PNM 12.31.2012 10-K
Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 _________________________________________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2012

Commission
File Number
 
Names of Registrants, State of Incorporation,
Address and Telephone Number
 
I.R.S. Employer
Identification No.
001-32462
 
PNM Resources, Inc.
(A New Mexico Corporation)
414 Silver Ave. SW
Albuquerque, New Mexico 87102-3289
(505) 241-2700
 
85-0468296
001-06986
 
Public Service Company of New Mexico
(A New Mexico Corporation)
414 Silver Ave. SW
Albuquerque, New Mexico 87102-3289
(505) 241-2700
 
85-0019030
002-97230
 
Texas-New Mexico Power Company
(A Texas Corporation)
577 N. Garden Ridge Blvd.
Lewisville, Texas 75067
(972) 420-4189
 
75-0204070
Securities Registered Pursuant To Section 12(b) Of The Act:
Registrant
 
Title of Each Class
 
Name of Each Exchange
on Which Registered
PNM Resources, Inc.
 
Common Stock, no par value
 
New York Stock Exchange
Securities Registered Pursuant To Section 12(g) Of The Act:
Registrant
 
Title of Each Class                
Public Service Company of New Mexico
 
1965 Series, 4.58% Cumulative Preferred Stock
 
 
($100 stated value without sinking fund)
Indicate by check mark whether each registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
PNM Resources, Inc. (“PNMR”)
 
YES  ü
 
NO     
Public Service Company of New Mexico (“PNM”)
 
YES     
 
NO ü
Texas-New Mexico Power Company (“TNMP”)
 
YES     
 
NO ü

Indicate by check mark if each registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
PNMR
 
YES     
 
NO ü
PNM
 
YES     
 
NO ü
TNMP
 
YES  ü
 
NO     



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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.
 
PNMR
  
YES  ü
 
NO     
PNM
  
YES  ü
 
NO     
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     
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S–K is not contained herein, and will not be contained, to the best of registrants’ knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10–K or any amendment to this Form 10–K.  ü
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 the registrants are a shell company (as defined in Rule 12b-2 of the Exchange Act). YES         NO  ü
As of February 22, 2013, shares of common stock outstanding were:
 
PNMR
79,653,624

PNM
39,117,799

TNMP
6,358

On June 29, 2012, the aggregate market value of the voting common stock held by non-affiliates of PNMR as computed by reference to the New York Stock Exchange composite transaction closing price of $19.54 per share reported by The Wall Street Journal, was $1,556,431,813. PNM and TNMP have no common stock held by non-affiliates.
PNM AND TNMP MEET THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS (I) (1) (a) AND (b) OF FORM 10-K AND ARE THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION (I) (2).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document are incorporated by reference into Part III of this report:
Proxy Statement to be filed by PNMR with the SEC pursuant to Regulation 14A relating to the annual meeting of stockholders of PNMR to be held on May 9, 2013.
This combined Form 10-K 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-K 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-K that relate to each other registrant are not incorporated by reference therein.

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PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
INDEX 
 
 
 
Page
 
 
PART I
 
ITEM 1. BUSINESS
OPERATIONS & REGULATION
 
 
EMPLOYEES
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. MINE SAFETY DISCLOSURES
PART II
 
ITEM 5. MARKET FOR PNMR’S COMMON EQUITY, RELATED STOCKHOLDER 
 MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
 
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
 
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
 
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
 
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 

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GLOSSARY
 
Definitions:
  
 
ABO
  
Accumulated Benefit Obligation
Afton
  
Afton Generating Station
AFUDC
 
Allowance for Funds Used During Construction
ALJ
  
Administrative Law Judge
AMS
 
Advanced Meter System
AOCI
  
Accumulated Other Comprehensive Income
APBO
  
Accumulated Postretirement Benefit Obligation
APS
  
Arizona Public Service Company, which is the operator and a co-owner of PVNGS and Four Corners
ARO
  
Asset Retirement Obligation
BACT
  
Best Available Control Technology
BART
  
Best Available Retrofit Technology
BHP
  
BHP Billiton, Ltd, the parent of SJCC
Board
  
Board of Directors of PNMR
BTU
  
British Thermal Unit
CAA
 
Clean Air Act
Cascade
  
Cascade Investment, L.L.C.
CCB
  
Coal Combustion Byproducts
CO2
  
Carbon Dioxide
CTC
  
Competition Transition Charge
D.C. Circuit
 
United States Court of Appeals for the District of Columbia Circuit
Delta
  
Delta-Person Generating Station
DOE
  
United States Department of Energy
DOI
  
United States Department of Interior
ECJV
  
ECJV Holdings, LLC
EIB
  
New Mexico Environmental Improvement Board
EIP
  
Eastern Interconnection Project
EPA
  
United States Environmental Protection Agency
EPE
  
El Paso Electric
ERCOT
  
Electric Reliability Council of Texas
ESA
 
Endangered Species Act
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
FPL
  
FPL Energy New Mexico Wind, LLC
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
IRS
  
Internal Revenue Service
KW
  
Kilowatt
KWh
  
Kilowatt Hour

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LIBOR
  
London Interbank Offered Rate
Lordsburg
  
Lordsburg Generating Station
Luna
  
Luna Energy Facility
MD&A
  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
MMBTU
  
Million BTUs
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 Council
Ninth Circuit
  
