PNM Resources Inc.
PNM Resources Inc.
Incorporated: 1917 as Albuquerque Gas & Electric Company
Sales: $2.3 billion (2001)
Stock Exchanges: New York
Ticker Symbol: PNM
NAIC: 221111 Hydroelectric Power Generation; 221112 Fossil Fuel Electric Power Generation; 221113 Nuclear Electric Power Generation; 221119 Other Electric Power Generation; 221121 Electric Bulk Power Transmission and Control; 221122 Electric Power Distribution; 486210 Pipeline Transportation of Natural Gas; 221210 Natural Gas Distribution
PNM Resources Inc. was created in 2001 to act as a holding company for the Public Service Company of New Mexico and various other energy-related concerns. The company operates as a merchant utility—one involved in both regulated energy service and the competitive sale and trading of energy. PNM is the largest utility concern in New Mexico, providing electricity and natural gas to over 1.3 million customers. The firm owns and maintains 2,282 miles of electric transmission line and 7,594 miles of electrical distribution line. Its natural gas business includes 1,478 miles of pipeline and 10,900 miles of natural gas distribution and service pipe. PNM’s holdings also include interests in the San Juan Generating Station and the Palo Verde Nuclear Generating Station. In 2001, PNM’s wholesale—generation and trading—operations accounted for nearly 60 percent of company revenues.
Early History: 1880s to Early 1900s
PNM’s corporate roots can be traced to the 1880s, when venturesome local entrepreneurs began forming companies to bring electric, gas, and water service to New Mexico’s largest communities. Constantly needing additional capital, several of these companies were acquired one by one by Federal Light and Traction, a New York holding company that controlled various public utilities throughout the West and in Arkansas and New Jersey. By the 1920s, Federal dominated the New Mexico market with operating franchises in Albuquerque, Santa Fe, Las Vegas, Deming, and Belen.
The first electric and gas operations in Albuquerque, New Mexico’s largest city, began in 1882. Local businessman A.A. Grant obtained a gas manufacturing franchise, incorporated the Albuquerque Gas Company, and secured land to build a plant near the railroad’s coal unloading and storage yard. Dr. E.W. Harrison served as president during the company’s early years, when it successfully manufactured producer gas—made from nitrogen, carbon monoxide, hydrogen, and coal or coke—for distribution to local businesses and residences. But continuing leaks and pressure problems in the company’s underground pipe distribution network restricted service to a half-mile radius from the plant.
Albuquerque businessman and landowner Perfecto Armijo secured the city’s first electric franchise in 1882. Immediately after organizing the Albuquerque Electric Company with Dennis Dennison and A.A. Grant, Armijo sold his interest to them, and Dennison became president. In 1883, just one year after Thomas Edison built the world’s first generating station in New York City, electricity came to New Mexico. Two years later, a new power plant with a 250-kilowatt generator was constructed. The company was reorganized in 1886 under a new name, the Electric Light Company of Albuquerque, and appointed a new president, A.A. Grant.
In 1895, Grant, who had also served on the board of the Albuquerque Gas Company since its inception, was elected its president as well. Four years later, J.J. Henry, president of the Denver-based United States Light and Traction Company, obtained financial control of the two separate companies. Grant remained president of both organizations until 1902, when Henry sold the assets and franchises of his two recently acquired companies for 99 percent of the capital stock of a new Denver-based corporation, the Albuquerque Gas, Electric Light and Power Company (AGEL&P). Henry briefly served as president of AGEL&P until succeeded by William S. Iliff in 1903.
Albuquerque was a growing town with a new streetcar firm, the Albuquerque Transit Company, which, along with the American Lumber Company and 608 other customers, needed more power than AGEL&P’s old plant could furnish. To meet the growing demand, Iliff incorporated and became president of a separate Colorado firm in 1904, the Albuquerque Electric Power Company, created specifically to provide and distribute electric power for AGEL&P. Iliff negotiated a series of agreements with the American Lumber Company whereby it leased land for a new power plant and supplied fuel and water for the boilers. In return, Albuquerque Electric would provide American Lumber with continuous electric service.
