Off-peak wholesale power prices on a forward basis have “strengthened considerably” from New Mexico-based PNM Resources Inc.’s projections, a company official told analysts last week during a conference call on PNM’s 2002 financial results.

“We don’t have a good finger on why that [is] happening,” said Eddie Padilla, PNM’s senior vice president for power marketing and development. “We know that there are three very significant new plant additions that have just come online. They’re gas-fired,” he said, without providing any additional details on the three plants in question.

Padilla said that “given the gas price situation and the forward market right now, and these significant new generation additions that are gas-fired, we’re speculating that there is some movement in off-peak prices associated with the marginal gas units that may be displacing other units in the off-peak market right now.”

“Over the last couple of months, we’ve seen some firming of the wholesale market,” said Jeff Sterba, PNM’s CEO, during the conference call. “Although the market still suffers from a lack of liquidity and a shortage of creditworthy trading parties, I am pleased that we’re continuing to find opportunities in our focus on meeting the needs of smaller utilities, munis and co-ops in the western marketplace.”

Sterba’s remarks dovetail with recent comments made by executives with Pinnacle West, a utility based in neighboring Arizona. Officials with Pinnacle have also seen prices in western wholesale power markets firm up in recent months, and in a conference call with investors Pinnacle management also voiced concerns about a lack of liquidity and the continued cloud of creditworthiness overhanging the power industry (see Power Market Today, Feb. 5).

PNM last month provided guidance for ongoing earnings of $1.80-$2.05/share for 2003 (see Power Market Today, Jan. 3). The company’s chief financial officer, John Loyack, reaffirmed that guidance on Wednesday. “As we said back in January, the range is based on a number of factors, including retail growth rates, wholesale electricity prices, merchant sales velocity and spark spread,” he said.

“On the wholesale side, our low end forecast assumes weak liquidity and flat prices,” Loyack noted. “We’re projecting an average annualized market price of about $34.00/MWh. While current forwards are stronger than this, it’s far too early in the year to see this as a continuing trend.”

He said that spark spread assumptions at the low end estimate “remain at levels that will restrict operations of PNM’s gas-fired assets to capacity factors below 10%.” Sterba expanded on this topic at a later point in the call. “On spark spread, we really need to see spark spread of $15.00 before our gas units really have an impact,” he noted. “So if you see spark spread move up a dollar, but it moves from $7.00 to $8.00, it didn’t do a darn thing. Once we get above $15.00, then we start to see contributions because of increases in spark spread.”

Meanwhile, Sterba commented on the current bid-ask pricing spread for generation assets up for sale. “I think it’s narrowing a little bit. Not enough, but I think it’s narrowing,” he said. “I think there are some folks that are realizing that with the amount of market uncertainty that exists, it’s pretty difficult to put some of these assets into the market and the financial pressures continue,” Sterba added.

“So I think it’s narrowing,” he said. “I don’t think that we’ve seen a floor by any means yet and so we’re obviously actively monitoring that as we go forward.”

PNM reported consolidated net earnings available for common stock for 2002 of $63.7 million, or $1.61 per diluted share. In 2001, the company reported consolidated net earnings available for common stock of $149.8 million, or $3.77 per diluted share. For the quarter ended Dec. 31, 2002, the company reported earnings of $0.26 per diluted share, compared to $0.11 per diluted share in the final three months of 2001.

A one-time gain and various one-time charges reduced 2002 earnings by a net of $0.20 per share, including net charges of $0.06 per share in the fourth quarter. Ongoing earnings were $1.81 per share for the year and $0.32 per share for the final quarter, compared to ongoing earnings of $4.52 per share for all of 2001 and $0.20 per share in the final quarter of 2001.

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