United States Court of Appeals for the Ninth Circuit
NMAG
  
New Mexico Attorney General
NMED
  
New Mexico Environment Department
NMIEC
  
New Mexico Industrial Energy Consumers Inc.
NMPRC
  
New Mexico Public Regulation Commission
NOx
  
Nitrogen Oxides
NOI
  
Notice of Inquiry
NOPR
 
Notice of Proposed Rulemaking
NRC
  
United States Nuclear Regulatory Commission
NSPS
  
New Source Performance Standards
NSR
  
New Source Review
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
PBO
  
Projected Benefit Obligation
PCRBs
  
Pollution Control Revenue Bonds
PG&E
  
Pacific Gas and Electric Co.
PNM
  
Public Service Company of New Mexico and Subsidiaries
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
PNMR Term Loan Agreement
  
PNMR’s $100 Million Unsecured Term Loan 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
RMC
  
Risk Management Committee

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RPS
  
Renewable Energy Portfolio Standard
SCE
  
Southern California Edison Company
SCPPA
  
Southern California Public Power Authority
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
SRP
  
Salt River Project
S&P
  
Standard and Poor’s Ratings Services
TCEQ
  
Texas Commission on Environmental Quality
TECA
  
Texas Electric Choice Act
Tenth Circuit
 
United States Court of Appeals for the Tenth Circuit
TNMP
  
Texas-New Mexico Power Company and Subsidiaries
TNMP 2011 Term Loan Agreement
 
TNMP's $50 Million Secured Term Loan
TNMP Revolving Credit Facility
  
TNMP’s $75 Million Revolving Credit Facility
TNP
  
TNP Enterprises, Inc. and Subsidiaries
Tri-State
  
Tri-State Generation and Transmission Association, Inc.
Tucson
  
Tucson Electric Power Company
UAMPS
  
Utah Associated Municipal Power System
Valencia
  
Valencia Energy Facility
VaR
  
Value at Risk
WACC
  
Weighted Average Cost of Capital
WEG
 
WildEarth Guardians
WSPP
  
Western Systems Power Pool
 

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PART I
 
ITEM 1.
BUSINESS

THE COMPANY
Overview
PNMR is an investor-owned holding company of utilities providing electricity and energy efficiency products and services in New Mexico and Texas. With PNMR's exit from its unregulated businesses in 2011, PNMR is now fully repositioned as a holding company of regulated electric utilities 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 regulated 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. In 2011, PNM and TNMP completed general rate proceedings before their state regulators. In August 2012, PNM implemented a rate rider to collect renewable energy procurement costs that are not otherwise being collected in rates. On January 2, 2013, FERC approved a settlement for an increase in rates PNM charges its transmission customers and, in December 2012, PNM filed for an additional increase in rates charged to those customers based on a formula rate methodology, which is pending before FERC. PNM has also reached a settlement for an increase in rates charged to its largest firm-requirements wholesale customer, which is pending before FERC. In September 2012, TNMP received PUCT approval for an increase in its rates to reflect increases in its transmission cost of service. Additional information about rate filings is provided in Note 17.

PNMR's common stock trades on the New York Stock Exchange under the symbol PNM. PNMR was incorporated in the State of New Mexico in 2000.

Other Information

These filings for PNMR, PNM, and TNMP include disclosures for each entity. For discussion purposes, this report will use the term “Company” when discussing matters of common applicability to PNMR, PNM, and TNMP. Discussions regarding only PNMR, PNM, or TNMP will be indicated as such. A reference to “MD&A” in this report refers to Part II, Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations. A reference to a “Note” refers to the accompanying Notes to Consolidated Financial Statements.

Financial information relating to amounts of sales, revenue, net income, and total assets of reportable segments is contained in MD&A and Note 2.


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-K. 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.

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Also available on the Company's website at www.pnmresources.com/investors/governance.cfm 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.

OPERATIONS AND REGULATION
Regulated Operations
PNM

PNM is an electric utility that provides electric generation, transmission, and distribution service to its rate-regulated customers. In New Mexico, the utility's retail electric service territory covers a large area of north central New Mexico, including the cities of Albuquerque, Rio Rancho, and Santa Fe, and certain other areas of southern New Mexico. PNM also provides electricity to firm-requirements wholesale customers in New Mexico and Arizona. Service to retail electric customers is subject to the jurisdiction of the NMPRC. Service to wholesale customers is regulated by FERC. Regulation encompasses the utility's electric rates, service, accounting, issuances of securities, construction of major new generation, transmission, and distribution facilities, and other matters.

Other services provided by PNM include transmission services to third parties as well as the generation and sale of electricity into the wholesale market, which services are regulated by FERC. The utility owns or leases transmission lines, interconnected with other utilities in New Mexico, Texas, Arizona, Colorado, and Utah. The largest retail electric customer served by PNM accounted for 3.6% of the utility's revenues for the year ended December 31, 2012. PNM was incorporated in the State of New Mexico in 1917.

