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PNM RESOURCES INC - Quarter Report: 2012 September (Form 10-Q)

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
 [X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

Commission File
 
Name of Registrants, State of Incorporation,
 
I.R.S. Employer
 Number
 
 Address and Telephone Number
 
 Identification No.
001-32462
 
PNM Resources, Inc.
 
85-0468296
 
 
(A New Mexico Corporation)
 
 
 
 
Alvarado Square
 
 
 
 
Albuquerque, New Mexico 87158
 
 
 
 
(505) 241-2700
 
 
 
 
 
 
 
001-06986
 
Public Service Company of New Mexico
 
85-0019030
 
 
(A New Mexico Corporation)
 
 
 
 
Alvarado Square
 
 
 
 
Albuquerque, New Mexico 87158
 
 
 
 
(505) 241-2700
 
 
 
 
 
 
 
002-97230
 
Texas-New Mexico Power Company
 
75-0204070
 
 
(A Texas Corporation)
 
 
 
 
577 N. Garden Ridge Blvd.
 
 
 
 
Lewisville, Texas 75067
 
 
 
 
(972) 420-4189
 
 

Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
 
PNM Resources, Inc. (“PNMR”)
YES
ü
NO
 
 
Public Service Company of New Mexico (“PNM”)
YES
ü
NO
 
 
Texas-New Mexico Power Company (“TNMP”)
YES
 
NO
ü

(NOTE: As a voluntary filer, not subject to the filing requirements, TNMP filed all reports under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months.)

Indicate by check mark whether each registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 
PNMR
YES
ü
NO
 
 
PNM
YES
ü
NO
 
 
TNMP
YES
ü
NO
 




Table of Contents

Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Act).

 
 
Large accelerated
filer
 
Accelerated
filer
 
Non-accelerated
filer
 
Smaller Reporting Company
 
PNMR
 
ü
 
 
 
   
 
 
 
   
 
 
 
   
 
 
PNM
 
   
 
 
 
   
 
 
 
ü
 
 
 
   
 
 
TNMP
 
   
 
 
 
   
 
 
 
ü
 
 
 
   
 


Indicate by check mark whether any of the registrants is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES     NO ü

As of October 26, 2012, 79,653,624 shares of common stock, no par value per share, of PNMR were outstanding.

The total number of shares of common stock of PNM outstanding as of October 26, 2012 was 39,117,799 all held by PNMR (and none held by non-affiliates).

The total number of shares of common stock of TNMP outstanding as of October 26, 2012 was 6,358 all held indirectly by PNMR (and none held by non-affiliates).

PNM AND TNMP MEET THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS (H) (1) (a) AND (b) OF FORM 10-Q AND ARE THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION (H) (2).

This combined Form 10-Q is separately filed by PNMR, PNM, and TNMP.  Information contained herein relating to any individual registrant is filed by such registrant on its own behalf.  Each registrant makes no representation as to information relating to the other registrants.  When this Form 10-Q is incorporated by reference into any filing with the SEC made by PNMR, PNM, or TNMP, as a registrant, the portions of this Form 10-Q that relate to each other registrant are not incorporated by reference therein.



2

Table of Contents

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

INDEX

 
Page No.
 
 
 
 
 
 


3

Table of Contents

GLOSSARY
Definitions:
  
 
Afton
  
Afton Generating Station
AFUDC
 
Allowance for Funds Used During Construction
ALJ
  
Administrative Law Judge
AMS
 
Advanced Meter System
AOCI
  
Accumulated Other Comprehensive Income
APS
  
Arizona Public Service Company, which is the operator and a co-owner of PVNGS and Four Corners
BART
  
Best Available Retrofit Technology
BHP
  
BHP Billiton, Ltd, the Parent of SJCC
Board
  
Board of Directors of PNMR
CAA
 
Clean Air Act
CCB
  
Coal Combustion Byproducts
CO2
  
Carbon Dioxide
CTC
  
Competition Transition Charge
D.C. Circuit
 
U.S. Court of Appeals for the District of Columbia Circuit
Decatherm
  
Million British Thermal Units
Delta
  
Delta-Person Generating Station
DOE
  
United States Department of Energy
DOI
  
United States Department of Interior
ECJV
  
ECJV Holdings, LLC, a wholly owned subsidiary of Cascade Investment, L.L.C.
EIB
  
New Mexico Environmental Improvement Board
EIP
  
Eastern Interconnection Project
EPA
  
United States Environmental Protection Agency
ERCOT
  
Electric Reliability Council of Texas
Exchange Act
 
Securities Exchange Act of 1934
FASB
  
Financial Accounting Standards Board
FERC
  
Federal Energy Regulatory Commission
FIP
  
Federal Implementation Plan
First Choice
  
FCP Enterprises, Inc. and Subsidiaries
Four Corners
  
Four Corners Power Plant
FPPAC
  
Fuel and Purchased Power Adjustment Clause
GAAP
  
Generally Accepted Accounting Principles in the United States of America
GEaR
  
Gross Earnings at Risk
GHG
  
Greenhouse Gas Emissions
GWh
  
Gigawatt hours
IBEW
  
International Brotherhood of Electrical Workers, Local 611
IRP
 
Integrated Resource Plan
KW
  
Kilowatt
KWh
  
Kilowatt Hour
Lordsburg
  
Lordsburg Generating Station
Luna
  
Luna Energy Facility
MD&A
  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Moody’s
  
Moody’s Investor Services, Inc.
MW
  
Megawatt
MWh
  
Megawatt Hour
NAAQS
 
National Ambient Air Quality Standards
Navajo Acts
  
Navajo Nation Air Pollution Prevention and Control Act, Navajo Nation Safe Drinking Water Act, and Navajo Nation Pesticide Act
NDT
  
Nuclear Decommissioning Trusts for PVNGS
NEC
 
Navopache Electric Cooperative, Inc.
NERC
  
North American Electric Reliability Corporation
NMAG
  
New Mexico Attorney General

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Table of Contents

NMED
  
New Mexico Environment Department
NMIEC
  
New Mexico Industrial Energy Consumers Inc.
NMPRC
  
New Mexico Public Regulation Commission
NOI
  
Notice of Inquiry
NOPR
 
Notice of Proposed Rulemaking
NOx
  
Nitrogen Oxides
NRC
  
United States Nuclear Regulatory Commission
NSPS
  
New Source Performance Standards
NSR
  
New Source Review
O&M
  
Operations and Maintenance
OCI
  
Other Comprehensive Income
OPEB
  
Other Post Employment Benefits
Optim Energy
  
Optim Energy, LLC, a limited liability company, formerly known as EnergyCo, LLC
OSM
 
United States Office of Surface Mining Reclamation and Enforcement
PCRBs
  
Pollution Control Revenue Bonds
PNM
  
Public Service Company of New Mexico and Subsidiaries, a wholly owned subsidiary of PNMR
PNM Revolving Credit Facility
 
PNM's $400.0 Million Unsecured Revolving Credit Facility
PNMR
  
PNM Resources, Inc. and Subsidiaries
PNMR Revolving Credit Facility
 
PNMR's $300.0 Million Unsecured Revolving Credit Facility
PPA
  
Power Purchase Agreement
PSD
  
Prevention of Significant Deterioration
PUCT
  
Public Utility Commission of Texas
PV
  
Photovoltaic
PVNGS
  
Palo Verde Nuclear Generating Station
RCRA
  
Resource Conservation and Recovery Act
RCT
  
Reasonable Cost Threshold
REA
 
New Mexico's Renewable Energy Act of 2004
REC
  
Renewable Energy Certificates
REP
  
Retail Electricity Provider
RFP
  
Request for Proposal
RMC
  
Risk Management Committee
RPS
  
Renewable Energy Portfolio Standard
SCE
  
Southern California Edison Company
SCR
 
Selective Catalytic Reduction
SEC
  
United States Securities and Exchange Commission
SIP
  
State Implementation Plan
SJCC
  
San Juan Coal Company
SJGS
  
San Juan Generating Station
SNCR
 
Selective Non-Catalytic Reduction
SO2
  
Sulfur Dioxide
SPS
  
Southwestern Public Service Company
S&P
  
Standard and Poor’s Ratings Services
TECA
  
Texas Electric Choice Act
Tenth Circuit
 
U.S. Court of Appeals for the Tenth Circuit
TNMP
  
Texas-New Mexico Power Company and Subsidiaries, a wholly owned subsidiary of TNP
TNMP Revolving Credit Facility
  
TNMP’s $75.0 Million Revolving Credit Facility
TNP
  
TNP Enterprises, Inc. and Subsidiaries, a wholly owned subsidiary of PNMR
Valencia
  
Valencia Energy Facility
VaR
  
Value at Risk


5

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


PNM RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands, except per share amounts)
Electric Operating Revenues 
$
390,411

 
$
549,498

 
$
1,019,646

 
$
1,352,747

Operating Expenses:

 
 
 

 

Cost of energy
110,777

 
250,854

 
297,342

 
582,814

Administrative and general
45,283

 
69,755

 
135,371

 
197,016

Energy production costs
40,365

 
39,730

 
131,546

 
135,510

Regulatory disallowances

 

 

 
21,402

Depreciation and amortization
42,820

 
42,370

 
122,289

 
119,115

Transmission and distribution costs
17,082

 
17,925

 
50,896

 
52,962

Taxes other than income taxes
15,934

 
20,580

 
45,218

 
50,564

Total operating expenses
272,261

 
441,214

 
782,662

 
1,159,383

Operating income
118,150

 
108,284

 
236,984

 
193,364

Other Income and Deductions:
 
 
 
 
 
 
 
Interest income
3,130

 
3,748

 
9,808

 
12,010

Gains (losses) on investments held by NDT
5,716

 
(4,109
)
 
9,376

 
7,688

Other income
2,484

 
1,755

 
6,991

 
3,559

Other deductions
(3,451
)
 
(4,685
)
 
(10,719
)
 
(11,638
)
Net other income (deductions)
7,879

 
(3,291
)
 
15,456

 
11,619

Interest Charges
30,515

 
31,124

 
90,280

 
92,251

Earnings before Income Taxes
95,514

 
73,869

 
162,160

 
112,732

Income Taxes
33,538

 
25,964

 
54,609

 
37,206

Net Earnings
61,976

 
47,905

 
107,551

 
75,526

(Earnings) Attributable to Valencia Non-controlling Interest
(3,980
)
 
(4,111
)
 
(10,699
)
 
(10,764
)
Preferred Stock Dividend Requirements of Subsidiary
(132
)
 
(132
)
 
(396
)
 
(396
)
Net Earnings Attributable to PNMR
$
57,864

 
$
43,662

 
$
96,456

 
$
64,366

Net Earnings Attributable to PNMR per Common Share:
 
 
 
 
 
 
 
Basic
$
0.73

 
$
0.48

 
$
1.21

 
$
0.70

Diluted
$
0.72

 
$
0.48

 
$
1.20

 
$
0.70

Dividends Declared per Common Share
$
0.145

 
$
0.125

 
$
0.435

 
$
0.375


The accompanying notes, as they relate to PNMR, are an integral part of these financial statements.



6

Table of Contents

PNM RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Net Earnings
$
61,976

 
$
47,905

 
$
107,551

 
$
75,526

Other Comprehensive Income (Loss):
 
 
 
 
 
 
 
Unrealized Gain on Investment Securities:
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period, net of income tax (expense) of $(4,972), $1,123, $(15,409), and $(8,157)
7,587

 
(1,713
)
 
23,511

 
12,448

Reclassification adjustment for (gains) included in net earnings, net of income tax expense of $4,248, $1,593, $12,786, and $11,555
(6,481
)
 
(2,431
)
 
(19,509
)
 
(17,632
)
Changes in unrecognized amounts of pension and postretirement benefits, net of income tax (expense) benefit of $(476), $(425), $(1,428), and $176
727

 
648

 
2,181

 
(318
)
Fair Value Adjustment for Cash Flow Hedges:
 
 
 
 
 
 
 
Change in fair market value, net of income tax (expense) benefit of $51, $123, $150, and $441
(92
)
 
(219
)
 
(270
)
 
(781
)
Reclassification adjustment for (gains) losses included in net earnings, net of income tax expense (benefit) of $(16), $(827), $(47), and $(1,129)
29

 
1,493

 
85

 
2,036

Total Other Comprehensive Income (Loss)
1,770

 
(2,222
)
 
5,998

 
(4,247
)
Comprehensive Income
63,746

 
45,683

 
113,549

 
71,279

Comprehensive (Income) Attributable to Valencia Non-controlling Interest
(3,980
)
 
(4,111
)
 
(10,699
)
 
(10,764
)
Preferred Stock Dividend Requirements of Subsidiary
(132
)
 
(132
)
 
(396
)
 
(396
)
Comprehensive Income Attributable to PNMR
$
59,634

 
$
41,440

 
$
102,454

 
$
60,119


The accompanying notes, as they relate to PNMR, are an integral part of these financial statements.


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Table of Contents


PNM RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended September 30,
 
2012
 
2011
 
(In thousands)
Cash Flows From Operating Activities:
 
 
 
Net earnings
$
107,551

 
$
75,526

Adjustments to reconcile net earnings to net cash flows from operating activities:
 
 
 
Depreciation and amortization
153,992

 
151,984

Bad debt expense
2,458

 
20,120

Deferred income tax expense
55,141

 
43,167

Net unrealized (gains) losses on derivatives
3,076

 
(5,869
)
Realized (gains) on investments held by NDT
(9,376
)
 
(7,688
)
Stock based compensation expense
2,748

 
4,302

Regulatory disallowances

 
21,402

Other, net
(4,495
)
 
991

Changes in certain assets and liabilities:
 
 
 
Accounts receivable and unbilled revenues
(31,550
)
 
(88,462
)
Materials, supplies, and fuel stock
(6,769
)
 
(985
)
Other current assets
(4,225
)
 
(2,901
)
Other assets
(9,499
)
 
(3,310
)
Accounts payable
3,973

 
13,781

Interest and taxes
22,336

 
33,049

Other current liabilities
(21,681
)
 
(12,919
)
Proceeds from governmental grants
21,567

 

Other liabilities
(80,248
)
 
(43,691
)
Net cash flows from operating activities
204,999

 
198,497

 
 
 
 
Cash Flows From Investing Activities:
 
 
 
Additions to utility and non-utility plant
(214,743
)
 
(236,275
)
Proceeds from sales of investments held by NDT
136,305

 
121,202

Purchases of investments held by NDT
(138,658
)
 
(122,174
)
Proceeds from sale of First Choice
4,034

 

Return of principal on PVNGS lessor notes
23,455

 
32,274

Proceeds from sales of utility plant
1,367

 

Other, net
260

 
145

Net cash flows from investing activities
(187,980
)
 
(204,828
)

The accompanying notes, as they relate to PNMR, are an integral part of these financial statements.

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Table of Contents


PNM RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
Nine Months Ended September 30,
 
2012
 
2011
 
(In thousands)
Cash Flows From Financing Activities:
 
 
 
Short-term borrowings (repayments), net
30,700

 
67,000

Long-term borrowings
20,000

 
50,000

Repayment of long-term debt
(20,000
)
 
(50,000
)
Proceeds from stock option exercise
10,301

 
2,570

Purchases to satisfy awards of common stock
(21,930
)
 
(5,288
)
Dividends paid
(33,454
)
 
(34,690
)
Valencia’s transactions with its owner
(12,034
)
 
(11,972
)
Proceeds from transmission interconnection agreements
983

 
1,246

Repayment of transmission interconnection agreements
(1,169
)
 
(4,637
)
Other, net
(151
)
 
2,458

Net cash flows from financing activities
(26,754
)
 
16,687

 
 
 
 
Change in Cash and Cash Equivalents
(9,735
)
 
10,356

Cash and Cash Equivalents at Beginning of Period
15,091

 
15,404

Cash and Cash Equivalents at End of Period
$
5,356

 
$
25,760

 
 
 
 
Supplemental Cash Flow Disclosures:
 
 
 
Interest paid, net of amounts capitalized
$
64,040

 
$
64,130

Income taxes paid (refunded), net
$
5,302

 
$
(3,744
)
 
 
 
 
Supplemental schedule of noncash financing activities:
 
 
 
Liability incurred for purchase of Convertible Preferred Stock, Series A
 
 
$
73,475


The accompanying notes, as they relate to PNMR, are an integral part of these financial statements.


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Table of Contents



PNM RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
September 30,
2012
 
December 31,
2011
 
(In thousands)
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
5,356

 
$
15,091

Accounts receivable, net of allowance for uncollectible accounts of $1,931 and $1,778
119,887

 
87,794

Unbilled revenues
54,399

 
57,401

Other receivables
43,418

 
71,069

Materials, supplies, and fuel stock
61,000

 
54,231

Regulatory assets
47,899

 
44,993

Commodity derivative instruments
1,184

 
3,713

Income taxes receivable
100,802

 
95,130

Other current assets
38,467

 
33,397

Total current assets
472,412

 
462,819

Other Property and Investments:
 
 
 
Investment in PVNGS lessor notes
54,666

 
79,049

Investments held by NDT
186,839

 
168,851

Other investments
9,977

 
12,207

Non-utility property, net of accumulated depreciation of $137 and $120
4,615

 
4,631

Total other property and investments
256,097

 
264,738

Utility Plant:
 
 
 
Plant in service and plant held for future use
5,223,543

 
5,120,167

Less accumulated depreciation and amortization
1,766,689

 
1,705,520

 
3,456,854

 
3,414,647

Construction work in progress
148,313

 
132,420

Nuclear fuel, net of accumulated amortization of $50,106 and $36,411
86,496

 
80,067

Net utility plant
3,691,663

 
3,627,134

Deferred Charges and Other Assets:
 
 
 
Regulatory assets
468,991

 
482,155

Goodwill
278,297

 
278,297

Other deferred charges
92,747

 
89,470

Total deferred charges and other assets
840,035

 
849,922

 
$
5,260,207

 
$
5,204,613


The accompanying notes, as they relate to PNMR, are an integral part of these financial statements.


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Table of Contents



PNM RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
September 30,
2012
 
December 31,
2011
 
(In thousands, except share information)
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current Liabilities:
 
 
 
Short-term debt
$
113,400

 
$
82,700

Current installments of long-term debt
2,387

 
2,387

Accounts payable
81,463

 
103,139

Customer deposits
17,655

 
15,971

Accrued interest and taxes
82,169

 
53,114

Commodity derivative instruments
1,888

 
1,632

Dividends declared
11,680

 
10,089

Current portion of accumulated deferred income taxes
9,080

 
9,080

Other current liabilities
73,269

 
95,156

Total current liabilities
392,991

 
373,268

Long-term Debt
1,672,124

 
1,671,626

Deferred Credits and Other Liabilities:
 
 
 
Accumulated deferred income taxes
705,945

 
645,099

Accumulated deferred investment tax credits
14,101

 
15,771

Regulatory liabilities
438,377

 
418,098

Asset retirement obligations
84,191

 
79,233

Accrued pension liability and postretirement benefit cost
129,858

 
224,766

Commodity derivative instruments
2,770

 
2,437

Other deferred credits
94,749

 
106,378

Total deferred credits and other liabilities
1,469,991

 
1,491,782

Total liabilities
3,535,106

 
3,536,676

Commitments and Contingencies (See Note 9)


 


Cumulative Preferred Stock of Subsidiary
 
 
 
without mandatory redemption requirements ($100 stated value; 10,000,000 shares authorized; issued and outstanding 115,293 shares)
11,529

 
11,529

Equity:
 
 
 
PNMR common stockholders’ equity:
 
 
 
Common stock outstanding (no par value; 120,000,000 shares authorized; issued and outstanding 79,653,624 shares)
1,183,886

 
1,193,191

Accumulated other comprehensive income (loss), net of income taxes
(60,858
)
 
(66,856
)
Retained earnings
509,456

 
447,650

Total PNMR common stockholders’ equity
1,632,484

 
1,573,985

Non-controlling interest in Valencia
81,088

 
82,423

Total equity
1,713,572

 
1,656,408

 
$
5,260,207

 
$
5,204,613

 
 
 
 

The accompanying notes, as they relate to PNMR, are an integral part of these financial statements.


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Table of Contents

PNM RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Unaudited)

 
Attributable to PNMR
 
Non-
controlling
Interest
in Valencia
 
 
 
Common
Stock
 
AOCI
 
Retained
Earnings
 
Total PNMR Common Stockholder's Equity
 
 
Total
Equity
 
(In thousands)
Balance at December 31, 2011
$
1,193,191

 
$
(66,856
)
 
$
447,650

 
$
1,573,985

 
$
82,423

 
$
1,656,408

Proceeds from stock option exercise
10,301

 

 

 
10,301

 

 
10,301

Purchases to satisfy awards of common stock
(21,930
)
 

 

 
(21,930
)
 

 
(21,930
)
Excess tax (shortfall) from stock-based payment arrangements
(424
)
 

 

 
(424
)
 

 
(424
)
Stock based compensation expense
2,748

 

 

 
2,748

 

 
2,748

Valencia’s transactions with its owner

 

 

 

 
(12,034
)
 
(12,034
)
Net earnings before subsidiary preferred stock dividends

 

 
96,852

 
96,852

 
10,699

 
107,551

Subsidiary preferred stock dividends

 

 
(396
)
 
(396
)
 

 
(396
)
Total other comprehensive income

 
5,998

 

 
5,998

 

 
5,998

Dividends declared on common stock

 

 
(34,650
)
 
(34,650
)
 

 
(34,650
)
Balance at September 30, 2012
$
1,183,886

 
$
(60,858
)
 
$
509,456

 
$
1,632,484

 
$
81,088

 
$
1,713,572



The accompanying notes, as they relate to PNMR, are an integral part of these financial statements.



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PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Electric Operating Revenues
$
321,731

 
$
323,760

 
$
832,242

 
$
797,232

Operating Expenses:
 
 
 
 
 
 
 
Cost of energy
99,217

 
108,708

 
263,009

 
279,419

Administrative and general
41,150

 
37,916

 
120,857

 
110,833

Energy production costs
40,365

 
39,730

 
131,546

 
135,510

Regulatory disallowances

 

 

 
17,479

Depreciation and amortization
24,437

 
25,058

 
72,017

 
71,691

Transmission and distribution costs
11,172

 
11,848

 
33,679

 
35,357

Taxes other than income taxes
8,417

 
12,586

 
25,386

 
30,323

Total operating expenses
224,758

 
235,846

 
646,494

 
680,612

Operating income
96,973

 
87,914

 
185,748

 
116,620

Other Income and Deductions:
 
 
 
 
 
 
 
Interest income
3,173

 
3,770

 
9,938

 
12,052

Gains (losses) on investments held by NDT
5,716

 
(4,109
)
 
9,376

 
7,688

Other income
1,176

 
1,179

 
4,378

 
1,921

Other deductions
(1,682
)
 
(2,643
)
 
(4,553
)
 
(5,480
)
Net other income (deductions)
8,383

 
(1,803
)
 
19,139

 
16,181

Interest Charges
19,230

 
18,487

 
56,652

 
54,593

Earnings before Income Taxes
86,126

 
67,624

 
148,235

 
78,208

Income Taxes
31,235

 
25,052

 
51,929

 
26,574

Net Earnings
54,891

 
42,572

 
96,306

 
51,634

(Earnings) Attributable to Valencia Non-controlling Interest
(3,980
)
 
(4,111
)
 
(10,699
)
 
(10,764
)
Net Earnings Attributable to PNM
50,911

 
38,461

 
85,607

 
40,870

Preferred Stock Dividends Requirements
(132
)
 
(132
)
 
(396
)
 
(396
)
Net Earnings Available for PNM Common Stock
$
50,779

 
$
38,329

 
$
85,211

 
$
40,474


The accompanying notes, as they relate to PNM, are an integral part of these financial statements.


13

Table of Contents

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Net Earnings
$
54,891

 
$
42,572

 
$
96,306

 
$
51,634

Other Comprehensive Income (Loss):
 
 
 
 
 
 
 
Unrealized Gain on Investment Securities:
 
 
 
 
 
 
 
Unrealized holding gains arising during the period, net of income tax (expense) of $(4,972), $1,123, $(15,409), and $(8,157)
7,587

 
(1,713
)
 
23,511

 
12,448

Reclassification adjustment for (gains) included in net earnings, net of income tax expense of $4,248, $1,593, $12,786 and $11,555
(6,481
)
 
(2,431
)
 
(19,509
)
 
(17,632
)
Change in unrecognized amounts of pension and postretirement benefits, net of income tax (expense) benefit of $(476), $(423), $(1,428), and $9
727

 
646

 
2,181

 
(13
)
Fair Value Adjustment for Cash Flow Hedges:
 
 
 
 
 
 
 
Reclassification adjustment for (gains) losses included in net earnings, net of income tax expense (benefit) of $0, $0, $0, and $(11)

 

 

 
17

Total Other Comprehensive Income (Loss)
1,833

 
(3,498
)
 
6,183

 
(5,180
)
Comprehensive Income
56,724

 
39,074

 
102,489

 
46,454

Comprehensive (Income) Attributable to Valencia Non-controlling Interest
(3,980
)
 
(4,111
)
 
(10,699
)
 
(10,764
)
Comprehensive Income Attributable to PNM
$
52,744

 
$
34,963

 
$
91,790

 
$
35,690


The accompanying notes, as they relate to PNM, are an integral part of these financial statements.


14

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PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended September 30,
 
2012
 
2011
 
(In thousands)
Cash Flows From Operating Activities:
 
 
 
Net earnings
$
96,306

 
$
51,634

Adjustments to reconcile net earnings to net cash flows from operating activities:
 
 
 
Depreciation and amortization
97,086

 
97,918

Deferred income tax expense
52,558

 
33,835

Net unrealized (gains) losses on derivatives
3,076

 
(4,120
)
Realized (gains) on investments held by NDT
(9,376
)
 
(7,688
)
Regulatory disallowances

 
17,479

Other, net
(1,005
)
 
3,228

Changes in certain assets and liabilities:
 
 
 
Accounts receivable and unbilled revenues
(26,183
)
 
(25,871
)
Materials, supplies, and fuel stock
(6,404
)
 
(974
)
Other current assets
(6,942
)
 
1,626

Other assets
(9,425
)
 
8,187

Accounts payable
2,353

 
(2,013
)
Interest and taxes
80,418

 
18,186

Other current liabilities
(9,850
)
 
(4,173
)
Proceeds from governmental grants
21,567

 

Other liabilities
(75,629
)
 
(45,417
)
Net cash flows from operating activities
208,550

 
141,837

 
 
 
 
Cash Flows From Investing Activities:
 
 
 
Utility plant additions
(144,571
)
 
(185,402
)
Proceeds from sales of NDT investments
136,305

 
121,202

Purchases of NDT investments
(138,658
)
 
(122,174
)
Return of principal on PVNGS lessor notes
23,455

 
32,274

Other, net
(720
)
 
496

Net cash flows from investing activities
(124,189
)
 
(153,604
)

The accompanying notes, as they relate to PNM, are an integral part of these financial statements.


15

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PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
Nine Months Ended September 30,
 
2012
 
2011
 
(In thousands)
Cash Flows From Financing Activities:
 
 
 
Short-term borrowings (repayments), net
(66,000
)
 
67,000

Long-term borrowings
20,000

 

Repayment of long-term debt
(20,000
)
 

Valencia’s transactions with its owner
(12,034
)
 
(11,972
)
Proceeds from transmission interconnection arrangements
983

 
1,246

Repayment of transmission interconnection arrangements
(1,169
)
 
(4,637
)
Dividends paid
(18,076
)
 
(47,730
)
Other, net
(151
)
 
2,558

Net cash flows from financing activities
(96,447
)
 
6,465

 
 
 
 
Change in Cash and Cash Equivalents
(12,086
)
 
(5,302
)
Cash and Cash Equivalents at Beginning of Period
12,307

 
10,336

Cash and Cash Equivalents at End of Period
$
221

 
$
5,034

 
 
 
 
Supplemental Cash Flow Disclosures:
 
 
 
Interest paid, net of amounts capitalized
$
43,167

 
$
40,582

Income taxes paid (refunded), net
$
(63,114
)
 
$
(1,539
)

The accompanying notes, as they relate to PNM, are an integral part of these financial statements.


16

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PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
September 30,
2012
 
December 31,
2011
 
(In thousands)
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
221

 
$
12,307

Accounts receivable, net of allowance for uncollectible accounts of $1,931 and $1,778
94,315

 
68,661

Unbilled revenues
46,998

 
48,928

Other receivables
42,454

 
65,465

Affiliate receivables
8,930

 
8,912

Materials, supplies, and fuel stock
57,925

 
51,521

Regulatory assets
46,940

 
44,480

Commodity derivative instruments
1,184

 
3,713

Income taxes receivable
66,374

 
128,858

Other current assets
33,144

 
26,776

Total current assets
398,485

 
459,621

Other Property and Investments:
 
 
 
Investment in PVNGS lessor notes
54,666

 
79,049

Investments held by NDT
186,839

 
168,851

Other investments
3,985

 
2,900

Non-utility property
976

 
976

Total other property and investments
246,466

 
251,776

Utility Plant:
 
 
 
Plant in service and plant held for future use
4,075,995

 
4,009,873

Less accumulated depreciation and amortization
1,342,958

 
1,305,754

 
2,733,037

 
2,704,119

Construction work in progress
120,303

 
116,030

Nuclear fuel, net of accumulated amortization of $50,106 and $36,411
86,496

 
80,067

Net utility plant
2,939,836

 
2,900,216

Deferred Charges and Other Assets:
 
 
 
Regulatory assets
352,871

 
352,387

Goodwill
51,632

 
51,632

Other deferred charges
84,041

 
79,655

Total deferred charges and other assets
488,544

 
483,674

 
$
4,073,331

 
$
4,095,287

 
 
 
 

The accompanying notes, as they relate to PNM, are an integral part of these financial statements.


17

Table of Contents



PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
September 30,
2012
 
December 31,
2011
 
(In thousands, except share information)
LIABILITIES AND STOCKHOLDER’S EQUITY
 
 
 
Current Liabilities:
 
 
 
Short-term debt
$

 
$
66,000

Accounts payable
64,213

 
82,619

Affiliate payables
11,922

 
14,592

Customer deposits
17,655

 
15,971

Accrued interest and taxes
51,092

 
32,111

Commodity derivative instruments
1,888

 
1,632

Dividends declared
16,885

 
132

Current portion of accumulated deferred income taxes
16,562

 
16,562

Other current liabilities
53,219

 
60,944

Total current liabilities
233,436

 
290,563

Long-term Debt
1,215,569

 
1,215,540

Deferred Credits and Other Liabilities:
 
 
 
Accumulated deferred income taxes
562,534

 
504,419

Accumulated deferred investment tax credits
14,101

 
15,771

Regulatory liabilities
390,563

 
373,703

Asset retirement obligations
83,337

 
78,425

Accrued pension liability and postretirement benefit cost
125,840

 
213,688

Commodity derivative instruments
2,770

 
2,437

Other deferred credits
83,514

 
94,700

Total deferred credits and liabilities
1,262,659

 
1,283,143

Total liabilities
2,711,664

 
2,789,246

Commitments and Contingencies (See Note 9)


 


Cumulative Preferred Stock
 
 
 
without mandatory redemption requirements ($100 stated value; 10,000,000 authorized; issued and outstanding 115,293 shares)
11,529

 
11,529

Equity:
 
 
 
PNM common stockholder’s equity:
 
 
 
Common stock outstanding (no par value; 40,000,000 shares authorized; issued and outstanding 39,117,799 shares)
1,061,776

 
1,061,776

Accumulated other comprehensive income (loss), net of income taxes
(60,615
)
 
(66,798
)
Retained earnings
267,889

 
217,111

Total PNM common stockholder’s equity
1,269,050

 
1,212,089

Non-controlling interest in Valencia
81,088

 
82,423

Total equity
1,350,138

 
1,294,512

 
$
4,073,331

 
$
4,095,287


The accompanying notes, as they relate to PNM, are an integral part of these financial statements.