Immediate threat of an outside takeover from Kansas City financiers, however, prompted Iliff to propose the merger of Albuquerque Electric, one month after its incorporation, with AGEL&P. Both boards agreed, and in September 1904 AGEL&P secured 60 percent of the financial control of the Albuquerque Electric Power Company. Albuquerque Electric’s new power plant, later called Prager Station, opened the following year with a 500-kilowatt generator. The company added a 1,000-kilowatt generator in 1910 and served as AGEL&P’s prime power supplier until 1917.
Forming the Albuquerque Gas & Electric Company: 1917
New York City’s Federal Light and Traction Company, a public utility holding company, took financial control of AGEL&P and Albuquerque Electric in 1911. Federal’s president, Charles ? Chappelle, became president of both New Mexico firms as well, until succeeded by E.N. Sanderson in 1914. Federal merged its two Albuquerque companies into a new organization, the Albuquerque Gas & Electric Company, in 1917. Sanderson continued as president, and in 1919 Arthur Prager was transferred from Federal’s Trinidad, Colorado, properties to become agent in residence.
Prager later served as the firm’s general manager, became president in 1940, and went on to direct decades of growth in all fields of operation. More powerful generators continued to be installed at the company’s Prager Station, and a new power plant was built in Bernalillo, north of Albuquerque. A 46-kilovolt transmission line connected the two cities in 1926, and three years later another 46-kilovolt line—the first aluminum conductor line west of the Mississippi River—linked Bernalillo to Santa Fe.
The company received its first natural gas in 1930 via a pipeline constructed by the Dallas-based Southern Union Company from the San Juan gas wells in northern New Mexico. AGEL&P began distributing this gas to customers through its retail system and installing generators fueled by natural gas.
Adopting the PNM Name: 1946
On September 12, 1946, with the approval of the Securities and Exchange Commission (SEC), the Albuquerque Gas & Electric Company changed its corporate name to the Public Service Company of New Mexico (PNM) and acquired by statutory merger the properties of utilities in other New Mexico cities, including New Mexico Power Company, Deming Ice and Electric Company, and Las Vegas Light and Power Company. The following year, pursuant to Holding Company Act requirements, Federal liquidated, distributing to its shareholders all company common stock, with approximately 65 percent going to Federal’s parent, Cities Service Company. In 1948, Cities Service sold this block to the public, making PNM an independent operating utility.
Arthur Prager, who became the new company’s president, began his tenure by standardizing company operations. The subsidiaries in Las Vegas, Santa Fe, Belén, and Deming had been run independently with separate presidents and officers, different operating procedures, and little connection to Federal’s other New Mexico utilities. Wide scale changes were made to forge the separate businesses into a single, more efficient operation.
The next step was to unite the widely separated distribution and transmission systems. New Mexico’s phenomenal expansion during World War II, spurred by government defense and research installations like Kirtland Air Force Base, Sandia Laboratory, Los Alamos National Laboratory, and White Sands Missile Range, had led to increased power demands. AGEL&P had created a subsidiary, Stonewall Electric Company, in 1941 solely to construct transmission lines. Ten years later, with PNM’s statewide power grid completed, Stonewall was dissolved.
Concentrating on expanding electrical operations, PNM sold its retail gas operation to the Southern Union Company in 1949 for $4 million and entered into a long-term contract for delivery of natural gas to its power plants. Southern created a separate division, the Gas Company of New Mexico, to service that state’s customers.
PNM’s “Personal Commitment to New Mexico,” first and foremost, is to keep your gas and electricity service safe and reliable. Our commitment also includes involvement in our communities, from grants through the PNM Foundation to the building of a Habitat for Humanity house to our environmental efforts that include building bird habitats and reducing emissions from power plants. That’s why our commitment isn’t just to be a gas and electric utility, but rather is a personal commitment to our friends and neighbors.
