;988
$ (200,427) $ (407,014) $ ('f57,500) $ (55,886) $ (340,992)
$ 78,470 $
$3,026,907 $2 $2,668;603
$ 980,092 $ 953,884 _ $ 953 823 $ 988,489 $1,00fl,614
$ 23.820 $ 27.950 $ 26.813 $ 16.250 $ 20.438 "
$ 24.90 $ 25.87 $ 23.42- $ 20.63 39,118 39.118 39.487
$ 0.88 $ 0.80 $ 0.80 $ 1.00 $ 0,60 6.2% 14.8% 11.1% + 9.5% 9.9%
49.2% 50.8% 48.6% 46.7% 45.4%
0.7 0.6 0.7 0.7 0,7 ..,
50.1 '48:6 50.7 52.6 53_9 "'"
100.00% 100.00% 100.00% 100,00% 100.00%
- (See ecliate!y following the Consolidated Financial Statements for additional
- of its Energy ,Services Business Un t in _998, certain prior year amounts 17
i!_!_:_i i__i, i ! i¸¸¸!**flail! ! _iii_i
- i ii _i *;
- _
- The following is management's assessment of the Company's financial condition and the significant factors affecting the results of operations. This discussion should be read in conjunction with the Company's consolidated financial statements and related notes. Trends and contingencies of a material nature are discussed to me extent known and considered relevant.
OVERVIEW The Holding Company is an investor-owned holding company of energy and energy related companies. Its principal subsidiary, PNM, is an integrated public utility primarily engaged in the generation, transmission, distribution and sale *and marketing of electricity; transmission, distribution and sale of natural gas within the State of New Mexico; and the sale and marketing of electricity in the Western United States.
Upon the completion on December 31, 2001, of a one-for-one share exchange between PNM and the Holding CompanY, the Holding Company became the parent company of PNM. Prior to the share exchange, the Holding Company had existed as a subsidiary of PNM. The new parent company began trading on the New York Stock Exchange under the same PNM symbol beginning on December 31, 2001.
COMPETITIVE STRATEGY The Company is positioned as a "merchant utility," primarily operating as a regulated energy service provider. The Company is also engaged in the sale and marketing of electricity in the competitive energy market _)lace. AS a utility, PNM has an obligation to serve its customers under the jurisdiction of the New Mexico Public Regulation Commission ("PRC"). As a merchant, PNM markets excess production from the utility, as well as unregulated generation, into a competitive marketplace. The Company also has an electric power marketing operation focused on purchasing wholesale electricity in the open market for future resale or to provide energy to jurisdictional customers in New Mexico when the Company's generation assets cannot satisfy demand. The marketing operations utilize an asset-backed marketing strategy, whereby the Company's aggregate net open position for the sale of electricity is covered by the Company's excess generation capabilities.
As it currently operates, the Company's principal business segments are Utility Operations, which include Electric Services
("Electric") and Gas Services ("Gas"), and Generation and Marketing Operations ("Generation and Marketing"). Electric consists of two major business lines that include distribution and transmission. The transmission business line does not meet the definition of a segment due to its immateriality and is combined with the distribution business line for disclosure purposes. Unregulated Ooerations provide energy related services.
., The Electric and Gas Services strategy is directed at supplying reasonably priced and reliable energy to retail customers through
"- customer-driven operational excellence, high quality customer servsce,cost emcient processes, and improved overall organizational performance.
The Generation and Marketing strategy calls for increased asset-backed marketing and generation capacity supported by long-term contracts, balanced with stringent risk management policies. The Company's future growth plans call for approximately 75% of its new generation portfolio to be committed through _ong-term contracts, including salesto retail customers. Growth will be dependent on market development, and upon the Company's ability to generate funds for the Company's future expansion. Although the current environment has led the Company to scale back its expansion plans, the Company will continue to operate in the wholesale market. Expansion of the Company's generating portfolio will depend upon acquiring favorably priced assets at strategic locations and securing long-term commitments for the purchase of power from the acquired plants.
RESULTS OFOPERATIONS YEARENDEDDECEMBER3'1,2002 COMPAREDTO YEARENOEDDECEMBER31, 2001 Consolidated The Company's net earnings available to common shareholders for the year ended December 31, 2002 were $63.7 million, a 57.5% decrease in net earnings from $149.8 million in 2001. This decrease primarily reflects the slowdown in the wholesale electric market, where both prices and market liquidity were significantly lower than the prior year. Despite the slowdown in the wholesale electric market, PNM's electric utility operations recorded an operating income growth of 5.3%. This growth came from a combination of load growth and cost savings, demonstrating the balance the regulated utility provides in the Company's "merchant utility" strategy.
18
Eamings in 2002 and 2001 were affected by certain non-recurring gains and charges. These special items are detailed in the individual business segment discussions belOw. The following table enUmerates these non-recurring charges and shows their effect on diluted earnings per share, in thousands, except per share amounts.
EPS EPS EARNINGS (DILUTED} EARNINGS (DILUTED)
Net EarningsAvailablefor Comma.Shan_o/der= $ 63,686 $1.61 $149,847 $3.77 Aaju=tment for Specia(o_
l /n=j_
(net of income tax effects):
Realignment costs 5,337 0.14 Transmissionline project write-off 2.911 0.07 PVNGS* and Four Corners severance costs 942 0.03 Contribution to PNM Foundation 3,021 0.08 Nonrecoverable coal mine decommissioning costs 7,840 0.20 Write-off of Avistar investments 7,907 0_0 Western Resourcesacquisition and legal costs (1,471) (0.04) 10,859 0.27 Total 7,719 0.20 29.627 0.75 Net _ng= AvailableFor Cemmo_
Sl_reho_er=F.xdedlr,g SI_cMIC.#,n=
=_ Charge= $ 71.405 $1.81 $179,474 $4.52
- Pale Verde Nuclear Generating Station (!'PVNGS")
To adjust reported net earnings and diluted earnings per share to exclude the non-recurring gains and charges, gains, net of income tax expense, are subtracted from reported net earnings under GAAP, and charges, net of income tax benefit, are added back to reported net earnings under GAAP.
The following discussion is based on the financial information presented in the Consolidated Financial Statements - Segment Information no_e in the Notes to Consolidated Financial Statements.
Utility Operations E/ectric The table below sets forth the operating results for the Electric business segment.
YearEndedDecember3%
(In thousands of dollars)
Operatingrevenues:
External customers $570,089 $559,226 $10,863 Intersegment revenues 707 707 T_I revenues 57C..796 559,933 10,863 Cost of energy sold 3,888 5,102 (1,214)
Intersegment purchases 348,935 341,608 7,327 Toat,/costof energy 352,823 346,710 6,113
_ro=,mucj/_ 217,973 213,223 4,750 Administrative and other 52,660 48,821 3,839 Depreciation and amortization 34,025 32,666 1,359 Transmissionand distribution costs 34,236 37,376 (3,140)
Taxes other tha_ income taxes 12,482 I2,336 146 Income taxes 24,121 24,607 (486)
Total non-fuel operating expenses 157,524 155,806 1,718 0_/ncc_e $ 60,449 $ 57,417 $ 3,032 lg
&IANAGEMENT'S DISCUSSION ANDANALYSIS OFFINANCIAL AND RESULTS CONDiTiON OFOPERATION
iVIANAGE_AENDIsCUSsiON T'$ AN{)ANALYSIS OF FINANC!AL CONDITION AND RESULTSOF OPEB:_TIO_
$ 272.118 139,045 133,073 53,012 " 53.093 (81) 20,964 2t ,465 _501) 29,306 31.072 (1,766) 7,793 6,881 912 3,346 3,881 114,421 o_ t,,=,,,,, $ 18,652 from
_y'sconsolidated gros! gs.
customer and averagecuStomers:
_ (In _housands
$172,200 $
52,530 68,89S 2,872 27,5i9 17,735 Other * -- 26,781
} $ 272,118
- Average customers 443 396 " 434 591 y customer class
Residential 29,627 Commercial 12,009 Inclustria[ 749 44,889 4,806 92,080
- Customer-owned gas.
21
The gross margin, or operating revenues minus cost of energy sold, decreased $1.0 million or 0.8%. This decrease is due mainly to lower consumption of gas for electric generation of $6.0 million partially offset by a 2.0% growth in customer base of $5.0 million.
Gross margin is expected to decrease in 2003 due to the expiration of a rate rider in January 2003. The Company currently believes that gas assets are not earning an adequate level of return. As a result, the Company filed a request for increased rates in January 2003. The Company's last gas rate case;filing was in October 1997.
Total non-fuel operating expenses decreased $2.0 million or 1.7%. Administrative and other costs decreased only slightly from the prior year. In 2002, the Company recognized lower bad debt expense of $3.0 million because of collection improvements and the absence of osses from the bankruptcy of a significant customer in 2001, lower amortization costs of $1.2 million for SFAS 106 deferred costs (which were fully amortized in 2001), and lower consulting expenses of $0.5 mllhon in connection with cost control and process improvement initiativesin 2001 and lower legal expenses of $0.5 million for routine business matters. These decreases were mostly offset by higher allocated corporate administrative costs of $5.6 m=llion. Transmission and distribution costs decreased
$1.8 million or 5.7% primarily due to maintenance performed in 2001 to improve system reliability, which did not recur in 2002.
Taxes other than income taxes increased $0.9 million or 13.3% due to the absence of favorable audit outcomes by certain tax authorities recognized in 2001. Income taxes0 which include income taxes for interest charges, decreased $0.5 million or 13.8% due to lower pre-tax income Generation and Marketing Operations The table below sets forth the operating results for the Generation and Marketing business segment.
GenerationandMarketing YearEndedDecember31, (In thousands of do/lets)
O_r=tlngrevenues:
External customers $ 325.385 $ 1,393,635 $ (1,068,250)
Intersegment revenues 348,935 341,608 7,327 Totarlevenues 674,320 1,735,243 (1,060,923)
Cost of energy sold 406,310 1,267,887 (861,577)
Intersegment purchases 707 707 Tot_*costof energy 407,017 1,268,594 (861,577)
Grou n.wg_ 267,303 466,649 (199,346)
Administrative and other 35,452 34,730 722 Energy oroductJon costs 146,901 149,58S (2,684)
Depreciation and amortization 43,837 42,766 1,071 Taxes other than income taxes 11,060 8,865 2,195 ncome taxes 5,316 80,138 (74,822)
Total non-fuel operating expenses 242,566 316,084 (73,518)
Operatb_income $ 24,737 $ 150,565 $ (125,828)
Operating revenues declined $1,1 billion or 61.1% for the year to $674.3 million. This decrease in wholesale electricity sales primarily reflects the slowdowr in the wholesale electric market, which resulted from steep declines in wholesale prices and market liquidity as compared to the prior year perioc{.
The significantly higher wholesale pricing in 2001 was driven by increased demand in California. a lack of generating assets to serve the market and the impact of warm weather. By contrast, 2002 has seen relatively mild weather in the West, an abundance of low cost hydropower and weak economic conditions in the region. As a result, the average price realized by the Company felt to approximately $34 per MWh in 2002 versus $111 per MWh in 2001. The low wholesale pnces are expected to continue into 2003.
The decline in merchant sales volumes reflect the reduction in market participants in the wholesale market caused by bankruptcy, reduced credit quality of firms in the market and firms exiting the wholesale market. There are also significant unresolved legal, political and regulatory issues that had a dampening effect on activity in the marketplace. As a result, the Company's spot market and short-term sales have declined significantly. The Company delivered wholesale (bulk) power of 9.5 million MWh of electricity for the year ended December 31, 2002, compared to 12.6 million MWh for the same period in 2001.
22
_.'si _/i4. "
Although other firms have exited the wholesale market or h ave had their access to the wholesale market limited due to concerns over credit quality, the Company remains committed to be a participant in this marketplace. While market liquidity is weak, the Company will focus on long-term relationships with smaller wholesale customers (small investor-owned utilities, municipal utilities and co-ops). At the same time, the Company will continue to monitor market conditions. This commitment to the wholesale market leaves the Company poised to participate in the market as liquidity returns and regulatory issues are resolved.
The following table shows revenues by customer class:
Ge_r_ andMarketingRevem_a YearEndedDecember31, In thousands of dollars)
Intersegment sales $ 348,935 $ 341,508 Long-term contract 40,132 77,250 Other merchant sales* 266,956 1,313,739 Other 18,297 2,646
$ 674,320 $1,735,243
- Includes mark-to-market gains/(Iosses).
The following table shows sales by customer class:
Genermtlon andM_,rkeeng S_es(Megawatt hours)
Year Ended December 31, Intersegment sales 7,406,506 7,255,297 Long-term contract 844,168 1,463,031 Other merchant sales 8,605,987 11,114,069 16,856,661 t9,832,397 The gross margin, or operating revenues minus cost of energy sold, decreased $199.3 million or 42.7%. Lower margins were created
. .. ' primarily by weak pricing, less price volatility and lower market liquidity. In addition, unexpected outages at Four Corners reduced availability of power for wholesale sales. These lower margins were partially offset by a favorable change in the mark-to-market position of the marketing portfolio of $55.3 million year-over-year ($29.5 million gain in 2002 versus $25.8 million loss in 2001). A majority of the gain in 2002 represents the reversal of previously recognized mark-to-market losses.
Total non-fuel operating expenses decreased $73.5 million or 23.3%. Administrative and other costs increased $0.7 million or 2.1% for the year. This increase is primarily due to higher corporate administrative cost allocations of $4.9 million, partially offset by an adjustment of $1.6 million to prior year San Juan Generating Station ("SJGS") participant billings (the Company is the operator of SJGS and shares costs with other owners) and lower costs of $2.3 million resulting from increased capital activity for generation expansion. Energy production costs decreased $2.7 million or 1.8% for the period reflecting the benefits of $2.3 million for the acceleration into 2001 of a planned outage at SJGS, decreased costs of $3.5 million for planned outages at SJGS and an adjustment of $3.6 million to prior year Polo Verde Nuclear Generating Station ("PVNGS") billings From Arizona Public Service Company, the operator of PVNGS. These cost decreases were partially offset by costs of $4.0 million related to the future expansion of Afton Generating Station ("Alton"), severance costs of $1.6 million at PVNGS and Four Corners Power Plant ("Four Corners"), costs of
$1.4 million for planned and unplanned outages at Four Corners and costs of $0.8 million at Lordsburg Generating Station ("Lordsburg"),
which became fully operational in June 2002. Depreciation and amortization increased $1.1 million or 2.5% due to the addition of Lordsbu rg.,Taxes other than income taxes increased $2.2 million or 24.8% reflecting adjustments recorded in the prior year for favorable audit outcomes by certain tax authorities. Income taxes, which include income taxes for interest charges, decreased $74.8 million or 93.4%
due to a decline in pre-tax income.
MANAGEIVIENT 'S DISCUSSION ANDANALYSIS OFFINANCIAL CONDITION ANDRESULTSOFOPERATION increased
_ment from of $8.8 market conditions.
the mine 1for the
$81.1 I corresponding ii¸.
24
OFF4NANCIAL CO_-IDIT]ON A_ID "
- _Ud ,_OFO_f_:_:
H49.8 million, a md an active wholesale These special items are Yn=
EP$.
Earnings (Dilutedl Earnings (Diluted)
'"_ $149,847 .... $3.77 $100,360 $2.53 3,021 , 0;08 .....
7,84O 0.20 7,907 (8,306) (0.2t)
(2,8o8) (0,07) lUlatory assets 6,552 0.16 2,740 0.07 10_859 0.27 .4,047 . .0.10 29,627 ; 0.75 2,225 , " , 0.05
=_ (;ll=_ $17%474 _ $4.52 $102,585 $2.58 i" the special gains and non-recu_r ng Charges, spec a reported net earnings under _P and non-recurring charges, net of income
, tax benefit, are added back to reported net earnings under GAAP.
25
i_ _ , iii i_ _j iiiiiii!!i_,_ , i¸¸_/i_i ¸i_ii_¸
_ !_ i I¸!¸¸¸¸_¸ i_ !:i_//i_iii_i !_:_ _ _ k* _ ,_ _L_ _ _
The following discussion is based on the financial information presented in the Consolidated Financial Statements - Segment Information note. The tables below set forth the operating results for each business segment.
Utility Operations Electric The table below sets forth the operating results for the Electric business segment.
Year Ended December 3%
(In thousands of dollars) rlvIIwel:
External customers $ 559,226 $ 538,758 $ 20,468 Intersegment revenues 707 707 Total/reveltues 559.933 539,465 20,468 Cost of energy sold 5,102 5,048 54 Intersegment purchases 341.608 324.744 16.864 Tota/cost of em,rlW 346,710 329,792 16.918 Grossmargin 213 223 209,673 3,550 Administrative and other 48,821 46,905 1,916 Depreciation and amortization 32,666 31,480 1,186 Transmission and distribution costs 37,376 33,092 4,284 Taxes other than ncome taxes 12,336 14,102 (1,766)
Income taxes 24,607 27,743 (3,136)
Total non-fuel operating expenses 155,806 153,322 2,484 o_at_g Income $ 57,417 $ 56,351 $ 1,066 Operating revenues increased $20.5 million or 3.8% for the period to $559.9 million, Retail electricity delivery grew 2.3% to 7.3 million MWh in 2001 compared to 7.1 million MWh delivered in the pror year period, resulting in increased revenues of $8.9 million year-over-year. This volume increase was the result of load growth from economic expansion in New Mexico. n addition, revenues from third party use of the Company's transmission system increased $9.6 million as a result of additional contracts from increased activity in the Western power market. Revenues also benefited from a $1 1 m Ilion increase in revenue from property leasing.