18

Table of Contents

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Unaudited)
 
Attributable to PNM
 
 
 
 
 
 
 
 
 
Total PNM
Common
Stockholder’s
Equity
 
Non-
controlling
 Interest in Valencia
 
 
 
 
 
 
 
 
 
 
 
Common
Stock
 
AOCI
 
Retained
Earnings
 
 
 
Total
Equity
 
 
 
 
 
 
 
(In thousands)
Balance at December 31, 2011
$
1,061,776

 
$
(66,798
)
 
$
217,111

 
$
1,212,089

 
$
82,423

 
$
1,294,512

Valencia’s transactions with its owner

 

 

 

 
(12,034
)
 
(12,034
)
Net earnings

 

 
85,607

 
85,607

 
10,699

 
96,306

Total other comprehensive income

 
6,183

 

 
6,183

 

 
6,183

Dividends declared on preferred stock

 

 
(396
)
 
(396
)
 

 
(396
)
Dividends declared on common stock

 

 
(34,433
)
 
(34,433
)
 

 
(34,433
)
Balance at September 30, 2012
$
1,061,776

 
$
(60,615
)
 
$
267,889

 
$
1,269,050

 
$
81,088

 
$
1,350,138



The accompanying notes, as they relate to PNM, are an integral part of these financial statements.

19

Table of Contents


TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Electric Operating Revenues:
 
 
 
 
 
 
 
   Non-affiliates
$
68,680

 
$
54,787

 
$
187,404

 
$
150,175

   Affiliate

 
12,196

 

 
30,608

        Total electric operating revenues
68,680

 
66,983

 
187,404

 
180,783

Operating Expenses:
 
 
 
 
 
 
 
Cost of energy
11,560

 
10,307

 
34,333

 
30,719

Administrative and general
10,130

 
9,998

 
30,700

 
29,798

Regulatory disallowances

 

 

 
3,923

Depreciation and amortization
13,819

 
12,674

 
37,173

 
33,662

Transmission and distribution costs
5,910

 
6,072

 
17,217

 
17,597

Taxes other than income taxes
6,291

 
6,381

 
16,322

 
16,113

Total operating expenses
47,710

 
45,432

 
135,745

 
131,812

Operating income
20,970

 
21,551

 
51,659

 
48,971

Other Income and Deductions:
 
 
 
 
 
 
 
Interest income

 
1

 
1

 
1

Other income
771

 
418

 
1,708

 
1,068

Other deductions
(405
)
 
(105
)
 
(464
)
 
(181
)
Net other income (deductions)
366

 
314

 
1,245

 
888

Interest Charges
7,047

 
7,276

 
21,214

 
21,880

Earnings Before Income Taxes
14,289

 
14,589

 
31,690

 
27,979

Income Taxes
5,205

 
5,721

 
11,577

 
10,845

Net Earnings
$
9,084

 
$
8,868

 
$
20,113

 
$
17,134


The accompanying notes, as they relate to TNMP, are an integral part of these financial statements.



20

Table of Contents

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Net Earnings
$
9,084

 
$
8,868

 
$
20,113

 
$
17,134

Other Comprehensive Income (Loss):
 
 
 
 
 
 
 
Change in unrecognized amounts of pension and postretirement benefits, net of income tax (expense) benefit of $0, $(1), $0, and $169

 
2

 

 
(305
)
Fair Value Adjustment for Cash Flow Hedges:
 
 
 
 
 
 
 
Change in fair market value, net of income tax (expense) benefit of $51, $110, $150, and $382
(92
)
 
(198
)
 
(270
)
 
(689
)
Reclassification adjustment for losses included in net earnings, net of income tax expense (benefit) of $(16), $(850), $(47), and $(1,052)
29

 
1,535

 
85

 
1,900

Total Other Comprehensive Income (Loss)
(63
)
 
1,339

 
(185
)
 
906

Comprehensive Income
$
9,021

 
$
10,207

 
$
19,928

 
$
18,040


The accompanying notes, as they relate to TNMP, are an integral part of these financial statements.

21

Table of Contents


TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended September 30,
 
2012
 
2011
 
(In thousands)
Cash Flows From Operating Activities:
 
 
 
Net earnings
$
20,113

 
$
17,134

Adjustments to reconcile net earnings to net cash flows from operating activities:
 
 
 
Depreciation and amortization
41,222

 
36,352

Deferred income tax expense
11,337

 
9,981

Regulatory disallowances

 
3,923

Other, net
(275
)
 
(69
)
Changes in certain assets and liabilities:
 
 
 
Accounts receivable and unbilled revenues
(5,367
)
 
(8,751
)
Materials and supplies
(365
)
 
124

Other current assets
(709
)
 
(1,547
)
Other assets
(498
)
 
(2,985
)
Accounts payable
(358
)
 
1,858

Interest and taxes
4,860

 
4,277

Other current liabilities
1,980

 
2,383

Other liabilities
(3,411
)
 
(1,101
)
Net cash flows from operating activities
68,529

 
61,579

Cash Flows From Investing Activities:
 
 
 
Additions to utility and non-utility plant
(61,168
)
 
(44,214
)
Proceeds from sales of utility plant
1,367

 

Net cash flows from investing activities
(59,801
)
 
(44,214
)
Cash Flow From Financing Activities:
 
 
 
Short-term borrowings (repayments), net – affiliate
2,300

 
(1,200
)
Long-term borrowings

 
50,000

Repayment of long-term debt

 
(50,000
)
Dividends paid
(11,028
)
 
(7,066
)
Other, net

 
(100
)
Net cash flows from financing activities
(8,728
)
 
(8,366
)
 
 
 
 
Change in Cash and Cash Equivalents

 
8,999

Cash and Cash Equivalents at Beginning of Period
1

 
1
Cash and Cash Equivalents at End of Period
$
1

 
$
9,000

 
 
 
 
Supplemental Cash Flow Disclosures:
 
 
 
Interest paid, net of amounts capitalized
$
13,074

 
$
14,474

Income taxes paid (refunded), net
$
1,848

 
$
3,250


The accompanying notes, as they relate to TNMP, are an integral part of these financial statements.




22

Table of Contents



TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
September 30,
2012
 
December 31,
2011
 
(In thousands)
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
1

 
$
1

Accounts receivable
25,572

 
19,133

Unbilled revenues
7,401

 
8,473

Other receivables
1,126

 
847

Materials and supplies
3,075

 
2,710

Regulatory assets
959

 
513

Current portion of accumulated deferred income taxes
2,273

 
2,272

Other current assets
1,426

 
694

Total current assets
41,833

 
34,643

Other Property and Investments:
 
 
 
Other investments
267

 
271

Non-utility property
2,240

 
2,240

Total other property and investments
2,507

 
2,511

Utility Plant:
 
 
 
Plant in service and plant held for future use
985,318

 
947,327

Less accumulated depreciation and amortization
338,600

 
323,123

 
646,718

 
624,204

Construction work in progress
20,141

 
12,968

Net utility plant
666,859

 
637,172

Deferred Charges and Other Assets:
 
 
 
Regulatory assets
116,120

 
129,768

Goodwill
226,665

 
226,665

Other deferred charges
6,078

 
6,686

Total deferred charges and other assets
348,863

 
363,119

 
$
1,060,062

 
$
1,037,445


The accompanying notes, as they relate to TNMP, are an integral part of these financial statements.

23

Table of Contents



TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
September 30,
2012
 
December 31,
2011
 
(In thousands, except share information)
LIABILITIES AND STOCKHOLDER’S EQUITY
 
 
 
Current Liabilities:
 
 
 
Short-term debt – affiliate
$
3,000

 
$
700

Accounts payable
8,055

 
12,263

Affiliate payables
2,258

 
1,314

Accrued interest and taxes
25,525

 
20,666

Other current liabilities
10,412

 
9,480

Total current liabilities
49,250

 
44,423

Long-term Debt
311,432

 
310,963

Deferred Credits and Other Liabilities:
 
 
 
Accumulated deferred income taxes
170,552

 
159,197

Regulatory liabilities
47,814

 
44,395

Asset retirement obligations
737

 
699

Accrued pension liability and postretirement benefit cost
4,018

 
11,078

Other deferred credits
4,106

 
3,437

Total deferred credits and other liabilities
227,227

 
218,806

Total liabilities
587,909

 
574,192

Commitments and Contingencies (See Note 9)


 


Common Stockholder’s Equity:
 
 
 
Common stock outstanding ($10 par value; 12,000,000 shares authorized;
 
 
 
issued and outstanding 6,358 shares)
64

 
64

Paid-in-capital
405,366

 
416,394

Accumulated other comprehensive income (loss), net of income taxes
(243
)
 
(58
)
Retained earnings
66,966

 
46,853

Total common stockholder’s equity
472,153

 
463,253

 
$
1,060,062

 
$
1,037,445


The accompanying notes, as they relate to TNMP, are an integral part of these financial statements.


24

Table of Contents

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDER’S EQUITY
(Unaudited)
 
Common Stock
 
Paid-in Capital
 
AOCI
 
Retained Earnings
 
Total Common Stockholder's Equity
 
(In thousands)
Balance at December 31, 2011
$
64

 
$
416,394

 
$
(58
)
 
$
46,853

 
$
463,253

Net earnings

 

 

 
20,113

 
20,113

Total other comprehensive income (loss)

 

 
(185
)
 

 
(185
)
Dividends declared on common stock

 
(11,028
)
 

 

 
(11,028
)
Balance at September 30, 2012
$
64

 
$
405,366

 
$
(243
)
 
$
66,966

 
$
472,153


The accompanying notes, as they relate to TNMP, are an integral part of these financial statements.



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PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



(1)
Significant Accounting Policies and Responsibility for Financial Statements

Financial Statement Preparation

In the opinion of management, the accompanying unaudited interim Condensed Consolidated Financial Statements reflect all normal and recurring accruals and adjustments that are necessary to present fairly the consolidated financial position at September 30, 2012 and December 31, 2011, consolidated results of operations and comprehensive income for the three and nine months ended September 30, 2012 and 2011, and consolidated cash flows for the nine months ended September 30, 2012 and 2011. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could ultimately differ from those estimated. The Notes to Condensed Consolidated Financial Statements include disclosures for PNMR, PNM, and TNMP. This report uses the term “Company” when discussing matters of common applicability to PNMR, PNM, and TNMP. Discussions regarding only PNMR, PNM, or TNMP are so indicated. Certain amounts in the 2011 Condensed Consolidated Financial Statements and Notes thereto have been reclassified to conform to the 2012 financial statement presentation.

These Condensed Consolidated Financial Statements are unaudited. Certain information and note disclosures normally included in the annual Consolidated Financial Statements have been condensed or omitted, as permitted under the applicable rules and regulations. Readers of these financial statements should refer to PNMR’s, PNM’s, and TNMP’s audited Consolidated Financial Statements and Notes thereto that are included in their respective 2011 Annual Reports on Form 10-K. Weather causes the Company’s results of operations to be seasonal in nature and the results of operations presented in the accompanying Condensed Consolidated Financial Statements are not necessarily representative of operations for an entire year.
GAAP defines subsequent events as events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued. Based on their nature, magnitude, and timing, certain subsequent events may be required to be reflected at the balance sheet date and/or required to be disclosed in the financial statements. The Company has evaluated subsequent events as required by GAAP.

Principles of Consolidation
The Condensed Consolidated Financial Statements of each of PNMR, PNM, and TNMP include their accounts and those of subsidiaries in which that entity owns a majority voting interest. PNM also consolidates the PVNGS Capital Trust and Valencia. PNM owns undivided interests in several jointly-owned power plants and records its pro-rata share of the assets, liabilities, and expenses for those plants.

PNMR shared services' administrative and general expenses, which represent costs that are primarily driven by corporate level activities, are charged to the business segments. These services are billed at cost, except those billed to Optim Energy, which included a profit element. Other significant intercompany transactions between PNMR, PNM, and TNMP include transmission and distribution services; lease, interest, and income tax sharing payments; and dividends paid on common stock. All intercompany transactions and balances have been eliminated. See Note 12.

Dividends on Common Stock

Dividends on PNMR's common stock are declared by its Board. The timing of the declaration of dividends is dependent on the timing of meetings and other actions of the Board. This has historically resulted in dividends considered to be attributable to the second quarter of each year being declared through actions of the Board during the third quarter of the year. The Board declared dividends on common stock considered to be for the second quarter of $0.145 per share in July 2012 and $0.125 in July 2011, which are reflected as being in the second quarter within “Dividends Declared per Common Share” on the PNMR Condensed Consolidated Statements of Earnings. The Board declared dividends on common stock for the third quarter of $0.145 per share in September 2012 and $0.125 per share in September 2011, which are reflected as third quarter within "Dividends Declared per Common Share."


26

Table of Contents

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


PNM declared a cash dividend on its common stock to PNMR of $16.8 million in September 2012, which was paid in October 2012, and declared and paid a dividend of $17.7 million in June 2012. PNM declared cash dividends on its common stock to PNMR of $39.1 million in December 2010, which was paid in January 2011, $4.6 million in March 2011, which was paid in April 2011, and $3.6 million in June 2011, which was paid in July 2011. TNMP declared and paid cash dividends to PNMR of $11.0 million in the nine months ended September 30, 2012 and $7.1 million in the nine months ended September 30, 2011. TNMP dividends were recorded as reductions of its paid-in-capital.

(2)
Segment Information

The following segment presentation is based on the methodology that management uses for making operating decisions and assessing performance of its various business activities. A reconciliation of the segment presentation to the GAAP financial statements is provided.

PNM Electric
PNM Electric includes the retail electric utility operations of PNM that are subject to traditional rate regulation by the NMPRC. PNM Electric provides integrated electricity services that include the generation, transmission, and distribution of electricity for retail electric customers in New Mexico. PNM Electric also includes the generation and sale of electricity into the wholesale market as well as providing transmission services to third parties. The sale of electricity includes the asset optimization of PNM's jurisdictional assets as well as the capacity excluded from retail rates. FERC has jurisdiction over wholesale and transmission rates.

TNMP Electric
TNMP Electric is an electric utility providing regulated transmission and distribution services in Texas under the TECA. TNMP's operations are subject to traditional rate regulation by the PUCT.

First Choice
First Choice, which was sold by PNMR on November 1, 2011 (Note 14), operated as a certified retail electric provider in Texas. First Choice provided electricity to residential, small commercial, and governmental customers. Although First Choice was regulated in certain respects by the PUCT, it was not subject to traditional rate regulation.

Corporate and Other

The Corporate and Other segment includes PNMR holding company activities, primarily related to corporate level debt and PNMR Services Company.

The following tables present summarized financial information for PNMR by segment. PNM and TNMP each operate in only one segment. Therefore, tabular segment information is not presented for PNM and TNMP.


27

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PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


PNMR SEGMENT INFORMATION
 
PNM
Electric
 
TNMP
Electric
 
Corporate
and Other
 
Consolidated
Three Months Ended September 30, 2012
(In thousands)
Electric operating revenues
$
321,731

 
$
68,680

 
$

 
$
390,411

Cost of energy
99,217

 
11,560

 

 
110,777

Margin
222,514

 
57,120

 

 
279,634

Other operating expenses
101,104

 
22,331

 
(4,771
)
 
118,664

Depreciation and amortization
24,437

 
13,819

 
4,564

 
42,820

Operating income
96,973

 
20,970

 
207

 
118,150

Interest income
3,173

 

 
(43
)
 
3,130

Other income (deductions)
5,210

 
366

 
(827
)
 
4,749

Net interest charges
(19,230
)
 
(7,047
)
 
(4,238
)
 
(30,515
)
Segment earnings (loss) before income taxes
86,126

 
14,289

 
(4,901
)
 
95,514

Income taxes (benefit)
31,235

 
5,205

 
(2,902
)
 
33,538

Segment earnings (loss)
54,891

 
9,084

 
(1,999
)
 
61,976

Valencia non-controlling interest
(3,980
)
 

 

 
(3,980
)
Subsidiary preferred stock dividends
(132
)
 

 

 
(132
)
Segment earnings (loss) attributable to PNMR
$
50,779

 
$
9,084

 
$
(1,999
)
 
$
57,864

 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2012
 
 
 
 
 
 
 
Electric operating revenues
$
832,242

 
$
187,404

 
$

 
$
1,019,646

Cost of energy
263,009

 
34,333

 

 
297,342

Margin
569,233

 
153,071

 

 
722,304

Other operating expenses
311,468

 
64,239

 
(12,676
)
 
363,031

Depreciation and amortization
72,017

 
37,173

 
13,099

 
122,289

Operating income (loss)
185,748

 
51,659

 
(423
)
 
236,984

Interest income
9,938

 
1

 
(131
)
 
9,808

Other income (deductions)
9,201

 
1,244

 
(4,797
)
 
5,648

Net interest charges
(56,652
)
 
(21,214
)
 
(12,414
)
 
(90,280
)
Segment earnings (loss) before income taxes
148,235

 
31,690

 
(17,765
)
 
162,160

Income taxes (benefit)
51,929

 
11,577

 
(8,897
)
 
54,609

Segment earnings (loss)
96,306

 
20,113

 
(8,868
)
 
107,551

Valencia non-controlling interest
(10,699
)
 

 

 
(10,699
)
Subsidiary preferred stock dividends
(396
)
 

 

 
(396
)
Segment earnings (loss) attributable to PNMR
$
85,211

 
$
20,113

 
$
(8,868
)
 
$
96,456

 
 
 
 
 
 
 
 
At September 30, 2012:
 
 
 
 
 
 
 
Total Assets
$
4,073,331

 
$
1,060,062

 
$
126,814

 
$
5,260,207

Goodwill
$
51,632

 
$
226,665

 
$

 
$
278,297

Additions to utility and non-utility plant included in accounts payable
$
6,056

 
$
886

 
$
1,063

 
$
8,005


28

Table of Contents

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
PNM
Electric
 
TNMP
Electric
 
First
Choice
 
Corporate
and Other
 
Consolidated
Three Months Ended September 30, 2011
(In thousands)
Electric revenues from non-affiliates
$
323,760

 
$
54,787

 
$
170,999

 
$
(48
)
 
$
549,498

Intersegment revenues

 
12,196

 

 
(12,196
)
 

Total electric operating revenues
323,760

 
66,983

 
170,999

 
(12,244
)
 
549,498

Cost of energy
108,708

 
10,307

 
144,035

 
(12,196
)
 
250,854

Margin
215,052

 
56,676

 
26,964

 
(48
)
 
298,644

Other operating expenses
102,080

 
22,451

 
25,076

 
(1,617
)
 
147,990

Depreciation and amortization
25,058

 
12,674

 
346

 
4,292

 
42,370

Operating income (loss)
87,914

 
21,551

 
1,542

 
(2,723
)
 
108,284

Interest income
3,770

 
1

 
29

 
(52
)
 
3,748

Other income (deductions)
(5,573
)
 
313

 
(115
)
 
(1,664
)
 
(7,039
)
Net interest charges
(18,487
)
 
(7,276
)
 
(249
)
 
(5,112
)
 
(31,124
)
Segment earnings (loss) before income taxes
67,624

 
14,589

 
1,207

 
(9,551
)
 
73,869

Income taxes (benefit)
25,052

 
5,721

 
594

 
(5,403
)
 
25,964

Segment earnings (loss)
42,572

 
8,868

 
613

 
(4,148
)
 
47,905

Valencia non-controlling interest
(4,111
)
 

 

 

 
(4,111
)
Subsidiary preferred stock dividends
(132
)
 

 

 

 
(132
)
Segment earnings (loss) attributable to PNMR
$
38,329

 
$
8,868

 
$
613

 
$
(4,148
)
 
$
43,662

 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2011
 
 
 
 
 
 
 
 
 
Electric revenues from non-affiliates
$
797,232

 
$
150,175

 
$
405,485

 
$
(145
)
 
$
1,352,747

Intersegment revenues

 
30,608

 

 
(30,608
)
 

Total electric operating revenues
797,232

 
180,783

 
405,485

 
(30,753
)
 
1,352,747

Cost of energy
279,419

 
30,719

 
303,285

 
(30,609
)
 
582,814

Margin
517,813

 
150,064

 
102,200

 
(144
)
 
769,933

Other operating expenses
329,502

 
67,431

 
67,693

 
(7,172
)
 
457,454

Depreciation and amortization
71,691

 
33,662

 
987

 
12,775

 
119,115

Operating income (loss)
116,620

 
48,971

 
33,520

 
(5,747
)
 
193,364

Interest income
12,052

 
1

 
63

 
(106
)
 
12,010

Other income (deductions)
4,129

 
887

 
(494
)
 
(4,913
)
 
(391
)
Net interest charges
(54,593
)
 
(21,880
)
 
(535
)
 
(15,243
)
 
(92,251
)
Segment earnings (loss) before income taxes
78,208

 
27,979

 
32,554

 
(26,009
)
 
112,732

Income taxes (benefit)
26,574

 
10,845

 
11,833

 
(12,046
)
 
37,206

Segment earnings (loss)
51,634

 
17,134

 
20,721

 
(13,963
)
 
75,526

Valencia non-controlling interest
(10,764
)
 

 

 

 
(10,764
)
Subsidiary preferred stock dividends
(396
)
 

 

 

 
(396
)
Segment earnings (loss) attributable to PNMR
$
40,474

 
$
17,134

 
$
20,721

 
$
(13,963
)
 
$
64,366

 
 
 
 
 
 
 
 
 
 
At September 30, 2011:
 
 
 
 
 
 
 
 
 
Total Assets
$
3,936,468

 
$
1,041,613

 
$
274,741

 
$
119,818

 
$
5,372,640

Goodwill
$
51,632

 
$
226,665

 
$
43,013

 
$

 
$
321,310

Additions to utility and non-utility plant included in accounts payable
$
6,811

 
$
4,672

 
$
106

 
$
253

 
$
11,842



29

Table of Contents

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


(3)
Variable Interest Entities

GAAP determines how an enterprise evaluates and accounts for its involvement with variable interest entities, including determining the primary beneficiary of a variable interest entity, by focusing primarily on whether the enterprise has the power to direct the activities that most significantly impact the economic performance of a variable interest entity. GAAP also requires continual reassessment of the primary beneficiary of a variable interest entity. Additional information concerning PNM's variable interest entities is contained in Note 9 of the Notes to Consolidated Financial Statements in the 2011 Annual Reports on Form 10-K.

PNM has a PPA to purchase all of the electric capacity and energy from Valencia, a 145 MW natural gas-fired power plant near Belen, New Mexico, through May 2028. A third-party built, owns, and operates the facility while PNM is the sole purchaser of the electricity generated. PNM is obligated to pay fixed O&M and capacity charges in addition to variable O&M charges under this PPA. For the three and nine months ended September 30, 2012, PNM paid $4.8 million and $14.0 million for fixed charges and $0.6 million and $0.9 million for variable charges. For the three and nine months ended September 30, 2011, PNM paid $4.6 million and $13.7 million for fixed charges and $0.9 million and $1.3 million for variable charges. PNM does not have any other financial obligations related to Valencia. The assets of Valencia can only be used to satisfy obligations of Valencia and creditors of Valencia do not have any recourse against PNM’s assets. PNM has concluded that the third party entity that owns Valencia is a variable interest entity and that PNM is the primary beneficiary of the entity under GAAP. As the primary beneficiary, PNM consolidates the entity in its financial statements. The assets and liabilities of Valencia set forth below are immaterial to PNM and, therefore, not shown separately on the Condensed Consolidated Balance Sheets. The owner's equity and net income of Valencia are considered attributable to non-controlling interest.

Summarized financial information for Valencia is as follows:

Results of Operations
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Operating revenues
$
5,358

 
$
5,505

 
$
14,916

 
$
15,024

Operating expenses
(1,378
)
 
(1,394
)
 
(4,217
)
 
(4,260
)
Earnings attributable to non-controlling interest
$
3,980

 
$
4,111

 
$
10,699

 
$
10,764


Financial Position
 
September 30,
 
December 31,
 
2012
 
2011
 
(In thousands)
Current assets
$
3,507

 
$
2,405

Net property, plant, and equipment
78,661

 
80,785

Total assets
82,168

 
83,190

Current liabilities
1,080

 
767

Owners’ equity – non-controlling interest
$
81,088

 
$
82,423


PNM leases interests in Units 1 and 2 of PVNGS under arrangements, which were entered into in 1985 and 1986, that are accounted for as operating leases. PNM is not the legal or tax owner of the leased assets. PNM has an option to purchase the leased assets at appraised value at the end of the leases, but does not have a fixed price purchase option and does not provide residual value guarantees. PNM has options to renew the leases at fixed rates set forth in the leases, which represent 50% of the amounts during the original terms of the leases, for two years beyond the termination of the original lease terms. The option

30

Table of Contents

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


periods on certain leases may be further extended for up to an additional six years if the appraised remaining useful lives and fair value of the leased assets are greater than parameters set forth in the leases. PNM is only obligated to make payments to the trusts for the scheduled semi-annual lease payments, which, net of amounts that will be returned to PNM through its ownership in related lessor notes, aggregate $80.0 million as of September 30, 2012 over the remaining terms of the leases. Under certain circumstances (for example, final shutdown of the plant, the NRC issuing specified violation orders with respect to PVNGS, or the occurrence of specified nuclear events), PNM would be required to make specified payments to the beneficial owners and take title to the leased interests. If such an event had occurred as of September 30, 2012, PNM could have been required to pay the beneficial owners up to approximately $167.6 million, which would result in PNM taking ownership of the leased assets and termination of the leases. PNM has no other financial obligations or commitments to the trusts or the beneficial owners. Creditors of the trusts have no recourse to PNM’s assets other than with respect to the contractual lease payments. PNM has no additional rights to the assets of the trusts other than the use of the leased assets. PNM has evaluated the PVNGS lease arrangements and concluded that it does not have the power to direct the activities that most significantly impact the economic performance of the trusts and, therefore, is not the primary beneficiary of the trusts under GAAP. PNM has recorded no assets or liabilities related to the trusts other than the accrual of lease payments between the scheduled payment dates, which were $11.8 million at September 30, 2012 and $26.0 million at December 31, 2011 and are included in other current liabilities on the Condensed Consolidated Balance Sheets. For additional information regarding these leases, see Risk Factors, MD&A – Off Balance Sheet Arrangements and Note 7 of the Notes to Consolidated Financial Statements in the 2011 Annual Reports on Form 10-K.

PNM has a PPA covering the entire output of Delta, which is a variable interest under GAAP. This arrangement was entered into prior to December 31, 2003 and PNM has been unsuccessful in obtaining the information necessary to determine if it is the primary beneficiary of the entity that owns Delta, or to consolidate that entity if it were determined that PNM is the primary beneficiary. Accordingly, PNM is unable to make those determinations and, as provided in GAAP, continues to account for this PPA as an operating lease. PNM makes fixed and variable payments to Delta under the PPA. For the three and nine months ended September 30, 2012, PNM incurred fixed payments of $1.6 million and $4.7 million and variable payments of $0.3 million and $0.6 million under the PPA. For the three and nine months ended September 30, 2011, PNM incurred fixed payments of $1.5 million and $4.5 million and variable payments of $0.7 million and $1.0 million under the PPA. PNM’s only quantifiable obligation under the PPA is to make the fixed payments, which as of September 30, 2012, aggregated $46.7 million through the end of the PPA in 2020. PNM will also pay variable costs, which cannot be quantified since the amounts are based on how much the generating plant is in operation. PNM has no other obligations or commitments with respect to Delta.

(4)
Fair Value of Derivative and Other Financial Instruments

Energy Related Derivative Contracts

Overview

The primary objective for the use of commodity derivative instruments, including energy contracts, options, and futures, is to manage price risk associated with forecasted purchases of energy or fuel used to generate electricity, or to manage anticipated generation capacity in excess of forecasted demand from existing customers. The Company's energy related derivative contracts are designed to manage commodity risk. PNM is required to meet the demand and energy needs of its retail and firm-requirements wholesale customers. PNM is exposed to market risk for its share of PVNGS Unit 3 and the needs of its firm-requirements wholesale customers not covered under a FPPAC. PNM’s operations are managed primarily through a net asset-backed strategy, whereby PNM’s aggregate net open forward contract position is covered by its forecasted excess generation capabilities or market purchases. PNM could be exposed to market risk if its generation capabilities were to be disrupted or if its load requirements were to be greater than anticipated. If all or a portion of load requirements were required to be covered as a result of such unexpected situations, commitments would have to be met through market purchases. Additional information concerning the Company's energy related derivative contracts, including how commodity risk is managed, is contained in Note 8 of the Notes to Consolidated Financial Statements in the 2011 Annual Reports on Form 10-K.

On November 1, 2011, PNMR completed the sale of First Choice. See Note 14. Accordingly, First Choice information after October 31, 2011 is not included. The difference between PNMR and PNM amounts represents First Choice.


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PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Accounting for Derivatives

Energy contracts that meet the definition of a derivative under GAAP and do not qualify, or are not designated, for the normal sales and purchases exception are recorded on the balance sheet at fair value at each period end. The changes in fair value are recognized in earnings unless specific hedge accounting criteria are met and elected. Normal sales and purchases are not marked to market and are reflected in results of operations when the underlying transactions settle. The Company had no designated cash flow or fair value hedges related to commodity derivatives in the year ended December 31, 2011 and the nine months ended September 30, 2012.

The contracts recorded at fair value that do not qualify or are not designated for cash flow hedge accounting are classified as economic hedges. Economic hedges are defined as derivative instruments, including long-term power agreements, used to economically hedge generation assets, purchased power and fuel costs, and customer load requirements. Changes in the fair value of economic hedges are reflected in results of operations and are classified between operating revenues and cost of energy according to the intent of the hedge. The Company has no trading transactions.

The Company does not offset fair value, cash collateral, and accrued payable or receivable amounts recognized for derivative instruments under master netting arrangements. At September 30, 2012 and December 31, 2011, amounts posted as cash collateral under margin arrangements were $1.6 million and $1.8 million for both PNMR and PNM. Cash collateral amounts are included in other current assets on the Condensed Consolidated Balance Sheets. At September 30, 2012 and December 31, 2011, PNMR and PNM had the legal right to reclaim cash collateral of $1.6 million and zero. PNMR and PNM had no obligation to return cash collateral at September 30, 2012 and December 31, 2011.

Commodity Derivatives

Commodity derivative instruments are summarized as follows:
 
Economic Hedges
 
September 30,
2012
 
December 31,
2011
PNMR and PNM
(In thousands)
Current assets
$
1,184

 
$
3,713

 
 
 
 
Current liabilities
(1,888
)
 
(1,632
)
Long-term liabilities
(2,770
)
 
(2,437
)
 
(4,658
)
 
(4,069
)
Net
$
(3,474
)
 
$
(356
)

PNM has a NMPRC approved hedging plan to manage fuel and purchased power costs related to customers covered by its FPPAC. The table above includes $0.1 million of current assets and current liabilities at September 30, 2012, and $0.5 million of current assets and current liabilities at December 31, 2011 related to this plan. The offsets to these amounts are recorded as regulatory assets and liabilities on the Condensed Consolidated Balance Sheets.
 

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PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following table presents the effect of commodity derivative instruments on earnings, excluding income tax effects.
 
Economic Hedges
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
PNMR
(In thousands)
Electric operating revenues
$
(740
)
 
$
2,915

 
$
897

 
$
4,250

Cost of energy
263

 
(2,873
)
 
(278
)
 
(2,788
)
   Total gain (loss)
$
(477
)
 
$
42

 
$
619

 
$
1,462

PNM
 
 
 
 
 
 
 
Electric operating revenues
$
(740
)
 
$
2,915

 
$
897

 
$
4,250

Cost of energy
263

 
(562
)
 
(278
)
 
(404
)
   Total gain (loss)
$
(477
)
 
$
2,353

 
$
619

 
$
3,846

Commodity contract volume positions are presented in Decatherms for gas related contracts and in MWh for power related contracts. The table below presents PNMR’s and PNM’s net buy (sell) volume positions:
 
Economic Hedges
 
Decatherms
 
MWh
September 30, 2012
 
 
 
PNMR and PNM
1,435,000

 
(1,786,923
)
December 31, 2011
 
 
 
PNMR and PNM
1,499,000

 
(366,448
)
In connection with managing its commodity risks, the Company enters into master agreements with certain counterparties. If the Company is in a net liability position under an agreement, some agreements provide that the counterparties can request collateral from the Company if the Company’s credit rating is downgraded; other agreements provide that the counterparty may request collateral to provide it with “adequate assurance” that the Company will perform; and others have no provision for collateral.

The table below presents information about the Company’s contingent requirements to provide collateral under commodity contracts having an objectively determinable collateral provision that are in net liability positions and are not fully collateralized with cash. Contractual liability represents commodity derivative contracts recorded at fair value on the balance sheet, determined on an individual contract basis without offsetting amounts for individual contracts that are in an asset position and could be offset under master netting agreements with the same counterparty. The table only reflects cash collateral that has been posted under the existing contracts and does not reflect letters of credit under the Company’s revolving credit facilities that have been issued as collateral. Net exposure is the net contractual liability for all contracts, including those designated as normal purchases and sales, offset by existing cash collateral and by any offsets available under master netting agreements, including both asset and liability positions.
Contingent Feature –
Credit Rating Downgrade
 
Contractual Liability
 
Existing Cash Collateral
 

Net Exposure
 
 
(In thousands)
September 30, 2012
 
 
 
 
 
 
PNMR and PNM
 
$
3,977

 
$

 
$
3,943

December 31, 2011
 
 
 
 
 
 
PNMR and PNM
 
$
4,036

 
$

 
$
4,036



33

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PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Sale of Power from PVNGS Unit 3

Since January 1, 2011, PNM has been selling power from its interest in PVNGS Unit 3 daily at market prices. PNM has established fixed rates for the substantial majority of these sales through the end of 2013 through hedging arrangements that are accounted for as economic hedges. PNM is also partially hedged for 2014.