Rate Proceedings

Customer rates for retail electric service are set by the NMPRC. PNM made a general rate case filing in June 2010. On August 8, 2011, the NMPRC issued a final order modifying a stipulation reached by PNM and other parties in this case. The modified stipulation provides:

$72.1 million increase in annual non-fuel revenues for all New Mexico retail customers, implemented August 21, 2011
Customers formerly served by TNMP prior to its acquisition by PNMR (“PNM South”) being covered by the same FPPAC utilized for other retail customers of PNM (“PNM North”)
Subject to further NMPRC approvals, recovery of costs associated with NMPRC approved renewable energy procurement plans through a rate rider beginning no earlier than August 2012
No new general rate adjustment effective prior to July 1, 2013, unless PNM needs to file for recovery of costs to comply with any federal or state environmental law or requirement effective after June 30, 2010
Limit on annual recovery of costs for fuel, renewable energy, and energy efficiency, with recovery of additional amounts deferred for collection to future periods
As permitted by the above NMPRC order, PNM filed an application in January 2012 for a rate rider 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, and the revenue requirements for PNM-owned solar PV facilities and a solar battery storage demonstration project that went into service during 2011. On August 14, 2012, the NMPRC issued an order approving the rider. PNM implemented the rider on August 20, 2012. The rider will terminate upon a final order in PNM's next general rate case unless that order authorizes a continuation of the rider. Amounts that can be collected under the rider are capped at $18.0 million in 2012 and $24.6 million in 2013. Any amounts above the caps are deferred for future recovery without carrying costs. Collections under the rider during 2012 were below the cap. As a separate component of the rider, if PNM's earned return on jurisdictional equity in 2013, adjusted for weather and other items not representative of normal operation, exceeds 10.5%, it will refund to customers during May through December 2014 the amount over 10.5%.


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PNM has entered into firm-requirements wholesale contracts to provide electricity to various customers. These contracts contain both capacity charges and energy charges. Capacity charges are monthly payments for a commitment of resources to service the contract requirements. Energy charges are payments based on the amount of electricity delivered to the customer and are intended to compensate for the variable costs incurred to provide the energy. PNM's firm-requirements demand was 109 MW in 2012, and is expected, based solely on existing contracts, to be 106 MW in 2013, 106 MW in 2014, and 108 MW in 2015. No firm-requirements customer of PNM accounted for more than 2.5% of PNM's revenues for the year ended December 31, 2012.

In September 2011, PNM filed with FERC to increase rates for electric service and ancillary services provided to NEC, PNM's largest firm-requirements wholesale customer. PNM also requested a traditional FPPAC and full recovery of certain third-party transmission charges. FERC issued an order allowing the increased rates to be collected beginning April 14, 2012, subject to refund. The parties agreed to a settlement providing for an increase in rates of $5.3 million, an extension of the contract for 10 years, and an agreement that PNM will be able to file an application for formula based rates to be effective in 2015. The settlement has been filed with FERC and is pending FERC approval. PNM is unable to predict the outcome of this proceeding. PNM provides both energy and power services to the City of Gallup, New Mexico, its second largest firm-requirements wholesale customer, under an electric service agreement that expires June 30, 2013.  PNM and the City of Gallup are in discussions regarding PNM continuing to provide services after the current agreement expires.
In October 2010, PNM filed a notice with FERC to increase its wholesale electric transmission rates for 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 rates were implemented on June 1, 2011, subject to refund. On January 2, 2013, FERC approved a settlement among the parties providing for an increase in transmission service revenues of $2.9 million annually. PNM refunded amounts collected in excess of the settled rates in January 2013. 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 rate increase does not impact PNM's retail customers.
In December 2012, PNM filed a notice with FERC to increase its wholesale electric transmission rates for all of its transmission customers. The proposed increase is $3.2 million annually and is a formula based rate as contemplated by the approved settlement in the case described above. FERC has not taken action on the filing and PNM is unable to predict the outcome of this proceeding.

Operational Information

Weather-normalized retail electric loads decreased by 0.7% in 2012. The system peak demands for retail and firm-requirements customers were:

System Peak Demands
 
2012
 
2011
 
2010
 
(Megawatts)
Summer
1,948

 
1,938

 
1,973

Winter
1,523

 
1,709

 
1,551


PNM holds long-term, non-exclusive franchise agreements for its electric retail operations, with varying expiration dates. These franchise agreements allow the utility to access public rights-of-way for placement of its electric facilities. Franchise agreements have expired in some areas PNM serves, including Albuquerque, Rio Rancho, and Santa Fe. Because PNM remains obligated under New Mexico state law to provide service to customers in these areas, the expirations should not have a material adverse impact. The Albuquerque, Rio Rancho, and Santa Fe metropolitan areas accounted for 48.5%, 11.3%, and 9.5% of PNM's 2012 revenues and no other franchise area represents more than 5%. Although PNM is not required to collect or pay franchise fees in some areas it serves, the utility continues to collect and pay such fees in certain parts of its service territory, including Albuquerque, Rio Rancho, and Santa Fe.

PNM owns or leases 3,189 circuit miles of electric transmission lines that interconnect with other utilities in New Mexico, Arizona, Colorado, Texas, and Utah. Although there has been modest load growth in the utility's service territory in recent years, there has been little development of new transmission facilities. Therefore, most of the capacity on PNM's transmission system is fully committed during peak hours, with very little to no additional access available on a firm commitment basis. These factors result in physical constraints on the system and limit the ability to wheel power into PNM's service area from outside of New Mexico.