The following table shows electric revenues by customer class and average customers:
I_ Re_m._s(In thousands of dollars)
Year Ended December 3%
Residential $187,600 $186,133 Commercial 242,372 238,243 Industrial 82,752 79,671 Other 47,209 35,418
_, $ 559,933 $ 539,465 Average customers 377,589 368,506 The following table shows electric sales by customer class:
Et_'r/c Sak_(Megawatt hours)
Year Ended December 3%
Residential 2,197,889 2,171,945 Commercial 3,213,208 3,133,996 Industrial 1,503,266 1,544,367 Other 240,934 238,635 7,255,297 7,088,943 26
The gross margin, or operating revenues minus cost of energy sold, increased $3.6 million, which reflects the increased energy sales, transmission revenue and property leasing revenue, partially offset by higher cost for the electricity sold to retail customers.
Electric exclusively purchases power from Generation and Marketing at Company developed prices which are not based on market rates. These intercompany revenues and expenses are eliminated in the consolidated results.
Total non-fuel operating expenses increased $2.5 million or 1.6%. Administrative and general costs increased $1.9 million or 4.1%
for the period. This increase is primarily due to higher allocated corporate administrative costs of $5.0 million. Consulting expenses focused on cost control and process improvement initiatives also contributed to the increase. These increases were partially offset by lower bad debt and collection expense of $3.4 million. By December 2000, the Company had resolved most of the problems associated with implementing its new billing system. As a result, bad debt expense was significantly lower in 2001. Depreciation and amortization increased $1.2 million or 3.8% due to a higher depreciable plant base. Transmission and distribution costs increased $4.3 million or 12.9% primarily due to a non-recurring increase in maintenance to improve reliability for the transmission and distribution systems. Taxes other than income taxes decreased $1.8 million or 12.5% reflecting favorable audit outcomes by certain tax authorities and tax planning strategies in 2001. Income taxes, which include taxes associated with interest charges, decreased $3.1 million or 11.3% due to lower pre-tax income.
Gas The table below sets forth the operating results for the Gas business segment.
Year Ended December 31, (In thousands of dollars)
Ol_raU_ twv_s $ 385,418 $ 319,924 $ 65,494 Tota/costof .t,,'gy 251.296 195,334 55.962 Grossrr.,rg_, 134,122 124.590 9,532 Administrative and other 53,093 44.104 8,989 Depreciation and amortization 21,465 19,994 1,471 Transmission and distributio_ costs 31,072 27,206 3.866 Taxesother than income taxes 6,881 8,502 (1,621)
Income taxes 3,881 5,680 (1,799)
Total non-fuel operating expenses 116,392 105,486 10,906 Oper,_.g_.=ome $ 17,730 $ 19,104 $ (1,374)
Operating revenues increased $65.5 million or 20.5% for the period to $385.4 million. The Company purchases natural gas in the open market and resells it at cost to its distribution customers. As a result, increased gas revenues driven by increased gas costs do not impact the Company's gross margin or earmngs. The revenue increase was driven primarily by a 17.6% increase in average gas prices in the first half of 2001, resulting from increased market demand. In addition, a 3.1% volume increase and a gas rate increase, which became effective October 30, 2000 contributed to the _ncrease. The gas rate increase added $7.8 million of revenue.
Transportation volume increased 14.5% or $6.0 million. This growth was primarily attributed to gas transportation customers whose increased demand was driven by the strong power market in the Western United States during the first half of 2001. Approximately
$28.1 million of gas revenue in 2001 was attributable to sales to the Company's Generation and Marketing Operations.
27
_1ANAGEIVlENT'S DISCUSSION ANDANALYSIS OFFINANCIAL CONDITION ANDRESULTS OFOPERATION
MANAGEMENDISCUSSJO_J TS ANDANALYSIS OFFINANCIAL CONDITION ANDBES_,L_8 OFOPERATIO_
$ 643,201 O65 518_388 707 34,730 32,886_, 1,844 149,585 42,766
- 1,207
'_ 1t,457 !)
-_loperat ng expenses and the second half of 2000. This of generaUng in the last profitably in the marketplace - also declined imited price volatility.
_% for the period to $1.7 billion. This increase in wholesale electricity sales prices in the first half of 2001. The Company delivered wholesale (bulk) million MWh in the _Sfiorperiod. The average *price realized per MWh in 2001 compared tO $61 per MWh in 2000. Wholesale revenues 50.4 million to $1.4 billion, an 85.7% [ncraase.
__ (ln thousands of dallars)
Year Ended Oecembor Sl, sales $' 341;608 $ 324,744
_ 77,250 87.731 1,313,739 655,881 2_646 6,822
The following table shows sales by customer class:
Ganerat/onandMarkeUng$a/es(Megawatt hours)
YearEndedDecember3%
Intersegment sales 7,255,277 7,088,943 Long-term contract 1,463,031 330.003 Other merchant sales 11,114,069 12,022,125 19,832,397 19,441,071 The gross margin, or operating revenues minus cost of energy sold, increased $141.7 million or 43.0%. The Company's margin benefits significantly from rising gas prices as most of the Company's generation portfolio is fueled by stable priced fuel sources, such as coal and uranium. As the increase in gas prices puts upward pressure on electricity prices, the profitability of the Company's stable low-cost generation increases significantly. Margin also benefited from the Company's power marketing activities. The Company buys and then resells electricity in the market generating incremental margin by taking advantage of price changeS in the electricity sales market. In addition, the Company also tailors electric deliveries for its wholesale customers creating incremental margin opportunities. Generally, as market prices decline, marketing volumes rise supporting margin levels in lower price electric markets.
These higher margins were partially offset by an unfavorable change in the mark-to-market position of the marketing portfolio of
$21.0 million year-over-year ($25.8 million loss in 2001 versus $4.8 million loss in 2000) as the ,Western power market deterioration in the latter half of 2001 resulted in a reduction of the Company's merchant energy portfolio.
Total non-fuel operating expenses increased $69.6 million or 28.2%. Administrative and general costs increased $1.8 million or 5.6% for the period. This increase is primarily due to higher allocated corporate administrative costs of $5.4 million and higher power marketing expenses of $1.0 million mainly for additional incentive bonuses and consu ring fees and other expenses of $0.6 million related to business development and process improvement. This increase was partially offset by lower year-over-year Generation and Marketing business development costs of $4.5 million due to significant costs related to the acquisition of a long-term wholesale customer. Energy production costs increased $12.4 million or 9.0% for the year. The increase is primarily due to higher maintenance costs of $7.9 million in 2001 resulting from scheduled and unscheduled outages at PVNGS, SJGS and Reeves Generating Station ("Reeves"), additional incentive bonuses of $0.5 million at SJGS, and increasec_operations costs of $1.2 million for generation at Reeves, one of the Company's gas generation facilities, which has a higher cost of production than the Company's coal and nuclear facilities. This increase was partially offset by lower maintenance costs of $1.3 million at Four Corners as a result
" of decreased outage time. A significant unscheduled outage occurred in the fall of 200t at SJGS, which resulted in higher costs of
$2.3 million in 2001. The Company took advantage of the outage to accelerate its outage scheduled for the spring of 2002. As a result, maintenance costs and the related lost market potential of the accelerated outage was avoided inthe spring of 2002.
Depreciation and amortization increased $1.2 million or 2.9% for the period due to a higher depreciable plant base. Taxes other i than income taxes decreased $2.6 million or 22.0% as a result of favorable audit outcomes by certain tax authorities. Income taxes, which nclude taxes for interest charges, increased $50.7 million or 242.2% due to an increase in pre-tax income.
Unregulated Businesses In July 2001, the Board of Directors of Avistar decided to wind down all unregulated operations except for Avistar's Reliadigm business unit, which provides maintenance solutions and technologies to the electric power industry. Avistar had previously divested itself of its Energy Partners business unit and liquidated Axon Field Services and Pathways Integration. This divestiture was largely in response to market disruptions caused by the California energy crisis. In addition, the transfer of operation of the Sangre de Cristo Water Company to the City of Santa Fe was completed in the third quarter of 2001. All remaining non-Reliadigm investments were written-off with the exception of Avistar's investment in Nth Power, an energy related venture capital fund. These write-downs reflect the significant decline in the technology market and bankruptcy of these investees. The Company recorded non-operating charges of $13.1 million to reflect these activities and the impairment of its Avistar investments.
Due to the cessation of much of Avistar's historic operations, business activity declined significantly. Revenues decreased 30.8%
for the period to $1.5 million. Operating losses for Avistar decreased from $4.6 million in 2000 to $4.2 million in 2001 primarily due to decreased costs as a result of the shutdown of certain operations. In January 2002, Avistar was transferred by way of a dividend to Holding Company by PNM.
Corporate Corporate administrative and general costs, which represent costs that are driven exclusively by corporate-level activities, increased $13.3 million or 16.8% for the period to $92.4 million. This increase was due to increased pension and post-retirement benefits expense of $9.9 million and higher legal costs of $0.8 million associated with routine business operations.
Other Non-Operating Costs Other income decreased $14.1 miJlion for the year. In 2000, the Company recognized a gain of $13.8 million related to the settlement of a lawsuit.
Other deductions increased $55.3 million for the year. In 2001, the Company recorded charges of $13.1 million to write-off certain permanently impaired Avistar investments, $13.0 million of non-recoverable coal mine decommissioning costs previously established as a regulatory asset, non-recoverable regulatory costs of $11.1 million, a donation of $5.0 million to the PNM Foundation and a charge of $18.0 million related to the Corn pany's terminated acquisition of Western Resources. Pn2000, the Company recognized gains of $4.5 million for the reversal of certain reserves associated with the resolution of two gas rate claims and $2.4 million related to the Company's hedge of certain non-qualified retirement plan trust assets. In addition, in 2000, the Company recorded charges of $12.5 million related to the Company's terminated acquisition of Western Resources.
IncomeTaxes The Company's consolidated income tax expense was $81.1 million in the twelve months ended December 31, 2001, anLjl_crease of $6.7 million for the year. This increase was due to higher earnings in 2001. The Company's effective income tax rates for the years ended 2001 and 2000 were 35.02% and 42.41%, respectively. In 2001, the Company determined that $6.6 million of valuation allowances taken against certain income tax related regulatory assets were no longer required due to changes in the evaluation of its regulatory strategy in light of the holding company filing in May 2001. In 2000, when the allowance was established, management believed these income-tax-related regulatory assets would not be recoverable based on the probable regulatory outcome of industry restructuring in New Mexico. Currently, management fu _yexpects to recover these costs in future rate cases, a situation that was not possible prior to the delay of open access in New Mexico. Excluding the impact of the valuation reserve changes, the Company's effective income tax rates for the years ended 2001 and 2000 were 37.85% and 38.67%, respectively. The decrease in the effective rate was primarily due to the favorable tax treatment received on 2001 equity earnings from a passive investment.
/_ANAGE_IENT_S DISCUSSION ANDANALYSIS OFFINANCIAL ANDRESULTS CONDiTiON OFOPERATION
,1.80 md factors costs is the will rate sfees.
..Company Jrrent
}f about and
' be offset rags in s_hedule. San Inaddition, insouthern ints, Over e
such Juan, a from internal to concerns the utilities and market leaves discussion, and
" " Forward financial results
cRmCAL/¢l;:0utfn!_ POLICESMB E'_TIglB]E_
th apply accounting policies of those _ported amounts of revenue financial statements.
different assumptions. Management has portrayal of the Company's financial Condition and results and that involve application of these policies best represent the operating results Company. The following discussion provides informat on on the processes management in making judgments and assumptions as they apply to its critical accounting policies, . utilized by Revenue Recognition Unbilled Utility Revenues Revenues service is rendered or energy is delivered to customers.
_of their meters, which occurs on a last _incethe date of the results in unbilled n a particular month _nbilled revenue is
, line losses and
- reflectin_ experience, service customers while behalf of COmpany collects a cost of service revenue forthe transportation, deliven/, and _, stomer service provided to these Customers. Sales-service tariffs are subject to the terms of the Purchase Gas Adjustments Clause (' PGAC") while transportation sennce customers are metered and billed on the last day of the month; The_, the Company estimates unbilled decatherrns and cost of service revenues for sales service customers only.
The _Jnbilled c_catherms are based
. on consumption estimates and the associated cost of service revenue for the period. A cycle bill contains an amount for both the current period's Consumption and the prior period's consumption. The Unbilled portion that is recorded is estimated as a percentage of the next month's budgeted cycle billings. These budgets are prepared using historical data adjusted for known trends,, including prior period consumption. Adjustments are also made to the budgeted cycle billings for weather variations above or below normal, customer growth, and any pricing changes by customer rate and revenue class. Any differences between the estimate and the actual cycle billings are recorded inthe month billed.
- UnbilledWholesale Power Marketing Revenues Wholesale power marketing revenues are recognized in the month the energy is delivered to the customer and,are based on the actual amounts suppliedto the customer. However, in accordance with the Western Systems Power Pool contract, these revenues are billed in the month subsequent to their delivery. Consequently, wholesale power marketing revenues for the last month in any reporting Pariod are unbilled when reported, Accrued unbilled utility revenues and unbi led wholesale power marketing revenues are combined and specifically identified in the consolidated balance sheets.
33
Regulatory Assets and Liabilities itsfinancial statements rulation "
and
("SFAS 71 "), In s predecessor recorded certail , liabilities the effects concludes that the . The of as Company cont nual!y , anticipated and the future status of any of its The g Act").
assets. During The t in anticipation 2000 _e settlement In discussions =
2000 recorded assets, the difference on the_ n 200 ! passed Senate due to changes in in 2001 the Corn the eva pany In AugL a result of the
("Tucson") tO close discussed Company for a coal mine decommissioning t Company wrote-off decorum ssioning costs _ mers and
.: $13 million for th_ of which $8.1 million related a portion of SJGS Unit 4. In addition, the Companl to non.recoverable transition costs andeS3 million Electric rate nd Marketing Agreement also seeks _28, 2003. In Operations during connection wit} the transfer of The forgone transition costs include: mication assets, the cost of management of 2003.
costs. The Company will incur a one-time :nt in facilities As recoverability of its throug_ ;]e for the regulatory assets. If future recover) portion of the costs that were not recoverab 34
i¸_!iiii
__ _ i*
Asset Impairment The Company evaluates its tangible long-lived assets for impairment whenever indicators of impairment exist pursuant to Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 144"). These potential impairment triggers would include fluctuating market conditions as a result of industry deregulation; planned and scheduled customer purchase commitments; future market penetration; customer growth; fluctuating market prices (resulting from changing fuel costs, other economic conditions, etc.); weather patterns, and other market trends. Accounting rules require that if the sum of the undiscounted expected future cash flows from a company's asset (without interest charges that will be recognized as expenses when incurred), is less than the carrying value of the asset, an asset impairment must be recognized in the financial statements. The amount of impairment recognized is calculated by subtracting the fair value of the asset from the carrying value of the asset.
Impairment testing for the Company's power generation assets is done in two parts: those power generation assets used to supply New Mexico retail customer needs (evaluated as one group) and those used to supply wholesale market needs (evaluated as another group). Management's assumptions about future prices, volumes, and other market trends in the wholesale electricity market have fluctuated in the past and are expected to continue to be volatile. A significant adverse change in these assumptions may result in an impairment of the Company's power generation assets. Please note that the assumptions inherent in the Company's analysis of asset impairment are inter-dependent. Changes in any one assumption is a simplified view which attempts to give the reader an understanding of the sensitivities affecting the Company's earnings. If market prices were to decrease 22% below the Company's projected average market price of $34/MWh, the Company may be required to recognize a charge to earnings for the related asset Jmpairment in accordance with SFAS 144.
Pension and Other Post-retirement Benefits The Company and its subsidiaries maintain a qualified defined benefit pension plan (the "Plan"), which covers eligible non-union and union employees including officers. The Plan was frozen at the end of 1997 to new partici pants, salary levels and benefits. The Company's policy is to fund actuarially-determined contributions.
The Company's income for its Plan approximated $1.4 million for the year ended December 31, 2002, and is calculated based upon a number of actuarial assumptions, including an expected long-term rate of return on the Plan assets of 9.0%. In developing the expected long-term rate of return assumption, the Corn pany evaluated input from its actuaries, including their review of asset class return expectations as well as long-term inflation assumptions. This long-term rate of return assumption compares to the historical 10-year compounded return of 8.6% through the end of December 2002. The expected long-term rate of return on the Plan assets is based on an asset allocation assumption of 65% with equity managers, 25% with fixed income managers, and 10%
with alternative investments that are primarily real estate and timber. Because of market fluctuat on. the Plan's actual asset allocation as of December 31,2002 was 63% with equity managers, 27% with fixed income managers, and 10% with alternative investments. The Company reviews the actual asset allocation and periodically rebalances the asset allocation to the targeted allocation. The Company continues to believe that 9.0% is a reasonable long-term rate of return on the Plan's assets, despite the recent market
- _ downturn in which the Plan assets had an actual loss of 8.3% for the twelve months ended December 31, 2002. The Company will
- _. continue to evaluate its actuarial assumptions, including expected rate of return at least annually, and will adjust as necessary.
The Company bases its determination of pension expense or income on a market-related valuation of assets, which reduces year-to-year volatility. If investment return is outside a range of 5% to 13% (expected long-term rate of return plus or minus 4%),
this market-related valuation recognizes the portion of return that is outside the range over a five year period from the year in which the return occurs. Since the market-related value of assets recognizes the portion of return that is outside the range over a five-year period, the future value of assets will be impacted as previously deferred returns are recorded.
The discount rate that the Company utilizes for determining future pension obligations is based on a review of long-term hign-grade bonds. The discount rate determined on this basis has decreased to 6.75% at September 30, 2002 from 7.50% at September 30, 2001. Based on an expected rate of return on the Plan assets of 9 g%, a discount rate of 6.75% and various other assumptions, it is estimated that the pension expense for the Plan will approximate $3.2 million in fisca year 2003 and $3.8 million in fiscal year 2004. Future actual pension income or expense will depend on future investment performance, changes in future discount rates and vari.ous other factors related to the populations participating m our pension plans.