Non-Derivative Financial Instruments

The carrying amounts reflected on the Condensed Consolidated Balance Sheets approximate fair value for cash, receivables, and payables due to the short period of maturity. Available-for-sale securities are carried at fair value. Available-for-sale securities for PNMR and PNM consist of PNM assets held in the NDT for its share of decommissioning costs of PVNGS and, beginning in August 2012, a trust for PNM's share of post-term reclamation costs related to the coal mines serving SJGS (Note 9), which investments are included in "other investments" on the Condensed Consolidated Balance Sheet. PNMR and PNM do not have any unrealized losses on available-for-sale securities. The fair value and gross unrealized gains of investments in available-for-sale securities are presented in the following table.
 
September 30, 2012
 
December 31, 2011
 
Unrealized Gains
 
Fair Value
 
Unrealized Gains
 
Fair Value
 
 
 
(In thousands)
 
 
Equity securities:
 
 
 
 
 
 
 
   Domestic value
$
5,083

 
$
29,856

 
$
3,549

 
$
25,143

   Domestic growth
20,062

 
53,246

 
16,714

 
52,187

International and other
434

 
12,064

 
662

 
12,754

Fixed income securities:
 
 
 
 
 
 
 
   Municipals
4,307

 
44,173

 
2,861

 
41,463

   U.S. Government
1,451

 
33,479

 
1,353

 
25,367

   Corporate and other
1,167

 
13,788

 
742

 
9,171

Cash investments

 
2,820

 

 
2,766

 
$
32,504

 
$
189,426

 
$
25,881

 
$
168,851


The proceeds and gross realized gains and losses on the disposition of available-for-sale securities for PNMR and PNM are shown in the following table. Realized gains and losses are determined by specific identification of costs of securities sold.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Proceeds from sales
$
90,518

 
$
26,312

 
$
136,305

 
$
121,202

Gross realized gains
$
6,263

 
$
2,800

 
$
11,029

 
$
16,290

Gross realized (losses)
$
(5,131
)
 
$
(1,847
)
 
$
(7,055
)
 
$
(4,129
)

Held-to-maturity securities are those investments in debt securities that the Company has the ability and intent to hold until maturity. Held-to-maturity securities consist of the investment in PVNGS lessor notes and certain items within other investments, including the EIP lessor note.

The Company has no available-for-sale or held-to-maturity securities for which carrying value exceeds fair value. There are no impairments considered to be “other than temporary” that are included in AOCI and not recognized in earnings.


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Table of Contents

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


At September 30, 2012, the available-for-sale and held-to-maturity debt securities had the following final maturities:
 
Fair Value
 
Available-for-Sale
 
Held-to-Maturity
 
PNMR and PNM
 
PNMR
 
PNM
 
(In thousands)
Within 1 year
$
1,543

 
$
951

 
$
951

After 1 year through 5 years
30,977

 
85,484

 
78,420

After 5 years through 10 years
14,418

 
2,110

 

After 10 years through 15 years
9,196

 

 

After 15 years through 20 years
12,102

 

 

After 20 years
23,204

 

 

 
$
91,440

 
$
88,545

 
$
79,371


Fair Value Disclosures

The Company determines the fair values of its derivative and other instruments based on the hierarchy established in GAAP, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. GAAP describes three levels of inputs that may be used to measure fair value. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Level 3 inputs used in determining fair values for the Company consist of internal valuation models.

For NDT investments, Level 2 fair values are provided by the trustee utilizing a pricing service. The pricing provider predominantly uses the market approach using bid side market value based upon a hierarchy of information for specific securities or securities with similar characteristics. For commodity derivatives, Level 2 fair values are determined based on market observable inputs, which are validated using multiple broker quotes, including forward price, volatility, and interest rate curves to establish expectations of future prices. Credit valuation adjustments are made for estimated credit losses based on the overall exposure to each counterparty. For long-term debt, Level 2 fair values are provided by an external pricing service. The pricing service primarily utilizes quoted prices for similar debt in active markets when determining fair value. For investments categorized as Level 3, primarily the PVNGS lessor notes and other investments, fair values were determined by discounted cash flow models that take into consideration discount rates that are observable for similar type assets and liabilities. Management of the Company independently verifies the information provided by pricing services.

The Company records any transfers between fair value hierarchy levels as of the end of each calendar quarter. There were no transfers between levels during the nine months ended September 30, 2012 and 2011.


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PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Items recorded at fair value on the Condensed Consolidated Balance Sheets are presented below:
 
 
 
GAAP Fair Value Hierarchy
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
September 30, 2012
 
 
(In thousands)
 
 
PNMR and PNM
 
 
 
 
 
 
 
Decommissioning and reclamation investments
 
 
 
 
 
 
 
   Cash and equivalents
$
2,820

 
$
2,820

 
$

 
$

   Equity securities:
 
 
 
 
 
 
 
     Domestic value
29,856

 
29,856

 

 

     Domestic growth
53,246

 
53,246

 

 

International and other
12,064

 
12,064

 

 

   Fixed income securities:
 
 
 
 
 
 
 
     U.S. government
33,479

 
29,746

 
3,733

 

     Municipals
44,173

 

 
44,173

 

     Corporate and other
13,788

 

 
13,788

 

          Total
$
189,426

 
$
127,732

 
$
61,694

 
$

 
 
 
 
 
 
 
 
Commodity derivative assets
$
1,184

 
$

 
$
1,184

 
$

Commodity derivative liabilities
(4,658
)
 

 
(4,658
)
 

          Net
$
(3,474
)
 
$

 
$
(3,474
)
 
$

 
 
 
 
 
 
 
 
December 31, 2011
 
 
 
 
 
 
 
PNMR and PNM

 
 
 
 
 
 
NDT investments

 
 
 
 
 
 
   Cash and equivalents
$
2,766

 
$
2,766

 
$

 
$

   Equity securities:

 
 
 
 
 
 
     Domestic value
25,143

 
25,143

 

 

     Domestic growth
52,187

 
52,187

 

 

     International and other
12,754

 
12,754

 

 

   Fixed income securities:
 
 
 
 
 
 
 
     U.S. government
25,367

 
21,409

 
3,958

 

     Municipals
41,463

 

 
41,463

 

     Corporate and other
9,171

 

 
9,171

 

          Total
$
168,851

 
$
114,259

 
$
54,592

 
$

 

 
 
 
 
 
 
Commodity derivative assets
$
3,713

 
$

 
$
3,713

 
$

Commodity derivative liabilities
(4,069
)
 

 
(4,069
)
 

          Net
$
(356
)
 
$

 
$
(356
)
 
$


A reconciliation of the changes in Level 3 fair value measurements for PNMR is as follows. PNM had no Level 3 fair value measurements during the nine months ended September 30, 2012 and 2011.

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Table of Contents

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
PNMR
(In thousands)
Balance at beginning of period
$

 
$
4,392

 
$

 
$
(822
)
Total gains (losses) included in earnings

 
(5,025
)
 

 
201

Purchases

 
429

 

 
3,163

Settlements

 
1,142

 

 
(1,604
)
Balance at end of period
$

 
$
938

 
$

 
$
938

Total gains (losses) included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the end of the period
$

 
$
589

 
$

 
$
1,455


The above gains and losses (realized and unrealized) for Level 3 fair value measurements included in earnings are reported in cost of energy.

The carrying amounts and fair values of investments in PVNGS lessor notes, other investments, and long-term debt, which are not recorded at fair value on the Condensed Consolidated Balance Sheets are presented below:
 
 
 
 
 
GAAP Fair Value Hierarchy(1)
 
Carrying Amount
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
September 30, 2012
(In thousands)
PNMR
 
 
 
 
 
 
 
 
 
Long-term debt
$
1,674,511

 
$
2,107,877

 
$

 
$
2,102,638

 
$
5,239

Investment in PVNGS lessor notes
$
78,023

 
$
78,420

 
$

 
$

 
$
78,420

Other investments
$
7,390

 
$
12,059


$
758

 
$

 
$
11,301

PNM
 
 
 
 
 
 
 
 
 
Long-term debt
$
1,215,569

 
$
1,512,711

 
$

 
$
1,512,711

 
$

Investment in PVNGS lessor notes
$
78,023

 
$
78,420

 
$

 
$

 
$
78,420

Other investments
$
1,398

 
$
1,443

 
$
491

 
$

 
$
952

TNMP
 
 
 
 
 
 
 
 
 
Long-term debt
$
311,432

 
$
426,934

 
$

 
$
426,934

 
$

Other investments
$
267

 
$
267

 
$
267

 
$

 
$

 
 
 
 
 
 
 
 
 
 
December 31, 2011
 
 
 
 
 
 
 
 
 
PNMR
 
 
 
 
 
 
 
 
 
Long-term debt
$
1,674,013

 
$
1,873,002

 
 
 
 
 
 
Investment in PVNGS lessor notes
$
107,094

 
$
108,742

 
 
 
 
 
 
Other investments
$
12,207

 
$
14,208

 
 
 
 
 
 
PNM
 
 
 
 
 
 
 
 
 
Long-term debt
$
1,215,540

 
$
1,294,846

 
 
 
 
 
 
Investment in PVNGS lessor notes
$
107,094

 
$
108,742

 
 
 
 
 
 
Other investments
$
2,900

 
$
3,052

 
 
 
 
 
 
TNMP
 
 
 
 
 
 
 
 
 
Long-term debt
$
310,963

 
$
413,966

 
 
 
 
 
 
Other investments
$
271

 
$
271

 
 
 
 
 
 
    
(1) GAAP does not require disclosure of the fair value hierarchy information prior to 2012.

37

Table of Contents

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


(5)
Earnings Per Share

In accordance with GAAP, dual presentation of basic and diluted earnings per share is presented in the Condensed Consolidated Statements of Earnings of PNMR. Information regarding the computation of earnings per share is as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands, except per share amounts)
Net Earnings Attributable to PNMR
$
57,864

 
$
43,662

 
$
96,456

 
$
64,366

Average Number of Common Shares:
 
 
 
 
 
 
 
Outstanding during period
79,654

 
86,673

 
79,654

 
86,673

Equivalents from convertible preferred stock (Note 7)

 
4,363

 

 
4,638

    Vested awards of restricted stock
114

 
164

 
156

 
154

Average Shares - Basic
79,768

 
91,200

 
79,810

 
91,465

Dilutive Effect of Common Stock Equivalents (1):
 
 
 
 
 
 
 
Stock options and restricted stock
622

 
542

 
600

 
516

Average Shares - Diluted
80,390

 
91,742

 
80,410

 
91,981

Net Earnings Per Share of Common Stock:
 
 
 
 
 
 
 
Basic
$
0.73

 
$
0.48

 
$
1.21

 
$
0.70

Diluted
$
0.72

 
$
0.48

 
$
1.20

 
$
0.70


(1) 
Excludes the effect of out-of-the-money options for 1,108,946 shares of common stock at September 30, 2012.

(6)
Stock-Based Compensation

Additional information concerning stock-based compensation under PNMR's Performance Equity Plan ("PEP") is contained in Note 13 of the Notes to Consolidated Financial Statements in the 2011 Annual Reports on Form 10-K. In 2011, the Company changed its approach to awarding stock-based compensation. As a result, no stock options have been granted in 2011 or 2012 and awards of restricted stock have increased.

Stock Options

The following table summarizes activity in stock options for the nine months ended September 30, 2012:
 
Shares
 
Weighted-
Average
Exercise
Price
 
Aggregate
Intrinsic
Value
 
Weighted-
Average
Remaining
Contract Life
Outstanding at beginning of period
3,202,229

 
$
18.95

 
 
 
 
 
Granted

 
$

 
 
 
 
 
Exercised
(757,497
)
 
$
13.60

 
 
 
 
 
Forfeited
(5,101
)
 
$
12.22

 
 
 
 
 
Expired
(265,443
)
 
$
25.71

 
 
 
 
 
Outstanding at end of period
2,174,188

 
$
20.01

 
$
9,429,630

(1) 
 
4.52 years
Exercisable at end of period
2,033,857

 
$
21.39

 
$
8,195,812

 
 
4.32 years
(1) At September 30, 2012, the exercise price of 1,108,946 outstanding stock options is greater than the closing price of PNMR common stock on that date; therefore, those options have no intrinsic value.


38

Table of Contents

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following table provides additional information concerning stock options:
 
 
Nine Months Ended September 30,
 
 
2012
 
2011
Weighted-average grant date fair value of options granted
 
$

 
$

Total fair value of options that vested (in thousands)
 
$
1,058

 
$
1,189

Total intrinsic value of options exercised (in thousands)
 
$
4,515

 
$
1,077


Restricted Stock and Performance Shares

PNMR has agreements with employees for awards of restricted stock subject to time vesting requirements. PNMR also has awards subject to achieving performance or market targets, some of which also have time vesting requirements. The grant date fair value for restricted stock and stock awards with performance targets is determined based on the market price of PNMR common stock on the date of the agreements reduced by the present value of future dividends, which will not be received prior to vesting, applied to the total number of shares that are anticipated to vest, although the number of performance shares ultimately awarded cannot be determined until after the performance periods end. The grant date fair value of stock awards with market targets is determined using Monte Carlo simulation models, which provide grant date fair values that include an expectation of the number of shares to be issued.

Compensation expense for performance-based shares is recognized ratably over the performance period and is adjusted periodically to reflect the level of achievement expected to be attained. Compensation expense related to market-based shares is recognized ratably over the measurement period, regardless of the actual level of achievement, provided the employees remain with the Company during the period. Compensation expense for other restricted stock awards is recognized ratably over the vesting period.

The following table summarizes restricted stock activity, including performance-based and market-based shares, for the nine months ended September 30, 2012:
 
 
Shares
 
Weighted-
Average
Grant-Date
Fair Value
Nonvested at beginning of period
 
418,730

 
$
12.36

Granted
 
320,597

 
$
15.63

Vested
 
(375,402
)
 
$
12.67

Forfeited
 
(7,503
)
 
$
12.48

Nonvested at end of period
 
356,422

 
$
14.71


The following table provides additional information concerning restricted stock, including performance-based and market-based shares:
 
 
Nine Months Ended
 
 
September 30,
 
 
2012
 
2011
Weighted-average grant date fair value of shares granted
 
$
15.63

 
$
13.10

Total fair value of shares that vested (in thousands)
 
$
4,755

 
$
1,084

Expected quarterly dividends per share
 
$
0.145

 
$
0.125

Risk-free interest rate
 
0.76
%
 
1.20
%
Included as granted and vested in the above tables are 42,768 shares that were based on achieving performance targets during the 2009 through 2011 period. The Board approved these shares at maximum levels in March 2012. Also included as

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Table of Contents

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


granted and vested in the tables above are 117,174 shares that were based upon achieving performance or market targets for 2011. The Board approved these shares in March 2012, including the performance-based shares at near maximum levels.

PNMR also has share agreements that provide for performance or market targets through 2014. Excluded from the above tables are maximums of 168,269, 190,369, and 205,878 shares for periods ending in 2012, 2013, and 2014 that would be awarded if all performance or market criteria are achieved and all executives remain eligible.

In March 2012, the Company entered into a retention award agreement with its Chairman, President, and Chief Executive Officer under which she would receive 135,000 shares of PNMR's common stock if the Company meets specific market targets at the end of 2016 and she remains an employee of the Company. If the Company achieves specific market targets at the end of 2014 and she remains an employee of the Company, she would receive 35,000 of the total shares at that time. The retention award was made under the PEP and was approved by the Board on February 28, 2012. The above tables do not include any shares under the retention award agreement.

(7)
Capitalization

Additional information concerning financing activities, including a TNMP cash-flow hedge that establishes a fixed interest rate on a variable rate loan, is contained in Note 6 of the Notes to Consolidated Financial Statements in the 2011 Annual Reports on Form 10-K.

Short-term Debt

PNMR has a revolving credit financing capacity of $300.0 million under the PNMR Revolving Credit Facility. PNM has a revolving credit financing capacity of $400.0 million under the PNM Revolving Credit Facility. Both of these facilities included two one-year extension options, subject to approval by the lenders. In October 2012, the first of the one-year extension options for the PNMR Revolving Credit Facility and the PNM Revolving Credit Facility were exercised extending the expiration of both facilities to October 31, 2017. TNMP has a revolving credit facility with financing capacity of $75.0 million under the TNMP Revolving Credit Facility that expires in December 2015. At September 30, 2012, the weighted average interest rate was 1.97% for borrowings outstanding under the PNMR Revolving Credit Facility. Short-term debt outstanding consisted of:
 
 
September 30,
 
December 31,
Short-term Debt
 
2012
 
2011
 
 
(In thousands)
PNM – Revolving credit facility
 
$

 
$
66,000

TNMP – Revolving credit facility
 

 

PNMR
 
 
 
 
Revolving credit facility
 
113,400

 
16,700

Bi-lateral line of credit
 
*

 

 
 
$
113,400

 
$
82,700

* This $5.0 million line of credit was allowed to expire in August 2012.

At October 26, 2012, PNMR, PNM, and TNMP had $182.3 million, $396.5 million, and $74.7 million of availability under their respective revolving credit facilities, including reductions of availability due to outstanding letters of credit. Total availability at October 26, 2012, on a consolidated basis, was $653.5 million for PNMR. As of October 26, 2012, TNMP had $12.3 million in borrowings from PNMR under their intercompany loan agreement. At October 26, 2012, PNMR, PNM and TNMP had consolidated invested cash of $6.6 million, $6.6 million, and none.


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Table of Contents

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Financing Activities

In April 2012, PNM filed an application with the NMPRC requesting approval to participate in the refunding of $20.0 million of PCRBs, which was approved in May 2012. PNM also received NMPRC authority to exercise the two one-year extension options under the PNM Revolving Credit Facility.

In September 2012, PNM participated in the issuance of $20.0 million of new PCRBs by the City of Farmington, New Mexico, which bear interest at 2.54% and mature September 1, 2042 with a mandatory tender on June 1, 2017. The new PCRBs refunded a $20.0 million series of PCRBs, which bore interest at 5.15% and matured in 2037, that were redeemed at par and retired.

Convertible Preferred Stock

PNMR had 477,800 shares of Series A convertible preferred stock outstanding through September 23, 2011 when it entered into an agreement to purchase all of the outstanding shares. The purchase closed on October 5, 2011. The Series A convertible preferred stock was convertible into PNMR common stock in a ratio of 10 shares of common stock for each share of preferred stock and received dividends equivalent to dividends paid on PNMR common stock as if the preferred stock had been converted into common stock. The Series A convertible preferred stock was entitled to vote on all matters voted upon by common stockholders, except for the election of the Board, and would have received distributions substantially equivalent to common stock in the event of liquidation of PNMR. The terms of the Series A convertible preferred stock resulted in it being substantially equivalent to common stock. Therefore, for earnings per share purposes, the number of common shares into which the Series A convertible preferred stock was convertible was included in the weighted average number of common shares outstanding for periods the Series A convertible preferred stock was outstanding. Similarly, dividends on the Series A convertible preferred stock were considered to be common dividends in the accompanying Condensed Consolidated Financial Statements.

(8)
Pension and Other Postretirement Benefit Plans

PNMR and its subsidiaries maintain qualified defined benefit pension plans, postretirement benefit plans providing medical and dental benefits, and executive retirement programs (“PNM Plans” and “TNMP Plans”). PNMR maintains the legal obligation for the benefits owed to participants under these plans.

Additional information concerning pension and OPEB plans is contained in Note 12 of the Notes to Consolidated Financial Statements in the 2011 Annual Reports on Form 10-K. Annual net periodic benefit cost (income) for the plans is actuarially determined using the methods and assumptions set forth in that note and is recognized ratably throughout the year.

PNM Plans

The following tables present the components of the PNM Plans’ net periodic benefit cost:
 
Three Months Ended September 30,
 
Pension Plan
 
OPEB Plan
 
Executive Retirement Program
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Components of Net Periodic
 
 
 
 
 
 
 
 
 
 
 
Benefit Cost
 
 
 
 
 
 
 
 
 
 
 
Service cost
$

 
$

 
$
54

 
$
65

 
$

 
$

Interest cost
8,058

 
8,202

 
1,324

 
1,345

 
219

 
233

Long-term return on plan assets
(10,325
)
 
(9,269
)
 
(1,225
)
 
(1,347
)
 

 

Amortization of net loss
2,629

 
2,302

 
972

 
801

 
21

 
23

Amortization of prior service cost
79

 
79

 
(336
)
 
(662
)
 

 

Net periodic benefit cost
$
441

 
$
1,314

 
$
789

 
$
202

 
$
240

 
$
256



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PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
Nine Months Ended September 30,
 
Pension Plan
 
Other Postretirement Benefits
 
Executive Retirement Program
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
(In thousands)
 
 
 
 
Components of Net Periodic
 
 
 
 
 
 
 
 
 
 
 
Benefit Cost
 
 
 
 
 
 
 
 
 
 
 
Service cost
$

 
$

 
$
162

 
$
195

 
$

 
$

Interest cost
24,174

 
24,606

 
3,972

 
4,035

 
657

 
699

Long-term return on plan assets
(30,975
)
 
(27,807
)
 
(3,675
)
 
(4,041
)
 

 

Amortization of net loss
7,887

 
6,906

 
2,916

 
2,403

 
63

 
69

Amortization of prior service cost
237

 
237

 
(1,008
)
 
(1,986
)
 

 

Net periodic benefit cost
$
1,323

 
$
3,942

 
$
2,367

 
$
606

 
$
720

 
$
768


PNM made contributions to its pension plan trust of zero and $77.7 million in the three and nine months ended September 30, 2012 and $20.5 million and $34.0 million in the three and nine months ended September 30, 2011. PNM does not anticipate making additional contributions to its pension trust in 2012.  Based on current law, including recent amendments to funding requirements, and estimates of portfolio performance, PNM estimates minimum required contributions for its pension plan trust would total $74.4 million for 2013-2016. Minimum required contributions were developed using current funding assumptions, including discount rates of 5.3% to 6.1%. Actual amounts required to be funded in the future will depend on the actuarial assumptions at that time, including the appropriate discount rate. PNM may make additional contributions at its discretion. PNM made contributions to the OPEB trust of $0.8 million and $2.4 million in the three and nine months ended September 30, 2012 and $0.7 million and $1.9 million in the three and nine months ended September 30, 2011. PNM expects contributions during 2012 to the OPEB trust to total $3.2 million.  Disbursements under the executive retirement program, which are funded by the Company and considered to be contributions to the plan, were $0.4 million and $1.1 million in the three and nine months ended September 30, 2012 and $0.4 million and $1.2 million in the three and nine months ended September 30, 2011 and are expected to total $1.5 million during 2012.

TNMP Plans

The following tables present the components of the TNMP Plans’ net periodic benefit cost (income):
 
Three Months Ended September 30,
 
Pension Plan
 
OPEB Plan
 
Executive Retirement Program
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
(In thousands)
 
 
 
 
Components of Net Periodic
 
 
 
 
 
 
 
 
 
 
 
Benefit Cost (Income)
 
 
 
 
 
 
 
 
 
 
 
Service cost
$

 
$

 
$
61

 
$
77

 
$

 
$

Interest cost
909

 
951

 
156

 
163

 
11

 
12

Long-term return on plan assets
(1,331
)
 
(1,368
)
 
(129
)
 
(133
)
 

 

Amortization of net (gain) loss
115

 
86

 
(52
)
 
(48
)
 

 

Amortization of prior service cost

 

 
14

 
15

 

 

Net Periodic Benefit Cost (Income)
$
(307
)
 
$
(331
)
 
$
50

 
$
74

 
$
11

 
$
12



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TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
Nine Months Ended September 30,
 
Pension Plan
 
Other Postretirement Benefits
 
Executive Retirement Program
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
(In thousands)
 
 
 
 
Components of Net Periodic
 
 
 
 
 
 
 
 
 
 
 
Benefit Cost (Income)
 
 
 
 
 
 
 
 
 
 
 
Service cost
$

 
$

 
$
183

 
$
231

 
$

 
$

Interest cost
2,727

 
2,853

 
468

 
489

 
33

 
36

Long-term return on plan assets
(3,993
)
 
(4,104
)
 
(387
)
 
(399
)
 

 

Amortization of net (gain) loss
345

 
258

 
(156
)
 
(144
)
 

 

Amortization of prior service cost

 

 
42

 
45

 

 

Net Periodic Benefit Cost (Income)
$
(921
)
 
$
(993
)
 
$
150

 
$
222

 
$
33

 
$
36


TNMP made contributions to its pension plan trust of zero and $5.3 million in the three and nine months ended September 30, 2012 and $0.8 million and $1.0 million in the three and nine months ended September 30, 2011. TNMP does not anticipate making additional contributions to its pension trust in 2012. Based on current law, including recent amendments to funding requirements, and estimates of portfolio performance, TNMP estimates there would be no minimum required contributions to its pension plan trust  for 2013-2016. Minimum required contributions were developed using current funding assumptions, including discount rates of 5.3% and 6.1%. Actual amounts to be funded in the future will depend on the actuarial assumptions at that time, including the appropriate discount rate. TNMP may make additional contributions at its discretion. TNMP made contributions to the OPEB trust of zero and $0.3 million in the three and nine months ended September 30, 2012 and zero and $0.4 million in the three and nine months ended September 30, 2011. TNMP does not expect to make additional contributions during 2012 to the OPEB trust. Disbursements under the executive retirement program, which are funded by the Company and considered to be contributions to the plan, were less than $0.1 million in the three and nine months ended September 30, 2012 and 2011 and are expected to total $0.1 million during 2012.

(9)    Commitments and Contingencies

Overview
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 periodically participates in the investigation and remediation of various sites. In addition, the Company occasionally enters into financial commitments in connection with its business operations. The Company is also involved in various legal and regulatory (Note 10) proceedings in the normal course of its business. It is not possible at this time for the Company to determine fully the effect of all litigation and other legal and regulatory proceedings on its financial position, results of operations, or cash flows.
 
With respect to some of the items listed below, the Company has determined that a loss is not probable or that, to the extent probable, cannot be reasonably estimated. In some cases, the Company is not able to predict with any degree of certainty the range of possible loss that could be incurred. Notwithstanding these facts, the Company has assessed these matters based on current information and made judgments concerning their potential outcome, giving due consideration to the nature of the claim, the amount and nature of damages sought, and the probability of success. Such judgments are made with the understanding that the outcome of any litigation, investigation, and other legal proceeding is inherently uncertain. In accordance with GAAP, the Company records liabilities for matters where it is probable a loss has been incurred and the amount of loss is reasonably estimable. The actual outcomes of the items listed below could ultimately differ from the judgments made and the differences could be material. The Company cannot make any assurances that the amount of reserves or potential insurance coverage will be sufficient to cover the cash obligations that might be incurred as a result of litigation or regulatory proceedings. The Company does not expect that any known lawsuits, environmental costs, and commitments will have a material effect on its financial condition, results of operations, or cash flows.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Additional information concerning commitments and contingencies is contained in Note 16 of the Notes to Consolidated Financial Statements in the 2011 Annual Reports on Form 10-K.

Commitments and Contingencies Related to the Environment

Nuclear Spent Fuel and Waste Disposal
 
Nuclear power plant operators are required to enter into spent fuel disposal contracts with the DOE that require the DOE to accept and dispose of all spent nuclear fuel and other high-level radioactive wastes generated by domestic power reactors. Although the Nuclear Waste Policy Act required the DOE to develop a permanent repository for the storage and disposal of spent nuclear fuel by 1998, the DOE announced that it would not be able to open the repository by 1998 and sought to excuse its performance under the contract. In November 1997, the D.C. Circuit issued a decision preventing the DOE from excusing its own delay, but refused to order the DOE to begin accepting spent nuclear fuel. PNM estimates that it will incur approximately $42.8 million (in 2010 dollars) for its share of the costs related to the on-site interim storage of spent nuclear fuel at PVNGS during the term of the operating licenses. PNM accrues these costs as a component of fuel expense as the fuel is consumed. At September 30, 2012 and December 31, 2011, PNM had a liability for interim storage costs of $13.8 million and $14.5 million included in other deferred credits.

On June 8, 2012, the D.C. Circuit issued its decision on a challenge by several states and environmental groups of the NRC's rulemaking regarding temporary storage and permanent disposal of high-level nuclear waste and spent nuclear fuel. The petitioners had challenged the NRC's 2010 update to the agency's Waste Confidence Decision. Previous versions of the Waste Confidence Decision had expressed the NRC's confidence, in a generic fashion, that high level nuclear waste and spent nuclear fuel safe storage could be safely stored on the sites of the country's commercial nuclear power plants until a mined geologic repository becomes available. The D.C. Circuit found that the agency's 2010 Waste Confidence Decision update constituted a major federal action, which requires either an environmental impact statement or a finding of no significant impact from the agency's actions. The D.C. Circuit found that the NRC's evaluation of the environmental risks from spent nuclear was deficient, and therefore remanded the 2010 Waste Confidence Decision update for further action. PNM is unable to predict the impact that the decision may have on the operation of PVNGS.
The Clean Air Act
 
Regional Haze
 
In 1999, EPA developed a regional haze program and regional haze rules under the CAA. The rule directs each of the 50 states to address regional haze. States are required to establish goals for improving visibility in national parks and wilderness areas (also known as Class I areas) and to develop long-term strategies for reducing emissions of air pollutants that cause visibility impairment in their own states and for preventing degradation in other states. States must establish a series of interim goals to ensure continued progress. The first planning period specifies setting reasonable progress goals for improving visibility in Class I areas by the year 2018. In July 2005, the EPA promulgated its final regional haze rule. A major provision of the rule included guidelines for states to conduct BART determinations for certain covered facilities. The BART requirements of the regional haze rule apply to facilities, including utility boilers, built between 1962 and 1977 that have the potential to emit more than 250 tons per year of visibility impairing pollution. If it is demonstrated that the emissions from these sources cause or contribute to visibility impairment in any Class I area, then BART must be installed. The regional haze rules require that BART controls must be installed on an eligible facility by 2018.

SJGS
Several provisions of the CAA aim to improve visibility in certain national parks and wilderness areas to natural conditions by the year 2064. SJGS is a source that is subject to these statutory obligations to reduce visibility impacts.
 
Pursuant to the CAA, states have the primary role to regulate visibility requirements by promulgating SIPs. The State of New Mexico submitted its SIP on the two elements of the visibility rules - regional haze and interstate transport - for review by EPA in June 2011. The SIP found that BART to reduce NOx emissions from SJGS is selective non-catalytic reduction technology

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TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


(“SNCR”) and requires SJGS to install SNCR on each of its four units. Nevertheless, on August 22, 2011, EPA published its FIP, stating that it was required to do so by virtue of a consent decree it had entered into with an environmental group in litigation concerning the interstate transport requirements of the CAA. The FIP included a regional haze BART determination for SJGS that requires installation of selective catalytic reduction technology (“SCR”) on all four units within five years of the rule's effective date of September 21, 2011. The FIP also requires stringent NOx emission limits. EPA stated that it would review and act on the SIP at some future date.

 PNM filed a Petition for Review in the Tenth Circuit on September 16, 2011, challenging EPA's regional haze FIP decision as arbitrary, capricious, or otherwise not in accordance with law. Additionally, in October 2011, PNM asked EPA to reconsider the FIP and in May 2012 supplemented its request for reconsideration with cost information from actual bids received in response to an RFP to install SCRs. On October 21, 2011, the Governor of New Mexico and NMED petitioned the Tenth Circuit to review EPA's decision on the same grounds as PNM's challenge and requested EPA to reconsider its decision. The New Mexico Governor and NMED also joined PNM's supplemental request for reconsideration in May 2012. These three parties filed motions with the Tenth Circuit to stay the effective date of the rule, which were denied on March 1, 2012. The same three parties have also formally asked EPA to stay the effective date of the rule. WildEarth Guardians also filed an action to challenge EPA's rule in the Tenth Circuit, seeking to shorten its compliance period from five years to three years. WildEarth Guardians, Diné Citizens Against Ruining our Environment, National Parks Conservation Association, New Energy Economy, San Juan Citizens Alliance, and Sierra Club intervened in support of EPA in both PNM's challenge and in the case brought by the New Mexico Governor and NMED. PNM has intervened in support of the challenge brought by the New Mexico Governor and NMED. PNM has also intervened in the WildEarth Guardians' action advocating that the five-year compliance period in the FIP be maintained should the FIP stand. The Tenth Circuit entered an order in March 2012 scheduling briefing on the merits in the challenges to the FIP. Oral arguments were held on October 23, 2012. During oral arguments, the court ordered the parties to file supplemental information in November 2012 and January 2013. No decision has been announced and there is no deadline for a court decision.