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PNM also generates and sells electricity into the wholesale market. Because PNM's 134 MW share of Unit 3 at PVNGS is excluded from retail rates, that unit's power is being sold in the wholesale market. In April 2008, PNM entered into three separate contracts for the sale of capacity and energy related to its entire interest in PVNGS Unit 3 through December 31, 2010. Subsequently, the utility has sold its share of the unit output daily at market prices. PNM has established fixed rates for all 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. Because of lower existing market prices, margins associated with sales subsequent to 2010 were significantly lower than those achieved in the 2008 agreements. Beyond the PVNGS contracts, PNM also engages in activities to optimize its existing jurisdictional assets and long-term purchase power agreements through spot market, hour ahead, day ahead, week ahead, and other sales of any excess generation not required to fulfill retail load and contractual commitments. Revenues from these sales, other than those from PVNGS Unit 3, are credited to retail customers through the FPPAC.

Use of Future Test Year

Senate Bill 477 (“SB 477”) was passed by the New Mexico legislature and became effective in June 2009. SB 477 is designed to promote more timely recovery of reasonable costs of providing utility service in two ways.

The NMPRC must set rates using the test period that best reflects the conditions the utility will experience when new rates are anticipated to go into effect. The NMPRC is required to consider that a future test period may be the one that best meets this requirement. A future test period is a twelve-month period beginning no later than the date a proposed rate change is expected to take effect.

The NMPRC must include certain construction work in progress (“CWIP”) for environmental improvement, generation, and transmission projects in rate base, without an offset for AFUDC. With this provision, PNM will be able to collect costs as projects are being built rather than waiting until they are finished to include them in rate base.

The use of a future test year should help PNM mitigate the adverse effects of regulatory lag, which is inherent when using a historical test year. Accordingly, the utility's earnings should more closely reflect the rate of return allowed by the NMPRC. PNMR believes that achieving earnings that approximate its allowed rate of return is an important factor in attracting equity investors, as well as being considered favorably by credit rating agencies and financial analysts. In November 2012, the NMPRC issued an order promulgating rules that clarify the filing requirements for public utility rate applications based on a future test year.

PNM previously announced it anticipated filing a request for a general rate increase with the NMPRC in mid-2013. With the uncertainty related to environmental capital spending described in Note 16 and improved operating results, PNM is re-evaluating when it will file its next general rate case. As with any forward looking financial information, utilizing a future test year in a rate filing presents challenges that exist in the forecasting process. These include forecasts of both operating and capital expenditures that necessitate reliance on many assumptions concerning future conditions and operating results. In the rate making process, PNM's assumptions are subject to challenge by regulators and intervenors who may assert different interpretations or assumptions.

Renewable Portfolio Standard

The REA was enacted to encourage the development of renewable energy in New Mexico. The act establishes a mandatory RPS requiring a utility to acquire a renewable energy portfolio equal to 10% by 2011, 15% by 2015, and 20% by 2020. The act 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. PNM files required renewable energy plans with the NMPRC annually. See Note 17.

TNMP

TNMP is a regulated utility operating in Texas. TNMP's predecessor was organized in 1925. TNMP is incorporated in the State of Texas.

TNMP provides transmission and distribution services in Texas under the provisions of TECA and the Texas Public Utility Regulatory Act. TNMP is subject to traditional cost-of-service regulation with respect to rates and service under the jurisdiction of the PUCT and certain municipalities. Because its transmission and distribution activities are solely within ERCOT, TNMP is not subject to traditional rate regulation by FERC. TNMP serves a market of small to medium sized communities, most of which

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have populations of less than 50,000. TNMP is the exclusive provider of transmission and distribution services in most areas it serves.

TNMP's service territory consists of three non-contiguous areas. One portion of this territory extends from Lewisville, which is approximately 10 miles north of the Dallas-Fort Worth International Airport, eastward to municipalities near the Red River, and to communities north, west, and south of Fort Worth. The second portion of its service territory includes the area along the Texas Gulf Coast between Houston and Galveston, and the third portion includes areas of far west Texas between Midland and El Paso. ERCOT is the independent system operator that is responsible for maintaining reliable operations for the bulk electric power supply system in its region.

TNMP provides transmission and distribution services at regulated rates to various REPs that, in turn, provide retail electric service to consumers within TNMP's service area. As of December 31, 2012, 89 active REPs receive transmission and distribution services from TNMP. The acquirer of First Choice, including the former First Choice operations, accounted for 19% of TNMP's revenues in 2012. Two other unaffiliated customers of TNMP accounted for operating revenues of 17% in 2012 and 10% in 2012. No other customer accounted for more than 10% of revenues.

Regulatory Activities

In August 2010, TNMP filed with the PUCT for a general rate increase. On January 27, 2011, the PUCT approved a stipulation that settles the case. Key components of the settlement were:

A revenue increase of $10.25 million, effective February 1, 2011
A return on equity of 10.125%
A hypothetical 55%/45% debt-equity capital structure

The PUCT approved interim adjustments to TNMP's transmission rates of $5.5 million on May 14, 2010 and $2.5 million on September 27, 2012.

Franchise Agreements

TNMP holds long-term, non-exclusive franchise agreements for its electric transmission and distribution services. These agreements have varying expiration dates and some have expired. TNMP intends to negotiate and execute new or amended franchise agreements with municipalities where the agreements have expired or will be expiring. Since TNMP is the exclusive provider of transmission and distribution services in most areas that it serves, the need to renew or renegotiate franchise agreements should not have a material adverse impact on TNMP's business. TNMP also earns revenues from service provided to facilities in its service area that lie outside the territorial jurisdiction of the municipalities with which TNMP has franchise agreements.