Lowering the Plan's expected long-term rate of return on pension assets by 0.5% (from (2%to 8.5%) would have lowered pension income for fiscal 2002 by approximately $1.9 million. Lowering the discount rate by 0.5% would have lowered pension income for fiscal year 2002 by approximately $200,000.
The value of the Plan assets has decreased from $339.7 million at September 30, 2001 to $325.1 million at September 30, 2002 including $20.1 million of contributions during 2002. The Company expects to make $20 million in contributions for the 2003 plan year. These contributions are expected to help the Company avoid potential actions of the Pension Benefit Guaranty Corporation for under-funded plans including higher insurance premiums and notification to participants of the under-funded plan status.
35
and
- assessment c
N I-
Fees rhe associated legal costs for these legal expected to be incurred in connection 5 "Accounting for Contingencies _ (_SFAS 5") ieaal matters when t _ nr_h=h =
has been incurred and the amount of expected legal costs to be incurred is reasonably estimable. These tl fees.
_larket Risk - Interest Rate Risk and Financia nstruments" for disCussion and derivative Company',, regarding the IJ_gBITY _glg_ BEg01ffiCES A1 J cash and short-term i investments of $83.3 million compared to $179.2 million n 2001. Certain Iong-te_ investments have been reclassified fund certain construction projects in 2002.
Cash 2 was $97.3 million comparedto cash provided by
, the result of a decline in payment of its pension and did not make itsl n addition, the Corn pany million until January 2002 because of an extension granted by the ,tRSto taxpayers in several counties in New wildfires in 2000. These non-recurring payments reduced operating cash flows below historical levels.
Cash used for investing activities was $200.4 million in 2002 compared to $407.0 million in 2001 Cash usecl for invest ng activities include s construction expenditures for newgenerating plants of $67.4 million in 2002 compared to $70 9 mil ion n 2001. Payments for combustion turbines not yet included in plant were $31.3 million n 2002 Compared to $32.6mi lion in 2001. In add tion, cash used f0rinvesting in 2001 includes the purchase Of short-term and long-term investments of $150.0 million. The change in cash used for investing activities Was partially offset by the redemption of Short-term investments of $76.6 million in 2002. Expenditures in 2001 reflect the acquisition of certain transmission assets and other related investing activities of $13.9 million.
Cash generatedby financing activities was $78.5 million in 2002 compared to $0.4 million in 2001. Financing activities in 2002
.... were primarily short-term borrowings of $115.0 m I ion compared to $35.0 million in 2001' for liquidity reasons, partially offset by an i 8% increase in cash payments for common stock dividends.
- Capital Requirements i_ Totalcap_t requirements indude construction expenditures aswell as other major capital requirementsand cash dividend requirements program is upgrading generation and distribution systems, and purchasing nuclear fuel, To position, the Companyannounced in 2002 its plans to eliminate capital expenditures for previously planned generation
- apital requirements for 2003 are $176 million and: projections for construction expenditures for 2003 are $156 million including remaining payments on the combustion turbines discussed below. For 2003-2007 projections, total capital requirements are $800 million and construction expenditures are $708 mitlion.Tl_ese estimates are under continuing review and subject to on-going adjustment.
PNM had previously committed to purchase five combustion turbines for a total cost of $t51.3 million. The turbines are for power generation piants with an estimatecl cost Of construct on of approximately $370 rail ion over the next five years depending on market conditions. PNM has expended $225 million as of December 31 2002 iof which $144 million was for equipment purchases. On June 27, 2002, Lordsl_Jrg, an 80 MW natural gasfired plant, became fully operational and commenced serving the wholesale power market Alton, a 141 MW simple cycle gas turbine, became fu y operational on December 4, 2002; These plants are part of the Company's ongoing competitive strategy of increasing generation capacity over time to serve increasing retail load, sales under long-term contracts and :other merchant sales. These plants were not originally planned to serve New Mexico retail customers and therefore are not currently, linClUded inthe rate base. However, it is possible that these plants may be needed inthe future to serve the growing retail load. If so, theseplants will have to be certified bythe PRC and would then be included in the rate base.
37
i_!i!i_! : : _ _i¸ :
In 2002, the Company utilized cash generated from operations, cash on hand, as well as its liq construction commitments. The Company anticipates that internal cash generation and current debt capa<
meet all its capital requirements for the years 2003 through 2007. To cover the difference in the amounts and generation and cash requirements, the Company intends to use short-term borrowings under its current and future Liquidity As of February 28, 2003, PNM had $215 million of liquidity arrangements in addition to $76 million of cash. The ,
- consist of $195 million from an unsecured revolving credit facility ("Credit Facility") and $20 million in local entered into a new revolving credit facility on December 19, 2002, which increased borrowing capacity million. This facility will mature December 18, 2003. There were $170 million in borrowings against the 28, 2003. In addition, the Holding Company has $15 million in local lines of credit.
The Company's ability, if required, to access the capital markets at a reasonable cost and to provide largely dependent upon its ability to earn a fair return on equity, results of operations, credit ratings, regulatory a and wholesale market conditions. Financing flexibility is enhanced by providing a high percentage internal sources and having the ability, if necessary, to issue long-term securities, and to obtain short-term 'credit.
PNM's credit outlook is considered stable by Moody's Investor Services, inc. ("Moody's") and Standard Services ('S&P') and positive by Fitch, Inc. ("Fitch"). The Company is committed to maintaining or improving its ratings. S&P currently rates PNM's semor unsecured notes ("SUNs"] and its Eastern Interconnection Project ("El debt "BBB-" and its preferred stock "BB". Moody's rates PNM's SUNs and senior unsecured pollution control revenue and preferred stock "Ba 1". The EIP senior secured debt is also rated "Bal ". Fitch rates PNM's control revenue bonds "BBB-," PNM's EIP lease obligation "BB+" and PNM's preferred stock "BB-."
that a security rating is not a recommendation to buy, sell or hold securities, that it may be subject to any time by the assigning rating organization, and that each rating should be evaluated independently of any other rating Long-term Obligations and Commitments The following tables show the Company's long-term obligations and commitments as of December 31,2002.
Payments Due (In thousands)
Contractual Obligations Total Less then 1 year 2-3 years 4-$ years After S yo_rs Short-Term Debt (a) $ 150,000 $150,000 $ $ $ -
Long-Term Debt 980,092 1,852 272,728 5,260 700,252
., Operating Leases 446,973 28,216 58,216 62,391 298,150
.... PurchasedPowerAgreement 213_191 23.889 48,217 34,704 106,38i; _,
CoalContract_) 1,496,838 106.048 205.229 183,252 1,002,309 Total Contractual Cash
.: Obligations $3,287,094 $ 310,005 $ 584,390 $ 285,607 $ 2,!07,092
- (a) Represents the actual outstanding balance of the Credit Facility as of December 31. 2002.
(b)Assumesdeliveries under the Coal Contract. I{ no deliveries are made, certain minimum payments may be required under the Con/ContraCt.-
Amountof Commitment Expiration Per Period (In thousands) ,,_ . -.
Other Commercial Commitments Total Amounts Committed Short-Term Debt (c) $ 41,500 $ 41,500 $ $ $ "
Local Lines of Credit 35,000 35,000 $ $ $ - '
Letters of Credit 5_700 5,700 $ - $
Total CommercialCommitments $ 82.200 $ 82,200 $ $
(c) Represents the unused borrowing capacity of the Credit Facility less outstanding letters of credit of $3.5 million as of December31,2002, PNM leases interests in Units 1 and 2 of PVNGS, certain transmission facilities, office buildings and other equipment under operating
-: leases. The lease expense for PVN(3$ is $66.3 million per year over base lease terms expiring in 2015 and 2016. In 1998, PNM established PVNGS Capital Trust ("Capital Trust") for the purpose of acquiring all the debt underlying the PVNGS leaseS.'PNM
?' consolidates Capital Trust in its consolidated financial statements. The purchase was funded with the proceeds from the issuance 38
of $435 million of SUNs. which were loaned to Capital Trust. Capital Trust then acquired and now holds the debt component of the PVNGS leases. For legal and regulatory reasons, the PVNGS lease payment continues to be recorded and paid gross with the debt component of the payment returned to PNM via Capital Trust. As a result, the net cash outflows for the PVNGS lease payment were
$13.2 million for the year ended December 31, 2002. The table above reflects the net lease payment.
PNM's other significant operating lease obligations include the EIP, a leased interest in transmission line with annual lease payments of $2.8 million {see "Planned Financing Activities" below), and an operating lease for the entire output of Delta, a gas fired generating plant in Albuquerque, New Mexico, with imputed annual lease payments of $6.0 million.
The Company's off-balance sheet obligations are limited to PNM's operating leases and certain financial instruments related to the purchase and sale of energy {see below). The present value of PNM's operating lease obligations for PVNGS Units 1 and 2, EIP and the Delta operating lease was $196 million as of December 31. 2002.
PNM has entered into various long-term Purchase Power Agreements ("PPAs") obligating it to buy electricity for aggregate fixed payments of $213.2 million plus the cost of productior and a return These contracts expire December 2006 through July 2010. In addition, PNM is obligated to sell electricity for $85.2 million in fixed payments plus the cost of production and a return. These contracts expire December 2003 through June 2010. PNM's marketing portfolio as of December 31, 2002 included open contract positions to buy $59.7 million of electricity and to sell $56.1 million of electricity. In addition, PNM had open forward positions classified as normal sales of electricity under the derivative accounting rules of $140.7 million and norma purchases of electricity of
$98.9 million.
PNM contracts for the purchase of gas to serve its retail customers. These contracts are short-term in nature, supplying the gas needs for the current heating season and the following off-season months. The price of gas is a pass-through, whereby PNM recovers 100% of its cost of gas.
Contingent Provisions of Certain Obligations The Holding Company and PNM 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. The Holding Company or PNM 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.
PNM's master purchase agreement for the procurement of gas for its retail customers contains a contingent require_ent 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 loathe sale of electricity in the Western Systems Power Pool ("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 ("MAC") provision, which could require PNM to provide security if a material adverse change in its financial condition or operations were to occur.
PNM's committed Credit Facility contains a "ratings trigger." If PNM is downgraded or upgraded by the ratings agencies, the
_!i result would be an increase or decrease n interest cost, respectively. PNM's committed Credit Facility contains a MAC provision which, if triggered, could prevent PNM from drawing on its unused capacity under the Credit Facility. In addition, the Credit Facility contains a contingent requirement that requires PNM to maintain a debt-to-ca pital ratio, inclusive of off-balance sheet debt, of less than 65% as well as maintenance of an earnings before interest, taxes, depreciation and amortization ("EBITDA")/interest coverage ratio of three times. If PNM's debt-to-capital ratio, inclusive of off-balance sheet debt, were to exceed 65% or its interest coverage ratio falls below 3.C, PNM could be required to repay all borrowings under the Credit Facility, be prevented from drawing on the unused capacity under the Credit Facility, and be required to provide security for all outstanding letters of credit issued under the Credit Facility. At December 31, 2002, PNM had $5.7 million of letters of credit outstanding. The outstanding balance of the Credit Facility at December 31,2002 was $150.0 million*
If a contingent requirement were to be triggered under the Credit Facility resultir g Enan acceleration of the outstanding loans under the Credit 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.
Planned Financing Activities i As of December 31, 2002, PNM has $268.4 million of long-term debt that matures in August 2005 excluding sinking fund payments related to EIP secured lease bonds. All other long-term debt of PNM matures in 2016 or later. The Corn pany could enter into other long-term financings for the purpose of strengthening its balance sheet, funding growth and reducing its cost of capital.
39
PNM's r _ot li mited
, agreements 2002, qned approval is ged the
_ting as a in the to mess
$18.4 million
! of an
- _ have a to life of
[. The Company in its next I_e securitization lnts be borrowed, under the
_accounts receivables from time to time.
March 2003.
to its _0% ownership interest the related $26.2 million 24, 2003, calling the to PNM is the the PRC PNM cannot pay dividendsthat will pay dividends in any year, as determined on a rolling 2003, with the signing of the Global
_mr_ equity contributions made by PNM has vadousfinancial covenants, which limit the transfer of lS.
declare dividends is dependent upon the extent m whic_ cash flows will support
- the effect of regulatory decisions and legislative
- business *considerations.and market and economic
Consistent with the PRC_ holding company order, PNM paid dividends of $127.0 million to the Holding Company on December 3t, 2001. On March 4, 2002, the PNM Board of Directors declared a dividend of $5.5 million, which was paid on March 19, 2002.
On3une 10, 2002, the PNM Board of Directors declared a dividend of $24.7 million, which was paid on June 28, 2002.
On February i8,2003, the Holding Company's Board of Directors approved a 4 5% ncrease in the common stock dividend. The increase raised thequarterly dividend to $0.23 per share, for an indicated annual dividend of $0.92 per share.
Capital Structure The Company's capitalization, including current maturities of tong-term debt, at December 31, 2002 and 2001 are shown below:
Common Equity 49.2% 50.8%
Preferred Stock 0.7 0.6 Long-term Debt 50.1 48.6 Total Capitalization* 100.0% 100.0%
- Total capitalization does not include as debt the present value of PNM's operat ng lease obligations for PVNGS Units 1 and 2, EIP and the Delta operating ease, which was $196 million as of December 31, 2002 and $224 million as of December 31, 2001.
- OTHERISSUESFACING TIR COMPANY - RESTRUCTURING THEELECTRIC UTILITYINDUSTRY St_t_ -:
tn April 1999, the New Mexico E ectric Ut ty Industry Restructuring Act of 1999 ("Restructuring Act _')was enacted into law. The Restructuring Act opens the state's electric power market to customer choice. In March 2001, amendments to the Restructuring Act were passed which delayed the origina! implementat on dates by approximately five years, including the requirement for corporate separation of supply service and energy-related service assets from distribution and transmission service assets. The Restructuring Act, as amended, w I give, schools, residential and small business customers the opportunity to choose among competing power suppliers beginn ng n January 2007. Competition would be expanded to include all customers Starting in July 2007.
On October 10, 2002, PNM announced that it had agreed with the PRC Staff, the New Mexico Attorney General, and other consumer groups on the Global Electrc Agreement that includes agreement to support repeal of a majority of the Restructuring ACt, as amended. The Global Electric Agreement, which inc udes agreement on a five-year rate path, procedures for the Company's participation in merchant plant activities and other regulatory iss_ues, was approved by the PRC on January 281 2003. The New Mexico Legislature is currently in session. Legislation repealing the Restructuring ACt, as amended, and continuing the authorization for
_ utilities to participate in merchant plant activities for a limited time has been introduced as SB 718. On February 28, 2003, SB 718
- _ passed the Senate by a vote of 37-2. It is now awaiting action in the House of Representatives. The Company is unable to predict
.; at this time if restructuring will occur as provided in current law or, if so, what form it will take. (See "Merchant Plant Filing and Global Electric Agreement" below).
The Restructuring Act, as amended, recognized that electric utilities should be permitted a reasonable opportunity to recover an appropriate amount of the costs previously incurred in providing electric service to their customers. These stranded costs represent all costs associated with generation-related assets, currently in rates, in excess of the expected competitive market price over the life of those assets and include plant decommissioning costs, regulatory assets, and lease and lease-related costs. Utilities would be allowed to recover no less than 50% of stranded costs through a non-bypassable charge on all customer bills for five years after implementation of customer choice. The PRC could authorize a utility to recover up to 100% of its stranded costs if the PRC finds that recovery of more than 50%: (i) is in the public interest; (ii) is necessary to maintain the financial integrity of the public utility; (iii) is necessary to continue adequate and reliable service; and [iv) will not cause an increase in rates to residential or small business customers during the transition period. The Restructuring Act, as amended, also allows for the recovery of nuclear decommissioning costs by means of a separate wires charge over the life of the underlying generation assets. Approximately $135 million of costs associated with the power supply and energy services businesses under the Restructuring ACt, as amended, were established as regulatory assets. Because of the Company's belief that recovery is probable, these assets continue to be classified as regulatory assets, although the Company has discontinued the use of accounting for rate regulated activities. See Note 12 of the notes to consolidated financial statements for further develpments.
41
Federal The 107th Congress adjourned without passing comprehensive energy legislation. Both the House ano the Senate passed energy legislation but were unable to resolve disagreement on a number of provisions during conference committee discussions. President Bush has expressed his continuing commitment to his National Energy Policy and has urged Congress to move {_:_/ard w!th energy legislation. Key committee chairs in both the House and the Senate have expressed desires to mov e quickly on, a comprehensive energy bill. The Company is unable to predict if energy legislation will be passed or if passed, what form it will take, or if it Will be signed by the President if passed.
MERCHANT PLANTFILINGANDGLOBAL ELECTRIC AGREEMENT Senate Bill ("SB 266") enacted by the 2001 session of the New Mexico legislature, all,owed public utitlties to "invest in, construct, acquire or operate" generating plants not intended to provide retail electric service ('merchant plant '), free oflcertain otherwise applicable regulatory requirements contained in the Public Utility Act. By order entered on March 27 that these provisions of SB 266 raised issues such as cost allocations for ratemaking, revenue allocations fo= how the PRC can ensure the utility will meet its duty to provide service when the utility invests in merchant : will be financed and how transactions between regulated services and merchant plants will be to address these issues.
In November 2001, PNM began negotiations with the PRC utility staff and intervenors in order to reso ve its merchant plant filing and other matters. Discussions included the future framework for restructuring the e ectr c industry n New Mexico under the Restructuring Act, a future retail electric rate path and PNM's merchant plant filing.