In litigation with several environmental groups, the U.S. District Court for the District of Columbia entered a consent decree, which, as amended, required EPA to review and take action through a proposed rulemaking on New Mexico's regional haze SIP on or before May 31, 2012 and a final rulemaking on or before November 15, 2012. On May 31, 2012, EPA issued its proposed action on the regional haze SIP, which was published in the Federal Register on June 15, 2012. EPA proposed approval of all components of the SIP, except for the BART determination for SJGS. With respect to that element of the SIP, EPA determined that with the FIP in place, it had met its obligation under the consent decree, and stated that it would issue a separate proposal or would entertain the withdrawal of the SIP in favor of an alternative that may be developed through discussions with the State of New Mexico and PNM.
On April 25, 2012, PNM received a copy of a letter from two of the five Commissioners of the NMPRC addressed to the Governor of New Mexico and the New Mexico congressional delegation.  In the letter, the Commissioners ask that the parties to the litigation join to ask EPA to stay both the FIP and the litigation and to consider a “third alternative” to the FIP and the SIP.  They suggest that the third alternative be retiring one or more of the existing coal-fired units at SJGS and replacing that capacity with gas-fired generation.  On April 26, 2012, PNM received a copy of a letter from the Governor of New Mexico addressed to the EPA Administrator.  In that communication, the Governor requested that EPA stay the FIP and respond to the SIP by approving it or explaining why it is not approvable.  Furthermore, the Governor requested PNM to develop viable alternatives to the FIP, assuming that EPA stays the FIP and responds to the SIP.  PNM agreed to comply with the Governor's request. In her letter to the Governor, the EPA Administrator requested that NMED take the lead in working with the parties and stakeholders.
On July 2, 2012, the EPA Administrator replied to the Governor stating that she had signed a 90-day stay of the FIP. The stay was published in the Federal Register on July 16, 2012. The stay purports to stay the effectiveness of the FIP for a period of 90 days after publication. The stay states that any FIP requirements during the 90-day period are stayed, but also acknowledges that there are no such requirements. The only mandate of the FIP is that PNM comply with its emission limit on its ultimate compliance date. Therefore, the stay does not alter future compliance requirements of the FIP, including the compliance deadline in the FIP. The stay provides that EPA “intends” to proceed to a rulemaking at some future time to either 1) extend the compliance date, or 2) provide for an alternative proposal that might be developed during the period of the stay. Because the stay is not effective to toll the compliance date absent a subsequent formal EPA rulemaking, the compliance date currently remains September 21, 2016.

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(Unaudited)


In accordance with the Governor's request, PNM has engaged in discussions with NMED, EPA, and other stakeholders regarding an alternative to the FIP and SIP. In July 2012, the NMED established a process to elicit input from the public via open meetings across New Mexico and from a variety of stakeholders, including PNM, the Navajo Nation, local governmental representatives, and a number of environmental groups, regarding an alternative to SCRs and SNCRs. PNM supported that process and advocated for alternatives that would cost consumers less than the FIP while also achieving environmental benefits and considering economic impact to New Mexico. In September 2012, the NMED proposed an alternative to EPA suggesting the closure of Units 1 and 2 at SJGS and the installation of SNCRs on Units 3 and 4 by the end of 2017. The NMED also suggested replacement of PNM's share of the capacity from the two closed units with gas-fired generation. The Company views the NMED proposal as an important step in meeting the objectives of addressing the environmental needs of the regional haze program at a lower cost to customers while balancing the economic impact to the "four corners" region. Among other things, there would need to be an agreement in principle among EPA, NMED, and PNM in order for the NMED proposal to proceed. The proposal would also be subject to approval by the other owner of SJGS Units 1 and 2 as well as various regulatory agencies. The proposal could also be subject to administrative and judicial challenge by others.
On October 12, 2012, EPA published a notice in the Federal Register extending the existing administrative stay for an additional 45 days. The extension is intended to allow for additional time for further discussions of alternatives to EPA's FIP. The administrative stay does not extend the September 21, 2016 compliance date of the FIP.

Notwithstanding the above process, the unchanged compliance deadline of the FIP requires PNM to continue to take steps to commence installation of SCRs at SJGS. In April 2012, PNM received bids for this project from several bidders pursuant to its RFP. After further negotiations with the bidders, PNM entered into a contract on October 31, 2012 with an engineering, procurement, and construction contractor to install SCRs and is negotiating a contract with an engineering firm for construction management services on behalf of the SJGS owners. The construction contract includes termination provisions in the event that SCRs are determined in the future to be unnecessary. The construction contract contains a cost estimate, which will be refined through an “open book” subcontractor bidding process with final costs to be determined by June 30, 2013. Based on the indicative bid for construction, PNM estimates the total cost to install SCRs on all four units of SJGS will be between approximately $824 million and $910 million, which amounts include costs for construction management, gross receipts taxes, AFUDC, and other PNM costs. The costs for the project to install SCRs would encompass installation of technology to comply with the NAAQS requirements described below.

Based on a recently completed conceptual design study, PNM currently estimates the installation of SNCRs on all four units of SJGS would cost between approximately $85 million and $90 million. If SNCRs are installed at SJGS, additional equipment would be required to be installed to meet the NAAQS requirements described below, the cost of which is estimated to total between approximately $105 million and $110 million for all four units of SJGS. The estimates for SNCRs and the NAAQS requirements include gross receipts taxes, AFUDC, and other PNM costs.

PNM's share under either SCRs or SNCRs would be about 46.3% based upon its SJGS ownership interest. Operating costs would also increase with the installation of either SCRs or SNCRs.

Because legal challenges to the FIP are continuing and because PNM has agreed to discuss alternatives to the SIP and the FIP, PNM is working to minimize the previously planned 2012 and 2013 total project expenditures. PNM currently estimates its share of the total project expenditures to be up to $3 million in 2012 and $102 million in 2013.
PNM anticipates filing a request with the NMPRC in late 2012 or early 2013 for approval of the SCR project and to recover SCR costs in rates charged to customers. Furthermore, PNM will seek recovery from its ratepayers for all costs that may be incurred as a result of the CAA requirements.

Due to the compliance deadline under the FIP, PNM is preparing to install SCRs at SJGS while simultaneously pursuing two other paths regarding BART at SJGS. PNM continues to vigorously pursue litigation in the Tenth Circuit. PNM is also participating in discussions regarding an alternative to the FIP and SIP. PNM is unable to predict the ultimate outcome of these matters or what, if any, additional pollution control equipment will be required at SJGS. If additional equipment is necessary and/or final requirements result in additional operating costs being incurred, PNM believes that its access to the capital markets is sufficient to be able to finance the installation. It is possible that requirements to comply with the final BART determinations,

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(Unaudited)


combined with the financial impact of possible future climate change regulation or legislation, if any, other environmental regulations, the result of litigation, and other business considerations, could jeopardize the economic viability of SJGS or the ability of individual participants to continue participation in the plant.
 
Four Corners
On October 6, 2010, EPA issued its proposed regional haze determination of BART for Four Corners. The rule, as proposed, would require the installation of SCR as post-combustion controls on each of Units 1-5 at Four Corners to reduce NOx emissions. PNM estimates its share of costs incurred by APS could be up to $69.0 million for post-combustion controls at Four Corners Units 4 and 5. Such amount does not include PNM's AFUDC and internal costs. PNM has no ownership interest in Four Corners Units 1, 2, and 3. PNM would seek recovery from its ratepayers of all costs that are ultimately incurred.
Following EPA's issuance of its proposed BART, APS submitted a letter to EPA proposing to shut down Four Corners Units 1, 2, and 3 by 2014 and to install post-combustion pollution controls for NOx on Units 4 and 5 by the end of 2018, provided that EPA agrees to a resolution of Four Corners' obligations or liability, if any, under the regional haze and reasonably attributable visibility impairment programs, the NSR program, and NSPS programs of the CAA. The proposed shut down of Four Corners Units 1, 2, and 3 is also conditioned upon the completion of APS's acquisition of SCE's ownership interest in Four Corners Units 4 and 5 and the negotiation of a new coal supply agreement.
In response to APS's proposal, EPA issued a Supplemental Notice Requesting Comment in February 2011 and proposed to find that an alternative emission control strategy, largely based upon APS's proposal, would achieve more progress than EPA's October 2010 BART proposal.
 
On August 6, 2012, the EPA issued its final BART determination for Four Corners. The rule includes two compliance alternatives. The first emission control strategy finalized by the EPA would require the installation of post-combustion controls on each of Units 1-5 at Four Corners to reduce NOx emissions. Under the alternative emission control strategy finalized by the EPA, the owners of Four Corners would have the option to close permanently Units 1-3 by January 1, 2014 and install post-combustion NOx controls on each of Units 4 and 5 by July 31, 2018. For particulate matter emissions, EPA is requiring Units 4 and 5 to meet an emission limit of 0.015 lb/Decatherm and the plant to meet a 20% opacity limit, both of which are achievable through operation of the existing baghouses. Although unrelated to BART, the final BART rule also imposes a 20% opacity limitation on certain fugitive dust emissions from Four Corners' coal and material handling operations. The Four Corners participants have until July 1, 2013 to notify the EPA of which emission control strategy Four Corners will follow.

APS continues to work with EPA to resolve these issues. The Four Corners participants' obligations to comply with EPA's final BART determinations, coupled with the financial impact of possible future climate change regulation or legislation, other environmental regulations, and other business considerations, could jeopardize the economic viability of Four Corners or the ability of individual participants to continue their participation in Four Corners.
PNM is continuing to evaluate the impacts of EPA's BART determination for Four Corners. PNM is unable to predict the ultimate outcome of this matter.
SJGS Operating Permit Challenge
On February 16, 2012, EPA issued its response to a WildEarth Guardians petition objecting to SJGS's operating permit granted by the NMED in January 2011. In its order, EPA required NMED to provide clarification on several of the matters raised by WildEarth Guardians.  EPA's order in this matter does not constitute a finding that the plant has violated any provision of the CAA or that it has violated any emission limits. 
In August 2012, NMED issued a response to the EPA order. In the response, NMED stated that SJGS's operating permit would be reopened to make certain modifications to the permit. On September 19, 2012, NMED issued a public notice regarding proposed modifications to the SJGS operating permit. The proposed modifications include changes to the SO2 and particulate matter emission limits that were previously incorporated into the SJGS NSR permit. In addition, NMED has proposed a requirement for the submittal of a compliance plan to address carbon monoxide emissions increases at SJGS Unit 2 raised by WildEarth

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Guardians in its protest of the permit issuance. PNM will comply with NMED's proposal and does not believe it will have a material impact.
 
National Ambient Air Quality Standards (“NAAQS”)
The CAA requires EPA to set NAAQS for pollutants considered harmful to public health and the environment. EPA has set NAAQS for certain pollutants, including NOx, SO2, ozone, and particulate matter. In 2010, EPA updated the primary NOx and SO2 NAAQS to include a 1-hour maximum standard while retaining the annual standards for NOx and SO2 and the 24-hour SO2 standard. New Mexico is in attainment for the 1-hour NOx NAAQS. EPA has issued draft guidance on how to determine whether areas in a state comply with the new 1-hour SO2 NAAQS. EPA conducted a stakeholder process, which concluded in June 2012, to discuss how to assess compliance with this standard. EPA announced that it will publish further guidance or initiate rulemaking on these matters after completion of that process.  Although the process of determining compliance with the 1-hour SO2 NAAQS has not been finalized, PNM believes that compliance with the 1-hour SO2 standard may require operational changes and/or equipment modifications at SJGS. On April 6, 2012, PNM filed an application for an amendment to its air permit for SJGS, which would be required for the installation of either SCRs or SNCRs described above. In addition, this application included a proposal by PNM to install equipment modifications for the purpose of reducing fugitive emissions, including NOx, SO2, and particulate matter. These modifications would help SJGS meet the NAAQS. It is anticipated that this technology would be installed at the same time as the installation of regional haze BART controls, in order to most efficiently and cost effectively conduct construction activities at SJGS. The cost of this technology is dependent upon the type of control technology that is ultimately determined to be NOx BART at SJGS. See “Regional Haze - SJGS” above.

On June 14, 2012, EPA proposed to lower the standard for fine particulate matter. The proposed rule was published in the Federal Register on June 29, 2012. EPA took comments for nine weeks. PNM provided comments through its trade associations. A final rule is expected by December 14, 2012. PNM is currently evaluating the impact of the proposed standard on SJGS and its operations.
 
In January 2010, EPA announced it would strengthen the 8-hour ozone standard by setting a new standard in a range of 0.060-0.070 parts per million. EPA had intended to establish the new standard by July 31, 2011. However, in September 2011, President Obama requested that the EPA administrator withdraw the agency's proposed rule that would have replaced the existing ozone NAAQS.   In his release, the President stated that work is already underway to reconsider the ozone standard, with proposed revisions expected in the fall of 2013 and a final standard published by 2014.  Depending upon where the standard for ozone is set, San Juan County, where SJGS is situated, could be designated as not attaining the standard for ozone. If that were to occur, NMED would have responsibility for bringing the county into compliance and would look at all sources of NOx and volatile organic compounds since these are the pollutants that form ground-level ozone. As a result, SJGS could be required to install further NOx controls to meet a new ozone NAAQS. In addition, other counties in New Mexico, including Bernalillo County, may be designated as non-attainment. PNM cannot predict the outcome of this matter, the impact of other potential environmental mitigations, or if additional NOx controls would be required as a result of ozone non-attainment designation.
Citizen Suit Under the Clean Air Act
The operations of the SJGS are covered by a Consent Decree with the Grand Canyon Trust and Sierra Club and with the NMED that includes stipulated penalties for non-compliance with specified emissions limits. Stipulated penalty amounts are placed in escrow on a quarterly basis pending review of SJGS's emissions performance. Over the past several years, PNM has also submitted reports addressing mercury and NOx emission controls for SJGS as required by the Consent Decree. Plaintiffs and NMED rejected PNM's reports. PNM disputes the validity of the rejection of the reports. In May 2011, PNM entered into an agreement with NMED and the plaintiffs to resolve the dispute over the applicable NOx emission limits under the Consent Decree. Under the agreement, so long as the NOx emissions limits imposed under the EPA FIP and the New Mexico SIP meet a specified emissions limit, and PNM does not challenge these limits, the parties' dispute is deemed settled.
In May 2010, PNM filed a petition with the federal district court seeking a judicial determination on the dispute relating to PNM's mercury controls. NMED and plaintiffs seek to require PNM to implement additional mercury controls. PNM estimates the implementation would increase annual mercury control costs for the entire station, which are currently $0.6 million, to a total of $6.0 million. The court appointed a special master to evaluate the technical arguments in the case. The special master was asked to address the detection and determination limits of the mercury monitors at SJGS and the appropriate brominated activated

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(Unaudited)


carbon injection rate that maximizes the reduction of mercury emissions from SJGS.  The special master issued a report indicating he was unable to make a determination on either of these issues based on the materials provided to him under the court's order.  In September 2012, PNM submitted objections to certain portions of the special master report and requested an evidentiary hearing. Also in September 2012, NMED and plaintiffs filed a motion asking the court to affirm certain findings in the special master report and order PNM to conduct additional mercury testing. PNM cannot predict the outcome of this matter.
Navajo Nation Environmental Issues
Four Corners is located on the Navajo Reservation and is held under an easement granted by the federal government, as well as a lease from the Navajo Nation. The Navajo Acts purport to give the Navajo Nation Environmental Protection Agency authority to promulgate regulations covering air quality, drinking water, and pesticide activities, including those activities that occur at Four Corners. In October 1995, the Four Corners participants filed a lawsuit in the District Court of the Navajo Nation challenging the applicability of the Navajo Acts to Four Corners. The District Court stayed these proceedings pursuant to a request by the parties and the parties are seeking to negotiate a settlement.
In May 2005, APS and the Navajo Nation signed an agreement resolving the dispute regarding the Navajo Nation's authority to adopt operating permit regulations under the Navajo Nation Air Pollution Prevention and Control Act. As a result of this agreement, APS sought, and the courts granted, dismissal of the pending litigation in the Navajo Nation Supreme Court and the Navajo Nation District Court, to the extent the claims relate to the CAA. The agreement does not address or resolve any dispute relating to other aspects of the Navajo Acts.
The Company cannot currently predict the outcome of these matters or the range of their potential impacts.
Section 114 Request
In April 2009, APS received a request from EPA under Section 114 of the CAA seeking detailed information regarding projects at and operations of Four Corners. EPA has taken the position that many utilities have made physical or operational changes at their plants that should have triggered additional regulatory requirements under the NSR provisions of the CAA. Other electric utilities have received and responded to similar Section 114 requests, and several of them have been subject to notices of violation and lawsuits by EPA. APS has responded to EPA's request. PNM is currently unable to predict the timing or content of EPA's response, if any, or any resulting actions.
 
Four Corners New Source Review
Following two NOIs to sue, EarthJustice filed a lawsuit in October 2011 in the U.S. District Court for New Mexico against APS and the other Four Corners participants, except PNM, alleging violations of the PSD provisions of the CAA. EarthJustice filed suit against PNMR, which is not a Four Corners participant. In January 2012, following a third NOI to sue, EarthJustice filed its First Amended Complaint, naming PNM as a party instead of PNMR. In addition to the allegations of its original complaint, EarthJustice alleged NSPS violations. PNM was served with the amended complaint in January 2012. Among other things, the plaintiffs seek to have the court enjoin operations at Four Corners until it obtains any required PSD permits and complies with the NSPS. The plaintiffs further request the Court to order the payment of civil penalties, including a beneficial mitigation project. In April 2012, the Four Corners participants, including PNM, filed motions to dismiss the complaint. The Court has not ruled on the pending motions. PNM cannot currently predict the outcome of this matter or the range of its potential impact.
Endangered Species Act
In January 2011, the Center for Biological Diversity, Diné Citizens Against Ruining Our Environment, and San Juan Citizens Alliance filed a lawsuit in the U.S. District Court for the District of Colorado against the OSM and the DOI, alleging that OSM failed to engage in mandatory Endangered Species Act (“ESA”) consultation with the U.S. Fish and Wildlife Service ("FWS") prior to authorizing the renewal of an operating permit for the mine that serves Four Corners.  The lawsuit alleges that activities at the mine, including mining and the disposal of coal combustion residue, will adversely affect several endangered species and their critical habitats.  The lawsuit requested the court to vacate and remand the mining permit and enjoin all activities carried out under the permit until OSM has complied with the ESA.  Neither PNM nor APS was a party to the lawsuit. On March 14, 2012, the Court entered an order dismissing the plaintiffs' lawsuit without prejudice. On May 14, 2012, the plaintiffs appealed the Court's order to the Tenth Circuit.

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(Unaudited)


On March 19, 2012, Diné Citizens Against Ruining Our Environment, Black Mesa Water Coalition, Toh Nizhoni Ani, San Juan Citizens Alliance, and Center for Biological Diversity sent EPA a NOI threatening to file a lawsuit in federal district court on or after May 18, 2012 if EPA fails to take certain actions allegedly required under the ESA.  These environmental groups allege that EPA has failed to meet its duties under the ESA to ensure that operations at Four Corners do not jeopardize the continued existence of endangered or threatened species or their critical habitat as required under the ESA.  The environmental groups also allege that the EPA has violated the ESA by failing to carry out its programs for the conservation of listed species.  APS is currently evaluating the NOI to determine its potential impact on Four Corners and will continue to monitor any developments.  PNM cannot predict the outcome of this matter.
Cooling Water Intake Structures
EPA issued its proposed cooling water intake structures rule in April 2011, which would provide national standards for certain cooling water intake structures at existing power plants and other facilities under the Clean Water Act. The proposed standards are intended to protect fish and other aquatic organisms by minimizing impingement mortality (the capture of aquatic wildlife on intake structures or against screens) and entrainment mortality (the capture of fish or shellfish in water flow entering and passing through intake structures). The proposed rule would require facilities such as Four Corners and SJGS to either demonstrate that impingement mortality at its cooling water intakes does not exceed a specified rate or reduce the flow at those structures to less than a specified velocity and to take certain protective measures with respect to impinged fish. To minimize entrainment mortality, the proposed rule would also require these facilities to either meet the definition of a closed cycle recirculating cooling system or conduct a “structured site-specific analysis” to determine what site-specific controls, if any, should be required.
The proposed rule would require existing facilities to comply with the impingement mortality requirements as soon as possible, but no later than eight years after the effective date of the rule, and to comply with the entrainment requirements as soon as possible under a schedule of compliance established by the permitting authority. EPA is required to issue a final rule by June 27, 2013. PNM and APS continue to follow the rulemaking and are performing analyses to determine the potential costs of compliance with the proposed rule. PNM is unable to predict the outcome of this matter or a range of the potential costs of compliance.
Santa Fe Generating Station
PNM and the NMED are parties to agreements under which PNM installed a remediation system to treat water from a City of Santa Fe municipal supply well, an extraction well, and monitoring wells to address gasoline contamination in the groundwater at the site of the former Santa Fe Generating Station and service center. PNM believes the observed groundwater contamination originated from off-site sources, but agreed to operate the remediation facilities until the groundwater meets applicable federal and state standards or until the NMED determines that additional remediation is not required, whichever is earlier. The municipal well continues to operate and meets federal drinking water standards. PNM is not able to assess the duration of this project.
The Superfund Oversight Section of the NMED has conducted multiple investigations into the chlorinated solvent plume in the vicinity of the site of the former Santa Fe Generating Station. In February 2008, a NMED site inspection report was submitted to EPA, which states that neither the source nor extent of contamination has been determined and also states that the source may not be the former Santa Fe Generating Station. The NMED investigation is ongoing. PNM is unable to predict the outcome of this matter.
Coal Combustion Byproducts Waste Disposal
Regulation
CCBs consisting of fly ash, bottom ash, and gypsum from SJGS are currently disposed of in the surface mine pits adjacent to the plant. SJGS does not operate any CCB impoundments. The Mining and Minerals Division of the New Mexico Energy, Minerals and Natural Resources Department currently regulates mine placement of ash with federal oversight by the OSM. APS disposes of CCBs in ash ponds and dry storage areas at Four Corners and also sells a portion of its fly ash for beneficial uses, such as a constituent in concrete production.  Ash management at Four Corners is regulated by EPA and the New Mexico State Engineer's Office. 

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In June 2010, EPA published a proposed rule that includes two options for waste designation of coal ash. One option is to regulate CCBs as a hazardous waste, which would allow EPA to create a comprehensive federal program for waste management and disposal of CCBs. The other option is to regulate CCBs as a non-hazardous waste, which would provide EPA with the authority to develop performance standards for waste management facilities handling the CCBs and would be enforced primarily by state authorities or through citizen suits. Both options allow for continued use of CCBs in beneficial applications. EPA's proposal does not address the placement of CCBs in surface mine pits for reclamation. A final rule regarding waste designation for coal ash is not expected from EPA before the end of 2012. An OSM CCB rulemaking team has been formed to develop a proposed rule. 
On April 5, 2012, several environmental groups, including Sierra Club, filed a citizen suit in the D.C. Circuit claiming that EPA has failed to review and revise RCRA's regulations with respect to CCBs. The groups allege that EPA has already determined that revisions to the CCBs regulations are necessary. They also claim that EPA now has a non-discretionary duty to revise the regulations. The environmental groups asked the court to direct EPA to complete its review of the regulation of CCBs and a hazardous waste analytical procedure and to issue necessary revisions of such regulations as soon as possible. PNM and industry groups are evaluating the potential implications of the suit on EPA's rulemaking agenda for CCBs.
 
PNM advocates for the non-hazardous regulation of CCBs. However, if CCBs are ultimately regulated as a hazardous waste, costs could increase significantly. PNM would seek recovery from its ratepayers of all costs that are ultimately incurred. PNM cannot predict the outcome of EPA's or OSM's proposed rulemaking regarding CCB regulation, including mine placement of CCBs, or whether these actions will have a material impact on its operations, financial position, or cash flows. 
 
Sierra Club Allegations
In December 2009, PNM and PNMR received a NOI to sue under RCRA from the Sierra Club (“RCRA Notice”).  The RCRA Notice was also sent to all SJGS owners, to SJCC, which operates the San Juan Mine that supplies coal to SJGS, and to BHP. Additionally, PNM was informed that SJCC and BHP received a separate NOI to sue under the Surface Mine Control and Reclamation Act ("SMCRA") from the Sierra Club. In April 2010, the Sierra Club filed suit in the U.S. District Court for the District of New Mexico against PNM and PNMR. Also named in the lawsuit were SJCC and BHP. In the complaint, as amended, Sierra Club alleged that activities at SJGS and the San Juan Mine were causing imminent and substantial harm to the environment, including ground and surface water in the region, and that placement of CCBs at the San Juan Mine constituted "open dumping" in violation of RCRA.  The suit also includes claims against SJCC and BHP under SMCRA. The complaint requested judgment for injunctive relief, payment of civil penalties, and an award of plaintiffs' attorney's fees and costs.
On March 28, 2012, the parties filed an executed consent decree with the court, which was approved by the court on April 12, 2012, settling the litigation. Under the terms of the consent decree, the SJGS owners and SJCC will construct and operate a slurry wall and recovery trench, fund other environmental projects, and pay Sierra Club's attorneys' and experts' fees. The total estimated cost of the settlement is $10.2 million, of which about $4.5 million is PNM's share. Substantially all of the income statement impact related to this settlement was recorded in 2011. The consent decree also includes a release of claims and covenant not to sue by Sierra Club. PNM is complying with the requirements of the consent decree.
Hazardous Air Pollutants (“HAPs”) Rulemaking
 
In December 2011, the EPA issued its final Mercury and Air Toxics Standards (“MATS”). MATS is designed to reduce emissions of heavy metals, including mercury, arsenic, chromium, and nickel, as well as acid gases, including hydrochloric and hydrofluoric gases, from coal and oil-fired electric generating units with a capacity of at least 25 MW. Existing facilities will generally have up to four years to demonstrate compliance with the new rule. PNM's assessment of MATS indicates that the control equipment currently used at SJGS allows the plant to meet the emission standards set forth in the rule although the plant may be required to install additional monitoring equipment. With regard to mercury, stack testing performed for EPA during the MATS rulemaking process showed that SJGS achieved a mercury removal rate of 99% or greater. APS will conduct testing to determine what additional controls, if any, will be required at Four Corners. If additional controls are required, the costs are not expected to be material.
 

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Other Commitments and Contingencies
Coal Supply
The coal requirements for SJGS are being supplied by SJCC, a wholly owned subsidiary of BHP. In addition to coal delivered to meet the current needs of SJGS, PNM prepays SJCC for certain coal mined but not yet delivered to the plant site. At September 30, 2012 and December 31, 2011, prepayments for coal, which are included in other current assets, amounted to $10.7 million and $14.6 million. These amounts reflect delivery of a portion of the prepaid coal and its utilization due to the mine fire incident described below. SJCC holds certain federal, state, and private coal leases and has an underground coal sales agreement to supply processed coal for operation of SJGS through 2017. Under the coal sales agreement, SJCC is reimbursed for all costs for mining and delivering the coal, including an allocated portion of administrative costs, and receives a return on its investment. BHP Minerals International, Inc. has guaranteed the obligations of SJCC under the coal agreement. The coal agreement contemplates the delivery of coal that would supply substantially all the requirements of the SJGS through December 31, 2017.
APS purchases all of Four Corners' coal requirements from a supplier with a long-term lease of coal reserves with the Navajo Nation. The Four Corners coal contract runs through July 6, 2016 with pricing determined using an escalating base-price. Negotiations concerning the coal supply contract are continuing.
In 2010, PNM updated its study of the final reclamation costs for both the surface mines that previously provided coal to SJGS and the current underground mine providing coal and revised its estimates of the final reclamation costs. The estimate for decommissioning the Four Corners mine was also revised in 2010. Based on the most recent estimates, remaining payments for mine reclamation, in future dollars, are estimated to be $49.8 million for the surface mines at both SJGS and Four Corners and $21.5 million for the underground mine at SJGS as of September 30, 2012. At September 30, 2012 and December 31, 2011, liabilities, in current dollars, of $23.5 million and $26.5 million for surface mine reclamation and $4.4 million and $4.2 million for underground mine reclamation were recorded in other deferred credits. On June 1, 2012, the SJGS owners entered into a trust funds agreement to provide funding to compensate SJCC for post-term reclamation obligations under the coal sales agreement. The trust funds agreement requires each owner to enter into an individual trust agreement with a financial institution as trustee, create an irrevocable trust, and deposit initial funding into the trust by August 30, 2012. Thereafter, deposits, which are based on funding curves, must be made on an annual basis. PNM made its initial funding requirement of $2.6 million in August 2012 and estimates funding an additional $0.8 million by December 31, 2012.
PNM collects a provision for surface and underground mine reclamation costs in its rates. The NMPRC has capped the amount that can be collected from ratepayers for final reclamation of the surface mines at $100.0 million. Previously, PNM recorded a regulatory asset for the $100.0 million and recovers the amortization of this regulatory asset in rates. If future estimates increase the liability for surface mine reclamation, the excess would be expensed at that time.
San Juan Underground Mine Fire Incident
On September 9, 2011, a fire was discovered at the underground mine owned and operated by SJCC that provides coal for SJGS. The federal Mine Safety and Health Administration (“MSHA”) was notified of the incident. On September 12, 2011, SJCC informed PNM that the fire was extinguished. However, MSHA required sealing the incident area and confirmation of a noncombustible environment before allowing re-entry of the sealed area. SJCC regained entry into the sealed area of the mine in early March 2012. At that time, MSHA conducted a root cause analysis inspection of the incident area, but has not yet issued its report. SJCC has completed inspection of the mine equipment and reported no significant damage. SJCC removed the equipment from the impacted mine panel and reassembed it at a new panel face. On May 4, 2012, SJCC received approval from MSHA and resumed longwall mining operations. However, if further difficulties occur in the longwall mining operation, PNM and the other owners of SJGS would need to consider alternatives for operating SJGS, including running at less than full capacity or shutting down one or more units, the impacts of which cannot be determined at the current time.
The costs of the mine recovery flow through the cost-reimbursable component of the coal supply agreement. PNM anticipates that it will recover through its FPPAC the portion of such costs attributable to its customers subject to New Mexico regulation. The staff of the NMPRC has requested that PNM provide information segregating the impacts of this incident on the FPPAC. PNM's filings with the NMPRC reflect a preliminary estimate that this incident increased the deferral under the FPPAC

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through April 30, 2012 by $17.3 million. Based on information PNM has received from SJCC to date, PNM does not expect the mine fire to have a material effect on its financial condition, results of operations, or cash flows.
Nuclear Fuel
The PVNGS participants are continually identifying their future nuclear fuel resource needs and negotiating arrangements to fill those needs. In late August 2012, one of PVNGS's suppliers that converts uranium concentrates to uranium hexafluoride invoked the force majeure provision in its contract when it shut down its conversion plant due to regulatory compliance issues. The PVNGS participants have sufficient strategic reserves of enriched uranium such that they do not anticipate a short-term impact on nuclear fuel supplies as a result of the force majeure declaration. The PVNGS participants are evaluating alternate long-term options for securing conversion services.
PVNGS Liability and Insurance Matters
The PVNGS participants have insurance for public liability exposure for a nuclear incident totaling $12.6 billion per occurrence. Commercial insurance carriers provide $375 million and $12.2 billion is provided through a mandatory industry wide retrospective assessment program. If losses at any nuclear power plant covered by the program exceed the accumulated funds, PNM could be assessed retrospective premium adjustments. Based on PNM's 10.2% interest in each of the three PVNGS units, PNM's maximum potential assessment per incident for all three units is $36.0 million, with an annual payment limitation of $5.4 million.
The PVNGS participants maintain “all risk” (including nuclear hazards) insurance for damage to, and decontamination of, property at PVNGS in the aggregate amount of $2.75 billion, a substantial portion of which must first be applied to stabilization and decontamination. These coverages are provided by Nuclear Electric Insurance Limited (“NEIL”). If NEIL's losses in any policy year exceed accumulated funds, PNM is subject to retrospective assessments of $4.3 million for each retrospective assessment declared by NEIL's Board of Directors. The insurance coverages discussed in this and the previous paragraph are subject to policy conditions and exclusions.