Competitive Businesses
First Choice

As discussed in Note 3, PNMR completed the sale of First Choice on November 1, 2011 receiving $270.0 million, plus $59.3 million for estimated working capital. The latter amount was subject to adjustment based on the actual amounts of certain components of working capital at October 31, 2011. PNMR recognized a pre-tax gain of $174.9 million on the sale in 2011. The parties could not agree on the working capital amount and, 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 resulting in an additional pre-tax gain of $1.0 million in 2012. PNMR used the net proceeds from the sale of First Choice to repurchase some of PNMR's outstanding debt and equity and for other corporate purposes, including repayment of borrowings under the PNMR Revolving Credit Facility.

First Choice, operating as a certified REP in ERCOT, provided electricity to residential, small commercial and governmental customers. First Choice focused its competitive customer acquisition efforts in major Texas metropolitan areas open to electric choice within ERCOT, including Dallas-Fort Worth, Houston, Corpus Christi, and McAllen-Harlingen. Although First Choice was regulated in certain respects by the PUCT, its business was not subject to traditional rate of return regulation. Rates were negotiated by First Choice with each customer. No specific provisions existed for the recovery of First Choice's purchased power costs and changes in those costs affected operating results.

During the period it was a subsidiary of PNMR, First Choice's operating results were pressured by several factors. Due to the competitive nature of the Texas market, First Choice, similar to other REPs, experienced significant turnover in its customer

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base, which along with the impacts of Hurricane Ike and depressed economic conditions resulted in significant increases in the levels of uncollectible accounts and bad debt expense. First Choice's load fluctuated due to customer additions and losses, changes in customer usage, and seasonality of weather. First Choice experienced increased sales and operating revenues during the summer months as a result of increased air conditioner usage. First Choice monitored and revised its load forecast to account for changing customer loads and entered into hedging arrangements to cover forecasted sales.

Optim Energy

In January 2007, PNMR and ECJV, a wholly owned subsidiary of Cascade, which until late in 2011 was a large PNMR shareholder, created Optim Energy to serve expanding energy markets, principally the areas of Texas covered by ERCOT. Optim Energy's business consisted of development, operation, and ownership of diverse generation assets, complemented by wholesale marketing to optimize those assets. PNMR and ECJV each had a 50 percent ownership interest in Optim Energy, a limited liability company. Optim Energy had interests in three electric generating resources located within the ERCOT area.

Beginning in 2009, Optim Energy was affected by continuing adverse market conditions, primarily low natural gas and power prices. In response to those adverse conditions, Optim Energy changed its strategy to focus on utilizing cash flow from operations to reduce debt. Optim Energy also concentrated on optimizing generation assets as a stand-alone independent power producer.

As discussed in Note 21, PNMR determined its investment in Optim Energy was fully impaired at December 31, 2010 and reduced the carrying value of the investment to zero by recording a pre-tax loss of $188.2 million. PNMR, ECJV, and Cascade entered into agreements on September 23, 2011, whereby Optim Energy was restructured and ECJV made an equity contribution to Optim Energy in exchange for an increased ownership interest, which resulted in PNMR's ownership in Optim Energy being reduced from 50% 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 through September 23, 2011 and used the cost method thereafter. In accordance with GAAP, PNMR did not record income or losses associated with its investment in Optim Energy in 2011.

Corporate and Other

The Corporate and Other segment includes PNMR holding company activities, primarily related to corporate level debt and PNMR Services Company. PNMR Services Company provides corporate services through shared services agreements to PNMR and all of PNMR's business units, including PNM and TNMP, and through transition services agreements with First Choice and Optim Energy. These services are charged and billed on a monthly basis to the business units. Billings are at cost, except for services provided to Optim Energy, which included a profit element.

SOURCES OF POWER
PNM
Generation Capacity

As of December 31, 2012, the total net generation capacity of facilities owned or leased by PNM was 2,333 MW. PNM also obtains 204 MW of power under a long-term PPA with the New Mexico Wind Energy Center.


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PNM's owned and leased capacity in electric generating facilities in commercial service as of December 31, 2012 is:
 
 
 
 
 
 
Generation
 
 
 
 
 
 
Capacity
Type
 
Name
 
Location
 
(MW)
Coal
 
SJGS
 
Waterflow, New Mexico
 
783

Coal
 
Four Corners
 
Fruitland, New Mexico
 
200

Gas
 
Reeves Station
 
Albuquerque, New Mexico
 
154

Gas
 
Afton (combined cycle)
 
La Mesa, New Mexico
 
230

Gas
 
Lordsburg
 
Lordsburg, New Mexico
 
80

Gas
 
Luna (combined cycle)
 
Deming, New Mexico
 
185

Gas/Oil
 
Delta
 
Albuquerque, New Mexico
 
132

Gas
 
Valencia
 
Belen, New Mexico
 
145

Nuclear
 
PVNGS
 
Wintersburg, Arizona
 
402

Solar
 
PNM-owned solar
 
Five sites in New Mexico
 
22

 
 
 
 
 
 
2,333


Fossil‑Fueled Plants

SJGS consists of four units operated by PNM. Units 1, 2, 3, and 4 at SJGS have net rated capacities of 340 MW, 340 MW, 496 MW and 507 MW. SJGS Units 1 and 2 are owned on a 50% shared basis with Tucson. SJGS Unit 3 is owned 50% by PNM, 41.8% by SCPPA, and 8.2% by Tri‑State. SJGS Unit 4 is owned 38.457% by PNM, 28.8% by MSR Public Power Agency, 10.04% by the City of Anaheim, California, 8.475% by the City of Farmington, New Mexico, 7.2% by the County of Los Alamos, New Mexico, and 7.028% by UAMPS. See Note 16 for additional information about SJGS.