New Mexico continued growing beyond the national average during the post-World War II years, and most of the growth was concentrated in PNM’s service area. The state’s population increased 38.6 percent from 1950 to 1960, while the franchised area grew by 53.5 percent. New Mexico’s economy—based on farming, livestock, mining, oil, and gas—expanded. In addition, outside manufacturers moved into the state, and new industries that required large amounts of power, including uranium mining and milling, arose. Not only did PNM’s customer base increase by 58.2 percent during the decade, but these customers were also using more power. Average residential household electrical use rose 58 percent from 1948 to 1953.
PNM responded by installing new and larger generators on an almost annual basis and constructing two new gas- and oil-fired power plants near Albuquerque. Generators put into service from 1955 to 1962 produced one and a half times more generating capacity than those that had been built in the previous 72 years.
D.W. Reeves became president in 1955, and Prager moved up to chairman. By 1960, all of PNM’s generating stations used natural gas purchased from the Gas Company of New Mexico for fuel. Rising fuel costs led Reeves to explore the possibility of substituting coal for gas for better economy. The Public Service Coal Company, a wholly owned subsidiary, was formed that year to explore, acquire, and develop coal properties. It later changed its name to the Western Coal Company.
At the same time, PNM was working to connect its power grid with other regional utilities. A new transmission line to the uranium mines in northwestern New Mexico was completed in 1958. By 1963, that line was extended to the Arizona border and connected with Arizona Public Service’s system. The next year, a second interstate tie was completed with Western Colorado Power.
Regional utilities began coordinating future construction plans. In 1964, Reeves became the first president of Western Energy and Supply Transmission Associates (WEST), an organization serving nine western states. The following year, the group announced plans to build a joint power plant, the coal-fired Four Corners Plant in northwestern New Mexico, near PNM’s coal leases. PNM acquired a 13 percent ownership in two generating units of the plant, the first step in WEST’S ambitious goal of creating 36-million kilowatts of new electrical capacity by 1985 to meet projected demand. Construction began in 1966.
For more than 50 years the cost of electricity had been declining as demand increased. Technological advances and greater demand led to larger and more efficient power plants. The average customer’s cost had dropped from 2.66 cents per kilowatt-hour in 1946 to 1.84 cents in 1964. Meanwhile, by 1968, existing homes were using more than twice as much energy as they did in 1953, and new homes consumed up to five times as much.
George Schreiber became PNM’s third president in 1966, when Reeves took over as chairman. The next year, Albuquerque, PNM’s largest market, gave the company a new 25-year electrical franchise. The Four Corners Plant became operational in 1969, and PNM announced plans to construct with Tucson Gas and Electric Company another coal-fired plant in the same region. Called the San Juan Generating Station, it would have state-of-the-art pollution controls, and PNM would own a 64 percent interest.
Steady Growth: 1970s
New Mexico continued growing in the 1970s. Among the United States, it ranked seventh in total mineral production, first in uranium, third in copper, fourth in natural gas, and sixth in oil, extractive industries that required vast amounts of power. Coal was regaining popularity as a cheaper substitute for more expensive fuels like gas and oil, and the state had known reserves of nearly 300 billion tons. For 15 years, the local uranium industry had been growing steadily; now its electricity use was doubling every year.
PNM took advantage of the growing need for its services. Work began on the San Juan plant in 1970. The company’s 1972 construction forecast was astronomical—$252 million would be spent on building new utility plants over the next five years, almost equaling the value of already existing facilities. The Public Service Land Company, a subsidiary of PNM, was created that year to secure land and water rights for future power plants. It was later renamed Paragon Resources.
Rates rose when the New Mexico Public Service Commission (PSC) approved a 10 percent rate increase in 1972, along with a fuel adjustment clause to counter rising energy costs. But since customer rates could not include the cost of unfinished construction projects, PNM sought additional capital on Wall Street, joining the New York Stock Exchange in 1972.