Water Supply
Because of New Mexico's arid climate and periodic drought conditions, there is concern in New Mexico about the use of water, including that used for power generation. PNM has secured groundwater rights in connection with the existing plants at Reeves Station, Delta, Valencia, Afton, Luna, and Lordsburg. Water availability does not appear to be an issue for these plants at this time.
PNM, APS, and BHP have undertaken activities to secure additional water supplies for SJGS, Four Corners, and related mines to accommodate the possibility of inadequate precipitation in coming years. Since 2004, PNM has entered into agreements for voluntary sharing of the impacts of water shortages with tribes and other water users in the San Juan basin. The current agreements run through December 31, 2012 and renewals have been negotiated, but not fully executed. In addition, in the case of water shortage, PNM, APS, and BHP have reached agreement with the Jicarilla Apache Nation on a long-term supplemental contract relating to water for SJGS and Four Corners that runs through 2016. Although the Company does not believe that its operations will be materially affected by drought conditions at this time, it cannot forecast the weather or its ramifications, or how policy, regulations, and legislation may impact the Company should water shortages occur in the future.
In April 2010, APS signed an agreement on behalf of the PVNGS participants with five cities to provide cooling water essential to power production at PVNGS for the next forty years.
PVNGS Water Supply Litigation
In 1986, an action commenced regarding the rights of APS and the other PVNGS participants to the use of groundwater and effluent at PVNGS. APS filed claims that dispute the court's jurisdiction over PVNGS' groundwater rights and their contractual rights to effluent relating to PVNGS and, alternatively, seek confirmation of those rights. In 1999, the Arizona Supreme Court issued a decision finding that certain groundwater rights may be available to the federal government and Indian tribes. In addition, the Arizona Supreme Court issued a decision in 2000 affirming the lower court's criteria for resolving groundwater claims. Litigation

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(Unaudited)


on these issues has continued in the trial court. No trial dates have been set in these matters. PNM does not expect that this litigation will have a material impact on its results of operation, financial position, or cash flows.
San Juan River Adjudication
In 1975, the State of New Mexico filed an action in New Mexico District Court to adjudicate all water rights in the San Juan River Stream System. PNM was made a defendant in the litigation in 1976. The action is expected to adjudicate water rights used at Four Corners and SJGS. In 2005, the Navajo Nation and various parties announced a settlement of the Navajo Nation's surface water rights. In March 2009, President Obama signed legislation confirming the settlement with the Navajo Nation. Under the terms of the settlement agreement, the Navajo water rights would be settled and finally determined by entry by the court of two proposed adjudication decrees.  The court has ordered that settlement of the Navajo Nation's claims under the settlement agreement and entry of the proposed decrees be heard in an expedited proceeding. 
PNM's water rights in the San Juan Basin may be affected by the rights recognized in the settlement agreement as being owned by the Navajo Nation (which comprise a significant portion of water available from sources on the San Juan River and in the San Juan Basin). Therefore, PNM has elected to participate in this proceeding.  The Company is unable to predict the ultimate outcome of this matter or estimate the amount or range of potential loss and cannot determine the effect, if any, of any water rights adjudication on the present arrangements for water at SJGS and Four Corners. Final resolution of the case cannot be expected for several years. An agreement reached with the Navajo Nation in 1985, however, provides that if Four Corners loses a portion of its rights in the adjudication, the Navajo Nation will provide, for an agreed upon cost, sufficient water from its allocation to offset the loss.
Complaint Against Southwestern Public Service Company
In September 2005, PNM filed a complaint under the Federal Power Act against SPS. PNM argued that SPS had been overcharging PNM for deliveries of energy through its fuel cost adjustment clause practices. PNM also intervened in a proceeding brought by other customers raising similar arguments relating to SPS' fuel cost adjustment clause practices (the “Golden Spread proceeding”). In April 2008, FERC issued its order in the Golden Spread proceeding. FERC affirmed the decision of an ALJ that SPS violated its fuel cost adjustment clause tariffs. However, FERC shortened the refund period applicable to the violation of the fuel cost adjustment clause issues. PNM and SPS have filed petitions for rehearing and clarification of the scope of the remedies that were ordered and reversal of various rulings in the order. FERC has not yet acted upon the requests for rehearing or clarification and they remain pending further decision. PNM cannot predict the final outcome of the case at FERC or the range of possible outcomes.
Begay v. PNM et al
A putative class action was filed against PNM and other utilities in February 2009 in the U.S. District Court in Albuquerque. Plaintiffs claim to be allottees, members of the Navajo Nation, who pursuant to the Dawes Act of 1887, were allotted ownership in land carved out of the Navajo Nation. Plaintiffs, including an allottee association, make broad, general assertions that defendants, including PNM, are rights-of-way grantees with rights-of-way across the allotted lands and are either in trespass or have paid insufficient fees for the grant of rights-of-way or both.  The plaintiffs, who have sued the defendants for breach of fiduciary duty, seek a constructive trust. They have also included a breach of trust claim against the United States and its Secretary of the Interior.  PNM and the other defendants filed motions to dismiss this action. In March 2010, the court ordered that the entirety of the plaintiffs' case be dismissed. The court did not grant plaintiffs leave to amend their complaint, finding that they instead must pursue and exhaust their administrative remedies before seeking redress in federal court. 
In May 2010, Plaintiffs filed a Notice of Appeal with the Bureau of Indian Affairs ("BIA"), which was denied by the BIA Regional Director. In May 2011, plaintiffs appealed the Regional Director's decision to the DOI Board of Appeals. Briefings on the merits of the appeal are complete and a decision is pending. PNM is participating in order to preserve its interests regarding any PNM-acquired rights-of-way implicated in the appeal. PNM cannot predict the outcome of the proceeding or the range of potential outcomes at this time.

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Transmission Issues
Cargill Complaint
In April 2010, Cargill Power Markets, LLC (“Cargill”) filed a complaint with FERC, asserting that PNM improperly processed its transmission service queue and unfairly invalidated a transmission service request by Cargill. In July 2010, FERC issued an order establishing a schedule for hearing and settlement procedures. In its order, FERC determined that PNM had improperly invalidated a single Cargill transmission service request submitted in February 2008 and set the issue for hearing to determine an appropriate remedy. In August 2010, Cargill filed a motion for rehearing. In January 2011, PNM and Cargill filed a settlement agreement with FERC in which PNM agreed to pay Cargill $0.2 million and put Cargill's transmission service request back into the queue. The settlement also left Cargill's rehearing motion in place before FERC. One intervenor in the proceeding contested the settlement. In December 2011, FERC issued an order approving the settlement as filed but requiring a compliance filing to modify the standard of review for third parties and FERC. Pursuant to the December 2011 order, the settlement agreement has been modified to reflect the change to the standard of review and was filed with FERC in March 2012. On May 25, 2012, FERC issued an order accepting the modified settlement agreement. PNM paid the $0.2 million in July 2012. On October 9, 2012, Cargill made a filing urging FERC to rule on Cargill's outstanding motion for rehearing. FERC has not ruled on Cargill's outstanding motion for rehearing. PNM is unable to predict the final outcome of this matter at FERC.

TGP Complaint
On March 2, 2012, TGP Granada, LLC and its affiliate (collectively, “TGP”) filed a complaint at FERC against PNM and Tortoise Capital Resources Corp. (“TTO”). PNM owns 60% of the EIP and leases the other 40% from TTO. TGP's filing requested FERC to direct PNM and TTO to identify the party that will immediately assume the obligation of making transmission capacity on the EIP available to customers for use after the April 1, 2015 expiration of the EIP lease agreement. TGP also requested a declaratory order or waiver regarding certain provisions of PNM's Open Access Transmission Tariff to allow its affiliate to change the point-of-receipt associated with a transmission service agreement related to the EIP without losing its transmission service priority.
PNM's lease of the portion of the EIP owned by TTO expires on April 1, 2015. The lease provides PNM the options (“End-of-Lease Options”), with 24 months advance notice, of purchasing the leased assets at the end of the lease for fair market value, or purchasing the leased assets prior to the lease expiration at the greater of fair market value and stipulated values contained in the lease. The lease also allows PNM to renew the lease for a series of terms with lease payments at the fair market value rate and provides PNM the option, if certain conditions are met, to renew the lease at 50% of the current lease payments for a maximum term to be calculated at the end of the initial lease term.
On April 2, 2012, PNM filed its response to TGP's complaint. PNM argued that the claims in the complaint are without legal merit, but took no position on the declaratory order or waiver request. On July 2, 2012, PNM notified TTO that PNM does not intend to invoke any of the End-of-Lease Options and that PNM is evaluating whether any NMPRC approvals are required in order to finalize its decision not to invoke any End-of-Lease Options. On July 3, 2012, PNM informed FERC that PNM had notified TTO of its election. On July 5, 2012, FERC issued an order denying TGP's requests for declaratory order and waiver. In addition, FERC directed PNM, in consultation with TTO, to identify the party that will provide long-term transmission service over the leased portion of the EIP within 30 days of the date of FERC's order. On August 13, 2012, FERC granted PNM's and TTO's requests for an additional 30 days to identify the party that will provide long-term transmission service over the leased portion of the EIP.
On September 5, 2012, PNM filed an informational filing with FERC stating that PNM and TTO had reached an agreement in principle setting out the terms and conditions under which PNM would exercise its option to purchase the 40% leased capacity as provided under the lease on April 1, 2015 and provide long-term transmission service on the leased capacity after April 1, 2015. PNM's informational filing also stated that PNM and TTO would use their reasonable best efforts to execute a definitive purchase agreement by October 31, 2012 and, within fourteen days of such date of execution, to request FERC approval(s) of the purchase agreement.  On October 9, 2012, TGP filed comments requesting that FERC direct PNM and TTO to conclude their negotiations expeditiously and ensure that the leased capacity is being made available to transmission customers now for use on a long-term basis pursuant to FERC's open access requirements. On November 1, 2012, PNM and TTO entered into a definitive agreement for PNM to exercise the option to purchase on April 1, 2015 the leased capacity at fair market value, which the parties agreed

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would be $7.7 million. The definitive agreement sets forth the terms and conditions under which PNM would also assume responsibility for scheduling long-term transmission service on the leased capacity. The agreement is subject to FERC approval and could be challenged by other parties. PNM cannot predict the outcome of this proceeding.

(10)
Regulatory and Rate Matters
The Company is involved in various regulatory matters, some of which contain contingencies that are subject to the same uncertainties as those described in Note 9. Additional information concerning regulatory and rate matters is contained in Note 17 of the Notes to Consolidated Financial Statements in the 2011 Annual Reports on Form 10-K.
PNM

Renewable Portfolio Standard
The REA establishes a mandatory RPS requiring a utility to acquire a renewable energy portfolio equal to 5% of retail electric sales by January 1, 2006, increasing to 10% by 2011, 15% by 2015, and 20% by 2020. The NMPRC requires renewable energy portfolios to be “fully diversified” beginning in 2011, with at least 20% from wind energy, 20% from solar energy, 10% from other renewable technologies, and 1.5% from distributed generation with the distributed generation component increasing to 3% in 2015. The REA provides for streamlined proceedings for approval of utilities' renewable energy procurement plans, assures utilities recovery of costs incurred consistent with approved procurement plans, and requires the NMPRC to establish a RCT for the procurement of renewable resources to prevent excessive costs being added to rates. The NMPRC has established a RCT for 2011 of 2% of all customers' aggregated overall annual electric charges that increases by 0.25% annually until reaching 3% in 2015. The NMPRC has docketed a new rulemaking to determine the appropriate calculation methodology of the RCT and whether the RCT level should be increased. The rulemaking also proposes changes to the RPS diversity requirements. A hearing on the RCT level was held on October 24, 2012.
In July 2010, PNM filed its renewable energy procurement plan for 2011. The NMPRC ultimately rejected PNM's proposal to satisfy its 2011 RPS requirement through the purchase of wind RECs and ordered PNM to procure actual wind energy in 2011. While the rejection of RECs was under appeal at the New Mexico Supreme Court, PNM procured the wind energy as ordered in 2011. PNM requested a variance from the diversity requirements for solar and certain “other resources” for 2011 based on the RCT and availability constraints, which the NMPRC granted conditioned upon PNM including in its 2012 procurement plan a proposal that would meet the diversity requirements by April 5, 2013. On June 7, 2012, the New Mexico Supreme Court dismissed the appeal as moot because the energy had been procured.
In July 2011, PNM filed its renewable energy procurement plan for 2012. The plan requested a variance from the RPS due to RCT limitations. The plan was diversity-compliant based on the reduced RPS, except for non-wind/non-solar resources, which were not currently available. In December 2011, the NMPRC approved PNM's 2012 plan with modifications. Under the modified plan, PNM must propose to spend $0.9 million more on renewable procurements in 2012 than it originally proposed. If PNM's proposed additional procurements are approved by the NMPRC, the resulting portfolio of renewable resources will constitute approximately 7.3% of PNM's energy sales in 2012, which is less than the statutory RPS of 10% due to the RCT. The NMPRC has not acted on the proposed additional procurements. The NMPRC also required PNM to file a supplemental plan by April 30, 2012, within which PNM was authorized to include an early filing of its 2013 renewable energy procurement plan proposing procurements to meet the 10% RPS by 2014 or sooner. PNM made the required filing on April 30, 2012, which included its renewable energy procurement plan for 2013. The 2013 plan proposes procurements for 2013 and 2014 of 20 MW of PNM-owned solar PV facilities, wind and solar REC purchases in 2013, and a purchased power agreement for the output of a new geothermal facility. The estimated cost of the new 20 MW of solar PV capacity is $45.5 million. If the proposed projects are approved and develop as planned, PNM will comply with the statutory RPS amount in 2013, but will require a variance from the NMPRC's diversity requirements in 2013 while the proposed geothermal facilities are being constructed. This plan is expected to achieve full RPS quantity and diversity compliance by 2014 without exceeding the RCT. A hearing on the 2013 plan was held September 4, 2012 and a final order is expected by November 30, 2012.
PNM is unable to predict the outcome or impact of these matters. PNM is recovering certain renewable procurement costs from customers through a rate rider. See Renewable Energy Rider below.

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PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Energy Efficiency and Load Management
Program Costs
Public utilities are required to obtain NMPRC approval to implement energy efficiency and load management programs. Costs to implement approved programs are recovered through a rate rider. On October 5, 2012, PNM filed an energy efficiency program application for programs to be offered beginning in May 2013. The filing included proposed program costs of $22.5 million plus proposed profit incentive adder revenues of $4.2 million. PNM requested that the NMPRC issue an order in this matter by April 1, 2013. Additional information concerning the program costs is contained in Note 17 of the Notes to Consolidated Financial Statements in the 2011 Annual Reports on Form 10-K.
Disincentives/Incentives Adder
The Efficient Use of Energy Act requires the NMPRC to remove utility disincentives to implementing energy efficiency and load management programs and to provide incentives for such programs. A rule approved by the NMPRC authorized electric utilities to collect rate adders of $0.01 per KWh for lifetime energy savings and $10 per KW for demand savings related to energy efficiency and demand response programs beginning in 2010. The NMAG and NMIEC appealed the NMPRC order adopting this rule to the New Mexico Supreme Court. PNM began implementing a rate rider under the rule to collect adders related to its 2010 program savings in December 2010 while the appeal of the rule was pending. In July 2011, the Supreme Court annulled and vacated the order adopting the rule and remanded the matter to the NMPRC. As a result of the Supreme Court decision, PNM filed revised tariffs and ceased collecting this adder for 2010 program savings on August 21, 2011. Of the $4.2 million authorized for recovery, $2.6 million was collected through August 20, 2011.
 
In June 2011, prior to the Supreme Court decision, the NMPRC approved PNM-specific adders of $0.002 per KWh and $4 per KW for savings due to programs implemented in 2011. PNM is presently collecting $1.3 million in adder revenues consistent with this order. After the Supreme Court decision vacating the rule, the NMPRC initiated a proceeding to determine whether PNM should be required to cease collecting the adders and to refund all adder revenues collected since December 2010. In November 2011, the NMPRC issued orders that PNM is not required to refund any adder revenues and is authorized to continue collecting the adders. However, in an order on rehearing, which it subsequently rescinded, the NMPRC further reduced the amount of the authorized adders. Prior to the rescission, PNM appealed the rehearing order to the Supreme Court. In March 2012, the Supreme Court granted PNM's motion to vacate the rehearing order and dismiss PNM's appeal. In a separate appeal and writ proceeding in the Supreme Court, NMIEC and the NMAG seek to overturn the NMPRC order allowing PNM to continue to collect adders in light of the 2011 Supreme Court decision. On May 21, 2012 the Supreme Court dismissed the writ proceeding. Oral arguments on the appeal are scheduled for December 10, 2012 before the Supreme Court and a decision in the appeal is expected in 2013. PNM is unable to predict the outcome of the appeal.

Decoupling Rulemaking

On May 15, 2012, the NMPRC issued a NOPR that would amend the NMPRC's energy efficiency rule to authorize use of a decoupling mechanism to recover certain fixed costs of providing retail electric service from the rates charged on a per KWh of consumption, as the mechanism for removal of disincentives associated with the implementation of energy efficiency programs. The proposed mechanism was generally consistent with the decoupling proposal that PNM included, and subsequently agreed to withdraw, in its 2010 Electric Rate Case application. The proposed rule addressed both disincentives and incentives associated with energy efficiency. On July 26, 2012, the NMPRC closed the proposed rulemaking and opened a new energy efficiency rulemaking that may address decoupling and incentives. Workshops to develop a proposed rule have been held, but no order proposing a rule has been issued. PNM is unable to predict the outcome of this matter.
 
2010 Electric Rate Case
PNM filed its 2010 Electric Rate Case application with the NMPRC in June 2010 to increase rates for its New Mexico retail customers. On August 21, 2011, PNM implemented a $72.1 million annual increase in rates as authorized by an order of the NMPRC, which modified a stipulation agreed to by PNM and several other parties. The amended stipulation allows PNM to file a new general rate case for rates to be effective as soon as July 1, 2013. In addition, the stipulation limits the amount that can be recovered on an annual basis for fuel costs, renewable energy costs, and energy efficiency costs during certain years as described in the stipulation. Recovery of costs in excess of the limits is to be deferred for recovery, without carrying costs, in future periods.

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PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The cap for the FPPAC year beginning July 1, 2012 is $38.8 million, which PNM began collecting at that time. PNM estimates that at June 30, 2013 approximately $28.8 million of FPPAC costs incurred will be deferred for future collection. Costs attributed to the mine fire incident discussed in Note 9 are included in the FPPAC amounts. Additional information concerning the 2010 Electric Rate Case is contained in Note 17 of the Notes to Consolidated Financial Statements in the 2011 Annual Reports on Form 10-K.
Renewable Energy Rider
In January 2012, PNM filed an application for a rate rider that PNM proposed would go into effect in August 2012 to collect costs for renewable energy procurements incurred after December 31, 2010 that are not otherwise being collected in rates. These costs include the procurement of solar RECs from customers, wind resource procurements during November and December 2011 as ordered by the NMPRC, and the revenue requirements for PNM-owned solar PV facilities and a solar battery storage demonstration project that went into service during 2011. The rider's rate for 2012 would be set at 2.081% of the retail customer's monthly bill. The rate would be reset to 2.695% as of January 1, 2013 to reflect unrecovered costs from 2012 and projected costs to be incurred in 2013. The rider would terminate upon a final order in PNM's next general rate case unless that order authorized a continuation of the rider. Amounts that can be collected under the proposed rider are capped at $18.0 million in 2012 and $24.6 million in 2013 under the stipulation in PNM's 2010 Electric Rate Case. Any amounts above the caps are deferred for future recovery without carrying costs. As a separate component of the rider, PNM proposes that if its earned return on jurisdictional equity in 2013 exceeds 10.5%, it would refund to customers during May through December 2014 the amount over 10.5%. On August 14, 2012, the NMPRC issued an order approving the rider with modifications. The NMPRC ordered that the rider be billed on a per KWh basis, rather than as a percentage of the bill. The approved rate is $0.0022335 per KWh in 2012 and $0.0028371 per KWh in 2013. The order disapproved the recovery of the cost of the supplemental procurement ordered by the NMPRC in the 2012 procurement plan because the NMPRC had not acted on the specific $0.9 million procurement proposed by PNM, which is discussed under Renewable Portfolio Standard above. In October 2012, a motion by an intervenor for rehearing was granted in part by the NMPRC to clarify that no separate hearing is required prior to increasing the rider rate for new procurements if a legally appropriate hearing on the increase was conducted as part of the hearing on the procurement plan. PNM implemented the rider on August 20, 2012.
2011 Integrated Resource Plan
NMPRC rules require that investor owned utilities file an IRP every three years. The IRP is required to cover a 20-year planning period and contain an action plan covering the first four years of that period. In its most recent IRP, which was filed in July 2011, PNM indicated that it planned to meet its anticipated load growth through a combination of new natural gas-fired generating plants, renewable energy resources, load management, and energy efficiency programs. However, PNM has not entered into any commitments regarding these plans beyond what is otherwise described herein. As required by NMPRC rules, PNM utilized a public advisory group process during the development of the 2011 IRP. Two protests were filed to the IRP requesting rejection of the plan. The NMPRC assigned the case to a Hearing Examiner and designated a mediator to facilitate negotiations. The NMPRC staff filed a motion in December 2011 to dismiss the protests and terminate the proceeding on the ground that PNM's IRP fully complies with NMPRC rules. PNM is unable to predict the outcome of this matter.
Emergency FPPAC
In 2008, the NMPRC authorized PNM to implement an Emergency FPPAC from June 2, 2008 through June 30, 2009. The NMPRC order approving the Emergency FPPAC also provided that if PNM's base load generating units did not operate at or above a specified capacity factor and PNM was required to obtain replacement power to serve jurisdictional customers, PNM would be required to make a filing with the NMPRC seeking approval of the replacement power costs. In its required filing, PNM stated that the costs of the replacement power amounting to $8.0 million were prudently incurred and made a motion that they be approved. The NMPRC staff opposed PNM's motion and recommended that PNM be required to refund the amount collected. Auditors selected by the NMPRC found that PNM was prudent in operating its base load units and in securing replacement power but had not obtained prior NMPRC approval in the manner required by the NMPRC order. PNM continues to assert that its recovery of replacement power costs was proper and did not violate the NMPRC's order. The NMPRC has not ruled on this matter. Under the terms of the approved stipulation in the 2010 Electric Rate Case, the parties to the stipulation, including the NMPRC staff, jointly requested that the NMPRC take no further action in this matter and close the docket. No party has opposed that request. PNM is unable to predict the outcome of this matter.

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PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Transmission Rate Case
In October 2010, PNM filed a notice with FERC to increase its wholesale electric transmission revenues by $11.1 million annually, based on a return on equity of 12.25%. The filing also seeks to revise certain Open Access Transmission Tariff provisions and bi-lateral contractual terms.  If approved, the rate increase would apply to all of PNM's wholesale electric transmission service customers, which include other utilities, electric cooperatives, and entities that use PNM's transmission system to transmit power at the wholesale level.  The proposed rate increase would not impact PNM's retail customers. In December 2010, FERC issued an order accepting PNM's filing and suspending the proposed tariff revisions for five months. The proposed rates were implemented on June 1, 2011, subject to refund. On July 3, 2012, PNM filed an unopposed settlement agreement with the FERC. Under the settlement agreement, PNM would increase transmission service revenues by $2.9 million annually and would refund amounts collected in excess of the settled rates. In addition, the parties agreed that if PNM files for a formula based rate change within one year from FERC's approval of the settlement agreement, no party will oppose the general principle of a formula rate, although the parties may still object to particular aspects of the formula. The ALJ has certified the settlement, which is subject to FERC approval. PNM is unable to predict the outcome of this proceeding.
Firm-Requirements Wholesale Customer Rate Case
In September 2011, PNM filed an unexecuted amended sales agreement between PNM and NEC with FERC. The agreement proposes a cost of service based rate for the electric service and ancillary services PNM provides to NEC, which would result in an annual increase of $8.7 million or a 39.8% increase over existing rates. PNM also requested a FPPAC and full recovery of certain third-party transmission charges PNM incurs to serve NEC. NEC filed a protest to PNM's filing with FERC. In November 2011, FERC issued an order accepting the agreement as filed, suspending the effective date for a five-month period, to be effective April 14, 2012, subject to refund, and set the proceeding for settlement. On June 25, 2012, the FERC settlement judge issued a settlement status report stating the parties had reached a settlement in principle and recommending that the settlement process be continued. The parties are currently working on finalizing the settlement. The finalized settlement would be subject to FERC approval. PNM is unable to predict the outcome of this proceeding.
TNMP
Interest Rate Compliance Tariff
Following a revision of the interest rate on TNMP's CTC, TNMP filed a compliance tariff to implement the new lower 8.31% rate. Intervenors asserted objections and, after regulatory proceedings, the PUCT issued an order making the new rate retroactive to July 20, 2006. TNMP successfully appealed to the District Court in Austin, Texas for the new rate not to be effective prior to December 27, 2007. However, the Texas 3rd Court of Appeals reversed the District Court and reaffirmed the PUCT's decision. Due to the new retroactive ratemaking theory contained in the Texas 3rd Court of Appeals opinion, TNMP recorded a pre-tax regulatory disallowance of $3.9 million in the three months ended June 30, 2011 to reflect the impact of applying the 8.31% rate retroactively. TNMP petitioned the Texas Supreme Court for review in July 2011. On June 8, 2012, the Texas Supreme Court denied TNMP's petition for review. TNMP filed a motion for rehearing on June 25, 2012, which was denied in August 2012 concluding this matter.
Advanced Meter System Deployment and Surcharge Request
In July 2011, the PUCT approved a settlement and authorized an advanced meter deployment plan that permits TNMP to collect $113.3 million in deployment costs through a surcharge over a 12-year period. TNMP began collecting the surcharge on August 11, 2011. Deployment of advanced meters began in September 2011 and is scheduled to be completed over a 5-year period. In February 2012, the PUCT opened a proceeding to consider the feasibility of an “opt-out” program for retail consumers that wish to decline receipt of an advanced meter. The PUCT has requested comments and convened a public meeting to hear various issues. No proposal or decision has yet been announced by the PUCT. However, various individuals filed a petition with the PUCT seeking a moratorium on any advanced meter deployment. The PUCT denied the petition and an appeal was filed with the Texas District Court on September 28, 2012. Any opt-out program would apply to all transmission and distribution utilities in ERCOT. TNMP cannot predict the outcome or effect of this proceeding.

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PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Remand of ERCOT Transmission Rates for 1999 and 2000

Following a variety of appeals, the ERCOT transmission rates approved in 1999 and 2000 were remanded back to the PUCT. These dockets concern the recalculation of rates for the fourth quarter of 1999 and all of 2000. In October 2011, TNMP joined in a non-unanimous settlement of the issues relating to resettlement of the last four months of 1999. In January 2012, the PUCT approved the non-unanimous settlement. TNMP received $1.6 million under the settlement. In June 2012, TNMP filed its transmission cost recovery factor filing (“TCRF") seeking $3.2 million in additional transmission costs. The PUCT staff requested a hearing asserting the settlement proceeds from the 1999 remand settlement need to be credited against the costs TNMP requested in its TCRF. TNMP maintains that the settlement proceeds should not be passed on to customers since TNMP was unable to recover those costs in 1999. Subsequently, the PUCT staff agreed to interim rate relief permitting TNMP to add $1.6 million in uncontested costs to its existing TCRF and add $1.6 million in costs in a subsequent TCRF if TNMP is successful in the contested case. The ALJ approved the interim relief on July 16, 2012. TNMP implemented the interim rates on September 1, 2012. On September 26, 2012, the contested portion of the case was remanded back to the PUCT pursuant to a joint motion of TNMP and PUCT staff. The joint filing represents an agreed resolution that permits the $1.6 million in interim rates to become final and authorizes TNMP to institute a surcharge in March 2013 to collect the additional $1.6 million in initially disputed costs plus interest at the PUCT under-billing rate. The matter is pending approval from the PUCT.  TNMP cannot predict the ultimate outcome of this matter.

Transmission Cost of Service Rates

On August 23, 2012, TNMP filed an application to update its transmission rates to reflect changes in its invested capital. The requested increase in total rate base is $26.4 million, which will increase revenues $2.5 million annually. The proposed rates reflect the addition and retirement of transmission facilities, including depreciation, federal income tax, and other associated taxes, and the approved rate of return on such facilities. The PUCT approved the interim adjustment and TNMP implemented it on September 27, 2012.

(11)
Optim Energy

Additional information concerning Optim Energy is discussed in Note 21 of the Notes to Consolidated Financial Statements in the 2011 Annual Reports on Form 10-K. PNMR and ECJV each had a 50 percent ownership interest in Optim Energy, a limited liability company, until September 23, 2011, when Optim Energy was restructured and PNM's interest was reduced to 1%. On January 4, 2012, ECJV exercised its option to acquire PNMR's remaining 1% ownership interest in Optim Energy at fair market value, which was determined to be zero. PNMR accounted for its investment in Optim Energy using the equity method of accounting until September 23, 2011 and then used the cost method through January 4, 2012. PNMR Services Company provided certain corporate services to Optim Energy through December 31, 2011 and is continuing to provide services with respect to certain open tax matters.

PNMR fully impaired its investment in Optim Energy at December 31, 2010 and, in accordance with GAAP, did not recognize losses of Optim Energy from January 1, 2011 through September 23, 2011, when PNMR ceased to account for its investment using the equity method of accounting. Accordingly, Optim Energy had no impact on PNMR's December 31, 2011 balance sheet or the statements of earnings and statements of cash flows for 2012 and 2011. Therefore, summarized financial information for Optim Energy is not presented.

(12)
Related Party Transactions

PNMR, PNM, and TNMP are considered related parties as defined under GAAP. TNMP provides transmission and distribution services to First Choice. On November 1, 2011, PNMR sold First Choice. TNMP revenues from First Choice through October 31, 2011 were related party revenues and included in the table below. PNMR Services Company provides corporate services to PNMR and its subsidiaries in accordance with shared services agreements. Optim Energy was a related party prior to September 23, 2011. PNMR Services Company provided corporate services to Optim Energy under a services agreement. There was also a services agreement for Optim Energy to provide services to PNMR. See Note 11 for information concerning Optim Energy.


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PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The table below summarizes the nature and amount of related party transactions of PNMR, PNM, and TNMP:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Electricity, transmission and distribution related services billings:
 
 
 
 
 
 
 
TNMP to PNMR
$

 
$
12,196

 
$

 
$
30,608

Services billings:
 
 
 
 
 
 
 
PNMR to PNM
22,143

 
24,680

 
68,030

 
70,849

PNMR to TNMP
6,439

 
7,295

 
20,206

 
21,250

PNM to TNMP
184

 
40

 
473

 
327

TNMP to PNMR
4

 
48

 
12

 
145

PNMR to Optim Energy

 
1,277

 

 
4,083

Optim Energy to PNMR

 
4

 

 
23

Interest billings:
 
 
 
 
 
 
 
PNMR to TNMP
22

 
8

 
72

 
36

PNMR to PNM

 
9

 
1

 
45

PNM to PNMR
45

 
33

 
134

 
97

Income tax sharing payments:
 
 
 
 
 
 
 
PNMR to PNM

 

 
63,114

 

PNMR to TNMP

 

 
1,952

 


(13)
New Accounting Pronouncements

Information concerning recently issued accounting pronouncements that have not been adopted by the Company and could have a material impact is presented below.

Accounting Standards Update 2011-11 - Balance Sheet: Disclosures about Offsetting Assets and Liabilities

The FASB released amended guidance that will require entities to disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. In addition, the update requires disclosure of collateral received and posted in connection with master netting agreements or similar agreements. The update is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods therein. The disclosures required by this amendment will be applied retrospectively for all comparative periods presented. The Company does not believe this guidance will have a material impact on the Company's financial statements and will comply with the disclosure requirements in 2013.

