Despite falling short of analysts’ earnings estimates in the second quarter, PNM Resources shares moved higher Monday on the company’s $1 billion purchase, including debt assumption, of neighboring utility holding company TNP Enterprises Inc. The purchase will double PNM’s customer base in the Southwest. PNM also raised its earnings guidance for the year.
The TNP purchase, which will add 482,000 retail customers in Texas and New Mexico to PNM’s customer base, included $189 million in equal amounts of stock and cash and the assumption of about $835 million of TNP debt and senior redeemable cumulative preferred stock. PNM expects the transaction to generate at least 10% annual accretion to its earnings per share in the first full year after closing and 20% accretion to free cash flow
TNP Enterprises is a privately-owned holding company for Texas-New Mexico Power Co. (TNMP) and First Choice Power (First Choice). TNMP provides electric service to 85 cities and more than 252,000 customers in Texas and New Mexico. Its affiliate, First Choice, is a retail electric provider with more than 230,000 customers in Texas.
With TNP, PNM Resources will serve nearly 716,000 electric customers and 459,000 gas customers. The combined company will have revenues of more than $2.3 billion and serve a number of growing communities, including Albuquerque and Santa Fe in New Mexico, and Dallas-Fort Worth, Houston, and Galveston in Texas. Through First Choice, the company will also serve customers in communities throughout the Electric Reliability Council of Texas (ERCOT) region.
“With TNP Enterprises, PNM Resources will be a better company, not just bigger,” said PNM Chairman Jeff Sterba, adding that TNP is a “solid fit” with PNM’s strategy to “balance stable and predictable regulated revenue streams with opportunities for growth.
“Like our own regulated business, TNMP, which accounts for almost three-quarters of TNP Enterprises’ earnings, has some of the highest reliability ratings in the industry and solid customer satisfaction ratings,” he said.
It also has solid credit ratings and Moody’s Investors Service said Monday it was revising its outlook on TNP’s two utilities to positive from negative, based on the purchase price and PNM’s intention to repay all of the outstanding debt and preferred securities at TNP. “Moody’s views the potential transaction and recapitalization as alleviating the primary credit concerns at TNP, which are its highly levered capital structure and limited financial flexibility,” the ratings agency said. Moody’s also affirmed the ratings of Public Service of New Mexico (Baa2 senior unsecured debt) and maintained its stable rating outlook.
Sterba predicted “strong returns for our shareholders as a result of this acquisition. Our expanded geographic footprint in growing areas of the Southwest will also afford us with a number of operating efficiencies and a broader service territory, thereby providing diversity in markets, weather, and customer usage patterns.”
He cited the long relationship between the two companies. PNM has been the power provider for TNMP’s New Mexico customers. Parts of PNM Resources’ gas service territory also overlap with TNMP’s New Mexico electric operations.
Both utility companies have seen substantial customer growth. PNM has experienced a compounded annual growth rate of 2.4% in electric customers and 2% in gas customers between 2001 and 2003. TNMP reported 2.3% compounded annual customer growth during the same time period.
Following completion of the merger, PNM said it expects 72% of its earnings before interest, taxes, depreciation and amortization to be generated by its regulated businesses. PNM Resources also said it expects to achieve $10 million of annual pre-tax cost savings in the first year after closing. Savings are expected to come largely from procurement, information technology systems, and other shared administrative areas.
PNM has arranged to issue $250 million in common equity, $200 million in equity-linked securities and $100 million in long-term debt to help finance the transaction. The company also intends to either retire or refinance $385 million of TNP Enterprises debt. These moves are expected to reduce TNP’s net long-term debt and preferred debt by about $500 million. As a result, PNM expects to realize net interest savings of $40 million.
PNM reported slightly lower than expected quarterly earnings on Monday of $16.8 million, or 28 cents a share, down from $17.6 million, or 30 cents a share, a year earlier. The average of analysts’ estimates was 32 cents/share. Operating revenue rose 12.2% to $365.6 million.
Retail electricity gross margins, which are operating revenues minus the cost of energy, decreased 3% to $89.7 million because of an electricity rate decrease put in place last year and the amortization of costs related to closing a surface mine at a power plant. Wholesale electricity gross margins fell by $5.4 million because of higher purchased power costs and reduced plant availability.
Citing results for the first six months of this year, for 2004, PNM raised its earnings forecast to a range of $1.30 to $1.45 per share, excluding one-time items and adjusted for a three-for-two stock split. That compares to analysts’ estimates of $1.41/share.
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