Four Corners Units 4 and 5 are 13% owned by PNM. Units 4 and 5 at Four Corners are jointly owned with SCE, APS, SRP, Tucson, and EPE and are operated by APS. PNM has no ownership interest in Four Corners Units 1, 2, or 3. Four Corners and a portion of the facilities adjacent to SJGS are located on land held under easements from the United States and also under leases from the Navajo Nation. APS, on behalf of the Four Corners participants, has negotiated amendments to an existing facility lease with the Navajo Nation that would extend the leasehold interest in the plant to 2041. The amendments have been approved by the Navajo Nation Council and signed by the Nation's President. DOI must also approve the amendments as well as a related federal rights-of-way grant that the Four Corners participants will pursue.  A federal environmental review will be conducted as part of the DOI review process.  See Note 16 for additional information about Four Corners.

PNM owns 100% of Reeves, Afton, and Lordsburg and 33.3% of Luna. The remaining interests in Luna are owned equally by Tucson and Freeport McMoran. PNM is entitled to the energy and capacity of Delta under a PPA that is deemed to be an operating lease. PNM has a PPA that entitles it to the entire output of Valencia. Valencia is a variable interest entity and is consolidated by PNM as required by GAAP. Therefore, Valencia is reflected in the above table as if it were owned. Reeves, Lordsburg, Delta, and Valencia are used primarily for peaking power and transmission support. See Note 9 for additional information about the Delta operating lease, including the potential purchase of Delta.

Nuclear Plant

PNM is participating in the three units of PVNGS, also known as the Arizona Nuclear Power Project, with APS (the operating agent), Salt River Project, EPE, SCE, SCPPA, and the Department of Water and Power of the City of Los Angeles. PNM is entitled to 10.2% of the power and energy generated by PVNGS. PNM has ownership interests of 2.3% in Unit 1, 4.6% in Unit 2, and 10.2% in Unit 3 and has leasehold interests of 7.9% in Unit 1 and 5.6% in Unit 2. The lease payments for the leased portions of PVNGS are recovered through retail rates approved by the NMPRC. See Note 7 for additional information concerning the PVNGS leases, including notices given to the lessors under the PVNGS Unit 1 leases in 2013 that PNM would renew the leases. See Note 16 for information on other PVNGS matters.

On March 11, 2011, a 9.0 magnitude earthquake occurred off the northeastern coast of Japan. The earthquake produced tsunamis that caused significant damage to the Fukushima Daiichi Nuclear Power Station in Japan. Following these events, the NRC established a task force to conduct a systematic and methodical review of NRC processes and regulations to determine whether the agency should make additional improvements to its regulatory system. In March 2012, the NRC issued the first regulatory requirements based on the recommendations of the task force. With respect to PVNGS, the NRC issued two orders requiring safety enhancements regarding: (1) mitigation strategies to respond to extreme natural events resulting in the loss of

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power at plants; and (2) enhancement of spent fuel pool instrumentation. The NRC has issued a series of interim staff guidance documents regarding implementation of these requirements. Due to the developing nature of these requirements, APS and PNM cannot predict the financial or operational impacts on PVNGS; however PVNGS continues to comply with regulatory requirements and related reporting.

Solar

In 2011, PNM completed its first major utility-owned renewable energy project when five utility-scale solar facilities in New Mexico went online. The five solar sites are located in Alamogordo, Deming, Los Lunas, Las Vegas, and Albuquerque. In addition to these facilities, PNM completed its solar-storage demonstration project in Albuquerque, which has a generation capacity of 0.5 MW that is not included in the above table. The NMPRC has approved PNM's 2013 renewable energy procurement strategy that includes an additional 21.5 MW of utility-owned solar capacity.