- Electric and gas operations begin in Albuquerque, New Mexico.
- The Albuquerque Gas & Electric Company is formed.
- The company changes its name to the Public Service Company of New Mexico (PNM).
- PNM goes public and operates as an independent utility.
- PNM sells its retail gas operation to the Southern Union Company.
- The Four Corners Plant becomes operational.
- PNM lists on the New York Stock Exchange.
- Construction begins on the Palo Verde nuclear power plant.
- The firm acquires the Gas Company of New Mexico from Southern Union.
- PNM reports a loss of $241 million.
- The company’s president Jerry Geist resigns amid negative publicity and shareholder lawsuits.
- The firm brings both its electric and gas operations under the PNM name.
- PNM Resources Inc. is created as a holding company.
Even though the first unit of San Juan came on line the following year, PNM and four other regional utilities made plans to build Palo Verde, the nation’s largest nuclear power plant, in Arizona. Based on PNM’s projections for electric power demand, the PSC approved its participation in the project in 1975; construction began the next year.
Rapid cost escalations from this ambitious construction schedule led state regulators to approve PNM’s proposed cost-of-service indexing in 1975. The brainchild of executive vice-president Jerry Geist, this controversial method allowed periodic automatic rate adjustments according to company expenditures, providing a guaranteed percentage of return to shareholders.
PNM was the fastest-growing and most profitable electric utility in the country during the late 1970s. From 1974 to 1980 its rates rose 120 percent, while 85 percent of its power came from coal-fired plants, which could be run more cheaply than those using gas or oil, and its coal subsidiary provided much of the fuel.
Diversification Leads to Disaster: Late 1970s-80s
Geist became president in 1976 and began diversifying the company’s assets into non-utility businesses, hoping to cash in on the Southwest’s booming economy, provide more uses for the increased electric power it would soon be producing, and create profits beyond the reach of regulators. Sunbelt Mining Company was formed in 1979 to provide coal for PNM generating plants. Meadows Resources, created in 1981, became involved in southwestern land development, various telecommunications companies, a Chicago savings and loan, a fiberboard manufacturing plant, and venture capital investments.
For a time all went well. The San Juan plant was completed in 1982, Meadows Resources and the Bellamah Land Company were making money on their joint housing developments, and PNM negotiated the sale and leaseback of its Palo Verde interest, generating additional cash flow. Geist’s apparent successes and innovative style made him an industry leader and darling of Wall Street financiers as PNM’s stock price soared. He was named chairman of PNM in 1982.
But state lawmakers were wary and passed a 15-month moratorium on further diversification that same year. It was lifted in 1983, when PNM agreed to end its controversial cost-of-service indexing. Two years later, PNM acquired the Gas Company of New Mexico from Southern Union as part of a price-fixing suit settlement by Southern.
As the 1980s wore on, clouds were beginning to appear on PNM’s horizon. New Mexico and the entire southwestern economy was slowing down, the regional real estate market began collapsing, and demand for power was nowhere near what had been anticipated. In 1986, the uranium industry actually used less than six percent of its projected power need. Reduced sales meant each kilowatt hour sold had to pay for a greater share of the costs of the company’s new generating plants and transmission lines.
In addition, PNM’s expenses were running out of control. Pollution control systems at the San Juan plant ended up costing $600 million, nearly half of the facility’s total price tag. Construction delays and cost overruns at Palo Verde raised PNM’s price tag for its 10.2 percent share from a budgeted $360 million to $1.2 billion. When the plant finally came on line in 1986, it was plagued with safety violations and excessive downtime. Even worse, revised projections showed that New Mexico customers would not need its power until the twenty-first century.
PNM was not alone. The entire Southwest was plagued with an overcapacity of electricity, which then depressed wholesale power prices. PNM proposed to solve some of these problems with a novel restructuring plan, splitting itself into a generating company and a distributing company, each under the control of a holding company that would replace the current PNM. In doing so, PNM hoped to take advantage of tax breaks, less regulation, and increased flexibility on rates to counter rising costs. The proposal was ultimately rejected by the state PSC in 1986. Opponents feared that PNM was trying to skirt state regulatory authority. A revised plan put forth the following year was withdrawn from consideration in 1988 after the company realized it had no chance of receiving approval.