(14)
Sale of First Choice
On September 23, 2011, PNMR entered into an agreement for the sale of First Choice to Direct LP, Inc. for $270.0 million, subject to adjustment to reflect the amounts of certain components of working capital at closing. Closing occurred on November 1, 2011, with PNMR receiving $329.3 million, which included an estimate of the components of working capital. For accounting purposes, the sale was effective as of the close of business on October 31, 2011. PNMR recognized a pre-tax gain of $174.9 million on the sale. In early 2012, the purchaser asserted that the amount paid at closing for working capital at October 31, 2011 was overstated by $2.4 million. PNMR responded disputing the purchaser's calculation and indicating that the amount paid at closing for working capital at October 31, 2011 was understated by $5.8 million. In accordance with the agreement for the sale, this matter was submitted to an independent party for a decision binding on the parties. A decision was received in August 2012. The decision resulted in PNMR being awarded $6.4 million of the $8.2 million in dispute. PNMR recorded an additional pre-tax gain of $1.0 million, which is included in other income in the three months ended September 30, 2012. PNMR Services Company provided

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PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


certain services at cost to First Choice for a transitional period through August 1, 2012. Because PNMR continues to have direct cash flows resulting from transmission and distribution services provided by TNMP to First Choice, First Choice is not reflected as discontinued operations. After October 31, 2011, TNMP's revenues from First Choice are not intercompany and are not eliminated in consolidation by PNMR.

(15)
Goodwill and Other Intangible Assets

The excess purchase price over the fair value of the assets acquired and the liabilities assumed by PNMR for its June 6, 2005 acquisition of TNP was recorded as goodwill and was pushed down to the businesses acquired. In 2007, the TNMP assets that were included in its New Mexico operations, including goodwill, were transferred to PNM. Additionally, the trade name “First Choice” and the First Choice customer list were acquired in the TNP acquisition. The trade name was considered to have an indefinite useful life; therefore, no amortization was recorded. The useful life of the customer list was estimated to be approximately eight years. As discussed in Note 14, PNMR completed the sale of First Choice on November 1, 2011. As a result, the goodwill and other intangible assets of First Choice are no longer included in PNMR's Condensed Consolidated Balance Sheet and PNMR no longer has any other intangible assets.

GAAP requires the Company to evaluate its goodwill and non-amortizing intangible assets for impairment annually at the reporting unit level or more frequently if circumstances indicate that the goodwill or intangible assets may be impaired. Application of the impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, and determination of the fair value of each reporting unit. A discounted cash flow methodology is primarily used to estimate the fair value of each reporting unit. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of long-term growth rates for the business, and determination of appropriate weighted average cost of capital for each reporting unit. Changes in these estimates and assumptions could materially affect the determination of fair value and the conclusion of impairment for each reporting unit.

For goodwill, the first step of the impairment test requires that the Company compare the fair value of each reporting unit with its carrying value, including goodwill. If as a result of this analysis, the Company concludes there is an indication of impairment in a reporting unit having goodwill, the Company is required to perform the second step of the impairment analysis, determining the amount of goodwill impairment to be recorded. The amount is calculated by comparing the implied fair value of the goodwill to its carrying amount. This exercise would require the Company to allocate the fair value determined in step one to the individual assets and liabilities of the reporting unit. Any remaining fair value would be the implied fair value of goodwill on the testing date. To the extent the recorded amount of goodwill of a reporting unit exceeds the implied fair value determined in step two, an impairment loss would be reflected in results of operations. Prior to 2012, the Company compared the fair value of non-amortizing intangibles other than goodwill to the recorded values.

The annual evaluations performed as of April 1, 2012 and 2011 did not indicate impairments of the goodwill or other intangible assets of any of the Company’s reporting units. Since the annual evaluation, there have been no indications that the fair values of the reporting units with recorded goodwill have decreased below the carrying values. Additional information concerning the Company’s goodwill, other intangible assets, and impairments is contained in Note 23 of Notes to Consolidated Financial Statements in the 2011 Annual Reports on Form 10-K.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition and Results of Operations for PNMR is presented on a combined basis, including certain information applicable to PNM and TNMP. The MD&A for PNM and TNMP is presented as permitted by Form 10-Q General Instruction H (2). This report uses the term “Company” when discussing matters of common applicability to PNMR, PNM, and TNMP. A reference to a “Note” in this Item 2 refers to the accompanying Notes to Condensed Consolidated Financial Statements (Unaudited) included in Item 1, unless otherwise specified. Certain of the tables below may not appear visually accurate due to rounding.

MD&A FOR PNMR

EXECUTIVE SUMMARY
Company Overview and Strategy
PNMR is a holding company with two regulated utilities serving approximately 739,000 residential, commercial, and industrial customers and end-users of electricity in New Mexico and Texas. In the latter part of 2011, PNMR exited both of its competitive businesses, First Choice and Optim Energy, and repositioned itself as a holding company solely operating its electric utilities, PNM and TNMP. Optim Energy had no impact on 2011 results of operations because it was written off in 2010 and PNMR had no further financial commitment to Optim Energy.
Strategic Goals
PNMR is focused on achieving the following strategic goals:

Earning authorized returns on its regulated businesses
Continuing to improve credit ratings
Providing a top-quartile total return to investors

PNMR's success in accomplishing these strategic goals is highly dependent on continued favorable regulatory treatment for its utilities. Both PNM and TNMP seek cost recovery for their investments through general rate cases and various rate riders. The PUCT has approved mechanisms that allow for recovery of capital invested in transmission and distribution projects without having to file a general rate case and allows for more timely recovery of amounts invested in TNMP's systems.
PNM and TNMP completed rate proceedings before their state regulators in 2011. PNM has two rate cases pending before FERC. A settlement in one case is pending FERC approval and an agreement in principle has been reached in the other. In August 2012, the NMPRC approved PNM's application for a renewable energy rider to recover NMPRC approved renewable energy costs. Additional information about rate filings is provided in Note 17 of the Notes to Consolidated Financial Statements in the 2011 Annual Reports on Form 10-K and in Note 10. PNM previously announced that it intended to file a request for an increase in the rates charged to New Mexico retail customers in late 2012, but now anticipates this filing will occur in mid-2013, partially due to the lack of clarity around the timing and amount of capital that will be required for BART at SJGS, as discussed below.

Fair and timely rate treatment from regulators is crucial to achieving PNMR's strategic goals because it leads to PNM and TNMP earning their allowed returns. PNMR believes that if the utilities earn their allowed returns, it would be viewed positively by rating agencies and would further improve credit ratings, which could lower costs to customers. Also, earning allowed returns should result in increased earnings for PNMR, which should lead to increased total returns to investors.

PNM's interest in PVNGS Unit 3 is permanently excluded from NMPRC jurisdictional rates. While PVNGS Unit 3's financial contribution is not calculated in the authorized returns on its regulated business, it impacts PNM's earnings and has demonstrated to be a valuable asset. Power generated from PNM's 134 MW interest in PVNGS Unit 3 is currently sold into the wholesale market and any earnings or losses are attributable to shareholders.


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Exit from Competitive Businesses
As a result of the exit from its competitive businesses, First Choice and Optim Energy, PNMR's business model is centered on its electric utilities. The elimination of the competitive businesses should reduce PNMR's risk and earnings volatility. Additional discussion about the exit from the competitive businesses is found in Notes 2 and 21 of the Notes to Consolidated Financial Statements in the 2011 Annual Reports on Form 10-K.

Business Principles

In addition to its strategic goals, three principles drive PNMR's business strategy and decision-making:

Contribute to the economic vitality of the communities we serve
Demonstrate environmental stewardship
Exhibit social responsibility

In support of these principles, PNMR works closely with customers, stakeholders, legislators, and regulators to ensure that our resource plans and infrastructure investments benefit from robust public dialogue and balance the diverse needs of our communities.
Economic Vitality
PNMR and its utilities are keenly aware of the roles they play in enhancing economic vitality in their New Mexico and Texas service territories. We believe there is a direct connection between electric infrastructure and economic growth. When considering expanding or relocating to other communities, businesses consider energy affordability and energy reliability to be important factors. PNM and TNMP strive to balance service affordability with infrastructure investment to maintain a high level of electric reliability. The utilities also work to ensure that rates reflect actual costs of providing service.
Investing in PNM's and TNMP's infrastructure is critical to ensure reliability and meet future energy needs. Both utilities have long-established records of providing customers with top-tier electric reliability. In September 2011, TNMP began its deployment of smart meters in homes and businesses across its Texas service area. As part of the State of Texas' long-term initiative to create a smart electric grid, the smart meter rollout will ultimately give consumers more energy consumption data and help them make more informed decisions. TNMP's deployment is expected to be completed in 2016.
Environmental Stewardship
For years, PNMR has demonstrated its commitment to environmental stewardship. PNMR's environmental objectives focus on four areas:

Deploying renewable energy
Reducing emissions from existing fossil-fueled power plants
Increasing energy efficiency participation
Reducing waste 
In 2011, PNM completed its $95 million investment in a utility-owned renewable energy project when five utility-scale solar facilities went online. The five solar sites located in Alamogordo, Deming, Los Lunas, Las Vegas, and Albuquerque provide a combined 22 MW of power. A sixth facility, the 500-KW PNM Prosperity Energy Storage Project, uses advanced batteries to store solar power and dispatch the energy either during high-use periods or when solar production is limited. The project features one of the largest combinations of battery storage and PV energy in the nation and involves extensive research and development of smart grid concepts with the Electric Power Research Institute, East Penn Manufacturing Co., Northern New Mexico College, Sandia National Laboratories, and the University of New Mexico. When the facility went online in September 2011, it was the nation's first solar storage facility fully integrated into a utility's power grid.
In addition, PNM's resource portfolio includes the purchase of 200 MW of wind power. PNM also purchases power from a customer-owned distributed solar generation program having an installed capacity of 14 MW at the end of 2011, which capacity is expected to increase to 21 MW by the end of 2012. Distributed generation, wind, and solar power are key means for PNM to meet the RPS established by the REA and related regulations issued by the NMPRC. These rules require a utility to achieve prescribed levels of energy sales from renewable sources within its generation mix, if that can be accomplished without exceeding the RCT cost limit set by the NMPRC, which aims to moderate the cost to consumers when utilities use more renewable resources.

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PNM sought and received a waiver from the NMPRC excusing it from meeting the RPS in 2012 because the cost to achieve the full RPS would exceed the RCT. However, PNM will continue to procure renewable resources while balancing the bill impact to customers in order to meet New Mexico's escalating RPS requirements.
On April 30, 2012, PNM filed its 2013 Renewable Energy Plan, which calls for:

20 MW of PNM-owned solar facilities to be in service by the end of 2013
A 20-year PPA for the output of a 10-MW geothermal facility to be in service by January 1, 2014
Limited wind and solar REC purchases in 2013
The proposed plan would achieve RPS quantity compliance in 2013, but likely will be slightly below the 20% solar renewable energy diversity requirement. However, the plan would achieve full quantity and diversity compliance in 2014 and will be beneath the RCT for both years. A hearing on the proposed plan was held in September 2012 before the NMPRC and a decision is expected by November 30, 2012.
PNM's SJGS near Farmington, New Mexico, is one of the top performers in the nation with respect to mercury removal. The plant outperforms the mercury limit imposed by EPA in the 2011 Mercury and Air Toxics Standards. Major environmental upgrades on each of the four units at SJGS, which were completed in early 2009, have significantly reduced emissions of NOx, SO2, particulate matter, and mercury. PNM's share of the costs of these upgrades was $161 million. Since 2006, SJGS has reduced NOx emissions by 38%, SO2 by 69%, particulate matter by 65%, and mercury by 99%.
In order to keep costs to customers as low as possible while also reducing visibility impairment related to regional haze, PNM has supported the installation of SNCRs at SJGS, a technology also proposed by the State of New Mexico to meet the regional haze regulations. However, EPA issued its FIP requiring SCRs to be installed at SJGS, which PNM estimates would significantly exceed the cost of installing SNCRs. Due to the compliance deadline under the FIP, PNM is preparing to install SCRs at SJGS while simultaneously pursuing two other paths regarding BART at SJGS. PNM is pursuing legal relief in the Tenth Circuit and administrative relief from the EPA regarding the FIP. PNM is also participating in discussions with stakeholders regarding an alternative to the FIP and SIP. See Note 9.
PNM is challenging EPA's proposal in the courts and administratively within EPA. Oral arguments on the court challenge were held October 23, 2012, but no decision has been issued. There is no deadline for a court decision. In July 2012, the NMED established a process to explore whether stakeholders could reach agreement on an alternative to SCRs and SNCRs. PNM supported that process and advocated for alternatives that would cost consumers less than the FIP while also achieving environmental benefits and considering economic impact to New Mexico. In September 2012, NMED proposed an alternative to EPA suggesting the closure of Units 1 and 2 at SJGS and the installation of SNCRs on Units 3 and 4 by the end of 2017. The NMED also suggested replacement of PNM's share of the capacity from the two closed units with gas-fired generation. The Company views the NMED proposal as an important step in meeting the objectives of addressing the environmental needs of the regional haze program at a lower cost to customers while balancing the economic impact to the "four corners" region. In order for the NMED proposal to proceed, there would need to be an agreement in principle among EPA, NMED, and PNM. The proposal would also be subject to approval by the other owner of SJGS Units 1 and 2, as well as various regulatory agencies. The proposal could also be subject to administrative and judicial challenge by others.
In order to be able to install SCRs on all four units of SJGS by the compliance deadline set forth in the FIP, PNM obtained bids for the installation of SCR technology. PNM entered into a contract on October 31, 2012 with an engineering, procurement, and construction contractor to install SCRs and is negotiating a contract with an engineering firm for construction management services on behalf of the SJGS owners. The construction contract includes termination provisions in the event that SCRs are determined in the future to be unnecessary. The construction contract contains a cost estimate, which will be refined through an “open book” subcontractor bidding process with final costs to be determined by June 30, 2013. Based on the indicative bid for construction, PNM estimates the total cost to install SCRs on all four units of SJGS will be between approximately $824 million and $910 million, which amounts include costs for construction management, gross receipts taxes, AFUDC, and other PNM costs. PNM's share of the costs would be about 46.3% based upon its SJGS ownership interest.
Energy efficiency also plays a significant role in helping to keep customers' electricity costs low and meeting their energy needs. PNM's and TNMP's energy efficiency and load management portfolios continue to be robust. In 2011, annual energy saved as a result of PNM's portfolio of energy efficiency programs was approximately 58,900 MWh. This is equivalent to the consumption of approximately 7,700 homes in PNM's service territory. PNM's load management and energy efficiency programs also help lower peak demand requirements. TNMP's energy efficiency programs in 2011 resulted in energy savings totaling an estimated 13,435 MWh.


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In 2008, PNMR established a three-year waste-reduction goal in which all facilities were to maintain recycling programs and identify significant waste streams. The target called for at least 75% of facilities to implement plans to reduce a minimum of
one waste stream by 15% below 2009 levels. By the end of 2011, more than 87% of PNMR facilities had achieved the waste-reduction goal. 

Social Responsibility

Through outreach, collaboration, and various community-oriented programs, PNMR continues to make significant progress in two of its key focus areas of low-income assistance and energy efficiency support in New Mexico and Texas.
Building off work that began in 2008, continuing outreach efforts include numerous community events that connected low-income customers with non-profit community service providers offering support and help with such needs as utility bills, food, clothing, medical programs, services for seniors, and weatherization. Additionally, four of the largest grants awarded in 2011 by PNMR supported nonprofits in various areas such as:

Adult literacy
Assistance for families trying to emerge from poverty
Food rescue from restaurants and grocers to help feed those in need
Assistance for low-income individuals to build a home, start a small business, or pursue higher education
 
In 2011, the PNM Good Neighbor Fund provided $1.2 million of assistance with utility bills to 9,907 families. Further, as part of the settlement in its 2010 Electric Rate Case, PNM agreed to voluntarily contribute an additional $1.3 million to the Good Neighbor Fund. This fund, along with additional collaboration with various other agencies, has helped to reduce the electricity affordability gap for many vulnerable customer groups such as seniors, young families, and medically challenged households.
The PNM Resources Foundation helps nonprofits become more energy efficient through Reduce Your Use grants. For 2012, the foundation awarded $0.3 million to 55 New Mexico nonprofits for such projects as shade structure installations, window replacements, and efficient appliance purchases. In 2011, the foundation gave more than $0.3 million to support 87 projects in New Mexico and Texas that helped purchase energy efficiency appliances and install high-performance windows and solar panels. Since the program's inception in 2008, Reduce Your Use grants have provided nonprofit agencies in New Mexico and Texas with a total of $1.3 million of support.

Economic Factors
In the three months ended September 30, 2012, PNM experienced a decrease in weather-normalized, retail load of 0.3% and TNMP experienced an increase in weather-normalized, retail load of 3.7% compared to the three months ended September 30, 2011. In the nine months ended September 30, 2012, PNM and TNMP experienced increases in weather-normalized, retail load of 0.2% and 4.1% compared to the nine months ended September 30, 2011. In recent years, New Mexico and Texas have fared better than the national average in unemployment. However, New Mexico's figures may be misleading due to people dropping out of the work force. Employment growth is much more telling, as Texas leads the way with growth rates well above the national rate while New Mexico's employment is relatively flat.

Rate Base Potential Growth
Based on the 5-year capital plan announced in December 2011, PNM expects rate base to grow at a 2% compound annual rate through 2013. That growth figure could be 7% from 2011 through 2016 through additional potential capital investments. The largest of these involves possibly being required to install SCRs to reduce emissions at SJGS and Four Corners. The addition of other facilities, such as renewable resources and peaking capacity, could also expand rate base. TNMP's compound annual rate base growth rate through 2013 is estimated at 8%, predicated on the utility's 5-year capital plan announced in December 2011. A significant portion of TNMP's capital additions should be recovered through expedited transmission and distribution cost recovery mechanisms authorized by the PUCT. PNMR will continue to carefully balance the potential rate base growth for PNM and TNMP with customer rate impacts.

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Results of Operations
A summary of net earnings attributable to PNMR is as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
Change
 
2012
 
2011
 
Change
 
(In millions, except per share amounts)
Net earnings
$
57.9

 
$
43.7

 
$
14.2

 
$
96.5

 
$
64.4

 
$
32.1

Average diluted common and common equivalent shares
80.4

 
91.7

 
(11.4
)
 
80.4

 
92.0

 
(11.6
)
Net earnings per diluted share
$
0.72

 
$
0.48

 
$
0.24

 
$
1.20

 
$
0.70

 
$
0.50

The components of the change in earnings attributable to PNMR are:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2012
 
September 30, 2012
 
(In millions)
PNM Electric
$
12.5

 
$
44.7

TNMP Electric
0.2

 
3.0

First Choice
(0.6
)
 
(20.7
)
Corporate and Other
2.1

 
5.0

Net change
$
14.2

 
$
32.1

PNMR's operational results were affected by the following:
Exit from unregulated businesses - PNMR sold First Choice in 2011; therefore 2012 results of operations do not include First Choice 
Rate increases for PNM and TNMP - Additional information about these rate increases is provided in Note 17 of the Notes to Consolidated Financial Statements in the 2011 Annual Reports on Form 10-K 
Decrease in the number of common and common equivalent shares primarily due to PNMR's purchase of its equity described in Note 6 of the Notes to Consolidated Financial Statements in the 2011 Annual Reports on Form 10-K
Other factors impacting results of operation for each segment are discussed under Results of Operations below

 Liquidity and Capital Resources
During 2011, PNMR and PNM replaced their revolving credit facilities with new facilities. The new facilities provide capacities for short-term borrowing and letters of credit of $300.0 million for PNMR and $400.0 million for PNM. In addition, TNMP has a $75.0 million revolving credit facility. Total availability for PNMR on a consolidated basis was $653.5 million at October 26, 2012. The Company utilizes these credit facilities and cash flows from operations to provide funds for both construction and operational expenditures. PNMR also has intercompany loan agreements with each of its subsidiaries.
The Company projects that its total capital requirements, consisting of construction expenditures and dividends, will total $1,526.9 million for 2012-2016, including amounts expended through September 30, 2012. This estimate does not include amounts for environmental upgrades at SJGS or Four Corners that may be required by EPA to address regional haze or other environmental compliance requirements, additional renewable resources that may be required to meet the RPS, or additional peaking resources that may be needed to meet needs outlined in PNM's current IRP. In addition to internal cash generation, the Company anticipates that it will be necessary to obtain additional long-term financing in the form of debt refinancing, new debt issuances, and/or new equity in order to fund its capital requirements through 2016. The Company currently believes that its internal cash generation, existing credit arrangements, and access to public and private capital markets will provide sufficient resources to meet the Company's capital requirements.


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RESULTS OF OPERATIONS

Segment Information

The following discussion is based on the segment methodology that PNMR’s management uses for making operating decisions and assessing performance of its various business activities. See Note 2 for more information on PNMR’s operating segments.

The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto. Trends and contingencies of a material nature are discussed to the extent known. Refer also to Disclosure Regarding Forward Looking Statements and to Part II, Item 1A. Risk Factors.

PNM Electric

The following table summarizes the operating results for PNM Electric:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
Change
 
2012
 
2011
 
Change
 
(In millions)
Electric operating revenues
$
321.7

 
$
323.8

 
$
(2.1
)
 
$
832.2

 
$
797.2

 
$
35.0

Cost of energy
99.2

 
108.7

 
(9.5
)
 
263.0

 
279.4

 
(16.4
)
     Margin
222.5

 
215.1

 
7.4

 
569.2

 
517.8

 
51.4

Operating expenses
101.1

 
102.1

 
(1.0
)
 
311.5

 
329.5

 
(18.0
)
Depreciation and amortization
24.4

 
25.1

 
(0.6
)
 
72.0

 
71.7

 
0.3

     Operating income
97.0

 
87.9

 
9.1

 
185.7

 
116.6

 
69.1

Other income (deductions)
8.4

 
(1.8
)
 
10.2

 
19.1

 
16.2

 
3.0

Net interest charges
(19.2
)
 
(18.5
)
 
(0.7
)
 
(56.7
)
 
(54.6
)
 
(2.1
)
     Earnings before income taxes
86.1

 
67.6

 
18.5

 
148.2

 
78.2

 
70.0

Income (taxes)
(31.2
)
 
(25.1
)
 
(6.2
)
 
(51.9
)
 
(26.6
)
 
(25.4
)
Valencia non-controlling interest
(4.0
)
 
(4.1
)
 
0.1

 
(10.7
)
 
(10.8
)
 
0.1

Preferred stock dividend requirements
(0.1
)
 
(0.1
)
 

 
(0.4
)
 
(0.4
)
 

Segment earnings
$
50.8

 
$
38.3

 
$
12.5

 
$
85.2

 
$
40.5

 
$
44.7


The following table summarizes the significant changes to electric operating revenues, cost of energy, and margin:

 
2011/2012 Change
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Electric
 
 
 
 
 
Electric
 
 
 
 
 
Operating
 
Cost of
 
 
 
Operating
 
Cost of
 
 
 
Revenues
 
Energy
 
Margin
 
Revenues
 
Energy
 
Margin
 
(In millions)
Retail rate increases
$
5.6

 
$

 
$
5.6

 
$
40.3

 
$

 
$
40.3

Wholesale rate increases
1.4

 

 
1.4

 
2.8

 

 
2.8

Retail load, fuel, and transmission
(11.7
)
 
(9.1
)

(2.6
)
 
(13.7
)
 
(17.4
)
 
3.7

Energy efficiency rider
7.2

 

 
7.2

 
17.1

 

 
17.1

Renewable energy rider
1.5

 
0.6

 
0.9

 
1.5

 
0.6

 
0.9

Unregulated margin
(1.4
)
 
(0.1
)
 
(1.3
)
 
(5.5
)
 
0.7

 
(6.2
)
Net unrealized economic hedges
(4.7
)
 
(0.9
)
 
(3.8
)
 
(7.5
)
 
(0.3
)
 
(7.2
)
Net change
$
(2.1
)
 
$
(9.5
)
 
$
7.4

 
$
35.0

 
$
(16.4
)
 
$
51.4



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The following table shows electric operating revenues by customer class and average number of customers:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
Change
 
2012
 
2011
 
Change
 
(In millions, except customers)
Residential
$
126.1

 
$
124.8

 
$
1.3

 
$
318.9

 
$
291.4

 
$
27.5

Commercial
120.4

 
115.7

 
4.7

 
317.1

 
287.8

 
29.3

Industrial
29.4

 
28.0

 
1.4

 
77.6

 
71.3

 
6.3

Public authority
8.1

 
7.4

 
0.7

 
19.3

 
17.8

 
1.5

Other retail
2.3

 
2.7

 
(0.4
)
 
9.5

 
7.3

 
2.2

Transmission
10.8

 
14.3

 
(3.5
)
 
29.3

 
35.3

 
(6.0
)
Firm requirements wholesale
10.5

 
8.1

 
2.4

 
28.8

 
25.1

 
3.7

Other sales for resale
15.8

 
19.8

 
(4.0
)
 
35.4

 
57.4

 
(22.0
)
Mark-to-market activity
(1.7
)
 
3.0

 
(4.7
)
 
(3.7
)
 
3.8

 
(7.5
)
 
$
321.7

 
$
323.8

 
$
(2.1
)
 
$
832.2

 
$
797.2

 
$
35.0

Average retail customers (thousands)
505.6

 
503.8

 
1.8

 
505.3

 
503.7

 
1.6

The following table shows GWh sales by customer class:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
Change
 
2012
 
2011
 
Change
Residential
975.7

 
1,006.0

 
(30.3
)
 
2,573.3

 
2,587.2

 
(13.9
)
Commercial
1,103.5

 
1,130.0

 
(26.5
)
 
3,064.1

 
3,060.2

 
3.9

Industrial
471.6

 
429.4

 
42.2

 
1,313.0

 
1,187.8

 
125.2

Public authority
84.0

 
84.1

 
(0.1
)
 
211.1

 
214.1

 
(3.0
)
Firm requirements wholesale
162.0

 
154.6

 
7.4

 
485.8

 
481.0

 
4.8

Other sales for resale
536.9

 
580.4

 
(43.5
)
 
1,263.4

 
1,709.9

 
(446.5
)
 
3,333.7

 
3,384.5

 
(50.8
)
 
8,910.7

 
9,240.2

 
(329.5
)

On August 21, 2011, PNM implemented a $72.1 million annual non-fuel rate increase for its retail customers. This rate increase improved revenues and margin by $5.6 million and $40.3 million for the three and nine months ended September 30, 2012. Lower retail loads, driven by weather, reduced revenues and margin for the three and nine months ended September 30, 2012 by $4.7 million and $0.8 million, as milder weather in the third quarter was partially offset by warmer weather in the second quarter. The average number of retail customers and usage per customer have stayed relatively flat during 2012. The increase in fuel costs and the reduction in off-system sales volumes resulting from the fire incident at the mine providing coal to SJGS are recovered through PNM's FPPAC and did not negatively impact 2012 results. See Note 9 for more discussion on the SJGS mine fire incident.

PNM implemented new rates, subject to refund, for one of its firm-requirements wholesale customers in April 2012, which improved revenues and margin by $1.4 million and $2.8 million for the three and nine months ended September 30, 2012. See Note 10.

PNM offers several energy efficiency programs and initiatives to its retail customers regulated by the NMPRC. In addition, PNM is allowed to earn adders on these programs, based on energy savings of the programs. PNM recovers these energy efficiency program costs via a rate rider. For the three and nine months ended September 30, 2012, revenues and margin improved by $7.2 million and $17.1 million, of which $0.3 million and $0.8 million is adder revenues and the remaining $6.9 million and $16.3 million is offset by an increase in operating expense for energy efficiency program costs.

On August 20, 2012, PNM implemented its renewable energy rider, a mechanism approved by NMPRC, which will recover renewable energy procurement costs, including the investment in and an allowed return on the 22 MW PNM-owned solar PV facilities incurred to meet PNM's RPS. See Note 10. For the three and nine months ended September 30, 2012, PNM revenues

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increased by $1.5 million and cost of energy for the purchase of RECs increased by $0.6 million. Revenues included a return on investment of $0.3 million and the remaining revenues recover renewable energy operating expenses and depreciation.

For the three and nine months ended September 30, 2012, lower unregulated revenues of $1.4 million and $5.5 million and margin of $1.3 million and $6.2 million resulted from lower market power prices on sales from and increases in nuclear fuel costs associated with PNM's share of PVNGS Unit 3, which is excluded from retail regulation.

Changes in unrealized mark-to-market gains and losses are based on economic hedges in place for sales and fuel costs not covered under the FPPAC, primarily associated with PVNGS Unit 3. Unrealized losses of $1.1 million for the three months ended September 30, 2012 compared to unrealized gains of $2.7 million for the three months ended September 30, 2011, decreased margin by $3.8 million. Unrealized losses of $3.1 million for the nine months ended September 30, 2012 compared to unrealized gains of $4.1 million for the nine months ended September 30, 2011, decreased margin by $7.2 million.

For the three months ended September 30, 2012, operating expenses decreased by $1.0 million. For the nine months ended September 30, 2012, operating expenses decreased by $18.0 million, primarily due to a regulatory disallowance of $17.5 million recorded in the second quarter of 2011. See Note 17 of the Notes to Consolidated Financial Statements in the 2011 Annual Reports on Form 10-K. PNM incurred $1.0 million and $2.7 million in the three and nine months ended September 30, 2011 to implement several process improvement activities, which did not recur in 2012 resulting in lower operating expenses.  The benefits of these process improvement initiatives and labor savings further reduced operating expenses by $3.0 million and $4.9 million for the three and nine months ended September 30, 2012. Lower incentive compensation of $1.8 million and $1.9 million reduced operating expenses for the three and nine months ended September 30, 2012. Adjustments of $4.4 million and $6.1 million for additional taxes other than income, primarily gross receipts taxes, were recorded in the three and nine months ended September 30, 2011 with no such adjustments recorded in 2012, resulted in reduced operating expenses in 2012 compared to 2011. For the nine months ended September 30, 2012, improved plant performance at SJGS and PVNGS reduced maintenance expenses by $2.4 million compared to 2011. Also, the timing of a planned outage at a gas facility in 2011 of $1.4 million and lower vegetation management costs of $1.0 million reduced expenses for the nine months ended September 30, 2012. For the three and nine months ended September 30, 2012, these savings were offset by increases of $6.9 million and $16.3 million of energy efficiency program costs, which are recovered through revenues discussed above.

For the three months ended September 30, 2012, other income (deductions) was $10.2 million higher than 2011, primarily related to improved performance of the NDT assets of $10.8 million. PNM incurred net losses, including impairments of the NDT investments of $4.1 million, in the third quarter of 2011, compared to net gains of $5.7 million in the third quarter 2012. In addition, the equity portion of AFUDC of $0.9 million improved other income. For the nine months ended September 30, 2012, other income (deductions) was $3.0 million higher, primarily related to improved performance of the NDT assets of $2.8 million, higher equity portion of AFUDC of $3.0 million, offset by lower interest income on the PVNGS lessor notes of $2.1 million due to lower outstanding balances.

For the three and nine months ended September 30, 2012, interest expense increased $2.2 million and $6.6 million due to the issuance of $160.0 million of 5.35% long-term debt in October 2011, which increases were partially offset by $0.5 million and $2.0 million increases in the debt portion of AFUDC and $0.7 million and $2.8 million of interest charges on PNM's investment in renewable resources that are deferred for recovery through the renewable energy rider. As discussed above, PNM implemented its renewable energy rider in August 2012 and interest costs associated with its investment in renewable energy are included in amounts being recovered through the rider.
 