The year-long negotiations ended on October 10, 2002 with the filing of the Global Electric Agreement sets a rate path through 2007 and resolves the issues surrounding indu PNM's merchant power strategy. The Global Electric Agreement was signed by ) Attorney General's Office, the New Mexico Industrial Energy Consumers, the City of Albuquerque, Mexico. The United States Executive Agencies ("USEA") subsequently agreed to support the Global r had signedAct it.
The Global Electric Agreement also provides for the signatories to support passage and concerning merchant plant activities in the New Mexico Legislature. The Global Electric Agreement was, approved by the PRC on January 28, 2003.
Under tne Global E ectric Agreement PNM w II decrease retail electric rates 6.5% in two phases ove r the. next t.hree years. The first phase will be a 4.0% decrease effective September 2003. The second phase will be a further 2.5% decrease from current rate levels, effect ve n September 2005. Rates would then be frozen at that level until the end of 2007. The Company expects to achieve necessary cost savings through additional cost efficiencies and fuel savings., The risks and benefits of all _esate electric sales, inure so ely to the Company's shareholders until December 2007. Since the Global Electric Agreement does not provide for a fuel
/ cost adjustment, the lower fuel costs sought to be captured by shifting to underground mining for the coal supplies at SJGS will flow through to the Company's earnings largely offsetting the reduction in retail revenues.
PNM wi I be abe to seek a general rate adjustment during the rate freeze period ff complying with any new or changed environmental or tax law or regulation, or a new broader application of existing environmental or tax laws or regulationS, w0ufd compromise its financial integrity. PNM also is permitted to capitalize the reasonable costs of mandatory renewable energy resources, including an after-tax cost of capital of 8.64% to be recorded concurrently with the deferral of those costs.
PNM is author zed to recover in the stipulated rates and future retail rates ts New Mexico jurisdictiona share of the decommissioning costs associated with the San Juan, La Plata and Navajo surface coa mines. PNM s allowed to recover up to $100 million of the costs, composed of approximately $69 m on in surface coal mine reclamation costs, and approximately $31 million of contract buyout costs, without being subject to prudence challenge by the signator es to the Global Electric Agreement. The costs will be amortized over 17 years commencing September 1, 2003 and in equal amounts each year thereafter. PNM Cannot seek to recover a return on the unamortized reclamation costs, but could seek to recover a return on the unamortized contract _ costs remaining as of December 31, 2007 in future rate adjustment proceedings.
The stipulated rates also provide for full recovery of nuclear decommissioning costs accrued in accordance mates in the applicable decommissioning cost study during the rate freeze period for PNM's interests in PVNGS Units of SJGS Unit 4 previously treated as an excluded resource from PNM's New Mexico retail rates are included resource to serve PNM's New Mexico retail and wholesale firm requirements customers' toad. PNM's contracts t from Tri-State, Delta and firm power from Southwestern Public Service Comapny ('SPS") would also be included as generation resources to serve PNM's New Mexico retail and wholesale firm requirements customers' load until each contract expires under the Global Electric Agreement.
42
_ ii_ _!!ili:_,
_ _i i_:i _¸ PRC approval or other authorization from the PRC is not required for PNM's merchant plant investment as long as PNM meets the following conditions: (a) PNM does not invest more than $1.25 billion in merchant plant; (b) PNM has an Investment grade credit rating on a stand-alone basis and on a consolidated basis with the Holding Company; and (c) PNM spends at least $60 million per year in gas and electric utility, non-merchant plant infrastructure needed to maintain adequate and reliable service. No prior approval for merchant plant participation would be required and expedited PRC approval would be available for financing of merchant plant if certain specified financial conditions are met. If PNM's credit rating on a stand-alone or consolidated basis with the Holding Company falls below investment grade, however, approvals are needed for new merchant plant projects and for continuing to participate in merchant plant projects of more than certain dollar value and under certain conditions.
PRC approval is not required for PNM to transfer any part of its interests in merchant plant or PVNGS Unit 3 from time to time to any other legal entity, provided that the following conditions are met: (a) PNM's debt to capital ratio will not exceed 65% after giving effect to the transfer and Cb)PNM'S investment grade status on a stand-alone basis and on a consolidated basis with the Holding Company will not be impaired by the transfer of merchant plant or PVNGS Unit 3 at the time of transfer.
PNM further agreed in the Global Electric Agreement that it will transfer all its interests in merchant plant out of PNM by January 1, 2010. PNM will accelerate the mandatory transfer to a date one year after PNM has completed expenditures of $1.25 billion on merchant plant. PNM may seek a vanance from the PRC at any time prior to January 1, 2010 to extend or vacate the time or terms and conditions requiring the transfer but not beyond January 1, 2015.
Under the Global Electric Agreement, if merchant plant or PVNGS Unit 3 is transferred to a PNM affiliate, PNM'S generation resources and the affiliate's generation resources may be jointly dispatched at the merchant affiliate's sole discretion until January 1,2015. Joint dispatch of all utility, PVNGS Unit 3 or merchant plant resources would be terminable at any time between 2008 and 2015 at PNM'S discretion, as long as the utility's dispatch capability is not impaired i_ any way.
PNM agreed to forego recovery of the costs incurred in preparing to transition to a competitive retail market in New Mexico. This wifi result in a one-time charge of approximately $16.7 million, pre-tax, n the first quarter of 2003.
In the Global Electric Agreement, PNM, PRC utility staff and intervenors agreed to actively support the repeal of a majority of the Restructuring Act, as amended. Legislation repealing the Restructuring Act, as amended, and continuing authorization for utilities to participate in merchant plant for a limited time has been introduced as SB 718. On February 28, 2003, SB 718 passed the Senate by a vote of 37-2. It is now awaiting action in the House of Representatives. If the repeal does not occur during the 2003 New Mexico Legislative Session, various modifications to the conditions of the Global Electric Agreement are triggered depending on how long repeal is delayed.
In summary, the terms of this Global Electric Agreement and the Company's continuing efforts to control expenses offer significant benefits to both customers and shareholders in the form of lower rates, a predictable rate path, and the resol.Jtion of important issues affecting implementation of the Company's strategic plan over the next several years. .,'
Tt_e Company is currently unable to predict the impact these proceedings may have on its plans to expand its generating capacity and its future financial condition and results of operations.
- _ WATERSUPPLY There is a growing concern in New Mexico about the use of water for power plants, due to the state's arid climate and current drought conditions. The availability of sufficient water supplies to meet all the needs of the state, including growth, is a major issue.
An interim committee of the legislature refused to support legislation mandating the use of dry cooling technology. However, legislation requiring a water conservation plan as part of an application for siting generation plants of a certain size is being considered in the 2003 session, n building the Alton and Lordsburg plants, the Company has secured sufficient water rights.
The Four Corners region, in which SJGS and Four Corners are located, has been expenencing drought conditions that may affect the water supply for the plants in 2003. as well as later years if adequate moisture is not received in the watershed that supplies the area. United States Bureau of Reclamation ("USBR") is working to assess the adequacy of the water supply under PNM'S USBR contract for 16,200 acre feet of water that supplies SJGS. Additionally, various stakeholders in the San Juan Basin, including the New Mexico State Engineer, are evaluating what water rights might be affected by the drought conditions, including water rights pursuant to the New Mexico state permit that provide 8,000 acre feet of water to SJGS and approximately 28,000 acre feet of water for Four Corners. PNM is assessing alternatives for tern porary supplies of water and is working with USBR and area stakeholders to minimize the effect on operations of the plants. PNM has assessed its situation with regard to the drought and the alternatives available to it and does not believe that its operations will be materially affected at this time. However, PNM cannot forecast the weather situation and its ramifications with any degree of certainty or how regulators and legislators may im pact PNM'S situation in the future, should the drought continue.
43
MANAGEMENT'SDiSCUSSiON A_D ANAEYSS OF FaNANCIAL AND RESULTSOF OPEBATIO_-]
CONDITION i!i !iI i¸i iii; :_II_
__!il _i
_ii__/_i
,il _,
Pacific Northwest Refund Proceeding Ini Energy, Inc;, filed a complaint at FERC alleging that spot market the ALJ issued a 3rthwest, Prior to the FERC acting on the ALJ's recommended ( in filing a motion at the FERC requesting the FERC to Enron trading strategies, to permit further investigation Pacific Northwest. The FERC re-opened the docket to receive but determined to undertake themselves the rew_ the ALI's recommended decision. On March3, 2003, Puget Sound and other
- e of unlawful wholesale electric prices in the Pacific Northwest provide refunds for spot market bilateral sales transactions in the Pacific NOrthwest. The Company be!eves there is nothing in this additional evidence that requires FERC to reverse the prior decision of the ALJ denying refunds. The Company is unable to predict the ultimate outcome of this FERC proceeding, or whether PNM will be directed to make any refunds as .the result of an order by the FERC....
.FERC Investigation of _'Enron-Like" Trading Practices The FERC has also initiated a market manipulation investigation, partially in response tO the bankruptcy filing of the Enron Corporation-("Enron") and to allegations that Enron may have engaged in manipulation of portions of the Western wholesale power market. In connection With that investigation, all' FERC jurisdictional and non-jurisdictlonal sellers into Western electric and gas markets have 2000-2001. PNM made its data submission on April 2, 2002.
_cernsabout Enron's trading practices. In light of these new revelations, the FERC issued additional orders in the pending investigation requir ng se lers to respond to detailed questions by admitting or denying that they had engaged in trading practices similar tO those practiced by Enron and certain other sellers, including so-called "wash" transactions. The FERC issued supplemental requests for data submissions. In its responses to the FERC requests, PNM denied that it had engaged in improper activities such as those identified in Enron's memos and also denied engaging in "wash" transactions, PNM admitted engaging in certain activities described in the memos that were not imprope r. Where appropriate, PNM's responses addressed any arguable similarities between any of its trad ng act vit es and those undei investigation by the FERC. The Fi:RC staff has issued a preliminary report on its findings, recommending that the FERC initiate formal investigative proceedings directed at three companies and the FERC has done so. The Company was not among the companies named. The .Company cannot predict the outcome of this investigation.
California Power Exchange and Pacific Gas and Electric ("PG&E") Bankruptcies In January and February 2001, Southern California Edison Companyand PC&E, major purchasers of power from the Cal PXz nd Cal ISO, defaulted on payments due the Cal PX 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. Total amounts due PNM from the Cal PX or Cal tSO for power sold to them in 2000 and 2001 total approximately $7 million. The Company has provided allowances for the total amount due from the Cal PX and Cal ISO.
California Attorney Genera/Complaint In March 2002, the Calif0mia Attorney General filed a complaint with the FERC against numerous sellers regarding prices for wholesale electri_ sales into the Caf IS(::)and Cal PX and to the California Department of Water Resources ("Cal DWR"). PNM was among the sellers identified in this complaint and filed its answer and motion to intervene. In its answer, PNM defended its pncing and challenged the theo_j of liability underlying the California Attorney General's complaint. On May 31, 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 rega_ to certain wholesale power transactions. PNM has made fil ngs required by the May 31, 2002 Order. The California Attorney General filed a request for rehearing contesting the FERC decision. On September 23, 20021 the FERC issued its order denying the California Attorney General's request for rehearing. The California Attorney General has filed a Petition for review in.the United States Court of Appeals for the Ninth Circuit. PNM has intervened in the Ninth Circuit appeal and intends to participate as a party in that proceeding. The Company cannot predict the outcome of this appaa As addressed below, the California Attorney General has also threatened litigation against PNM in state Court in California based on similar allegations.
Califomia Attomey General Threateiied Litigation The California Attorney General has filed several lawsuits in California state court against certain power marketers for alleged unfair trade practices involving alleged overcharges for electricity. By letter dated April 9, 2002, the California Attorney General notified 45
PNM of its intention to file a complaint in California state court against PNM concerning its alleged failure to file rates for wholesale electricity sold in California and for allegedly charging unjust and unreasonable rates in the California markets. The letter invited PNM to contact the California Attorney General's office before the complaint was filed, and PNM has met several times with representatives of the California Attorney General's office. Further discussions are contemplated. To date, a lawsuit has not been filed by the California Attorney General and the Company cannot predict the outcome of this matter.
California Ant/trust Litigation Severe class action lawsuits have been filed in California state courts against electric generators and marketers, alleging that the defendants violated the law by manipulating the market to grossly inflate electricity prices. Named defendants in these lawsul_cs include Duke Energy Corporation ("Duke') and related entities along with other named eel ere into the California market and numerous other "unidentified defendants." These lawsuits were consolidated for hearing in state court in San Diego. In May 2002, the. I:_ke defendants in the foregoing state court litigation served a cross-claim on PNM. Duke also cross-claimed against man) sellers into California. Duke asked for declaratory relief and for indemnification for any damages that mig on Duke. Several defendants removed the case to federal court. The federal judge has entered an order remanding the state court, but the fi ng of various procedural motions has delayed the effect of ths ruling. PNM has joined with other cross-defendants
- i in motions to dismiss the cross-claim. The Company believes it has meritorious defenses but cannot pred ct the outcome of this matter.
Block Forward Agreement Litigation On February 1, 2002, PNM was served with a declaratory relief complaint filed by the State of California in The state's declaratory relief complaint seeks a determination that the state is not liable for its commandeering
"! contracts known as "Block Forward Agreements". The Block Forward Agreements were a form of futures co of electricity at below-market prices and served as security for payment by PG&E and SCE for their electricity the Cal PX. When PG&E and SCE defaulted on payment obligations incurred through the Cal PX, the Cal the Block Forward Agreements to satisfy in part the obligations owed by PG&E and SCE. Befc Block Forward Agreements, California commandeered tnem for its own purposes. In March 2001, PNM and sellers of electricity through the Cal PX filed claims for damages with the California state Victims Compensatic Claims Board ("Victims Claims Board") on the theory that the state, by commandeering the Block deprived them of security to which they were entitled under the terms of the Ca PX's tariff. The Victim_
administrative remedy that servea as a mandatory prerequisite to filing suit against the state for recovery of damag eerin of the Block Forward Agreements. The Victims Claims Board denied PNM's claim on March 22, d i
_°c_map_dint a_ainst the State of California in California state court on September 20, 2002 seeking damages for the s_te's commandeering of the Block Forward Agreements and requesting judicial coordination with the state's declaratory relief actiori filed in February 2002 on the basis that the two actions raise essentially the same issues. The California State court stayed the proceedii_gs through April 11, 2003 pending resolution of certain related issues before the FERC.
EFFECTS OFCERTAIN EVENTSONFUTUREREVENUES On October 1, 1999, Western Area Power Administration ('WAPA") filed a petition at the FERC requesting the FERCto order PNM to provide network transmission service to WAPA under PNM's Open Access Transmission Tariff on behalf of the United States Department of Energy ("DOE") as contracting agent for Kirtland Air Force Base ("KAFB").
On April 29, 2002, the FERC issued its Final Order directing PNM to provide the service. The Company filed ar April 29th order in the United States Court of Appeals for the 10th Circuit. The Company, USEA and memorandum of understanding resolving the dispute. The memorandum provided that upon approval by Agreement resolving the Company's electric rate path and merchant plant issues described earlier in Merchant F Global Electric Agreement, the Company would dismiss its appeal at the Tenth Circuit and WAPA would purchase from the approximately 60 MW of electric power that will be wheeled under the FERC Final Order to serve KAFB.
between the Company and WAPA was executed on February 3, 2003. On March 1,2003 the power sales agreement went into and the Company dismissed its appeal at the 10th Circuit on March 5, 2003.
Due to the price difference between New Mexico jurisdictional retail sales rates and the wholesale rates under the power sales agreement between the Company and WAPA, the loss in revenue is expected to be $2.8 million per year beginning in 2004.
n a separate but related proceeding, PNM and the United States Executive Agencies on behalf of KAFB are involved in a PRC case regarding a dspute over specific Company tariff language under wh ch PNM provides service to KAFB. The PRC case was held in abeyance, pending the outcome of the FERC proceed ng. A status conference is scheduled before the PRC Hearing Examiner to determine how to proceed with the case due to the dismissal of the Tenth Circuit appeal and implementation of the power sales agreement between WAPA and the Company.
46
NEWSOURCE REVIEWRULES In November 1999, the Department of Justice at the request of the Environmental Protection Agency ("EPA") filed complaints against seven companies alleging the companies over the past 25 years had made modifications to their plants in violation of the New Source Review ("NSR") requirements and in some cases the New Source Performance Standard ("NSPS") regulations, which could result in the requirement to make costly environmental additions to older power plants. Whether or not the EPA will prevail is unclear at this time. The EPA has reached a settlement with one of the companies sued by the Justice Department. Discovery continues in the pending litigation, several of the pending cases are approaching trial, and a trial has commenced in one of the cases. No complaint has been filed against PNM by the EPA, and the Company believes that al of the routine maintenance, repair, and replacement work undertaken at its power plants was and continues to be in accordance with the requirements of NSR and NSPS. However, by letter dated October 23, 2000, the New Mexico Environmental Department ("NMED") made ar information request of PNM, advising PNM that the NMED was in the process of assisting the EPA in the EPA's nationwide effort "of verifymg that changes made at the country's utilities have not inadvertently triggered a modification under the Clean Air Act's Prevention of Significant Determination ("PSD") policies." PNM has responded to the NMED information request. In late June 2002, PNM received another information request from the NMED for a list of capital projects budgeted or completed in 2001 or 2002. PNM has responded to this additional NM ED information request.