Still, the company logged record profits of $151 million in 1986, and its stock rose to an all-time high of $39.75 a share early the next year. Then the dam broke. PNM’s diversification efforts began hemorrhaging money and attempts to pass the Palo Verde costs on to its customers were thwarted. In addition, the company’s stock nosedived to $12.63, and its bonds were devalued to junk status. PNM ended 1988 in the red. With losses totaling $241 million, the company cut its dividend to 48 percent and laid off nearly 800 employees, 20 percent of its work force. PNM ended the year by announcing it would begin selling all of its non-utility subsidiaries.
Things did not improve in 1989. Though PNM posted a profit, it suspended its common dividend indefinitely, reorganized to write off $200 million in bad investments, and cut Geist’s salary to one dollar for the year. Bellamah Community Development, PNM’s largest single non-utility investment, filed for bankruptcy while holding $400 million in real estate in the Southwest. In addition, Albuquerque voters passed an amendment requiring competitive bidding by power suppliers when PNM’s electrical franchise expired in 1992. To top the year off, shareholders began suing the company for mismanagement.
Geist resigned in 1990 amid a flurry of news reports highlighting his diversification debacle: $10 million in Bellamah bonuses paid to PNM executives; $4.5 million in PNM payoffs to Bellamah’s two partners to prevent a lawsuit; and utility money used to guarantee Meadows Resources’ real estate loans, a violation of the Public Utility Act. A PNM special internal committee estimated that $210 million was lost in its diversification efforts. The company sued Geist and two other executives from its diversified subsidiaries the next year, seeking the return of $5 million in bonuses, fees, and retirement benefits. However, 12 months later it dropped the suit due to mounting legal costs, after having already spent $3 million.
Refocusing Under Ackerman: Early to Mid-1990s
John Ackerman, former president of the Gas Company of New Mexico, became PNM’s new president and chairman. Charged with restoring its public image, Ackerman stressed the company’s rededication to its core business—providing public service. As a show of good will, electric and gas rates were frozen for three years starting in 1991.
Restoring profitability and finding customers to use its excess power were PNM’s two biggest problems. Though the company posted a small $13.5 million profit in 1991, excess capacity alone created a financial drain of 86 cents per share. While it cost PNM 4.5 cents per kilowatt hour to produce electricity at its coal plants, PNM Resources Inc. and nine cents per kilowatt hour at Palo Verde, it could only sell the excess energy for two cents per kilowatt hour in the saturated southwestern power market. And falling natural gas and oil prices made power generated from such plants cheaper than from PNM’s coal and nuclear power facilities.
Despite being called one of the “dismal four” struggling southwestern utilities by Bert Kramer, a utility analyst for Paine Webber who was quoted in the New York Times, PNM took some positive steps. Shareholder lawsuits were settled, multi-year contracts were signed to supply power to three regional utilities, and a small interest in its San Juan power plant was sold to the city of Anaheim, California. Electrical sales grew by 1.8 percent in 1991, and its Sangre de Cristo Water Company, which served Santa Fe, received an Environmental Excellence Award from the Environmental Protection Agency (EPA). In August 1992, PNM signed a preliminary 15-year electrical franchise agreement with the city of Albuquerque, whose customers represented 45.4 percent of its total electric operating revenues.
Ackerman was replaced by Ben Montoya as president and CEO in 1994 but remained chairman until 1999. Together, the pair continued to revamp PNM’s image. That year, the firm’s electric and gas operations were unified under the PNM name. In 1995, the company began expanding its wholesale operations, which sold and traded excess capacity. This portion of PNM’s business proved to be highly successful, growing by nearly 30 percent per year between 1995 and 2000. In fact, the company financial position as a whole improved, with both revenues and net earnings increasing each year from 1997 through 2000.