Plant Operating Statistics

Equivalent availability of PNM's major base-load generating stations were:
Plant
 
Operator
 
2012
 
2011
 
2010
SJGS
 
PNM
 
81.7%
 
86.9%
 
73.5%
Four Corners
 
APS
 
83.5%
 
81.5%
 
75.3%
PVNGS
 
APS
 
90.6%
 
89.1%
 
88.6%

Joint Projects

SJGS, PVNGS, Four Corners, and Luna are joint projects each owned or leased by several different utilities. Some participants in the joint projects are investor-owned utilities, while others are municipally or co-operatively owned. Furthermore, participants in SJGS and Four Corners may have varying percentage interests in different generating units within the project. The primary operating or participation agreements for the joint projects expire in 2016 for Four Corners, 2022 for SJGS, and 2027 for PVNGS. In addition, SJGS and Four Corners are coal-fired generating plants that obtain their coal requirements from mines near the plants. The agreements for coal supply expire in 2016 for Four Corners and 2017 for SJGS. As described above, Four Corners is situated on land under a lease from the Navajo Nation. Portions of PNM's interests in PVNGS Units 1 and 2 are through leases that expire in 2015 and 2016, but contain certain fixed-rate renewal and fair market value purchase options. As discussed in Note 7, PNM gave notice to the lessors in 2013 that PNM would renew the PVNGS Unit 1 leases and would retain control of the assets subject to the PVNGS Unit 2 leases at the expiration of the leases. Several of the participants in the joint projects are located in California. There are legislative and regulatory mandates in California that prohibit utilities from entering into new, or extending existing, arrangements for coal-fired generation. It is also possible that the participants in the joint projects have changed circumstances and objectives from those existing at the time of becoming participants. The status of these joint projects is further complicated by the uncertainty surrounding the form of potential legislation and/or regulation of GHG, CCBs, and other air emissions, as well as the impacts of the costs of compliance and operational viability of all or certain units within the joint projects. It is unclear how these factors will enter into discussion and negotiations concerning the status of the joint projects as the expiration of basic operational agreements approaches. PNM can provide no assurance that its participation in the joint projects will continue in the manner that currently exists. See Note 16.

PPAs

In addition to generating its own power, PNM purchases power under long-term PPAs. PNM also purchases power in the forward, day-ahead, and real-time markets.

In 2002, PNM entered into an agreement with FPL to develop the New Mexico Wind Energy Center. PNM began receiving power from the project in June 2003. FPL owns and operates the New Mexico Wind Energy Center, which consists of 136 wind-powered turbines on a site in eastern New Mexico. PNM has a contract to purchase all the power and RECs generated by the New Mexico Wind Energy Center for 25 years. The NMPRC has approved a voluntary tariff that allows PNM retail customers to buy wind-generated electricity for a small monthly premium. Power from the New Mexico Wind Energy Center is used to service load under the voluntary tariff and as part of PNM's electric supply mix for meeting retail load.

PNM's 2013 renewable energy procurement plan includes a 20-year agreement to purchase energy from a geothermal facility to be built near Lordsburg. The 10 MW facility will be the first geothermal project for the PNM system and is scheduled to be completed by December 31, 2013.

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A summary of purchased power, excluding Delta and Valencia, but including power purchased under long-term contracts that have expired by their terms, is as follows:
 
Year Ended December 31,
 
2012
 
2011
 
2010
Purchased under long-term PPAs
 
 
 
 
 
MWh
546,321

 
794,867

 
1,360,991

Cost per MWh
$
27.25

 
$
29.93

 
$
34.36

Other purchased power
 
 
 
 
 
Total MWh
948,911

 
988,564

 
1,083,548

Cost per MWh
$
27.30

 
$
31.47

 
$
40.61

TNMP
TNMP provides only transmission and distribution services and does not sell power.

First Choice

First Choice bought electricity and entered into hedging arrangements to purchase quantities of power to match the supply obligations to customers that were under fixed price contracts.  Power was purchased long-term in the over-the-counter market or using futures.  In the short term, hedges were adjusted to load changes by buying and selling power in the over-the-counter market or ERCOT day-ahead market.

FUEL AND WATER SUPPLY
PNM
The percentages of PNM's generation of electricity (on the basis of KWh), including Valencia and Delta, fueled by coal, nuclear fuel, and gas and oil, and the average costs to PNM of those fuels per MMBTU were as follows:
 
Coal
 
Nuclear
 
Gas and Oil
 
Percent of
Generation
 
Average
Cost
 
Percent of
Generation
 
Average
Cost
 
Percent of
Generation
 
Average
Cost
2012
59.2
%
 
$
2.99

 
31.3
%
 
$
0.88

 
9.0
%
 
$
3.25

2011
61.8
%
 
$
2.79

 
29.7
%
 
$
0.80

 
8.4
%
 
$
4.47

2010
58.9
%
 
$
2.49

 
31.3
%
 
$
0.66

 
9.8
%
 
$
4.54


In 2012 and 2011, 0.5% and 0.1% of PNM's generation was from utility owned solar, which has no fuel cost. The generation mix for 2013 is expected to be 60.2% coal, 28.5% nuclear, 10.8% gas and oil, and 0.5% utility owned solar. Due to locally available natural gas and oil supplies, the utilization of locally available coal deposits, and the generally adequate supply of nuclear fuel, PNM believes that adequate sources of fuel are available for its generating stations into the foreseeable future. See Sources of Power - PNM - PPAs for information concerning the cost of purchased power.

Coal

The coal supply contracts that provide fuel for SJGS and Four Corners expire in 2017 and 2016. Coal supply has not been arranged for periods after the existing contracts expire. PNM believes there is adequate availability of coal resources to continue to operate these plants although extended or new contracts could result in higher prices. See Note 16 for additional information about PNM's coal supply.

Natural Gas

The natural gas used as fuel for the electric generating plants is procured on the open market and delivered by third party transportation providers.


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Nuclear Fuel and Waste

PNM is one of several participants in PVNGS. The PVNGS participants are continually identifying their future nuclear fuel resource needs and negotiating arrangements to fill those needs. The PVNGS participants have contracted for all of PVNGS's requirements for uranium concentrates through 2016, 95% of its requirements for 2017, and 80% of its requirements for 2018. The participants have contracted for all of PVNGS's conversion services through 2016, 90% of its requirements in 2017, and 95% of its requirements in 2018. All of PVNGS's enrichment services are contracted through 2020 and all of PVNGS's fuel assembly fabrication services through 2016.