The National Energy Policy released in May 2001 by the National Energy Policy Development Group called for a review of the pending EPA enforcement actions. As a result of that review, on June 14, 2002, the EPA announced its intention to pursue steps to increase energy efficiency, encourage emissions reductions and make improvements and reforms to the NSR program. The EPA announced that, among other things, the NSR program had impeded or resulted in the cancellation of projects that would maintain or improve reliability, efficiency and safety of existing power plants. The EPA's June 2002 announcement contemplated further
- rulemakings on NSR-related issues and expressly cautioned that the announcement was not intended to affect pending NSR enforcement actions. Thereafter, on December 31, 2002, the EPA promulgated certain long-awaited revisions to the NSR rules, along with proposals to revise the routine maintenance, repair and replacement exclusion contained in the regulations. There is no specific timetable for these revistons and the ultimate resolution of NSR-related issues raised by the enforcement actions remains unclear. If the EPA were to prevail in the position advanced in the pending litigation, the Company may be required to make significant capital expenditures, which could have a material adverse effect on the Company's financial position and results of operations.
CITIZENSUITUNDERTHECLEAN AIRACT By letter dated January 9, 2002, counsel for the Grand Canyon Trust and Sierra Club (collectively, "GCT") notified PNM of GCT's intent to file a so-called "citizen suit" under the Clean Air Act, alleging that PNM and co-owners of the SJGS violated the Clean Air Act, and the implemention of federal and state regulations, at SJGS. Pursuant to that notification, on May 16, 2002, the GCT filed suit in federal district court in New Mexico against PNM (but not against the other SJGS co-owners). The suit alleges two violations of the Clean Air Act and related regulations and permits. First, GCT argues that the plant has violatea, and is currently in violation of, the federal PSD rules, as well as the corresponding provisions of the New Mexico Administrative Code. at SJGS Units 3 and 4.
Second, GCT alleges that the plant has "regularly violated" the 20% opacity limit contained in SJGS's operating permit and set forth in federal and state regulations at Units 1, 3 and 4. The lawsuit seeks penalties as well as injunctive and declaratory relief. PNM filed its answer in federal court on June 6, 2002, denying the material allegations in the corn plaint. Both sides in the litigation have filed motions for partial summary judgment, but the court has, to date, made no rulings on any of these matters. A trial date on liability issues has been scheduled on a trailing docket for June 2003. Based on its investigation to date, the Company firmly believes that the allegations are without merit and PNM vigorously disputes the allegations. PNM has always adhered and continues to adhere to h igh environmental standards as evidenced by its ISO 14000 certification. The Company is, however, unable to predict the ultimate outcome of the matter.
NATURAL GASEXPLOSION On April 25, 2001, a natural gas explosion occurred in Santa Fe, New Mexico. The apparent cause of the explosion was a leak from a PNM line near the location. The explosion destroyed a small building and injured two persons who were working in the building.
PNM's investigation indicates that the leak was an isolated incident likely caused by a combination of corrosion and increased pressure.
PNM also cooperated with an investigation of the incident by the PRC's Pipeline Safety Bureau (the "Bureau"), which issued its report on March 18, 2002. The Bureau's report gave PNM notice of probable violations of the New Mexico Pipeline Safety Act and related regulations. PNM and the Bureau staff entered a compliance agreement addressing the probable violations and filed it with the PRC for approval on March 4, 2003. PNM agreed to undertake a list of twenty-four corrective actions, including internal policy changes, retraining employees and enhancing gas line monitoring. PNM has also agreed to voluntarily accelerate spending on pipeline replacement by more than $10.0 million and to commit an additional $1.8 million to development and implementation of systems to improve gas line management. The compliance agreement is pending before the PRC. Two lawsuits against PNM by the
_njured persons along with several claims for property and business interruption damages have been resolved.
47
i ainst
_rong-
"climb and
- lines arroyos
_m ng the but the
,._reat i .
had on state lands.
a to predict the ,SJCC. On
_ lawsuit mine. The respect to the parties, court, that the the SJCC
- Company cannot price breakdown XlMED the circumstances any' . PNM and NMED
A_ if:i:! T¸¸ limitations in order to allow NMED to complete its review oft 2003. PNM has been advised by NMED counsel that NMED is in but PNM has not seen this ight be claimed. The Company is unable "SFAS 143"). In June 2001, measurement of lia-construction or development and scope written or oral contracts, including obliga-asset retirement obligation ("ARO") liability is rec-sing a systematic liability and, as on is satisfied. Accretion of the ARO liabil-the recorded liability differs from
- net difference between activities net of expected net of related income taxes.
_"Rescisslon of FASB Statements No. 4, 44, and 64, Amendment of FASB FASB issued SFAS 145. This statement updates and and eliminates an aired accounting for certain lease modifications effects as sate-leaseback transactions. In accordance with previous accounting standards, gains and losses gains and losses from unless they are unusual in nature or SFAS 145 is _ =beginning after May 15, 2002 for the provisions related to the rescission of FASB Statements No, 4, 44 and b4, and for all transactions entered into after May t S, 2002 for the provision related to the amendments of FASB
?_ Statement No. 13. The Company does not believe there will be a materia effect from the adoption, of this standard on the
_or results of operations.
,:. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ["SFAS FAS 146. This statement requires that a liability for a cost associated with an exit or disposal ities that are initiated after Benefits and Other Costs to Exit an Activity (including Certa/n Costs Incurred in a Restructuring)," It also Substantially nullifies EITF Issue No. 88-10, "Costs Associated With Lease Modification or Termination. _ Previously issued financial statements,.including interim financial statements, can,= be restated. :The Company does not expect its adoption Of this standard in fiscal year 2003 "_ohave a significant impact on its flr_ancialstatements.
of Financial Accounti_ and Disclosure,
- In December 2002, the FASB issued SFAS 148 that amended SFAS 1; value method of accounting for stock-based SFAS 148 is effective for fiscal years
- FAS 123 and Accounting Principles Board Opinion NO! of an entity's accounting policy with
_nd earnings per share in annual and interim financial statements; ,=requirements of SFAS 123 and are applicable to all companies with uirements of this standard in fiscal year 2002, but continues to account for stock-based compensation "APB 25.
4_
MANAGEMENT 'S DISCUSSION ANDANALYSIS OFFINANCIAL CONDITION ANDRESULTS OFOPERATION
AND regulatory favorable limit
_g
_s in policy and to to the
._of.the Chief controls:
es on segregation of duties; policies on results;
.... favorably risk i - often invOlves and establishing
_ volume md options to hedge _and to minimize the risk Of market fluctuations on the
- Generation and Marketing Operations, The Company's wholesale power marketing operations, including both long-term contracts and merchant, sales activ_ies, are managed through ar_asset-backed marketi ed by ilities were disrupted or if its retail load or a open contract position, it would
.- _rules forenergy contracts, the Companyaccounts for its various into purchase are fair market
- :orresponding charg_
_ized when th :ransaction occurs. Normal purchases and sales are not marked-to-market but rather recorded in results of operations when : underlying transaction occurs.
51
- _' /!i _i :*_¸i: ii* Li_i!i_i!!_ii_ii i /:!_
_ii
,! _ __iii_i _ _ _i_
- _i_ii!ii!_!_!i i__,- ' '__:
The following table shows how the net fail" value of mark-to-market energy contracts the balance sheet:
Year Ended December 3% _
(In thousands of dollars)
Mark-to-Market Energy Contracts:
Current asset $ 4,531 $ 9,461 Long-term asset 267 1,469 Total mark-to-market assets 4,798 10,930 Current liability (5,725) (36,256)
Long-term liability (5,114)
Total mare-to-market liabilities (5,725) (41,370)
Net fair value of mark-to-market energy contracts $ (927) ,$(30.440)
The mark-to-market energy portfolio po=_ions at December 31.
all open purchase and sale contracts. Becau_,ethe contractua rearer than the current market values of the contracts, the Company recorded a net loss of certain of these of a mark-to*market gain.*
The market prices used to value PNM's mark-to-market energy and Over-the-counter quotations. As of December 31, 2002 and December 31,200' valued using methods other than quoted prices, The Company did not chan in 2002 as compared to 2001.
The following table prov des detail of Changes in the Company's mark-to-market: Or liability balance sheet position from one period to the next:
Year Ended December 31, (in thousands of dollars)
Sources of Fair Value Gain/(Loss)
- - Fair value at beginning of year $ (30,440) $ (4,643) .-
_';_ Amount realized on contracts delivered
.,,:. during period 26,339 2,239
- u Changes in fair value 3,174 (28,036) .
Net fair value at end of period $ (927) $ (30,440)
- Net change recorded as mark-to-market $ 29,513 $ (25,797),
This table provides the maturity of the net assets/liabilities of the Company, givt amounts will settle and generate/(use)cash:
Fair Value et December 31, 2002
_.ess then - -
Sources of Fair Value I _eer 1-3 Years Total (In thousands of dollarsJ Mark-to-market energy contracts $ (1,194) $ 267 $ {927)
Note: All values determined using broker quotes.
52
2002, a decrease "n market pricing of PNM'S mark-to-market energy portfolio by 10% would have resulted 1%. Conversely, an increase in market pricing of this portfolio by 10% would have result-of less than 1%.
the market value of PNM's normal sales and purchases of electricity was a $54.6 million asset using the did not meet the definition of normal under the accounting rules for derivatives, gains of $56.3 million as an adjustment to Generation and Marketing operating rfair value of these contracts from January 1, 2002 to December 31, 2002.
TheCompanY assesses the risk of these long-term contracts and merchant sales activities using the VAR method to maintain the Company's total exposure within management-prescribed limits. The Company utilizes the variance/covariance model of VAR, which is a pr0babifi_ model that measures the risk of toss to earnings in market sensitive instruments. The variance/covariance model relies on statistical relationships to analyze how changes in different markets can affect a portfolio of instruments with different characteristics and market exposure. VAR models are relatively sophisticated however, the quantitative risk information 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 only considers the Company's forward position for the proceedirig 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 bothat an individual position level as well as at the total portfolio level. The confidence level established is 99%. For example, if VAR is calculated at $10 milli0n, it is estimated at a 99% confidence level that if prices move against PNM's positions, the Company's pre-taxgain or loss in l'_luidating the portfolio would not exceed $10 million in the three days that it would take to liquidate the portfolio.
The Company's MAR is regularly monitored by the Company's RMC. The RMC has put in place procedures to ensure that increases in VAR are reviewed and; if deemed necessary, acted upon to reduce exposures. The VAR represents an estimate of the potent a gains or losses that could be recognized on PNM's wholesale power marketing portfolios given current volatility in the market and is: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 clue to actual fluctuations in market rates, operating exposures, and the timing thereof, as well as changes to PNM's wholesale power marketing portfolios during the year.
The Company accounts for the sale of electric generation in excess of its retail needs or the purchase of power for retail needs as normal purchases and sales under SFAS 133. Purchases for resale and subsequent resales are accounted for as energy trading contracts in accordance with EITF 98-10 and comprise PNM's mark-to-market portfolio. The VAR for the mark-to-market portfolio was $72,027 at December 31, 2002. The Company also calculates a portfolio VAR, which in addition to its mark-to-market portfolio includes alfcontr_cts designated as normal sales and purchases, hedges, and its estimated excess generation assets. This excess is determined uslng average peak forecasts for the respective block of power in the forward market. The Company's portfolio VAR i was $2.0 million at December 31, 2002.
_° The following table shows the high, average and low market risk as measured by VAR on the Company's mark-to-market portfolio (three day hotdin gP eriod , 99% two-ta led confidence leve ).*
2002 (In thousands of dollars)
$3,408 $1,112 $29 Credit Risk PNM is _to credit losses in the event of non-performance or non-payment by counterparties. The Company uses a credit management l_-ocess to assess and monitor the financial conditions of counterparties. Credit exposure is also regularly monitored by the RMCi The Company provides for losses due to market and credit risk. PNM's credit risk with its largest counterparty as of December 31, 2002 was $18.7 million.
In 2001, in response to the increased credit risk and market price volatility described above, the Company provided an allowance against revenue of $12.O million for anticipated losses to reflect management's estimate of the increased market and credit risk in
-., the wholesale power market and its impact on 2001 revenues. As of December 31, 2001, $8.9 million was transferred to the allowance for baddebt. The Company reduced its reserves by $0.6 million for the year ended December 31, 2002 as a result of a 53
TS MANAGEMENDISCUSSIONANDANAL_'SIS OFFINANCIAL CONDITIOH ANDRESULTS OFOPERATION for onthe are
.'ompany with All of the of loss due to t 4,05%
i ¸ ", 'i _L . _
MANAGEMENT 'S DISCUSSION AN_ANALYSIS OFNNAI',]C1ALCO_,]DITIOr'_
ANDRE_UIIT_" _ OFOPERATtOt Jebt
- ompany.
PNM benefrts, plan t rates.
securities there-th_ Companydoes not tomeet "_ obligati0ns.
Financial of Operations_- Pension costs s hetd by the varioustrusts Discussion ;- Pension rthe RMC a reporting period and withinthe
_ _r _!i.,_i_!
k 55
MANAGEMENT'S RESPONSIBILITY FORFINANCIAL STATEMENTS The accompanying financial statements of PNM Resources, Inc. and its subsidiaries, have been prepared in conformity with account-ing principles generally accepted in the United States of America.
The integrity and objectivity of data in these financial statements and accompanying notes, including estimates and judgments related to matters not concluded by year-end, are the responsibility of management as is all other information in this Annual Report.
Management devotes ongoing attention to review and appraisal of its system of internal controls. This system is designed tO provide reasonable assurance, at an appropriate cost, that the Company's assets are protected, that transactions ano events are recorded properly and that financial reports are reliable. The system is augmented by a staff of corporate auditors, careful attention to selection and development of qualified financial personnel; and programs to further timely communication and monitoring of policies, standards and delegated authorities.
The Audit and Ethics Committee of the Board of Directors of PNM Resources, Inc., composed entirely of outside directors, meets regularly with financial management, the corporate auditors and the independent auditors to review the Work of each. The independent auditors and _:orporate auditors have free access to the Committee, without management representatives present, to discuss the results of their audits and their comments on the adequacy of internal controls and the quality of financial reporting.
REPORTOFINDEPENDENT AUDITORS To the Board of Directors and Stockholdersof PNM Resources, Inc.
We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of PNM Resources, Inc. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of earnings, retained earnings, comprehensive income (loss), and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility isto express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of PNM Resources, inc. and subsidiaries as of December 31, 2002 and 2001, and results of their operations and their cash flows for each of.,
the three years in the period ended December 31,2002, in conformity with accounting principles generally accepted in the Unite;d
_; States of America.
DELOITFE & TOUCHE LLP Omaha, Nebraska February 11, 2003 56
CONSOLIDATED STATEMENTS OFEARNINGS Year Ended December 31, (In thousands, except per share amounts)
Operat/ngRevenue(snotes
- 1and2)
Electric $ 895,474 $1,952,861 $1,289,192 Gas 272,118 385,418 319,924 Unregulated businesses 1,404 1,538 2,158 Total operating revenues 1,168,996 2,339,817 1,611,274 OperatingExpenses:
Cost of energy sold 550,053 1,524,285 949,880 Administrative and general 146,231 155,392 147,268 Energy production costs 149,528 152,455 139,894 Depreciation and amortization 102,409 96,936 93,059 Transmission and distribution costs 63,870 69,001 60,330 Taxes, other than income taxes 34,244 30,302 34,405 Income taxes (note 1 and 8) 20,887 88,769 53,964 Total operating expenses 1,067,222 2,117,140 1,478,800 Operating mcome 101,774 222,677 132,474 OtherIncomeandDeductkms:
Other income 48,360 52,147 66,246 Other deductions (12,306) (67,257) (11,950)
Income tax (expense) benefit (notes 1 and 8) (12,144) 7,706 (20,382)
Net other tncome and deductions 23,910 (7,404) 33,914 Earnings before interest charges 125,684 215,273 166,388 Interest Charges:
Interest on long-term debt (note 4) 56,409 62,716 62,823 Other interest charges 5,003 2,124 2,619 Net interest charges 61,412 64,840 ,.. 65,442 Net Earnings 64,272 150,433 100,946 Preferred Stock Dividend Requirements 586 586 586 Net Earnings Ap_eble to Common Stock $ 63,686 $ 149,847 $ 100,360 Net Earnings perShareof Common Stock(_ (note7) _; 1.63 $ 3.83 $ 2.54 N.t m,m'Zm_ W S_re d Comm_St_k _ (hereR $ 1.61 $ 3.77 $ 2.53 D/v/dends Pe/d per Share of Common Stock $ 0.86 $ 0.80 $ 0,80 The accompanying notes are an integral part of these financial statements 57
CONSOLIDATED STATEMENTS OFRETAINED EARNINGS CONSOLIDATED BALANCE SHEETS
(In thousands) ue(note4) " $ 624,119 $ 625.632 (94,721) (28,996) 444,651 415f388 974,049 1,012,024 11,760 11,652 12,8OO 12,8OO 980,092 953_884 1,978,701 1,990,360 150,000 35.OO0 97,968 76,141
"' 46,189 72,022 99,019 ,149,454 393,176 332_617 125,595 120,153
[8) 41,583 44,714 52,019 54.295 (note 3) 14,137 14,163 17,335 14,929
" 404.361 342,557 "
655,030 590,811 ""
$ 3,026,907 $2,913,788 i mcialstatements.