The Formation of PNM Resources: Late 1990s and Beyond
By the late 1990s, the U.S. utilities industry was in the midst of deregulation. New Mexico passed its Restructuring Act of 1999, forcing utility firms to separate regulated and unregulated businesses. As such, PNM revived its holding company plans from the 1980s. Unlike its previous attempts, the formation of a new company would not only gain approval but also serve as a necessary building block in the firm’s strategy to compete in both the generation and distribution markets.
Jeff Sterba—named president, CEO, and chairman in 2000—oversaw the creation of PNM Resources Inc., which would act as a holding company for Public Service Company of New Mexico. Shareholders approved the new structure in 2000 and, in June 2001, New Mexico’s Public Regulation Commission gave its authorization. Accompanying that authorization, however, were several conditions related to an initial dividend payment and the transfer of various assets that PNM believed to be unfair. Dissatisfied, PNM filed an appeal with the state Supreme Court to overturn the conditions. The company and the Commission finally reached a settlement in December, PNM dropped its appeal, and the new holding company was launched.
Sterba commented on the milestone in a December 2001 PR Newswire release, claiming that “activation of PNM Resources marks a significant step toward our goal of creating America’s best merchant utility. This new corporate structure allows us the business flexibility to continue our traditional focus on excellent customer service and efficiency in our utility operations, even as we pursue new opportunities in our growing power production and marketing business.”
During its first acquisition attempt as PNM Resources, the firm became involved in a legal battle surrounding its proposed purchase of Kansas-based electric utility firm Western Resources Inc. The $4 billion deal was announced in November 2000, but in July 2001 the Kansas Commerce Commission denied Western’s rate hike and its reorganization plan, which called for the spin off of non-utility assets. As a result, PNM Resources backed out of the deal and filed suit against Western, claiming it had breached the acquisition agreement. In December of that year, the deal was called off.
Even with acquisition setback, PNM Resources stood well positioned during the early years of the new century. During
2001, the company reported record earnings, and sales had increased by 46 percent over the previous year. PNM’s future success, however, was contingent on how well it battled its next round of challenges. New Mexico’s retail electricity market was slated to fully deregulate in 2007. Preparation for open competition in this market sector would no doubt bring additional change to PNM Resources. The company also faced staunch competition and price fluctuation in the wholesale market, and there was increased pressure to create and provide renewable or clean energy resources. Despite these obstacles, PNM Resources was confident it would remain New Mexico’s largest utility for years to come.
Public Service Company of New Mexico.
El Paso Electric Company; PG&E Corporation; Xcel Energy Inc.
Boschee, Pam, “PNM: Aggressive Wholesaler Players Eyes Market
South of the Border,” Electric Light & Power, August 2000, p. 16.
Gard, David M., History of Public Service Company of New Mexico, Albuquerque: Public Service Company of New Mexico, 1966. Getschow, George, “PS of New Mexico Generates Controversy With Plan to Sell Power Outside the State,” Wall Street Journal, October 21, 1980.
’PNM Resolves Remaining Issues Over Holding Company Rules,” PR Newswire, December 19, 2001.
“PNM’s Long-Term Growth Trend Underlies Record-Setting 2001,” Electric Light & Power, June 2002, p. 14.
Robbins, Cathy, “Utility Earnings Pay for PNM’s Diverse Holdings,” Albuquerque Journal, February 14, 1982.
Sikora, Martin, “A Big Utility Merger Lands in Court,” Mergers & Acquisitions Journal, December 1, 2001.
Ward, Leah Beth, “Fancy Footwork, Then a Stumble, in New Mexico,” New York Times, July 17, 1988.
—, “A Reckoning for the Utility High Rollers,” New York Times, July 29, 1990.
“Western-PNM Deal Terminated,” Oil Daily, January 10, 2002.
—James J. Podesta
—update: Christina M. Stansell