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TNMP Electric

The following table summarizes the operating results for TNMP Electric:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
Change
 
2012
 
2011
 
Change
 
(In millions)
Total electric operating revenues
$
68.7

 
$
67.0

 
$
1.7

 
$
187.4

 
$
180.8

 
$
6.6

Cost of energy
11.6

 
10.3

 
1.3

 
34.3

 
30.7

 
3.6

Margin
57.1

 
56.7

 
0.4

 
153.1

 
150.1

 
3.0

Operating expenses
22.3

 
22.5

 
(0.1
)
 
64.2

 
67.4

 
(3.2
)
Depreciation and amortization
13.8

 
12.7

 
1.1

 
37.2

 
33.7

 
3.5

Operating income
21.0

 
21.6

 
(0.6
)
 
51.7

 
49.0

 
2.7

Other income (deductions)
0.4

 
0.3

 
0.1

 
1.2

 
0.9

 
0.4

Net interest charges
(7.0
)
 
(7.3
)
 
0.2

 
(21.2
)
 
(21.9
)
 
0.7

Earnings before income taxes
14.3

 
14.6

 
(0.3
)
 
31.7

 
28.0

 
3.7

Income (taxes)
(5.2
)
 
(5.7
)
 
0.5

 
(11.6
)
 
(10.8
)
 
(0.7
)
Segment earnings
$
9.1

 
$
8.9

 
$
0.2

 
$
20.1

 
$
17.1

 
$
3.0

The following table summarizes the significant changes to total electric operating revenues, cost of energy, and margin:
 
2011/2012 Change
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Electric
 
 
 
 
 
Electric
 
 
 
 
 
Operating
 
Cost of
 
 
 
Operating
 
Cost of
 
 
 
Revenues
 
Energy
 
Margin
 
Revenues
 
Energy
 
Margin
 
(In millions)
Rate increases
$

 
$

 
$

 
$
0.7

 
$

 
$
0.7

Customer usage/load
(1.1
)
 

 
(1.1
)
 
(2.6
)
 

 
(2.6
)
Transmission cost recovery
1.4

 
1.3

 
0.1

 
3.4

 
3.6

 
(0.2
)
AMS surcharge
2.1

 

 
2.1

 
5.4

 

 
5.4

Other
(0.7
)
 

 
(0.7
)
 
(0.3
)
 

 
(0.3
)
Net change
$
1.7

 
$
1.3

 
$
0.4

 
$
6.6

 
$
3.6

 
$
3.0

The following table shows total electric operating revenues by retail tariff consumer class, including intersegment revenues, and average number of consumers:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
Change
 
2012
 
2011
 
Change
 
(In millions, except consumers)
Residential
$
33.2

 
$
34.5

 
$
(1.3
)
 
$
79.9

 
$
77.8

 
$
2.1

Commercial
22.7

 
21.7

 
1.0

 
65.1

 
62.0

 
3.1

Industrial
3.2

 
3.3

 
(0.1
)
 
10.1

 
9.5

 
0.6

Other
9.6

 
7.5

 
2.1

 
32.3

 
31.5

 
0.8

 
$
68.7

 
$
67.0

 
$
1.7

 
$
187.4

 
$
180.8

 
$
6.6

Average consumers (thousands) (1)
233.6

 
232.2

 
1.4

 
232.7

 
231.3

 
1.4


(1) 
TNMP provides transmission and distribution services to REPs that provide electric service to consumers in TNMP's service territories. The number of consumers above represents the customers of these REPs. Under TECA, consumers in Texas have the ability to choose any REP to provide energy. The average consumers reported above include

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66,273 and 67,549 consumers for the three and nine months ended September 30, 2011, who had chosen First Choice as their REP. These consumers are also included as customers in the First Choice segment.

The following table shows GWh sales by retail tariff consumer class:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
Change
 
2012
 
2011
 
Change
Residential
930.4

 
1,015.0

 
(84.6
)
 
2,173.4

 
2,319.4

 
(146.0
)
Commercial
692.5

 
703.7

 
(11.2
)
 
1,796.7

 
1,825.7

 
(29.0
)
Industrial
695.4

 
675.2

 
20.2

 
2,025.6

 
1,931.1

 
94.5

Other
26.5

 
28.7

 
(2.2
)
 
78.0

 
82.5

 
(4.5
)
 
2,344.8

 
2,422.6

 
(77.8
)
 
6,073.7

 
6,158.7

 
(85.0
)
(1) 
The GWh sales reported above include 324.1 and 775.3 GWhs for the three and nine months ended September 30, 2011 used by consumers who had chosen First Choice as their REP. These GWhs are also included below in the First Choice segment.

For the three months ended September 30, 2012, temperatures were cooler compared to the extremely warm summer in 2011 reducing revenues and margin. The reductions in revenues and margin were partially offset by an increase in the average number of consumers and higher usage per consumer, excluding impacts from weather. For the nine months ended September 30, 2012, milder weather compared to 2011, also reduced revenues and margin. An increase in the number of consumers, increased usage per consumer, and an increase in rates partially offset the weather impacts. For the three and nine months ended September 30, 2012, the AMS surcharge improved revenues and margin by $2.1 million and $5.4 million, including a return on investment of $0.2 million and $0.8 million. The remaining surcharge revenues offset increases in operating expenses and depreciation. On September 27, 2012, TNMP implemented a $2.5 million annual increase in its transmission cost of service rates to recover additional investment in transmission plant and associated costs. See Note 10.

For the three months ended September 30, 2012, savings from process improvement initiatives and labor efficiencies of $1.0 million reduced operating expenses. These reductions are offset by $1.1 million costs associated with the implementation of AMS, which are recovered via the surcharge described above. For the nine months ended September 30, 2012, operating expenses are lower compared to the same period in 2011, primarily due to a regulatory disallowance of $3.9 million recorded in the second quarter of 2011. See Note 10. In addition, operating expenses for the nine months ended September 30, 2012 reflect reductions due to process improvement initiatives and labor efficiencies of $2.6 million and lower maintenance costs of $1.1 million due to a spike in reliability related costs caused by severe drought conditions in 2011. An increase of $2.1 million of AMS related costs, which are recovered via a surcharge, offset these savings.

Increases in depreciation and amortization expenses for the three and nine months ended September 30, 2012 are mainly due to the AMS investment, which is recovered through the surcharge discussed above. In addition, increases in transmission plant also increased depreciation expense.

Interest expense decreased in 2012 as a result of TNMP refinancing its term loan in September 2011.


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First Choice

As discussed in Note 14, PNMR sold First Choice on November 1, 2011. The table below summarizes the operating results for First Choice for the three and nine months ended September 30, 2011:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2011
 
September 30, 2011
 
(In millions)
Total electric operating revenues
 
$
171.0

 
 
 
$
405.5

 
Cost of energy
 
144.0

 
 
 
303.3

 
Margin
 
27.0

 
 
 
102.2

 
Operating expenses
 
25.1

 
 
 
67.7

 
Depreciation and amortization
 
0.3

 
 
 
1.0

 
Operating income
 
1.5

 
 
 
33.5

 
Other income (deductions)
 
(0.1
)
 
 
 
(0.4
)
 
Net interest charges
 
(0.2
)
 
 
 
(0.5
)
 
Earnings before income taxes
 
1.2

 
 
 
32.6

 
Income (taxes)
 
(0.6
)
 
 
 
(11.8
)
 
Segment earnings
 
$
0.6

 
 
 
$
20.7

 

The following table shows total electric operating revenues by customer class and actual number of customers:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2011
 
September 30, 2011
 
(In millions, except customers)
Residential
 
$
104.2

 
 
 
$
241.9

 
Commercial
 
62.5

 
 
 
152.2

 
Other
 
4.3

 
 
 
11.4

 
 
 
$
171.0

 
 
 
$
405.5

 
Actual customers (thousands) (1,2)
 
223.1

 
 
 
223.1

 
(1) 
See note above in the TNMP Electric segment discussion about the impact of TECA.

(2) 
Due to the competitive nature of First Choice’s business, actual customer counts are presented in the table above as a more representative business indicator than the average consumers that are shown in the table for TNMP.

The following table shows GWh electric sales by customer class(1):
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2011
 
September 30, 2011
Residential
 
812.8

 
 
 
1,871.5

 
Commercial
 
569.5

 
 
 
1,397.8

 
 
 
1,382.3

 
 
 
3,269.3

 
(1) 
See note above in the TNMP Electric segment discussion about the impact of TECA.

During the three and nine months ended September 30, 2011, favorable weather and increases in both MWh sales and number of customers, which were partially offset by a decrease in average revenue rates, favorably impacted operating revenues. Due to extreme temperatures during the three months ended September 30, 2011, First Choice incurred significantly higher purchased power costs per MWh which negatively impacted the total amount of cost of energy.

First Choice managed its exposure to fluctuations in market energy prices by matching sales contracts with supply instruments designed to preserve targeted margin.  Accordingly, First Choice had forward contracts for the purchase of energy to cover the future load requirements for most of its fixed price sales contracts.  Gains or losses on unrealized economic hedges

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represent changes in unrealized fair value estimates related to these forward supply contracts.  Changes in the fair value of supply contracts that were not designated or were not eligible for hedge or normal purchase or sales accounting were marked to market through current period earnings as required by GAAP. During 2011, market energy prices increased, which resulted in unrealized mark-to-market gains on certain of First Choice's forward supply contracts.  First Choice was not required to mark the related fixed price sales contracts to market, which would likely show offsetting gains and losses as market energy prices fluctuate.  Gains on unrealized economic hedges increased segment earnings by $1.7 million in the nine months ended September 30, 2011.
The allowance for uncollectible accounts and related bad debt expense was based on collections and write-off experience. Lower customer departures, lower default rates, and an increase in commercial customers reduced bad debts in 2011 compared to previous years. Initiatives to reduce bad debts included efforts to reduce the default rate experienced for customers switching to another REP and increased focus on identifying new customer prospects that were more likely to demonstrate desired payment behavior. First Choice focused its marketing efforts on commercial customers and customers with established payment patterns. First Choice also increased the credit score required to become a customer and expanded the circumstances where customers were required to provide advance deposits to obtain service, or both. Bad debt expense was $7.6 million and $17.9 million for the three and nine months ended September 30, 2011.

During 2011, increases in marketing and operational costs were partially offset by a decrease in incentive compensation expense. The increases in operational costs were primarily related to developing a pre-pay option for customers and establishing local office locations. Interest expense decreased in 2011 primarily due to lower short-term debt.

Corporate and Other

The table below summarizes the operating results for Corporate and Other:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
Change
 
2012
 
2011
 
Change
 
(In millions)
Total revenues
$

 
$
(12.2
)
 
$
12.2

 
$

 
$
(30.8
)
 
$
30.8

Cost of energy

 
(12.2
)
 
12.2

 

 
(30.6
)
 
30.6

   Margin

 

 

 

 
(0.1
)
 
0.1

Operating expenses
(4.8
)
 
(1.6
)
 
(3.2
)
 
(12.7
)
 
(7.2
)
 
(5.5
)
Depreciation and amortization
4.6

 
4.3

 
0.3

 
13.1

 
12.8

 
0.3

   Operating income (loss)
0.2

 
(2.7
)
 
2.9

 
(0.4
)
 
(5.7
)
 
5.3

Other income (deductions)
(0.9
)
 
(1.7
)
 
0.8

 
(4.9
)
 
(5.0
)
 
0.1

Net interest charges
(4.2
)
 
(5.1
)
 
0.9

 
(12.4
)
 
(15.2
)
 
2.8

Earnings (loss) before income taxes
(4.9
)
 
(9.6
)
 
4.7

 
(17.8
)
 
(26.0
)
 
8.2

Income (taxes) benefit
2.9

 
5.4

 
(2.5
)
 
8.9

 
12.0

 
(3.1
)
Segment earnings (loss)
$
(2.0
)
 
$
(4.1
)
 
$
2.1

 
$
(8.9
)
 
$
(14.0
)
 
$
5.0


The Corporate and Other segment includes consolidation elimination of revenue and cost of energy between business segments, primarily related to TNMP's sale of transmission services to First Choice prior to November 1, 2011, when PNMR sold First Choice. Accordingly, there was no elimination of intersegment revenue in 2012.
Operating expense decreased primarily due to legal and consulting expenses incurred in 2011 related to assessment of strategic alternatives for PNMR's competitive businesses that did not recur in 2012.
Depreciation expense increased $1.0 million and $2.6 million in the three and nine months ended September 30, 2012 compared to 2011 due to accelerated amortization of leasehold improvements for part of its corporate headquarters. The accelerated amortization is offset by lower depreciation on software applications of $0.9 million and $2.5 million for the three and nine months ended September 30, 2012 compared to 2011. Changes in depreciation and amortization are offset in operating expenses as a result of allocation of these costs to other business segments. PNM and TNMP defer their allocations of the accelerated amortization of leasehold improvements as regulatory assets to be recovered through rates.

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Other income and deductions increased for the three months ended September 30, 2012 compared to 2011 as a result of recording an additional pre-tax gain of $1.0 million on the sale of First Choice (Note 14). This gain was offset by lower performance on other investments for the nine months ended September 30, 2012 compared to 2011.

Interest charges decreased $1.2 million and $3.5 million for the three and nine months ended September 30, 2012 compared to 2011 due to the re-acquisition of $50.0 million of PNMR 9.25% senior unsecured notes in November 2011.

LIQUIDITY AND CAPITAL RESOURCES

Statements of Cash Flows

The changes in PNMR’s cash flows for the nine months ended September 30, 2012 compared to September 30, 2011 are summarized as follows:
 
Nine Months Ended September 30,
 
2012
 
2011
 
Change
 
 
(In millions)
 
Net cash flows from:
 
 
 
 
 
  Operating activities
$
205.0

 
$
198.5

 
$
6.5

  Investing activities
(188.0
)
 
(204.8
)
 
16.8

  Financing activities
(26.8
)
 
16.7

 
(43.5
)
Net change in cash and cash equivalents
$
(9.7
)
 
$
10.4

 
$
(20.1
)

The changes in PNMR's cash flows from operating activities relate primarily to improved results of operations at PNM and TNMP, primarily due to rate increases, and the receipt of $21.6 million for governmental grants related to renewable energy initiatives. Increases were offset by contributions to the PNM and TNMP pension and other postretirement benefit plans of $86.9 million in 2012 compared to $38.6 million in 2011 and income taxes paid of $5.3 million in 2012 compared to refunds of $3.7 million in 2011.

The changes in PNMR's cash flows from investing activities relate primarily to changes in utility plant additions. At PNM, total utility plant additions in 2012 compared to 2011 decreased by $40.8 million, after an increase of $4.0 million related to nuclear fuel purchases. PNM additions in 2011 included $57.0 million related to solar projects, which were completed by the end of 2011. TNMP utility plant additions increased $17.0 million in 2012 compared to 2011, including increases of $10.8 million in transmission projects and $1.5 million related to the AMS deployment. Plant additions at the Corporate and Other segment also increased $2.3 million in 2012. Construction expenditures were funded primarily through cash flows from operating activities and short-term borrowings in both 2012 and 2011.

The changes in cash flows from financing activities relate primarily to increased short-term borrowings in 2012. Net cash outflows of $11.6 million to satisfy stock-based awards in 2012 compared to $2.7 million in 2011 also contributed to the change.

Financing Activities

See Note 6 of the Notes to Consolidated Financial Statements in the 2011 Annual Reports on Form 10-K, for additional information concerning the Company's financing activities. In May 2012, PNM received NMPRC approval to participate in the refunding of $20.0 million of PCRBs. PNM also received NMPRC authority to exercise the two one-year extension options under the PNM Revolving Credit Facility. The PNMR Revolving Credit Facility also provides for two one-year extension options although NMPRC authority to exercise them is not required. In October 2012, the first of the one-year extension options for the PNMR Revolving Credit Facility and the PNM Revolving Credit Facility were exercised extending the expiration of both facilities to October 31, 2017.

In September 2012, PNM participated in the issuance of $20.0 million of new PCRBs by the City of Farmington, New Mexico, which bear interest at 2.54% and mature September 1, 2042 with a mandatory tender on June 1, 2017. The new PCBRs refunded a $20.0 million series of PCRBs, which bore interest at 5.15% and matured in 2037, that were redeemed at par and retired.


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Capital Requirements

Total capital requirements consist of construction expenditures and cash dividend requirements for PNMR common stock and PNM preferred stock. Key activities in PNMR's current construction program include:

Upgrading generation resources and additional renewable energy projects
Expanding the electric transmission and distribution systems
Purchasing nuclear fuel

Projected capital requirements, including amounts expended through September 30, 2012, are:
 
2012
 
2013-2016
 
Total
 
(In millions)
Construction expenditures
$
283.9

 
$
1,011.0

 
$
1,294.9

Dividends on PNMR common stock
44.6

 
184.8

 
229.4

Dividends on PNM preferred stock
0.5

 
2.1

 
2.6

Total capital requirements
$
329.0

 
$
1,197.9

 
$
1,526.9

The construction expenditure estimates are under continuing review and subject to ongoing adjustment, as well as to Board review and approval. Estimates for construction expenditures currently do not include any significant expenditures for environmental control facilities. The construction expenditures above do not include amounts for environmental upgrades at SJGS or Four Corners that may be required by EPA to address regional haze or other environmental compliance requirements, additional renewable resources that may be required to meet the RPS, or additional peaking resources that may be needed to meet needs outlined in PNM's current IRP. Potential expenditures to address regional haze are discussed in Note 9. PNM currently estimates that additional potential expenditures of approximately $120 million for renewable resources and $80 million for peaking resources could be incurred in the 2013-2016 period, subject to NMPRC approval and other considerations. The ability of PNMR to pay dividends on its common stock is dependent upon the ability of PNM and TNMP to be able to pay dividends to PNMR. Note 5 of the Notes to Consolidated Financial Statements in the 2011 Annual Reports on Form 10-K describes regulatory and contractual restrictions on the payment of dividends by PNM and TNMP.
During the nine months ended September 30, 2012, PNMR met its capital requirements and construction expenditures through cash generated from operations, as well as its liquidity arrangements.
 
In addition to the capital requirements for construction expenditures and dividends, the Company has long-term debt that must be paid or refinanced at maturity. Note 6 of the Notes to Consolidated Financial Statements in the 2011 Annual Reports on Form 10-K contains information about the maturities of long-term debt. The Company has from time to time refinanced or repurchased portions of its outstanding debt before scheduled maturity. Depending on market conditions, the Company may refinance other debt issuances or make additional debt repurchases in the future.
Liquidity
PNMR's liquidity arrangements include the PNMR Revolving Credit Facility and the PNM Revolving Credit Facility that both expire in 2017 and the TNMP Revolving Credit Facility that expires in December 2015. The PNMR Revolving Credit Facility has a financing capacity of $300.0 million, the PNM Revolving Credit Facility has a financing capacity of $400.0 million, and the TNMP Revolving Credit Facility has a financing capacity of $75.0 million. The Company believes the terms and conditions of its facilities are consistent with those of other investment grade revolving credit facilities in the utility industry.  Each of the facilities contains one financial covenant, which requires the maintenance of debt-to-capital ratios of less than or equal to 65%.  These ratios for PNMR and PNM reflect the present value of payments under the PVNGS and EIP leases as debt.
These facilities provide short-term borrowing capacity and also allow letters of credit to be issued. Letters of credit reduce the available capacity under the facilities. The Company utilizes these credit facilities and cash flows from operations to provide funds for both construction and operational expenditures. The Company's business is seasonal with more revenues and cash flows from operations being generated in the summer months. In general, the Company relies on the credit facilities to be the initial funding source for construction expenditures. Accordingly, borrowings under the facilities increase over time. Depending on market and other conditions, the Company will periodically sell long-term debt and use the proceeds to reduce the borrowings under the credit facilities. Short-term borrowings at PNMR ranged from $113.0 million to $130.7 million during the three months ended September 30, 2012 and from $14.0 million to $141.1 million during the nine months ended September 30, 2012. PNM

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short-term borrowings ranged from zero to $88.5 million during the three months ended September 30, 2012 and from zero to $167.9 million during the nine months ended September 30, 2012. There were no borrowings under the TNMP Revolving Credit Facility during the nine months ended September 30, 2012. At September 30, 2012, the average interest rate was 1.97% for borrowings outstanding under the PNMR Revolving Credit Facility. PNMR also had a $5.0 million bi-lateral line of credit with a single financial institution that was allowed to expire in August 2012.
The Company currently believes that its capital requirements can be met through internal cash generation, existing credit arrangements, and access to public and private capital markets. To cover the difference in the amounts and timing of internal cash generation and cash requirements, the Company intends to use short-term borrowings under its current and future liquidity arrangements. However, if difficult market conditions experienced during the recent recession return or worsen, the Company may not be able to access the capital markets or renew credit facilities when they expire. Should that occur, the Company would seek to improve cash flows by reducing capital expenditures and exploring other available alternatives. Also, PNM may consider seeking authorization for the issuance of first mortgage bonds to improve access to the capital markets.
In addition to its internal cash generation, the Company anticipates that it will be necessary to obtain additional long-term financing to fund its capital requirements through 2016. This could include debt refinancing, new debt issuances, and/or new equity.
The Company's ability to access the credit and capital markets at a reasonable cost is largely dependent upon its:

Ability to earn a fair return on its investments
Results of operations
Ability to obtain required regulatory approvals
Conditions in the financial markets
Credit ratings 
The credit ratings for PNMR, PNM, and TNMP were set forth under the heading Liquidity in the MD&A contained in the 2011 Annual Reports on Form 10-K. On April 13, 2012, S&P raised the corporate credit rating for PNMR as well as the senior debt ratings for PNMR and TNMP and the preferred stock rating for PNM. S&P changed the outlook to stable for all entities. As of October 26, 2012, ratings on the Company's securities were as follows:
 
PNMR
 
PNM
 
TNMP
S&P
 
 
 
 
 
Senior secured debt
*
 
*
 
BBB+
Senior unsecured debt
BB+
 
BBB-
 
*
Preferred stock
*
 
BB
 
*
Moody's
 
 
 
 
 
Senior secured debt
*
 
*
 
A3
Senior unsecured debt
Ba1
 
Baa3
 
*
Preferred stock
*
 
Ba2
 
*
* Not applicable


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Table of Contents

A summary of liquidity arrangements as of October 26, 2012 is as follows:
 
PNMR
Separate
 
PNM
Separate
 
TNMP
Separate
 
PNMR
Consolidated
 
 
 
(In millions)
 
 
Financing capacity - revolving credit facility
$
300.0

 
$
400.0

 
$
75.0

 
$
775.0

 
 
 
 
 
 
 
 
Amounts outstanding as of October 26, 2012:
 
 
 
 
 
 
 
Revolving credit facility
106.4

 

 

 
106.4

Letters of credit
11.3

 
3.5

 
0.3

 
15.1

 
 
 
 
 
 
 
 
Total short–term debt and letters of credit
117.7

 
3.5

 
0.3

 
121.5

 
 
 
 
 
 
 
 
Remaining availability as of October 26, 2012
$
182.3

 
$
396.5

 
$
74.7

 
$
653.5

Invested cash as of October 26, 2012
$

 
$
6.6

 
$

 
$
6.6

The above table excludes intercompany debt. The remaining availability under the revolving credit facilities at any point in time varies based on a number of factors, including the timing of collections of accounts receivables and payments for construction and operating expenditures.
For offerings of securities registered with the SEC, PNMR has a shelf registration statement expiring in March 2014. This shelf registration statement has unlimited availability and can be amended to include additional securities, subject to certain restrictions and limitations. PNMR can also offer new shares of common stock through the PNM Resources Direct Plan under a separate SEC shelf registration statement that expires in August 2015. PNM has a shelf registration statement for up to $440.0 million of senior unsecured notes that will expire in May 2014.
Off-Balance Sheet Arrangements
PNMR's off-balance sheet arrangements include PNM's operating lease obligations for PVNGS Units 1 and 2, the EIP transmission line, and Delta. These arrangements help ensure PNM the availability of lower-cost generation needed to serve customers. See MD&A - Off-Balance Sheet Arrangements and Note 7 of the Notes to Consolidated Financial Statements in the 2011 Annual Reports on Form 10-K. See Note 9 for additional information concerning the EIP lease.
Commitments and Contractual Obligations
PNMR, PNM, and TNMP have contractual obligations for long-term debt, operating leases, purchase obligations, and certain other long-term liabilities. See MD&A - Commitments and Contractual Obligations in the 2011 Annual Reports on Form 10-K.

 Contingent Provisions of Certain Obligations
As discussed in the 2011 Annual Reports on Form 10-K, PNMR, PNM, and TNMP 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. In the unlikely event that the contingent requirements were to be triggered, PNMR, PNM, or TNMP could be required to provide security, immediately pay outstanding obligations, or be prevented from drawing on unused capacity under certain credit agreements. The contingent provisions also include contractual increases in the interest rate charged on certain of the Company's short-term debt obligations in the event of a downgrade in credit ratings. The Company believes its financing arrangements are sufficient to meet the requirements of the contingent provisions. No conditions have occurred that would result in any of the above contingent provisions being implemented.


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Capital Structure
The capitalization tables below include the current maturities of long-term debt, but do not include short-term debt and do not include operating lease obligations as debt.
 
September 30,
2012
 
December 31,
2011
PNMR
 
 
 
PNMR common equity
49.2
%
 
48.3
%
Preferred stock of subsidiary
0.3
%
 
0.3
%
Long-term debt
50.5
%
 
51.4
%
Total capitalization
100.0
%
 
100.0
%
 
 
 
 
PNM
 
 
 
PNM common equity
50.8
%
 
49.7
%
Preferred stock
0.5
%
 
0.5
%
Long-term debt
48.7
%
 
49.8
%
Total capitalization
100.0
%
 
100.0
%
 
 
 
 
TNMP
 
 
 
Common equity
60.3
%
 
59.8
%
Long-term debt
39.7
%
 
40.2
%
Total capitalization
100.0
%
 
100.0
%

OTHER ISSUES FACING THE COMPANY

Climate Change Issues

Background
In 2011, PNM's generating plants emitted approximately 7.1 million metric tons of CO2, which comprises the vast majority of its GHG.  By comparison, the total GHG in the United States in 2010, the latest year for which EPA has published this data, were approximately 6.8 billion metric tons, of which approximately 5.7 billion metric tons were CO2.  According to EPA data, electricity generation accounted for approximately 2.3 billion metric tons, or 40%, of the CO2 emissions.

PNM has several programs underway to reduce GHG from its generating plants, thereby reducing its exposure to climate change regulation. See Note 10. In 2011, PNM completed construction of 22 MW of utility-scale solar generation located at five sites on PNM's system throughout New Mexico. In April 2012, PNM filed its 2013 Renewable Energy Plan, which calls for an additional 20 MW of PNM-owned solar facilities to be in service by the end of 2013 and a 20-year PPA for the output of a 10-MW geothermal facility to be in service by January 1, 2014. Additionally, PNM has a customer distributed solar generation program that is expected to grow distributed solar from the 14 MW installed at the end of 2011 to 21 MW by the end of 2012. Once fully subscribed, the distributed solar programs will reduce PNM's production from fossil-fueled electricity generation by 82 GWh per year. PNM offers its customers a comprehensive portfolio of energy efficiency and load management programs, with a 2012 annual budget of over $17 million that projects electricity savings in 2012 of an estimated 63 GWh. Over the next 19 years, PNM projects the expanded energy efficiency and load management programs will provide the equivalent of approximately 12,870 GWh of electricity, which will avoid at least 6.1 million metric tons of CO2 based upon projected emissions from PNM's system-wide portfolio with and without these programs. These estimates are subject to change given that it is difficult to accurately estimate avoidance because of the high uncertainty of many of the underlying variables and complex interrelationships between those variables, including changes in demand for electricity.
Management periodically updates the Board on implementation of corporate environmental policy and the Company's environmental management systems, promotion of energy efficiency and use of renewable resources.  The Board is also advised of the Company's practices and procedures to assess the sustainability impacts of operations on the environment.  The Board

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regularly considers associated issues around climate change, the Company's GHG exposures, and potential financial consequences that might result from potential federal and/or state regulation of GHG.
Approximately 81.9% of PNM's owned and leased generating capacity at December 31, 2011 consisted of coal or gas-fired generation that produces GHG, all of which is located within the United States. The Company does not anticipate any direct impact from any near-term international accords. Based on current forecasts, the Company does not expect its output of GHG from existing sources to increase significantly in the near-term. Many factors affect the amount of GHG, including plant performance.  For example, if PVNGS experienced prolonged outages, PNM might be required to utilize other power supply resources such as gas-fired generation, which could increase GHG. If new natural gas-fired generation resources are added to meet increased load as anticipated in PNM's current IRP, GHG would be incrementally increased. Because of the Company's dependence on fossil-fueled generation, any legislation that imposes a limit or cost on GHG will impact the cost at which electricity is produced. While PNM expects to be entitled to recover that cost through rates, the timing and outcome of proceedings for cost recovery is uncertain. In addition, to the extent that any additional costs are recovered through rates, customers may reduce their demand, relocate facilities to other areas with lower energy costs, or take other actions that ultimately would adversely impact the Company.
Given the geographic location of its facilities and customers, PNM generally has not been exposed to the extreme weather events and other physical impacts commonly attributed to climate change, with the possible exception of periodic drought conditions. Climate changes are generally not expected to have material consequences in the near-term. Drought conditions in northwestern New Mexico could impact the availability of water for cooling coal-fired generating plants. Water shortage sharing agreements have been in place since 2004, although no shortage has been declared due to sufficient precipitation in the San Juan basin. PNM also has a supplemental water contract in place with the Jicarilla Tribe to help address any water shortages from primary sources. The contract expires on December 31, 2016.  TNMP has operations in the Gulf Coast area of Texas, which experiences periodic hurricanes and drought conditions. In addition to potentially causing physical damage to TNMP owned facilities, which disrupt the ability to generate, transmit, and/or distribute energy, hurricanes can temporarily reduce customers' usage and demand for energy.
EPA Regulation
In April 2007, the U.S. Supreme Court held that EPA has the authority to regulate GHG under the CAA.  This decision heightened the importance of this issue for the energy industry.  In December 2009, EPA released its endangerment finding stating that the atmospheric concentrations of six key greenhouse gases (CO2, methane, nitrous oxides, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride) endanger the public health and welfare of current and future generations.
In May 2010, EPA released the final PSD and Title V Greenhouse Gas Tailoring Rule (the "Tailoring Rule") to address GHG from stationary sources under the CAA permitting programs. The purpose of the rule is to “tailor” the applicability of two programs, PSD and Title V operating permit programs, to avoid impacting millions of small GHG emitters. The rule focuses on the largest sources of GHG, including fossil-fueled electric generating units. This program currently covers new construction projects that emit GHG of at least 100,000 tons per year (even if PSD is not triggered for other pollutants). In addition, modifications at existing facilities that increase GHG by at least 75,000 tons per year will be subject to PSD permitting requirements, even if they do not significantly increase emissions of any other pollutant. EPA had indicated in its original Tailoring Rule that it might extend PSD regulation to smaller emission sources. However, on July 3, 2012, EPA finalized the third phase of the rule by keeping the permitting thresholds where they are. All of PNM's fossil-fueled generating plants are classified as PSD major CO2 sources and potentially subject to the Tailoring Rule, but the existing plants do not have any currently planned projects that would trigger PSD permitting for GHG. Any newly constructed power plant would likely be subject to the Tailoring Rule.
On June 26, 2012, the U.S. Court of Appeals for the District of Columbia Circuit rejected challenges to EPA's 2009 GHG endangerment finding, GHG emission standards for light-duty vehicles, PSD Interpretive Memorandum (EPA's so-called GHG "Timing Rule"), and Tailoring Rule. The Court found that EPA's endangerment finding and its light-duty vehicle rule "are neither arbitrary nor capricious," that "EPA's interpretation of the governing CAA provisions is unambiguously correct," and that "no petitioner has standing to challenge the Timing and Tailoring Rules."