CONSOLIDATED STATEMENTS OFCASHFLOWS
_ December 31, (In thousands)
Cub Flow=FromOf_raUnm A_h_J*s: *
- ix : $ 64, 272 $ 150,433 $ 100,946 Net earnings Adjustmentsto reconcile net earnings to net cash flows from operating activities:
Depreciation and amortization 115,415 106,768 103,829 Accumulated deferred investment tax credit , (3,131) (3,139) (3,143)
Accumulated deferred income tax 47,269 (32,927) 21,215 Asset write-offs 4,817 24,079 Write-off Avistarinvestments 12,417 Non-recurring merger costs (2,436) 17,975 6,700 Net unrealized losseson trading and (29,513) 26,172 370 Wholesale credit reserve (5,406) 8,456 Other, met 2,083 (4,297) (330)
,: Changes in certain assetsand liabilities:
Accounts receivables 10,220 92,990 (90,680)
Other assets (52,655) 32,481 (32,444)
Accounts payable 23,660 (137,073) 107,346 Other liabilities (82,750) 46,873 17,250 Net cash flows provided by operating activitieS 97,251 327,346 239,515 Flows From Investing Actlv_J:
Utility plant additions (240,225) (264,844) (146,878)
Redemption of short-term investments 76,633 Return of principal PVNGS lessor notes 17,531 16.674 16,668 (11,567) (6,700)
Merger acquisition costs . ._.
Short-term and long-term investments (150,000)
Other (54,366) 2,723 (20,59_))
Net cash flows used for investing activities /. (200,427) (407,014) (157,500)
Cmh/=lows FromF/n_cMgAct/rifles:
!_ Borrowings (note 4) 115,000 35,000 (32.800)
Repayments (note 4)
Exercise of emp oyee stock opt ons(note 10) (2,412) (2,179) (1,232)
(27,867)
Common stock repurchase (note 4) .
Dividends paid (34,226) (31,876) (32,265)
Other 108 (560) (559)
Net cash flows provided by (used for) f nancing activities 78,470 385 (94,723)
Decrease in Cash and Cash Equivalents ' (24,706) (79,283) (12,708)
Beginning of Year 28,408 107,691 120.399 End of Year $ 3,702 $ 28,408 $107,691 Supp/emen_c_ flow d_
interest paid, net of capitalized interest $ 53,041 $ 62,216 $ 64,045 Income taxes paid, net $ 13,541 $ 72,146 $ 50,480 Long-term debt assumed for transmission line $ 26,152 $ $
The accompanying notes are an integral part of these 'financial statements.
8o
CONSOLIDATED STATEMENTS OFCAPITALIZATION As of December 31, (In thousands)
Common Stock Equity:
Common Stock, no par value (note 4) $ 624,119 $ 625,632 Accumulated other comprehensive income, net of tax (94,721) (28,996)
Retained earnings 444,651 415,388 Total common stock equity 974,049 1,012,024 Minority Interest (notes 1 and 5) 11.760 11,652 CumulativP mreferredStock:(note4)
Without mandatory redemption requtrements:
1965 Series. 4.58% with a stated value of $100.00 and a current redemption price of $102.00. Outstanding share_i at December 31, 2002 were 128,000 12,800 12,800 Long-Term Debt: (note 4)
IssueandF/riMMatu_/y First Mortgage Bonds, Pollution Control Revenue Bonds:
5.700% due 2016 65,000 65,000 6.375% due 2022 46,000 46,000 Total First Mortgage Bonds 111,000 111,000 Senior Unsecured Notes, Pollution Control Revenue Bonds:
6.300% due 2016 77,045 77,045 5.750% due 2022 37.300 37,300 5.800% due 2022 100,000 10(3,000 6.375% due 2022 90,000 90,000 6.375% due 2023 36.000 36,000 6.400% due 2023 I00,000 I00,000 6.300% due 2026 23,000 23,000 6.600% due 2029 11,500 11,500 Total Senior Unsecured Notes, Pollution Control Revenue Bonds 474,845 474,845 Senior Unsecured Notes:
7.100% due 2005 268,420 268,420
_ 7.500% due 2018 100.025 100,025 EIP debt due 2003-2012 26,152 Other, including unamortized discounts (350) (406)
Total ong-term debt 980.092 953,884 Total Capitalization $1,978,701 $1,990,360 The accompanying notes are an integral part 0fthese financial statements.
61
CONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME (LOSS)
,ii!ili_iiii!_i
¸¸¸!¸
NOTES TOCONSOLIDATED FINANCIAL STATEi_,1E_'.
DECE_IBEF_
31,29f_2_ 2_I,,Zili_]_
the ,.
In its
==
ny
.i reference the with the Holding discussions refer ,to Company. ' .
Accountin ....
Energy ' the H
_ reg-
_' the effective ; with 71
("SFAS101"). The .,
the as stranded cost assets.
I nterest or meets the criteria
- ,_been 63
NOTES TOCONSOLtDATE0 FINANCIAL STATEMENTS DECEMBER31, 2002, 200!, 2000 accepted in the United States requ res of assetsand liabilities and disclosure of and expenses during uivalents.
g cost,which includescapitalized allowancefor funds usedduring Mexico rate base.As a result,PNM cificactionsdetermined to be part of this announcement,PNM
$181.3 million based on the Jnit 3. In connectionwith a rate majorreplacements in the normal course of
- f. AFUDC usesa weighted averagecost of the historical cost of acquinng only be capitalizea on non-SFAS71 underconstructionin whichground has theoretica y that portion nade. The rate usedfor capitalizationis borrowing rate for the interest is being capitalized at the in 2002. No interestwas capitalized Foreventual resale, and coal held for use Is.Materialsand supplies issued.Materialsand suppliesare expensedwhen identified.
NOTES TOCO SO,.IDATED Gas in underground storage is valued usinc method, Withdrawals are Charged to sales service customersthrough the Purchased Gas due to migration are charged to the PGAC and are based on a PRC Coal is vatued using a rolling weighted average costing he current period cost per tons.
Periodic aerial surveys are performed and any necessary adjustments are expensed as identified.
Inventories consisted of the following at December 31, (in thousands).
Coal $12,678 $12,960 Gas in Underground storage 2,001 3,664 "
Materials and supplies 22,551 19,859
$37 230 Investments securities.
e held in n the_ is used to determine ga_ t December 31, 2002, all
! are included
- - Revenue Recognition ' -_ " i The Company's Utility Operations record electric and gas operating revenues n the period of de ivery, which includes est mated amounts for service rendered but unbilled at the end of eaq Operations' gas operating revenues exclude adjustments for differences n gas purchase costs that are above or J under the PGAC administered by the PRC. The Company recognizes this adjustment guidelines.
However_ the determination of the energy sales t0 individual custome_ is based on the reading of their meters, which occurs on a Systematic basis throughout the month. A:Lthe end of each month, amOUnts _f energy delivered to Customers since the date of the last meter reading are estimated and the corresponding unbilled revenue is estimated, The cycle meter reading resu ts n unbilled consumption between the date of the last meter reacling in month and the end of the month. Unbilled electric
., revenue is estimated each month line
-'_ losses and applicable customer rates based On regress on a and experience.
- __ The Company purchases gas )r producers purchase gas on behalf of
_i transportation service customers. The Company collects a cost of service revenue for the transportat on, delivery, and customer service provided to these customers_ Sales-service tar ffs are subject tothe terms ofthe PGAC while transportation serv ce customers=are metered and bil ed on the last day Of the month. Theref0rei the_ornpany estimates unbilled dec_atherms and cost of service revenues for sales-service customers only.
The Unbilled decatherms are based on consumption estimates and the associated cost of service revenue for the period. A cycle bill contains an amount for both the current period's'consumption 'and the prior period_ consumption: The Unbilled portion that is recorded is estimated as a percentage of the next month's budgeted cycle billings, These budgets are prepared using historical data adjusted for known trends, including prior period consumption. Adjustments are also made tothe budgeted cyc e b I ngs for weather variations above or below normal, customer rate and revenue class. Any dif-ferences between the estimate and the actual cyd(
The Company's., Generation and Market ng Operat ons record operat ng reven_ d part es n the penod of dehvery or as services are provided, These electr City sales.are recorded as operating revenues while the electricity purchases are recorded as costs of energy sold: These amounts are recorded or_a gross basis because the Company does not act as = tip. Certa_ sales to firm-requirementS wholesale customers :include a cost Company recognizes this adjustment when it is permitted to bill undet ons that are net settled, are recorded gross in operating revenues purchased power expense.
The Company enters into merchant energy contracts to take advantage of market opportunities associated with the purchase and
- sale of electricity. Unrealized gains and losses resulting from the impact of price movements on the Company's derivative energy
- contracts that are not deemed normal purchases and sales or hedges are recognized as adjustments to Generation and Marketing 85
NOTES TOCONSOLIDATED STATE_/!ENTS FINANCIAL DECENBER31,2002, 2091, 2000 idated ed on the use computed
- ,133"), as requires ise losson a
igs.
to exclude from hedge
)ject
)les Board
.=excess lilt, and disclosure requirements elected to remain NOn!23 only (see
- ontinue to be for the SFAS common) - $ 63,686 under (4,422)
$ 59,264
$ 1.63
$ 1.51 ,o
$ 1.61 1.50
[ Statement car-
] assets and liabilities and I effects of the dif-and liabilities are recovery of deferred tax ig well as corresponding regulatory undiscounted cash and
"-! wholesale markets are evaluated on price 87
t_;_; _,' _ FINANCIAL STATEMENTS conditions. J as an individual group * . ',
Certain (2) , ,
business line ( line for disclosure
[nlLrrY 0PERATIOB Electric PNM of Albuquerque i
s Gas PNM's c anta Fe.
are set I )r customers bein In 2000 a second q_
transportation
._., GENERATION J demand, (measured in on _ market, a 132 MW UNREGULATED:AND
-' eric
.i The immateri_' , transferred by a
- . way of a dividend t _ .
- ° m
NOTES TOCONSOLIDATED FINANCL !i
- changes and 1990s, federa designed to and potential
)ower generation to an unregulated status In ) and other
,12), plans for restructuring the i competition in the New action in the House of
)any's future be affected on the wholesale., pdce of electricity and natural the wholesale market and transmission service.
Summarized financial informatiOn by business segment for 2002, 2001, and 2000 is as follows:
Utllitv Generation UlWegulated
- Electric Gas Total , _1 Marir_tin 9 , " in_ Qther _', Con'-e!!d:'.ed (In thousands)
_Mer, t_E_WdZOOt=
$ 570,089 $ 272,118 $ 842,207 $ 325.385 $ 1,404 $1,168.996 Intersegment revenues 707 707 348,935 (349,642)
Depredation and amor'dzation 34,025 20,964 54.989 43,837 3.583 102,409 Interest income 436 436 872 1,995 42,087 44,954 Interest charges 23,640 13,546 37,186 16,625 7,601 61,412
_=()oss) 60,449 ,.. " 18,652 79,101 24,737 (2,064) 101,774 21,731 4.351 26,082 4,596 2,353 33,031
._ Seltzer not iacem_ 33,163 6,640 39,803 7,013 17,456 64,272 T=tduu_ 761,694 505,692 1,267,386 1,124,387 635,134 3,026,907
_:_ Gross property additions 56,698 46.676 103,374 116.447 20,404 240,225 "Ave/rM e oedlhEn s ded2001:
Operating revenues:
External customers $ 559,226 $ 385,418 $ 944,644 $1,393,635 $ "1,538 $ 2,339,817 Intersegment revenues 707 707 341 608 (342,315) .
D_r,_o, and =,o_o, _2.6_ 21,_s s4.131 42.7_ 39 96.936 Interest income 1,626 596 2,222 3,215 43,304 48,741 Interest charges 19,868 11,807 31.675 28_82 4.883 64,840 Operating income (toss) 57,417 17,730 75,147 150,565 ' (3,035) 222,677 Incometax expense(bene_ 23,679 3,469 27,148 73,525 (19,610) 81,063 Segmentnet _ (k_ 36,130 5,498 41,628 112,194 (3,389) 150,433 Tota# a=_= 749,948 469,410 1,219,358 1,430,917 263,513 2,913,788 Gross property additions 74,316 48,978 123,294 I26.605 14,945 264,844 8g
L+ , _._ _ u * , L; : ; , . _ _/ +
i I
- NOTESTOCONSOLIDATED FiNANCiAL STATEMENTS OECE_BER3t. 2_02, 200t,2000 93,059 132,474 74,346 4¸ 23,907
- 41,611
I_IOTES TOCONSOLIDATED FINANC},_i., _;;_,_
rtO recoveran Stranded rates, in assets, and non-bypassable rto recover up to maintain ii) not causealso an ying were by law,
.=rations nas I the Otobal ning in
.)As a
- ain GeneratiOn by the PRC of the mine
- I company Company's evaluatton =costs with coal which provides for a incurred in
! Fhe beginning 2007 underwriting es Act. The i_ customer choice, or if
NOTES TOCONSOLIDATED FINANCIAL DECEMBER 31,2002, 2001,2060 Sheets as of December 31, related to stranded or transition (In thol
$ 16,720 $ 15;908 100,877 100,877 ...."
35,708 35,775 67 . 1,667 (14_137) (14,163)
(4,682) (5,058)
(1,325) (1,408)
(8) (18)
(20,152) ....: (20,647)
$134_520 $133,580 i- :
recovery, except for the transition costs (see further in Note 12).
12C Tl_e number of and 2001. The only change to Common stock Of million. In 2001, the exercise of stock opti r of factors includin, r 's source of d_idends. As certain restrictions on the abili_/of PNM to _ent.
regarding dividends paid by PNM to the holdin and PNM can not -"_
ngs without prior PRC approval.
or other means.
upon the extent to which cash flows wili _pport dividends, and performance, the PRC's r cases the future, the effect of deregulating generation markets economic PRC on holding company formation, future growth plans ar_ the related capital may also affect the Company's ability to pay dividends.
order, PNM paid dividends of $127.0 million to the Company on December 31, 2001.
an additional dividend of approximately $5.5 million, Which was paid March
- clared a dividend of $24.7 million, which was paid 0n June 28, 2002.
pproved a 4.5 percent increase in the common stock dividend.
per share, for an indicated annual dividend of $0.?2 per share.
_lan to repurchase up to $35 million of PNM's common stock through 2000 through December 31, 2000, PNM repurchased an additional 417,900 cOSt of $9.0 million.
72
Cumulative PreferredStock No Holding Company preferred stock is outstanding. The Holding Company's restated articlesof incorporation authorize 10 million sharesof preferred stock, which may be issued without restriction. The number of authorized sharesof PNM cumulative preferred stock is 10 million shares.PNM has 128,000 shares,196S Series,4.S8%, par value of $100 per share, of cumulative preferred stock outstanding. The 196SSeriesdoes not have a mandatory redemption requirement but may be redeemable at 102% of the par value with accrued dividends. The holders of the 196S Series are entitled to payment before the holders of common stock in the event of any liquidation or dissolution or distribution of assetsof PNM. In addition, the 196S Series is not entitled to a sinking fund and cannot be converted into any other classof stock of PNM Long-Term Debt On March 11, 1998, PNM modified its 1947 Indenture of Mortgage and Deed of Trust so that no future bonds can be issued under the mortgage. While first mortgage bonds continue to serve as collateral for Pollution Control Bonds ("PCBs') in the outstanding pnncipal amount of $111 million, the lien of the mortgage covers only PNM's ownership interest in PVNGS.Senior unsecurednotes ("SUNs"), which were issued under a senior unsecurednote indenture, serve ascollateral for PCBsin the outstanding principal amount of $463.3 million. With the exception of the $111 million of PCBssecured by first mortgage bonds, the SUNs are and will be the senior debt of PNM.
In August 1998, PNM issued and sold $43S million of SUNsin two series,the 7.10% SeriesA due August 1,200S, in the principal amount of $300 million, and the 7.S0% SeriesB clue August 1, 2018, in the principal amount of $13S million. In 1999, PNM retired
$31.6 million of its 7.10% SUNsthrough open market purchases, utilizing the funds from operations and the funds from temporary investments leaving an outstanding principal balance of $268.4 million. In January 2000, PNM retired $3S.0 million of its 7.S% sen-ior unsecured notes through open market purchases utilizing funds from operations and the funds from temporary investmentsleav-ing an outstanding pnnc_palbalance of $100.0 million. The gains recognized on these purchaseswere immaterial.
On December 20, 2002, the Holding Company acquired the equity interest of the grantor trust that owns 60% of the EIP transmission line and related activities. As a result, $26.1 million of related debt wasbrought on to the consolidated balance sheet.
This debt was previously disclosed and reported as off balance sheet debt. The EIP debt bears interest at the rate of 10.2S%,
requires semi-annualprincipal and interest payments and matures on April 1, 2012.
Revolving Credit Facility and Other Credit Facilities At December 31, 2002, PNM had a $19S million unsecured revolving credit facility (the "Facility") with an expiration date of December 18, 2003. PNM must pay commitment fees of 0.2% per year on the unused amount of the Facility. PNM must also pay a utilization fee of .12S%for all borrowings in excessof 33% of the committed amount. PNM also had $20 million in local lines of credit. In addition, the Holding Company has a $20 million.reciprocal borrowing agreement with PNM and $1Smillion in local limes of credit. -
There were $1S0 million in outstanding borrowings bearing interest at a weighted average interest rate of 2.759% under the
- _i Facility as of December 31, 2002. On January 31, 2003, this amount was refunded at an interest rate of 2.325%. PNM was in compliance with all covenants under the Facility.
(S) Lease Commitments PNM leasesinterestsin Units1 and 2 of PVNGS,certaintransmissionfacilities,office buildings and other equipment under operating leases.The lease expensefor PVNGSis $66.3 million per year over baselease terms expinng in 2015 and 2016. Covenantsin PNM's PVNGSUnits 1 and 2 lease agreements limit PNM's ability, without consent of the owner participants in the lease transactions, (i) to enter into any merger or consolidation, or (ii) except in connection with normal dividend policy, to convey, transfer, lease or dividend more than 5% of its assets in any single transaction or seriesof related transactions.
In 1998, PNM established PVNGSCapital Trust ("Capital Trust") for the purpose of acquiring all the debt underlying the PVNGS leases. PNM consolidates Capital Trust in its consolidated financial statements. The purchase was funded with the proceeds from the tssuanceof $435 million of SUNS[see Note 4), which were loaned to Capital Trust. Capital Trustthen acquired and holds the debt component of the PVNGSleases. For legal and regulatory reasons, the PVNGSlease payment continues to be recorded and paid gross with the debt component of the payment returned to PNM via Capital Trust. As a result, the net cash outflows for the PVNGS lease payment were $13.2, $12.4 and $10.7 million in 2002, 2001 and 2000, respectively.The summary of PNM's future minimum operating lease payments below reflects the net cash outflow related to the PVNGS leases.
73
1_ _'_ 'i_ _ L _ ,. , i . ; _'
NOTES TOCON$OL!D_'_TED FiNANCiAL STATEMENTS DECEMBER 3t, ZOO?2_ =,:;i._!
- .'...;;r
- _
- _i_;;;[S_
- i, 20_;
- _:, tO01,?.SUO
$ (250) $ 59,987 (I,595) 37,070 (157) 36,648 (143) 32,173 (153) 21,864
" " , : $ (2,298) $ 218,912
' : ' _Company had the following maturities:
lowing
' " $219,880 $59,323 2,537 8,5!6 (7,624) is,34t) gas and electricity prices, interest
._ . r also
.=of favorable narket
, ,i _ financial derivative
" the financial conditions of counterparties. The 31, 2002 and 2001 was $18.7 million and $7.5 million, respectively.
'RC, the Company has previously entered into swaps to I the risk of
': , " ' 31thedge gains and losses from swaps is recoverable i_'. ' rudently incurred by the PRC. As a result; earnings are not 75
IOTESTOCONSOUOATED FINANCIAL STATEMENTS
_CEMSE_ 31, ?_C_22, 001. 2000 fluctuation during the pany would tsa component of the PGAC posure and' MarketingOperations
- of 2001. The had a notionalamount of to the futures quantities these transactionsascash component of Other
- to the Company's contractsforthe purchased$74.5
_ities.Forthe year
!i!! Ilion or 1.9 million l to sei1556.1 million of electricity.
d,contracts of $4.8 million tof $0,9 million. The contractsfor the sale of the 3purchasefor retail financialinstruments
- makesforward purchasesto At December31,2002, purchasesof electricity
- _, sale activities,are its own excess 3
'_._ or if its retail load
!ii of its,net open contract position, 2002, and bonds, assumingthe the entire planned 2002. This approval is forward starting interest rate The hedged interest rates expected for the l's and the industry's The derivative accounting and qualifying as a reclassifiedinto earnings in the
, _ineffectivenessis required to
$0..4million of hedge ineffectiveness 11
NOTES TO in earnings. At December 31, 2002, the fair market value Of these derivative financial instruments was approximately $18.4 million unfavorable to the Company, A f ges in the corporate credit component of an investment c forward starting interest rate swaps have a million. There were no fees on the transaction, as they are imbedded in the the mandatory unwind date (strike date), corresponding to the refinancing and amortized over the life of the debt as a yield adjustment.
(7) Earnings Per Share In accordance with SFAS No. earnings per share has been presented in the impact on the share amounts of potential common shams and tl (In thousands, except per share amounts)
Bade
$ 64,272 $150,433 $100,946 586 586 586
" $ 63,686 $149,847 $100,360 Average 39,118 39,118 39,487 Ne; $ 1.63 $ 3.83 $ 2.54 Diluted:
Net Earnings $ 64,272 $150,433 $100,946 586 586 586 Net $ 63,686 $149,847 $100,360 Average Number of 39,118 39,118 39.487 Diluted Effect of 325 613 223 Outstanding 39,443 39,731 39,710 Net_Slw*dt_==ii_.tk=cktDQut_ $ 1.61 $ 3.77 $ 2.53 (a) Ex( _common stock equivalents related to out of-the-money options
- =_ of 1 I. There were no anti-dilutive
NOTESTOCONSOLiD_ _:-;__,_,_,_.....
31_2062,_;"_'¢ DECEMBER
- =
OTE,S 10 .... ...........
,:>;, _001,2000
. (In
$ 32,192 37,656 -
56,OO8 19,924 57,373 .:i . .
183,229 _:-
Deferred :
216,425 189.157 41,583 11,749 67,744 _:
27,043 364.544 The the deferred income tax
_vai_ablefor 8.365 36,084 The Company has
.... )verthe estimatedusefullives - i
- for 1997 through 1998 have been resolved. No years are Company and PNM.
Pension Plan :
officers. The policy to employees' years of primarily consist of common stock, fixed In December 1996, th_ defined benefit plan Salaries used. in made an aggregate
-: contribution of $23.5. million to fund pension and other
-. _ million was made in September 2002 and $1.5 million i_ of a 3% non-matching contribution basis. The Company
- contributed $9.5, $9.0 and $8_9 milliOn in the years 31, 2002, 2001 and 2000, respectively.
7g
- ii _i_1%: /' I,_IL¸ i_i The following sets forth the pension plan's funded:status, components of plan valuation date of September 30: ':
c_ _. _ =,mereOUtCau_: "
Projected benefit obligation at beginning of year ii: $ 373.434 $ 321,429 Service cost 5,539 5.544 Interest cost 27,238 25,758 3,560 Amendments .
Actuarial gain 41 192 36.143 Benefits paid Projected benefit obligation at end of period 426,885 ChangeinPlanAssets:
Fair valueof plan assetsat beginning of year 339,838 389,827 Actual return on plan assets . _. - (20,207) (30,989)
Contribution 20,000 Benefits paid _ (20,518) (19,000) .
Fair value of plan assetsat end of year 319,113 339,838 Funded Status = : (107,772) (33,596)
Unrecognized net actuarial loss 144,328 48,432 Unrecognized prior service cost 3,109 3 437 Prepaid pension cost -*_*'": *:$ 39,665 $ 18,273 "
The amounts recognized in the Consolidated Balance Sheet consisto_.
Accrued benefit liability $(107,772) $ (33,596) i, Intangible asset 3,109 3,437 .
Accumulated other comprehensive income 144,328 48,432 Net amount recognized $ 39,665 $ 18273 1
. AverageAs=umpt/ons asof Septembe30 r ,
Discount rate 6.75% 7.S0%
Expected return on plan assets 9.00% 7.75% .i t.
,i Components of Net PeriodicIlenefltCost:
Service cost $ 5,539 $ 5,544 Interest cost 27,238 25,758 Expected return on plan assets (34,497) (29,488]
"L (847)
Amortization of net gain Amortization of transition obligation (1,158)
Amortization of prior service cost 326 34 Net periodic pension benefit $ (1,394)
_!_iii!!
i i_i¸¸ Other Post-retirement Benefits The Company provides medical and dental benefits to eligible retirees. Currently, retirees are offered the same benefits as active employees after reflecting Medicare coordination. The follow ng sets forth the plan's funded status, components of net periodic benefit cost (in thousands) at the plan valuation date of September 30:
Other Benefits Change _ Benefit Ob_n:
Benefit obligation at beginning of year $109,408 $ 81,711 Service cost 2.694 2,644 Interest cost 8,082 7,906 Amendments (31,960)
Unrecognized actuarial loss 32,876 20.500
_-. - Expected benefit paid (3,304) (3,353)
Benefit obligation at end of period 117.796 109,408 Fair value of plan assets at beginning of year 42,132 44,694 Actual return on plan assets (6,478) (5,161)
Employer contribution 7,429 6,748 Benefits paid (2,881) (3,553)
Fair value of plan assets at end of year 40,202 42,728 Funded Status (77,594) (66,680)
Unrecognized net transition obligati on 18,171 19,988 Unrecognized net actuarial loss 74,048 31,763 Unrecognized prior service cost (31,960)
Accrued post-retirement costs $ (17,335) $ (14,929)
We/_bted - Average Auumpt/ons am of September 30, Discount rate 6.75% 7.50%
Expected return on plan assets 9.00% 8.25%
Other Benefits CmwpmNmts of Net Per/od/c Benefit Cost:
_;_ Service cost $ 2,694 $ 2,644 $ 1,053
": Interest cost 8,082 7,906 5,428 Expected return on plan assets (4,505) (3,412) (3,572)
Amortization of net loss 1,320 799 Amortization of transition obligation 1,817 1,817 1,817
- ;, " Net periodic post-retirement benefit cost $ 9,408 $ 9.754 $ 4,726 81
of the were r Plan plan. The
- Company's stock option plans at December 31, and changes during the years then ended
__ _'__ _, 9-_ - _= .- -,,__ - _- -_ = ;,-., " -_ Z _=_ - -
Weighted Weighted Weighted Average /¢verell_ Average EXercise Exercise Exercise Shares" Price Share, s Price Shares Price
$19.100 3,336,221 $19.120 1,574_418 $18.207 901,620 $25.745 6,000 $22.610 L2,078,500 $19A03 Exercised 356,132 $18.044 299,951 $19._10 296,027 $16,363
- Forfeited 16,167 $21,390 6_,969_ $17.961 20,67.0, $17.320
_ 3_510,622 2,981,301 3,336;221 1,525,345981,197 916,263 grant . 1-,777,880 2,500,000_ --
i . -The following table summarizes information about stock options outstanding at December 31, 2002:
Ol_tlo_,s OutStanding - Options Exercisable il Weighted Weighted Number Average Exercisable Exercise
- * . $27.35 73,000 8.363 years 520.429 28,000 $11.876 3 2,588,502 6.888 years $19.332 1,433,895 $20.644 849,120. 9.246 years $25.745 63,450. $25.943 3,510,622 7.489 years $20.906 1,525,345 $20:703 table summa_izesweighted-average fair value of, options granted during the year
- PEP..... $ 7.42 $ ' - $ 7.24
_::T.i $ 7.03 $13.94 $ 6.98
$6.677 $ 83 $15,054 of grant using the Black-Scholes optiOn-pr c ng model w th the 3S" 3.43% 3.10% 2.98%
33.62% 33.99% 26.43%
_ 4.87% 5.38% 5.11%
10.0 years 10.0 years 10.0 years 83
!_ : _ _ i i ' ' i!_'_i ii_i'iii_iii!
(11) Construction Program and Joiwtly-_ Pl=mts
- 2002 were approximately and ma in operating expenses Earnings.
At December 3 and investments in jointly-owned c Plant Accumulated C
_c,,t__',i,)n (Fuel T In Service (In thousands)
$710,027 $393,892 $ -46,3%
Palo Verde Station (Nuclear)** $216,940 $ 67.732 Four Corners Power 4 and 5 (Coal) $118,509 $ 88,549 Company's interest in and 1its 1 and 2.
San The Corn owns SJGS. At December 31, sis Unit 3 is owned 50% by the with Company, 28:8%
("SCPPA") and 8.2% a Association, by M-S-R t the City of Anaheim 7,2% by the County t Utah Associated Municipal Power Systems.
Palo Verde The Company 1,270 MW units of PVNGS, also known with Southern Arizona Pub agent), Salt River Project,
_ny has a 10.2%
California Edison Company; SCPPA and The Department of Water and undivided interest in PVNGS, with portions of its interests in Units 1 and 2 held under _dditional discussion.)
84
endes Power Contracts with Southwestern Public Service Company ("SPS"), which originally provided for the purchase in May 2011. PNM may reduce its purchases from SPS by 25 MW annually upon three years' notice. PNM to reduce the purchase by 25 MW in 1999 and by an additional 25 MW in 2000. PNM also is party to a master sale agreement with SPS, dated August 2, 199£, pursuant to which PNM has agreed to purchase 72 MW of from 2002 through 2005. PNM has 70 MW of contingent capacity obtained from El Paso under a transmission ca trade arrangement through September 2004. Beginning October 2004 and continuing through is 39 MW. PNM holds a power purchased agreement ('PPA") with Tri-State for 50 MW through June 30, PNM is interconnected with various utilities for economy interchanges and mutual assistance in emergencies.
entered into an operating lease for the rights to all the output of a new gas-fired generating plant for 20 years.
Th Faximum dependable capacity is 132 MW. In July 2000, the plant went into operation. The gas turbine t.is operated by Delta-Person Limited Partnership ("Delta") and is located on PNM's retired Person Generating Albuquerque, New Mexico. Primary fuel for the gas turbine generating unit is natural gas, which is provided by PNM.
In addition;the unit has the capability to utilize low sulfur fuel oil in the event natural gas is not available or cost effective.
In PNM entered into a ong-term wholesale power contract with Texas-New Mexico Power ('TNMP") to provide power customers. The contract has a term of 5 1t2 years commencing July 1, 2001. PNM will provide varying demand to complement existing TNMP contracts. As those contracts expire, PNM will replace them and
_upplier beginning January 1, 2003. tn the last year of the contract, it is estimated that TNMP will need 114 MW_
2002, PNM entered into an agreement with FPL Energy LLC ("FPL"), a subsidiary of FPL Group, Inc., to develop generation facility in New Mexico. FPL Energy will build, own and operate the New Mexico Wind Energy Center
("NMWE'_,consisting of t36 wind-powered turbines on a site in eastern New Mexico PNM wilt buy all the power generated by the NMWE under.a 25-year contract. Construction of the wind energy site began in January 2003. Construction on a facility of this size typically takes Six to nine months to complete. PNM will ask the PRC to approve a voluntary tariff that will allow PNM retail customers to buy wind-generated electricity for a small monthly premium. Power from the facility not subscribed by PNM retail customers under the voluntary program will be sold on the wholesale market, either within New Mexico or outside the state.
In December 2002, PNM entered into a two-year contract to supply 80 MW of power to U.S. Navy facilities in San Diego, caiiforiiia. PNM began delivering power under the contract January 1, 2003. The contract runs through March 2005.
Coal Supply .,
The Coal requirements for the SJGS are being supplied by San Juan Coal Company ("SJCC"), a wholly-owned subsidiary of BHP Holdings, who holds certain Federal, state and private coal leases under a Coal Sales Agreement, pursuant to which SJCC will supply f':, proc_ Coai for operation of the SJGS until 2017. BHP Minerals International, Inc. has guaranteed the obligations of SJCC under
'i_ the agreement, which contemplates the delivery of approximately 103 million tons of coal during its remaining term. That amount
- wOUlC[supply:substantially all the requirements of the SJGS through approximately 2017.
FoUr C_rners Power Plant ("Four Corners") is supplied with coal under a fuel agreement between the owners and BHP Navajo Coa _(_'BNCC"), under which BNCC agreed to supply all the coal requirements for the life of the plant. The current fuel December 31, 2004. Negotiations for an extension have been initiated. BNCC holds a long-term coal mining for renewal, from the Navajo Nation and operates a surface mine adjacent to Four Corners with the coal supply
_ besufficient to supply the units for their estimated usefu lives.
Natural Gas Supply Tile Company contracts for the purchase of gas to serve its retail customers. These contracts are short-term in nature supplying the gas needs for the current heating season and the following off-season months. The price of gas is a pass-through, whereby the Company recovers 100% of its cost of gas.
The natural gas used as fuel by Generation and Marketing was delivered by Gas. In the second quarter of 2001, Generation and Marketing began procuring its gas supply independent of the Company and contracting with the Utility Operations for transportation services only.
85
NOTESTOCONSOLIDATED FINANCIAL STATEIVIENTS OECE_]BEB 31, 2002_2001,2060
- are for retail " *'
ons be on covered quo-insur-Company's federaltaw tO the outages "he
for PVNGS, The nuclear decommissioning funding program
_f the 2001 decommissioning spent fuel disposal, would be approximately 1,2002, 2001 ue of the trusts for the year ended as amended in 1987 (the "Waste Act,), the United States Department of ligh-level radioactive wastes generated by
) facilities necessary for the storage and disposal of spent 1998: The DOE has announced that such a repository cannot be complet-which can accommodate all fuel expected to be
)efieves that it will be able to load dry Facility prior to September 2003. PNM currently estimates that it
_r:the life of PVNGS for its share of the fuel costs related to the on-site PNM accrues these costs as a component of fuel has accrued $1.0 million in 2002 for interim spent fuel storage or disposal methods will be available for use by New Mexico. The apparent cause of the explosion was a leak injured two persons who were working in the building.
a combination of corrosion and increased pressure.
Pipeline Safety Bureau (the "Bureau"), which issued its
.=PNM notice of probable violations of the New Mexico Pipeline Safety Act and
_nceagreement addressing the probable violations and fhed it with
_=a list of twenty-four corrective actions, including' internal policy
- PNM has also agreed to voluntarily accelerate spending on it an additional $1.8 million to development and implementation of
)liance agreement is pending before the PRC-. Two lawsuits against PNM by property and business interruption damages have been resolved.
- he PRC utility staff and intervenors in order to resolve its merchant restructuring the electric industry in New Mexico under path and PNM's merchant plant filing.
- he filing of the Global Electric Agreement with the PRC. The Global 2007 and will resolve the issues surrounding industry deregulation in New Mexico and
/ PNM, the PRC Staff, the New Mexico Attorney Consumers, the City of Albuquerque, and the University of New Mexico* The
- - reement as if they had signed it.
- ! the signatories to support passage of legislation concerning merchant plant activities islature, qM wilt decrease retail electric rates 6.5% in two ohases over the next three years. The 2003. The second phase will be a further 2.5% decrease from current rate then be frozen at that level until the end of 2007. In addition, the risks and benefits shareholders until December 2007. Since the new rate Global Electric
- the lower fuel costs sought to be captured by shifting to underground mining gs largely offsetting the reduction in retail revenues.
87
_i_iii
_!;il i !i!i_il !ii :! i¸¸¸_II_
J¸ii_i!_iii_
_¸I_....