On March 27, 2012, EPA issued its proposed carbon pollution standards for the emission of GHG from new fossil-fueled electric generating units (“EGUs”). The proposed NSPS sets a limit of 1,000 lb CO2/MWh and covers newly constructed fossil-fueled EGUs that are larger than 25 MW. The proposed limit is based on the performance of natural gas combined cycle technology. Therefore, coal-fired power plants would likely only be able to comply with the standard by using carbon capture and sequestration technology. The proposed rule includes an exemption for simple cycle EGUs. However, during the comment period, EPA solicited

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comments on whether to drop the exemption and instead exempt any fossil-fueled EGU that limits electric generation to one-third of its annual generating capacity. The proposed rule, as written, does not include limits that apply to existing power plants, or proposed plants that already have a complete preconstruction permit and commence construction within 12 months of the issuance of the proposed rule. In a separate future action, EPA may issue existing sources CO2 emission guidelines. The proposal is the first NSPS issued for CO2, and although it is limited to new sources, it has potential far-reaching implications for the utility industry. When finalized, the standard could serve as Best Available Control Technology analysis for PSD permitting for new GHG sources under the Tailoring Rule. It is not clear whether this standard might also apply to existing sources making major modifications that would require pre-construction permits under the Tailoring Rule, but completion of the proposed NSPS for new EGUs is a prerequisite for EPA to promulgate GHG standards for existing sources. The proposed rule was published in the Federal Register on April 13, 2012. EPA accepted comment on the proposed rule through June 25, 2012.
EPA regulation of GHG from large stationary sources will impact PNM's operations due to its reliance on fossil-fueled electric generation. The impact to PNM is unknown because the regulatory requirements, including Best Available Control Technology implications and NSPS requirements, are still developing. Impacts could involve investments in efficiency improvements and/or control technologies at the fossil-fueled generating plants. Although there are no commercially viable GHG control technologies at this time, such technologies may become viable in the future. It is also possible that the costs of such improvements or technologies could impact the economic viability of some plants.
Federal Legislation
Prospects for enactment of legislation imposing a new or enhanced regulatory program to address climate change in the current Congress are unlikely, although Congress could address these issues at a future time. Instead, EPA is the primary venue for GHG regulation in the near future.
The Company has assessed, and continues to assess, the impacts of potential climate change legislation or regulation on its business.  This assessment is preliminary, and future changes arising out of the legislative or regulatory process could impact the assessment significantly.  The Company's assessment includes assumptions regarding the specific GHG limits, the timing of implementation of these limits, the level of emissions allowances allocated and the level that must be purchased, the development of technologies for renewable energy and to reduce emissions, the cost of emissions allowances, the degree to which offsets may be used for compliance, and provisions for cost containment. Moreover, the assessment assumes various market reactions such as with respect to the price of coal and gas and regional plant economics.  These assumptions, at best, are preliminary and speculative. However, based upon these assumptions, the enactment of climate change legislation would likely, among other things, result in significant compliance costs, including significant capital expenditures by the Company, and could jeopardize the economic viability of certain generating facilities. See Note 9.  In turn, these consequences would lead to increased costs to customers and could affect results of operations, cash flows, and financial condition if the incurred costs are not fully recovered through regulated rates. Higher rates could also contribute to reduced demand for electricity.  The Company's assessment process is ongoing, but too preliminary and speculative at this time for the meaningful prediction of financial impact.
State and Regional Activity
Pursuant to New Mexico law, each utility must submit an IRP to the NMPRC every three years to evaluate renewable energy, energy efficiency, load management, distributed generation, and conventional supply-side resources on a consistent and comparable basis.  The IRP is required to take into consideration risk and uncertainty of fuel supply, price volatility, and costs of anticipated environmental regulations when evaluating resource options to meet supply needs of the utility's customers.  The NMPRC issued an order in June 2007, requiring that New Mexico utilities factor a standardized cost of carbon emissions into their IRPs using prices ranging between $8 and $40 per metric ton of CO2 emitted and escalating these costs by 2.5% per year.  Under the NMPRC order, each utility must analyze these standardized prices as projected operating costs.  Reflecting the developing nature of this issue, the NMPRC order states that these prices may be changed in the future to account for additional information or changed circumstances.  However, PNM is required to use these prices for purposes of its IRP, and the prices may not reflect the costs that it ultimately will incur.  PNM's IRP filed with the NMPRC on July 18, 2011 (Note 10) showed that while consideration of the NMPRC required carbon emissions costs did not significantly change the resource decisions regarding future facilities over the next 20 years, it did slightly impact the projected in-service dates of some of the identified resources.  Much higher GHG costs than assumed in the NMPRC analysis are necessary to impact future resource decisions. The primary consequence of the standardized cost of carbon emissions was an increase to generation portfolio costs.
In 2007, seven western states, including New Mexico, and three Canadian provinces entered into an accord, called the Western Regional Climate Action Initiative (the “WCI”), to reduce GHG from automobiles and certain industries, including utilities.  

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The WCI released design recommendations for elements of a regional cap-and-trade program in September 2008 and created several subcommittees to develop detailed implementation recommendations.   Under the WCI recommendations, GHG from the electricity sector and fossil fuel consumption of the industrial and commercial sectors would be capped at then current levels and subject to regulation starting in 2012.  Over time, producers would be required to reduce their GHG.  Implementation of the design elements for GHG reductions would fall to each state and province.   On June 4, 2010, the NMED filed a petition with the EIB for the adoption of rules required to implement a WCI cap-and-trade program. A hearing was held in September 2010. On November 2, 2010, the EIB approved the NMED's proposal to institute a regional cap-and-trade rule that would affect sources regulated by NMED that emit more than 25,000 metric tons of CO2 per year. The cap would start with an emissions baseline established in 2011. NMED would grant allowances for free to regulated sources based on their baseline and a 2% annual reduction. In order to take effect, New Mexico and California must recognize each other as trading partners under the WCI regional trading program, which has not occurred. On October 20, 2011, the California Air Resources Board adopted a final cap-and-trade regulation that calls for quarterly auctions of GHG allowances starting in November 2012. Also, several market elements including allowance tracking and a trading market must be established by WCI. The EIB adopted the proposed rule in December 2010. PNM appealed the EIB's decision and after various legal proceedings, the EIB voted to repeal the cap-and-trade program regulation on February 6, 2012. New Energy Economy (“NEE”), a non-profit environmental advocacy organization, and Western Resource Advocates filed a joint notice of appeal of the EIB's decision with the New Mexico Court of Appeals on April 6, 2012.
In April 2011, NEE moved to intervene in PNM's appeal, which motion was denied by the New Mexico Court of Appeals. After further procedural steps in the Court of Appeals, NEE filed a Writ of Superintending Control in the New Mexico Supreme Court in June 2011 and also sought to vacate the remand order entered by the Court of Appeals. After oral argument, the Supreme Court held on July 27, 2011 that NEE has the right to be a party on appeal. However, the remand of PNM's appeal, in which NEE is now an appellee, remains in effect.
In December 2008, NEE petitioned the EIB to amend existing regulations and adopt new regulations that would reduce GHG from certain sources regulated by the State of New Mexico. Following extensive litigation regarding the EIB's authority to regulate GHG, which did not resolve the issue, the rulemaking hearing on the NEE petition concluded in October 2010. On December 8, 2010, the EIB adopted a modified version of the petition. The modifications pushed the effective date to January 1, 2013 or six months after NMED's cap-and-trade rule described above is no longer in force, whichever is later. PNM filed testimony in the rulemaking hearing estimating the cost of electricity to PNM's customers would increase by approximately $8 million each year over the prior year if the NEE's proposed rule is adopted. PNM appealed the EIB's decision and, after various legal proceedings, the EIB voted to repeal the NEE rule on March 16, 2012. NEE and Western Resource Advocates filed a joint notice of appeal of the EIB's decision with the New Mexico Court of Appeals on May 31, 2012.

The status of the NMED cap-and-trade rule and the NEE rule is currently uncertain and it is possible the EIB, the courts, or the legislature might take further action on them. In addition, the Governor of New Mexico established a small-business task force to review recent regulations shortly after her inauguration. The task force issued its recommendations on April 1, 2011. The recommendations include changing New Mexico's status in the WCI from participant to observer and revising the cap-and-trade rule approved in November 2010. New Mexico is no longer a participant in the WCI. However, the State is continuing to work with other states and provinces on other North American climate initiatives and clean energy policies and strategies.

On August 2, 2012, thirty-three New Mexico organizations representing public health, business, environmental, consumers, Native American and other interested parties filed a petition for rulemaking with the NMPRC. The petition asks the NMPRC to issue a NOPR regarding the implementation of an Optional Clean Energy Standard for electric utilities located in New Mexico. The proposed standard would have utilities that elect to participate reduce their CO2 emissions by 3% per year. Utilities that opt into the program would be assured recovery of their reasonable compliance costs. The NMPRC scheduled a workshop to discuss whether they have authority to proceed with the NOPR.

Transmission Issues
 
FERC has pending numerous notices of inquiry and rulemaking dockets related to transmission issues. Such actions may lead to changes in FERC administrative rules or ratemaking policy, but have no time frame in which action must be taken or a docket closed with no further action. Further, such notices and rulemaking dockets do not apply strictly to PNM, but will have industry-wide effects in that they will apply to all FERC-regulated entities. The Company monitors and often submits comments taking a position in such notices and rulemaking dockets or may join in larger group responses. The Company often cannot determine the full impact of a proposed rule and policy change until the final determination is made by FERC and PNM is unable to predict the outcome of these matters.

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On November 24, 2009, FERC issued Order 729 approving two Modeling, Data, and Analysis Reliability Standards (“Reliability Standards”) submitted by NERC – MOD-001-1 (Available Transmission System Capability) and MOD-029-1 (Rated System Path Methodology). Both MOD-001-1 and MOD-029-1 require a consistent approach, provided for in the Reliability Standards, to measuring the total transmission capability (“TTC”) of a transmission path. The TTC level established using the two Reliability Standards could result in a reduction in the available transmission capacity currently used by PNM to deliver generation resources necessary for its jurisdictional load and for fulfilling its obligations to third-party users of the PNM transmission system.
During the first quarter of 2011, at the request of PNM and other southwestern utilities, NERC advised all transmission owners and transmission service providers they have delayed the implementation of portions of the MOD-029 methodology for "Flow Limited" paths until such time as a modification to the standard can be developed that will mitigate the technical concerns identified by the transmission owners and transmission service providers. PNM and other western utilities filed a Standards Action Request with NERC in the second quarter of 2012. Several months to over a year will likely be required to process the request through the NERC's standards development process.
In July 2011, FERC issued Order 1000 adopting new requirements for transmission planning, cost allocation, and development.  Order 1000 calls for significant changes to the transmission process of WestConnect, an organization of utility companies providing transmission of electricity, in the western region that includes PNM.  The impacts of the new requirements of Order 1000 relating to future transmission development and ownership on PNM are uncertain.  Much of the work needed to be able to comply must be done at the subregional level and PNM is working through WestConnect in developing both its own and regional compliance filings. PNM and other WestConnect participants filed a modified version of Attachment K to their transmission tariffs for regional compliance on October 11, 2012. A second compliance filing will be made in April 2013 to address the planning and cost allocation between WestConnect and other regions.

Financial Reform Legislation

In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, which is intended to improve regulation of financial markets, was signed into law. Although many of the rules required to implement the legislation have not yet been finalized, the U.S. Commodity Futures Trading Commission ("CFTC") has published final rules defining several key terms related to the act, including the end-user exception to the clearing requirement for swaps.  The Company expects to qualify for the end-user exception and expects to be able to comply with its requirements within the time frame required by the CFTC. The Company continues to evaluate developments regarding this legislation and cannot predict the ultimate impact it may have on the Company’s financial condition, results of operations, cash flows, or liquidity.

Other Matters
As discussed under Employees in Item 1. Business in the 2011 Annual Reports on Form 10-K, at December 31, 2011, PNM Electric had 635 employees in its power plant and operations areas covered by a collective bargaining agreement with the IBEW that was entered into in May 2009. PNMR has no other employees represented by unions.  Negotiations for a new agreement with the IBEW began on January 30, 2012.  In the negotiations, PNM focused its efforts towards meeting four objectives:  improved safety, continued compliance, continued reliability, and cost management. The IBEW and PNM reached a tentative agreement on July 7, 2012 for the period of July 7, 2012 to April 30, 2015. The agreement was ratified by the IBEW on July 27, 2012. The agreement includes wage increase provisions of 2% effective July 7, 2012, May 1, 2013, and May 1, 2014.  The wages and benefits for all PNM employees who are members of the IBEW are typically included in the rates charged to electric customers, subject to approval of the NMPRC.

See Notes 9 and 10 herein and Notes 16 and 17 in the 2011 Annual Reports on Form 10-K for a discussion of commitments and contingencies and rate and regulatory matters.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with GAAP requires Company management to select and apply accounting policies that best provide the framework to report the results of operations and financial position for PNMR, PNM, and TNMP. The selection and application of those policies requires management to make difficult, subjective, and/or complex judgments concerning reported amounts of revenue and expenses during the reporting period and the reported amounts of assets and liabilities at the date of the financial statements. As a result, there exists the likelihood that materially different amounts would be reported under different conditions or using different assumptions.

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As of September 30, 2012, there have been no significant changes with regard to the critical accounting policies disclosed in PNMR’s, PNM’s, and TNMP’s 2011 Annual Reports on Forms 10-K. The policies disclosed included unbilled revenues, regulatory accounting, impairments, decommissioning costs, derivatives, pension and other postretirement benefits, accounting for contingencies, income taxes, and market risk.

MD&A FOR PNM

RESULTS OF OPERATIONS

PNM operates in only one reportable segment, PNM Electric, as presented above in Results of Operations for PNMR.

MD&A FOR TNMP

RESULTS OF OPERATIONS

TNMP operates in only one reportable segment, TNMP Electric, as presented above in Results of Operations for PNMR.

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

Statements made in this filing that relate to future events or PNMR's, PNM's, or TNMP's expectations, projections, estimates, intentions, goals, targets, and strategies are made pursuant to the Private Securities Litigation Reform Act of 1995. Readers are cautioned that all forward-looking statements are based upon current expectations and estimates. PNMR, PNM, and TNMP assume no obligation to update this information.
 
Because actual results may differ materially from those expressed or implied by these forward-looking statements, PNMR, PNM, and TNMP caution readers not to place undue reliance on these statements. PNMR's, PNM's, and TNMP's business, financial condition, cash flows, and operating results are influenced by many factors, which are often beyond their control, that can cause actual results to differ from those expressed or implied by the forward-looking statements. These factors include:

The ability of PNM and TNMP to recover costs and earn allowed returns in regulated jurisdictions
The ability of the Company to successfully forecast and manage its operating and capital expenditures
State and federal regulatory, legislative, and judicial decisions and actions on ratemaking, tax, and other matters
State and federal regulation or legislation relating to environmental matters, including the resultant costs of compliance and other impacts on the operations and economic viability of PNM's generating plants
The risk that recently enacted reliability standards regarding available transmission capacity and other FERC rulemakings may negatively impact the operation of PNM's transmission system
The performance of generating units, transmission systems, and distribution systems, which could be negatively affected by operational issues, extreme weather conditions, terrorism, and cybersecurity breaches
Variability of prices and volatility and liquidity in the wholesale power and natural gas markets
Changes in price and availability of fuel and water supplies
Uncertainties surrounding the mine fire incident at the mine supplying coal to SJGS
Uncertainty surrounding the status of PNM's participation in jointly-owned generation projects resulting from the scheduled expiration of the operational agreements for the projects
The risks associated with completion of generation, transmission, distribution, and other projects
Regulatory, financial, and operational risks inherent in the operation of nuclear facilities, including spent fuel disposal uncertainties
Uncertainty regarding the requirements and related costs of decommissioning power plants and coal mines supplying certain power plants, as well as the ability to recover decommissioning costs from customers
The impacts on the electricity usage of the Company's customers due to performance of state, regional, and national economies and mandatory energy efficiency measures, weather, seasonality, and other changes in supply and demand
The Company's ability to access the financial markets, including disruptions in the credit markets, actions by ratings agencies, and fluctuations in interest rates
The potential unavailability of cash from PNMR's subsidiaries due to regulatory, statutory, or contractual restrictions

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The impacts of decreases in the values of marketable equity securities maintained to provide for nuclear decommissioning and pension and other postretirement benefits
Commodity and counterparty credit risk transactions and the effectiveness of risk management
The outcome of legal proceedings, including the extent of insurance coverage
Changes in applicable accounting principles

Any material changes to risk factors occurring after the filing of PNMR’s, PNM’s, and TNMP’s 2011 Annual Reports on Form 10-K are disclosed in Item 1A, Risk Factors, in Part II of this Form 10-Q.

For information about the risks associated with the use of derivative financial instruments, see Item 3. “Quantitative and Qualitative Disclosures About Market Risk.”

SECURITIES ACT DISCLAIMER

Certain securities described or cross-referenced in this report have not been registered under the Securities Act of 1933, as amended, or any state securities laws and may not be reoffered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act of 1933 and applicable state securities laws. This Form 10-Q does not constitute an offer to sell or the solicitation of an offer to buy any securities.

WEBSITES
The PNMR website, www.pnmresources.com, is an important source of Company information. New or updated information for public access is routinely posted.  PNMR encourages analysts, investors, and other interested parties to register on the website to automatically receive Company information by e-mail. This information includes news releases, notices of webcasts, and filings with the SEC. Participants can unsubscribe at any time and will not receive information that was not requested.
Our Internet addresses are:
 
PNMR: www.pnmresources.com
PNM: www.pnm.com
TNMP: www.tnmp.com
 
The contents of these websites are not a part of this Form 10-Q. The SEC filings of PNMR, PNM, and TNMP, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, are accessible free of charge on the PNMR website as soon as reasonably practicable after they are filed with, or furnished to, the SEC. These reports are also available in print upon request from PNMR free of charge.
 
Also available on the Company's website at www.pnmresources.com/investors/governance.com and in print upon request from any shareholder are our:
 
Corporate Governance Principles
Code of Ethics (Do the Right Thing-Principles of Business Conduct)
Charters of the Audit and Ethics Committee, Nominating and Governance Committee, Compensation and Human Resources Committee, and Finance Committee
 
The Company will post amendments to or waivers from its code of ethics (to the extent applicable to the Company's executive officers and directors) on its website.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, PNMR and its subsidiaries are exposed to a variety of market risks. Market risk is the potential loss or gain that may occur as a result of changes in the market or fair value of a particular instrument or commodity. All financial and commodity-related instruments, including derivatives, are subject to market risk. The Company had no trading transactions during the year ended December 31, 2011 and the nine months ended September 30, 2012.
The Company controls the scope of its various forms of risk through a comprehensive set of policies and procedures and oversight by senior level management and the Board. The Board’s Finance Committee sets the risk limit parameters. The RMC, comprised of corporate and business segment officers, oversees all of the risk management activities, which include commodity

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risk, credit risk, interest rate risk, equity risk, and business risk. The RMC has oversight for the ongoing evaluation of the adequacy of the risk control organization and policies. The Company has risk control organizations, which are assigned responsibility for establishing and enforcing the policies, procedures, and limits and evaluating the risks inherent in proposed transactions, on an enterprise-wide basis.
The RMC’s responsibilities include: establishment of policies regarding risk exposure levels and activities in each of the business segments; authority to approve the types of derivatives entered into; authority to establish a general policy regarding counterparty exposure and limits; authority to approve and revise the corporate risk policy; authorization and delegation of transaction limits; review and approval of controls and procedures for derivative activities; review and approval of models and assumptions used to calculate mark-to-market and market risk exposure; authority to approve and open brokerage and counterparty accounts for derivatives; review of hedging and risk activities; the extent and type of reporting to be performed for monitoring of limits and positions; and quarterly reporting to the Audit and Finance Committees on these activities. The RMC also proposes risk limits to the Finance Committee for its approval.
It is the responsibility of each business segment to create its own control procedures and policies within the parameters established by the Corporate Financial Risk Management Policy, approved by the RMC. The RMC reviews and approves these policies, which are created with the assistance of the Risk Management Department and the Vice President and Treasurer. Each business segment’s policies address the following controls: authorized instruments and markets; authorized personnel; policies on segregation of duties; policies on mark-to-market accounting; responsibilities for deal capture; confirmation responsibilities; responsibilities for reporting results; statement on the role of derivative transactions; and limits on individual transaction size (nominal value).
Commodity Risk
PNMR is exposed to the impact of changes in price for energy and energy-related products, which is partially mitigated by PNMR's use of commodity derivatives. To the extent an open position exists, fluctuating commodity prices can impact financial results and financial position, either favorably or unfavorably. As a result, the Company cannot predict with certainty the impact that its risk management decisions may have on its businesses, operating results, or financial position.
Information concerning accounting for derivatives and the risks associated with commodity contracts is set forth in Note 4. Note 4 also contains a summary of the fair values of mark-to-market energy related derivative contracts included in the Condensed Consolidated Balance Sheets.
The following table details the changes in PNMR’s net asset or liability balance sheet position for mark-to-market energy transactions other than cash flow hedges:
 
Nine Months Ended
 
September 30,
 
2012
 
2011
Economic Hedges
(In thousands)
Sources of fair value gain (loss):
 
 
 
Net fair value at beginning of period
$
(356
)
 
$
(22,975
)
Amount realized on contracts delivered during period
(3,695
)
 
4,407

Changes in fair value
619

 
1,462

Net mark-to-market change recorded in earnings
(3,076
)
 
5,869

Net change recorded as regulatory assets and liabilities
(42
)
 
(140
)
Unearned/prepaid option premiums

 
904

Settlement of de-designated cash flow hedges

 
183

          Net fair value at end of period
$
(3,474
)
 
$
(16,159
)
The following table provides the maturity of PNMR’s net assets (liabilities) other than cash flow hedges, giving an indication of the calendar year in which these mark-to-market amounts will settle and generate (use) cash.


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Fair Value of Mark-to-Market Instruments at September 30, 2012
 
Settlement Dates
 
2012
 
2013
 
2014
 
2015
 
2016
 
(In thousands)
Economic hedges
 
 
 
 
 
 
 
 
 
Prices actively quoted
$

 
$

 
$

 
$

 
$

Prices provided by other external sources
587

 
(1,820
)
 
(1,300
)
 
(633
)
 
(308
)
Prices based on models and other valuations

 

 

 

 

Total
$
587

 
$
(1,820
)
 
$
(1,300
)
 
$
(633
)
 
$
(308
)

During the year ended December 31, 2011 and the nine months ended September 30, 2012, PNMR had no commodity derivative instruments designated as cash flow hedging instruments.

PNM measures the market risk of its long-term contracts and wholesale activities using a VaR calculation to measure price movements. The VaR calculation reports the possible market loss for the respective transactions. This calculation is based on the transaction’s fair market value on the reporting date. PNM utilizes the Monte Carlo VaR simulation model with a 95% confidence level and a three day holding period. The Monte Carlo model utilizes a random generated simulation based on historical volatility to generate portfolio values. For example, if VaR is calculated at $10.0 million, it is estimated that in 950 out of 1,000 market simulations the pre-tax loss in liquidating the portfolio would not exceed $10.0 million in the three days that it would take to liquidate the portfolio. The quantitative risk information, however, is limited by the parameters established in creating the model.

PNM measures VaR for all transactions that are not directly asset-related and have economic risk. PNM did not have any non-asset backed transactions for the nine months ended September 30, 2012 and 2011. PNM also measures VaR for the positions in its wholesale portfolio. 

First Choice measured the market risk of its retail sales commitments and supply sourcing activities using a GEaR calculation to monitor potential risk exposures related to taking contracts to settlement and a VaR calculation to measure short-term market price impacts. Because of its obligation to serve customers, First Choice was required to take certain contracts to settlement. Accordingly, a measure that evaluated the settlement of First Choice's positions against earnings provided management with a useful tool to manage its portfolio. Over a rolling 12 month period, First Choice used a hold-to-maturity at risk calculation for its GEaR measurement. The calculation utilized a Monte Carlo simulation with a 95% confidence level and holding each position to settlement. The quantitative risk information, however, was limited by the parameters established in creating the model.

First Choice utilized a VaR measure to manage its market risk. The VaR limit was based on the same total portfolio approach as the GEaR measure; however, the VaR measure was intended to capture the effects of changes in market prices over the life of the total portfolio and was intended to capture the effects of changes in market prices over a three day holding period. The VaR calculations utilized a Monte Carlo simulation at a 95% confidence level.

The Company's risk measures are regularly monitored by the Company's RMC. The RMC has put in place procedures to ensure that increases in risk measures that exceed the prescribed limits are reviewed and, if deemed necessary, acted upon to reduce exposures. VaR or GEaR limits were not exceeded during the nine months ended September 30, 2012 or 2011.

The VaR and GEaR limits represent an estimate of the potential losses that could be recognized on the Company’s portfolios, subject to market risk, given current volatility in the market, and are 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 due to actual fluctuations in market prices, operating exposures, and the timing thereof, as well as changes to the underlying portfolios during the year.

Credit Risk

PNMR is also exposed to credit risk from its retail and wholesale customers, as well as counterparties to derivative instruments. Credit risk relates to the risk of loss resulting from counterparties' nonperformance of their contractual obligations. The Company conducts counterparty risk analysis across business segments and uses a credit management process to assess the

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financial conditions of counterparties. Credit exposure is regularly monitored by the RMC. The RMC has put procedures in place to ensure that increases in credit risk that exceed the prescribed limits are reviewed and, if deemed necessary, acted upon to reduce exposures.

The following table provides information related to PNMR’s credit exposure as of September 30, 2012. The table further delineates that exposure by the credit worthiness (credit rating) of the counterparties and provides guidance as to the concentration of credit risk to individual counterparties. The PVNGS and EIP lessor notes are not exposed to credit risk, since the notes are repaid as PNM makes payments on the underlying leases. Other investments (Note 4) have no significant counterparty credit risk.

Schedule of Credit Risk Exposure
September 30, 2012
Rating (1)
Credit Risk Exposure(2)
 
Number of Counter-parties >10%
 
Net
Exposure of Counter-parties >10%
 
(Dollars in thousands)
External ratings:
 
 
 
 
 
Investment grade
$
3,567

 
2
 
$
1,448

Non-investment grade

 
 

Internal ratings:
 
 
 
 
 
Investment grade

 
 

Non-investment grade
410

 
 

Total
$
3,977

 
 
 
$
1,448


(1) 
The rating “Investment Grade” is for counterparties with a minimum S&P rating of BBB- or Moody's rating of Baa3. If the counterparty has provided a guarantee by a higher rated entity (e.g., its parent), determination is based on the rating of its guarantor. The category “Internal Ratings - Investment Grade” includes those counterparties that are internally rated as investment grade in accordance with the guidelines established in the Company’s credit policy.

(2) 
The Credit Risk Exposure is the gross credit exposure, including long-term contracts (other than full requirements customers), forward sales, and short-term sales. The exposure captures the amounts from receivables/payables for realized transactions, delivered and unbilled revenues, and mark-to-market gains/losses (pursuant to contract terms). Gross exposures can be offset according to legally enforceable netting arrangements but are not reduced by available credit collateral. Credit collateral includes cash deposits, letters of credit, and parental guarantees received from counterparties. Amounts are presented before the application of such credit collateral instruments. At September 30, 2012, PNMR held no credit collateral to offset its credit exposure.
    
The Company provides for losses due to market and credit risk. Net credit risk for the Company’s largest counterparty as of September 30, 2012 was $5.3 million, which is due from a full requirements customer.

Interest Rate Risk

The Company has long-term debt which subjects it to the risk of loss associated with movements in market interest rates. The majority of the Company’s long-term debt is fixed-rate debt and does not expose earnings to a major risk of loss due to adverse changes in market interest rates. However, the fair value of PNMR’s consolidated long-term debt instruments would increase by 4.5%, or $94.0 million, if interest rates were to decline by 50 basis points from their levels at September 30, 2012. In general, an increase in fair value would impact earnings and cash flows to the extent not recoverable in rates if all or a portion of debt instruments were acquired in the open market prior to their maturity. TNMP has long-term debt of $50.0 million that bears interest at a variable rate. However, TNMP has also entered into a hedging arrangement that effectively results in this debt bearing interest at a fixed rate, thereby eliminating interest rate risk. At October 26, 2012, PNMR had $106.4 million of consolidated short-term debt outstanding under its revolving credit facilities, which allow for a maximum aggregate borrowing capacity of $775.0 million. These facilities bear interest at variable rates, which averaged 1.97% for PNMR borrowings outstanding on October 26, 2012, and the Company is exposed to interest rate risk to the extent of future increases in variable interest rates.

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The securities held by PNM in the NDT had an estimated fair value of $186.8 million at September 30, 2012, of which 48.9% were fixed-rate debt securities that subject PNM to risk of loss of fair value with movements in market interest rates. If interest rates were to increase by 50 basis points from their levels at September 30, 2012, the decrease in the fair value of the fixed-rate securities would be 3.1%, or $2.8 million. The PVNGS and EIP lessor notes, described above, are not exposed to interest rate risk. PNM and TNMP do not directly recover or return through rates any losses or gains on the securities, including equity investments discussed below, in the trusts for nuclear decommissioning. However, the overall performance of these trusts does enter into the periodic determinations of expense and funding levels, which are factored into the rate making process to the extent applicable to regulated operations. PNM is at risk for shortfalls in funding of obligations due to investment losses, including those from the equity market risks discussed below to the extent not ultimately recovered through rates charged to customers.

Equity Market Risk

The NDT and the trust for post-term reclamation of the coal mines serving SJGS hold certain equity securities at September 30, 2012. These equity securities expose PNM to losses in fair value should the market values of the underlying securities decline. At September 30, 2012, these equity securities were valued at $95.2 million. A hypothetical 10% decrease in equity prices would reduce the fair values of these funds by $9.5 million.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

As of the end of the period covered by this quarterly report, each of PNMR, PNM, and TNMP conducted an evaluation under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer of each of PNMR, PNM, and TNMP concluded that the disclosure controls and procedures are effective.

Changes in internal controls

There have been no changes in each of PNMR’s, PNM's, and TNMP's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the quarter ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, each of PNMR’s, PNM's, and TNMP's internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Notes 9 and 10 in the Notes to Condensed Consolidated Financial Statements for information related to the following matters, for PNMR, PNM, and TNMP, incorporated in this item by reference.

The Clean Air Act – Regional Haze – SJGS
The Clean Air Act – Regional Haze – Four Corners
The Clean Air Act – SJGS Operating Permit Challenge
The Clean Air Act – Citizen Suit Under the Clean Air Act
The Clean Air Act – Navajo Nation Environmental Issues
The Clean Air Act – Four Corners New Source Review
Endangered Species Act
Santa Fe Generating Station
Coal Combustion Byproducts Waste Disposal – Sierra Club Allegations
PVNGS Water Supply Litigation
San Juan River Adjudication
Begay v. PNM et al
Transmission Issues
PNM – Renewable Portfolio Standard
PNM – Energy Efficiency and Load Management – Disincentives/Incentives Adder

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PNM – 2010 Electric Rate Case
PNM – Emergency FPPAC
PNM – Transmission Rate Case
PNM – Firm-Requirements Wholesale Customer Rate Case
TNMP – Interest Rate Compliance Tariff
TNMP – Advanced Meter System Deployment and Surcharge Request
TNMP – Remand of ERCOT Transmission Rates for 1999 and 2000

See also Climate Change Issues under Other Issues Facing the Company in MD&A. The third, fourth, and fifth paragraphs under State and Regional Activity are incorporated in this item by reference.

ITEM 1A. RISK FACTORS

As of the date of this report, there have been no material changes with regard to the Risk Factors disclosed in PNMR’s, PNM’s, and TNMP’s Annual Reports on Form 10-K for the year ended December 31, 2011.

ITEM 6. EXHIBITS

3.1
PNMR
Articles of Incorporation of PNMR, as amended to date (incorporated by reference to Exhibit 3.1 to PNMR’s Current Report on Form 8-K filed November 21, 2008)
 
 
 
3.2
PNM
Restated Articles of Incorporation of PNM, as amended through May 31, 2002 (incorporated by reference to Exhibit 3.1.1 to PNM’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002)
 
 
 
3.3
TNMP
Articles of Incorporation of TNMP, as amended through July 7, 2005 (incorporated by reference to Exhibit 3.1.2 to TNMP’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005)
 
 
 
3.4
PNMR
Bylaws of PNMR. with all amendments to and including December 8, 2009 (incorporated by reference to Exhibit 3.1 to PNMR’s Current Report on Form 8-K filed December 11, 2009)
 
 
 
3.5
PNM
Bylaws of PNM with all amendments to and including May 31, 2002 (incorporated by reference to Exhibit 3.1.2 to PNM’s Report on Form 10-Q for the fiscal quarter ended June 30, 2002)
 
 
 
3.6
TNMP
Bylaws of TNMP, as amended effective June 26, 2011 (incorporated by reference to Exhibit 3.6 to TNMP's Quarterly Report on Form 10-Q for the quarter ended September 30, 2011)
 
 
 
4.1
PNM
Tenth Supplemental Indenture, dated as of September 1, 2012, between PNM and Union Bank, N.A. (ultimate successor as trustee to The Chase Manhattan Bank), as Trustee
 
 
 
12.1
PNMR
Ratio of Earnings to Fixed Charges
 
 
 
12.2
PNM
Ratio of Earnings to Fixed Charges
 
 
 
12.3
TNMP
Ratio of Earnings to Fixed Charges
 
 
 
31.1
PNMR
Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
31.2
PNMR
Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
31.3
PNM
Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
31.4
PNM
Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
31.5
TNMP
Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
31.6
TNMP
Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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32.1
PNMR
Chief Executive Officer and Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
32.2
PNM
Chief Executive Officer and Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
32.3
TNMP
Chief Executive Officer and Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
PNMR, PNM, and TNMP
XBRL Instance Document
 
 
 
101.SCH
PNMR, PNM, and TNMP
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
PNMR, PNM, and TNMP
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF
PNMR, PNM, and TNMP
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
101.LAB
PNMR, PNM, and TNMP
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
PNMR, PNM, and TNMP
XBRL Taxonomy Extension Presentation Linkbase Document


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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.
 
 
PNM RESOURCES, INC.
PUBLIC SERVICE COMPANY OF NEW MEXICO
TEXAS-NEW MEXICO POWER COMPANY
 
 
(Registrants)
 
 
 
 
 
 
Date:
November 2, 2012
/s/ Thomas G. Sategna
 
 
Thomas G. Sategna
 
 
Vice President and Corporate Controller
 
 
(Officer duly authorized to sign this report)

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