PNM will be able to seek a general rate adjustment during the rate freeze period if environmental or tax law or regulation, or a new broader application of existing env ronmental would compromise its financia ntegi"ity. PNM also is permitted to ca pitalize all the reasonab e <
resources, including an after-tax cost of capital of 8.04% to be recorded concurrent y w ththe PNM is authorized to recover in the stipulated rates and future retail rates, its New decommis-sioning costs associated With the San Juan, La Plata and Navajo surface coal mines. PNM is million of the costs, composed 0f approximately $69 million in surface coal mine reclamation ( of contract buyout costs without being subject to prudence challenge by the sig: ,,costs
( to wi]l be amortized over 17 years commencing September 1, 2003 and in equal ar recover a return on the unam0rtized reclamation costs, but could seek to recove costs remaining as of December 31, 2007 in future rate adjustment proceedings.
The stipulated rates also provide for full recovery of nuclear decommissioning the applicable decommissionir_g Coststudy during the rate freeze period for PNM's of SJGS Unit 4 previously treated as an excluded resource from PNM's New to serve PNM's New Mexicoretait and wholesale firm requirements customers' power from Td-State, Delta Limited Partnership and firm power from Southwestern Public Service resources to serve PNM_ New Mexico retail and wholesale firm requirements customers' load under tr_e Global Electric Agreement, PRC approval or other authorization from the PRC is not required for PNM's merchant the following conditions: (a) PNM does not invest more than $1.25 billion in merchant credit rating on a stand-a one basis and on a consolidated basis with the Holding Company; and (c) year in gas and electric utility, non-merchant plant infrastructure needed t approval for merchant plant participation would be required and expedited PRC a of merchant plant if certain specified financial conditions are met. If PNM's credit rating with the Holding Company falls below investment grade, however, approvals are needed for new nd for Continuing to participate in merchant plant projects of more than a certain dollar value a PRC approva s not required for PNM to transfer any part of its interests in merchant ime to time to any other legal entity, provided that, the following conditions are met: (a) ;exceed 65% after giving effect to the transfer and (b) PNM's investment grade status on a _with the Holding Company wi I not be impaired by the transfer of merchant plant or PVNGS unit 3 a PNM further agreed in the Global Electric Agreement that it will transfer all its January 1, 2010. PNM will accelerate the mandatory transfer to a date one year a >illion on merchant plant. PNM may seek a variance from the PRC at any time prior to January 1, 2010 to ,=or terms
"_ and conditions requiring the transfer but not beyond January 1,2015.
_i_ Under the Global Electric Agreement, if merchant plant or PVNGS Unit 3 is transferred toa resources and the affiliate's generation resources may be jointly dispatched at the lnuary 1, 2015. Joint dispatch of all utility, PVNGS Unit 3 or merchant plant resources 2008 and 201S at PNM's discretion, as long as the utility's dispatch capability is not mpaired n any way.,
- PNM agreed to forego recovery of the costs incurred in preparing to transition This will result in a one-time write-off of approximately $16.7 million, pre-tax, u_
88
In the Global Electric Agreement, PNM, PRC utility staff and intervenors agreed to actively support the repeal of a majority of the Restructuring Act of 1999. If the repeal does not occur during the 2003 New Mexico Legislative Session, various modifications to the conditions of the Global Electric Agreement are triggered depending on how long repeal is delayed. SB 718 in the 2003 session would repeal the Restructuring Act as contemplated in the Global Electric Agreement. On February 28, 2003, SB 718 passed the Senate by a vote of 37-2 It is currently awaiting action in the House of Representatives.
In summary, the terms of this Global Electric Agreement and the Company's continuing efforts to control expenses offer significant benefits to both customers and shareholders in the form of lower rates, a predictable rate path, and the resolution of important issues affecting implementation of the Company's strategic plan over the next several years.
The Company is currently unable to predict the impact these proceedings may have on its plans to expand its generating capacity and its future financial condition and results of operations.
Other 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 on its consolidated financial statements. However, the Corn pany has recorded a liability where the litigation effects can be estimated and where an outcome is considered probable. 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.
The Company is involved in various legal proceedings in the normal course of business. The associated legal costs for these legal matters are accrued when incurred. It is also the Corn pany's policy to accrue for legal costs expected to be incurred in connection with SFAS 5 legal matters when it is probable that a SFAS 5 liability has been incurred and the amount of expected legal costs to be incurred is reasonably estimable. These estimates include costs for external counsel professional fees.
(13) Environmental Issues The normal course of operations of the Company necessarily involves activities and substances that expose the Company to potential liabilities under laws and regulations protecting the environment. Liabilities under these laws and regulations can be material and in some ns_ances may be imposed without regard to fault, or may be imposed for past acts, even though the past acts may have been lawful at the time they occurred. Sources of potential environmental liabilities include the Federal Comprehensive Environmental Response Compensation and Liability Act of 1980 and other similar statutes.
The Company records its environmental liabilities when site assessments or remedial actions are probable and a range of reasonably likely cleanup costs can be estimated. The Company reviews its sites and measures the liability quarterly, by assessing a range of reasonably likely costs for each identified site using currently available information, including existing technology, presently enacted laws and regulations, experience gained at similar sites, and the probable level of involvement and financial condition
-.:, of other potentially responsible parties. These estimates include costs for site investigations, remediatior, operations and maintenance, monitoring and site closure. Unless there is a probable amount, the Company records the lower end of such reasonably likely range of costs (classified as other long-term liabilities at undiscounted amounts).
The Company's recorded minimum liability estimated to remediate its identified sites was $8.5 million and $6.8 million as of December 31,2002 and 2001, respectively. The ultimate cost to clean up the Company's identified sites may vary from its recorded liability clue to numerous uncertainties inherent in the estimation process, such as: the extent and nature of contamination; the scarcity of reliable data for identified sites; and the time periods over which site remediation is expected to occur.
For the year ended December 31,2002, 2001 and 2000, the Company spent $0.7 million $1.7 million and $1.6 million respectively, for remediation. The majority of the December 31, 2002 environmental liability is expected to be paid over the next five years, funded by cash generated from operations. Future enwronmental obligations are not expected to have a material impact on the results of operations or financial condition of the Company.
8g
_']OTES TO CON$OD_ATED F1NAiY,_(';}AL STATE_;'_E?_iTS t
- Z $44,954
$ (2,436) 4,818 9,924
NOTES TO {_0L1D_ _._i_ _.......... ?:; _. _
143,,). In June nition and measurement
)r development within the contracts, including
+" ') liability
,The amortized using a a future of life the recorded e net for such activities net of related will be a material Amendment of FASB i statement updates and debt and eliminates an certain lease modifica-standards, gains and current statement permits gains and losses from Operations, unless they are unusual in nature or occur amendments of FASB Statement No.' this standard on the
('SFAS t associated with an exit or disposal activities that are initiated after
- .- Other Costs to Exit in a Issue No. 88-10, "Costs i_ statements,
- significant impact on its
-_Transition and Disclosure,
._FASB issued SFAS 148 that g for stock-based employee . SFAS 148 is effective for fiscal years ending after December 11 ] Principles Board Opinion entity's accounting policy with and interim financial rots of SFAS 123 and are of this standard in and Disclosure Requirements for 5, 57, and 107 and rescisSion "); I be made by a guarantor in ts financia that it has issued. It also requires a t has undertaken in issuing the ! 45 appli the guarantor to make payments gl
uaranteed a based on changes in an under y ng obligation that is related to an. asset, liability, or an equity security of tO the g . . pl rt_j,I................. ,..... t_ =re effective for financial statements Of :interim or annual periods ending after uaranteecl party. ;ne u,_,u=u._ ._H_,-_ ........
The initial recognition and initial measurement provisions are appli_cable one I:irospective basis to guarantees December 31, 2002, irrespective of the guarantor's fiscal year.end_ 3the guarantor's preViOUSaccounting for prior to the date of initial application should not be revised or restated. Th_ Company; adopted FIN 45, and such not have a material impact on the financial statements.
Standards Board ("FASB") Interpretat on No. 46, "Consolidation of Variable Interest Entities", an interpretation Research Bullet n (ARB) No 51 "Consolidated Financial Staternent_" ("FIN 463;In JanuarY 2003, the FASB issued FIN 46 consolidation of variable interest entities that have one or both of the following Characteristics:(1) the equ0ty investment at cient to permit the entity to finance its activit es without add tonat subordiriat_ financial support from other parties,
- led through other interests that will absorb some or all of the expected Iosses_l_the entity and (2) the equity investors ore of the following essential characteristics of a controll ng financial interest_ (a):_e direct or indirect ability to make about the entity's act v ties through voting rights or similar rights, (b) the Obligation t_ l_orb the expected losses of the e occur, wh ch makes it possib e for the entity to finance ts act v tes, or (c).the Hgh :to receive the expected residual
- h y ... ........... z_..L.^ "sk of abso_inn _e-e_ ed:losses. FASB be!,eves that of a
- .f the entity 0tthe occur, wmcn is me compensauu- .u. u,= ,, = , . ....
enterprise has a Ycontrolling financial interest in a variable interest entity, the as_ts,,l_at lBites, and *results of the activities
, v riab e nterest ent ty should be included in consolidated financial statements _ t.ho_ _)fthebusiness enterpnse. FIN 46 a ................. ._.._.4 bv their _ma_v:l _neflciafies if the entities do not xstin unconsolidateo varlaole interest enaaes _o ue cu_,=u,,_=-_,_ s r"7 '_ : .
I;_. uims el cns"gerser.......... sv.s among u=_t _= :'-volved,.. There are also additional dlsclosure.:_c_uiter 'ants _or an enterprme that holds ettect=ve y p - . ......... ..... _.-*efi_ia,_ FINs, 6 ao_lies immediately to vanaole
- " nt vanable interests n a veriaD e nteresz entity out IS not me pr Mmy u_=,,,=._- ,_ rr_
Sig_fica " - .......................... in whichIra ente orise obtains an interest after that
- ,._.L_==_=ntit;_s created after January 31 zuu3, and to vanaDue _n_ev_=__,,.,-,_o . _. _ ,.. . ....
- __
- ,,_- .... _-_-,- ' ............... =_= .4_.,=.,_ Wl :h it is t_rst aop,ea or Dy res_auH9 date an may be applied pros ectively with a cumutative-enecz aajusun_n_ == u. u,_ :_...._: _ .;:. , - . - _ .
previ0ud'yslissued financial statPr_ents for one or moreyears with a cumulat ve-effect adj_ent
- or.the beginning ot the nrst year
_stated. Currently, the company does not have interests in any variable interest entity, 2 3 Issues Related to Accounting for Contracts Involved in Energy Trading and Risk Management Activities", EITF 98-10 EITF 0 - " . ..... ..... =:..o-;_._1 Statement of Financial Accounting I " Accounting fo r Contracts Involved in Energy Trading ano r¢_s__nanagemem/_uv,
....... _ .... u==^-_..=....
_;==" _October 25 2002 the EITF No 133 SFAS 133") "Accounting for Derivative instruments ano ne_._'_.,,=,=_ _ -" ' .
Standards . ( - ........ _n _.._ .... iro_ that all enerav contracts held for trading purposes be reached a final consensus on EITF 02-3 that rescinos t:Hr _o-. ....... .1............ _
ted on a net mar n basis in the statement of earnings. The resc,ss,on of EITF9_10 requ._ .thet energy contracts wh,ch do no_
presen g e¢lt current earnings. _s a resu,_,a eet the definition of a derivative under SFAS 133 no longer be marked-to-market and recogrgZ ,; i_ , _---_ -k^-_-_ _-^ wr tten m nt mr unOer the accrual me_uu =,,uu,u u=
con@actswhich were marked to market under EITF 98-10 and must now be accou eo_
cost with any difference included as a cumulative effect adjustment in the perlod_of adoption. This transition provision will tiire for the frst quarter of 2003 - The rescission *of E TF 98-10 d d not have a-.material " " ' ; _act On the n ' vided in Company EITF 98 10 's also financial met
,n or results of operations as all contracts previously marked-to-market under th.e def!n!tlo pro.
_' the definition of a derivative under SFAS 133 and are properly recorded at fair value with gains and losses recorded in earnings.
_;_, The Company is reviewin_g its energy contract portfolio to determine whether" its contra CtSwill
_rmeethe definitiOnperiods irecla_ify to°fa tradingnet marginactivitieSbasis ITF 02 3 which should be presented on a net marg n basis. The Company Under E - , ........ _' ..... _e first _uarter of 2003 The Company does not expect to report
- _ for those contracts previously accountea _or unaer cl_r _o-,v ,,, u, ,_ --
revenues and cost of energy sold on a net margin basis, on a prospective basis as a result of the application of EITF 02-3 as none of the of Company's marketing activities meet the definitions of trading activities as prescribed by EiTF 02-3,
QUARTERLY OPERATING RESULTS The unaudited operating results by quarters for 2002 and 2001 are as follows:
Quarter Ended March 31 June 30 September 30 December 31 (In thousands, except uer share amounts) 2002:
Operating Revenues $ 3t3,996 $ 264,569 $ 289.440 $ 30C,991 Operating Income 32,687 19,449 29.135 20,503 Net Earnings 24,949 11 157 17,797 10,369 Net Earnings per Share(Basic) 0.63 0.28 0.45 0.26 Net Earningsper Share (Diluted) 0.63 0.28 (345 0.26 2001:
Operating Revenues $ 736,530 $ 666,091 $ 621,895 $ 315,301 Operating Income 77,300 80,547 47,422 17,408 Net Earnings 63,552 49,597 32,775 4,509 Net Earnings per Share (Basic) 1.62 1.26 0.83 0.11 Net Earnings per Share(Diluted) 1.60 1.24 0.82 0.11 In the opinion of management of the Company, all adjustments (consisting of normal recurring accruals) necessary for a fair statement of the results of operations for such periods have been included.
93
t.
i i _,. '_; L: * ., i 4< <
COMPARATIVE OPERATING STATISTICS (UNAUOITE!D) 1,824
!87,681 24i ,968 88,644 536,417 707 151
$ 160,398 42,480
_887 218 234,983 13,464 5
250
r .
COMPARA1WE OPERATING STATISTICS (UNAJJDITED)
Ul_A_ Custmm_ _t Year End:
345,588 340,656 332,332 321,949 319,415 Commercial 41,092 40,065 39,525 38,435 *" 37,652 Industrial ' 311 377 371 375 363
(_rier ultimate customers 796 924 , 625 , , 625 , 665 Total ultimate customers 387,787 382,022 372 853, " 361r384, _ 358,095 Sales for Resale 76 79 81 _,, _ 83 ....... 83 Total customers 387,863 382,101 '
- 372,934 361,467 358,178 Gas:
- Residential 411,642 404,753 390,428 383,292 i commercial 35,194 32,894 32,116 32,004
., Industrial 58 50 51, Other 3,664 3,528 _ 3,688 -
29 i " Transportation Total customers 27 450,585 441 34
_: Energy Saies--KWfi_iin thousands)-
Firm-requirements who esa e 581,428 616.703 330,003 179,249 278,615 Other contracted off-system 4.192.788 6,900,$89 7,315,679 6,196,499 4,033,931 Economy energy sales 4,675,939 S 059 808 _ 4 706 446 _- 4_795873 _,469.769 Total salesto ultimate customers 9,450,155 12,577,100 12,352 128 11,171,621 8,782,315 Intersegment sales Total energy sales 16,8S6,661 19,832,397 189
..... Firrn_requirementswholesale $ 25,973 $ 24,754 $ : 1S,$40 $ 7,046 $ 10,708
_,'i: Other contracted off-system 135,322 879,824 364,278 226,773 142,115
- _, Economyenergy sales 116,280 512,209 . 368,374 , 131_549 122,156
='._ Total revenues to ultimate customers 277,575 1,416,787 748,192 365_3_8 274,979
_=i" Intersegment revenues 348,935 341,608 318,872 362,722 Miscellaneous electric revenues 47,810 65 Total generation revenues $ 674,320 $ 689,981 C.mun_ a_ _ O_rae_ Cu_om_ _ yur F._r_ 76 79 81 _1_3 .1_
Reliable Net Capability--KW 1,734,000 1,521,000 1,521,000 1 1,506,(X)0 Coincidental Peak Demand_KW 1,456,000 t,397,000 1,368,000 1,291,000 1,313,000 Average FuelCost per Million BTU $ 1.3910 $ 1.6007 $ 1.3827 $ 1.3169 $ 1.2433 BTU per KWh of Net Generation 10,568 10,549 10,547 10,490 10,784 g5
- iiA EHOLE !NFOflJ'TIOND, will be held at 9
- 30 am on May 13, 2003 at The South Broadway Cultural Center, requested from stockholders when the notice of meeting and proxy statement Overnight, Registered or Certified Mail:
Mellon investor Services 85 Challenger Road 38 Ridgefleld Park, NJ 07660 f
and direct stock purchase plan as a service to both new investors and current the PNM Direct Plan gives shareholders the opportunity to
- ,, _ about the Plan and enrollment forms are available by calling Mellon Investor
! at melloninvestor.com.
on the New York Stock Exchange under the symbol PNM. The newspaper listing is PNM 5,082 common shareholders of record.
Qtr. DIv;_ Hl_lh Low Dividend High Low 1 $0.20 $30.760 $25.330 $0.20 $29.340 $22.875
"_ 2 $0.22 $30.550 $23.300 $0.20 $37.800 $28.700 3 $0.22 $24.330 $17.250 $0.20 $33.550 $24.752 i_i I 4 $0,22 $24.670 $17.470 $0.20 $28.680 $24.350 and Form 10-Q {quarterly report) to the Securities and Exchange Commission Financial and Statistical Report and other corporate literatu re are availa hie free accessing the information on the Internet at pnm.com or by writing the Vice President,
, earnings results and other important information, visit the PNM website at pnm.com.
Investor Relations:
Inc. Barbara L. Barsky Vice President, investor Relations Phone: 505-241-2662 Fax: 505-241-2367
- _ E-Mail: bbarsky@pnm.com