In 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 uranium conversion supplier has undertaken the necessary upgrades to its facility to address the regulatory compliance issues and anticipates resuming operations in a time frame that will not result in an adverse impact on PVNGS's ability to secure long-term conversion services. However, the participants are continuing to evaluate alternate long-term options for securing conversion services.

The Nuclear Waste Policy Act of 1982 required the DOE to begin to accept, transport, and dispose of spent nuclear fuel and high level waste generated by the nation's nuclear power plants by 1998. The DOE failed to begin accepting spent nuclear fuel by 1998, and APS (on behalf of itself and the other PVNGS participants) filed a lawsuit for DOE's breach in the United States Court of Federal Claims. The Court of Federal Claims ruled in favor of APS and in October 2010 awarded $30.2 million in damages to the PVNGS participants for costs incurred through December 2006. APS filed a subsequent lawsuit against DOE in the Court of Federal Claims on December 19, 2012. The lawsuit alleges that from January 1, 2007, through June 30, 2011, APS, as a co-owner of PVNGS, incurred additional damages due to DOE's continuing failure to remove spent nuclear fuel and high level waste from PVNGS. See Note 16.

The DOE had planned to meet its disposal obligations by designing, licensing, constructing, and operating a permanent geologic repository at Yucca Mountain, Nevada. In March 2010, the DOE filed a motion to dismiss with prejudice its Yucca Mountain construction authorization application that was pending before the NRC. Several interested parties have intervened in the NRC proceeding, but the matter has not been conclusively decided by either the NRC or the courts. Additionally, a number of interested parties have filed a variety of lawsuits in different jurisdictions around the country challenging the DOE's authority to withdraw the Yucca Mountain construction authorization application. None of these lawsuits has been conclusively decided by the courts.

All spent nuclear fuel from PVNGS is being stored on-site. PVNGS has sufficient capacity at its on-site independent spent fuel storage installation (“ISFSI”) to store all of the nuclear fuel that will be irradiated during the initial operating license periods, which end in November 2027. Additionally, PVNGS has sufficient capacity at its on-site ISFSI to store a portion of the fuel that will be irradiated during the extended license periods, which end in November 2047. If uncertainties regarding the United States government's obligation to accept and store spent fuel are not favorably resolved, the PVNGS participants will evaluate alternative storage solutions. These may obviate the need to expand the ISFSI to accommodate all of the fuel that will be irradiated during the extended license periods.
Water Supply

See Note 16 for information about PNM's water supply.

ENVIRONMENTAL MATTERS

Electric utilities are subject to stringent laws and regulations for protection of the environment by local, state, federal, and tribal authorities. In addition, PVNGS is subject to the jurisdiction of the NRC, which has the authority to issue permits and licenses and to regulate nuclear facilities in order to protect the health and safety of the public from radioactive hazards and to conduct environmental reviews pursuant to the National Environmental Policy Act. The liabilities under these laws and regulations can be material. In some instances, liabilities may be imposed without regard to fault, or may be imposed for past acts, whether or not such acts were lawful at the time they occurred. The construction expenditure projection includes environmental upgrades at Four Corners, but does not include any amounts related to environmental upgrades at SJGS that may be required by EPA to address regional haze described in Note 16. See MD&A - Other Issues Facing the Company - Climate Change Issues for information

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on GHG. In addition, Note 16 contains information related to the following matters, incorporated in this item by reference:

PVNGS Decommissioning Funding
Nuclear Spent Fuel and Waste Disposal
Environmental Matters under the caption “The Clean Air Act”
Endangered Species Act
Cooling Water Intake Structures
Santa Fe Generating Station
Environmental Matters under the caption “Coal Combustion Byproducts Waste Disposal”
Hazardous Air Pollutants (“HAPs”) Rulemaking

COMPETITION

Regulated utilities are generally not subject to competition from other utilities in areas that are under the jurisdiction of state regulatory commissions. In New Mexico, PNM does not have competition for services provided to its retail electric customers. In Texas, TNMP is not currently in any direct retail competition with any other regulated electric utility. However, PNM and TNMP are subject to customer conservation activities and initiatives to utilize alternative energy sources or otherwise bypass the PNM and TNMP systems.

PNM is subject to varying degrees of competition in certain territories adjacent to or within the areas it serves. This competition comes from other utilities in its region as well as rural electric cooperatives and municipal utilities.  PNM is involved in the generation and sale of electricity into the wholesale market.  It is subject to competition from regional utilities with similar opportunities to generate and sell energy at market-based prices and larger trading entities that do not own or operate generating assets.

EMPLOYEES
The following table sets forth the number of employees of PNMR, PNM, and TNMP as of December 31, 2012:
 
PNMR
 
PNM
 
TNMP
Corporate (1)
461

 

 

PNM
1,091

 
1,091

 

TNMP
357

 

 
357

   Total
1,909

 
1,091

 
357


(1)Represents employees of PNMR Services Company.
As of December 31, 2012, PNM had 592 employees in its power plant and operations areas that are currently covered by a collective bargaining agreement with the IBEW that was entered into in July 2012 and expires April 30, 2015. PNMR has no other employees represented by unions.

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 flow, 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

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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, including the ability of the mines supplying coal to PNM's coal-fired generating units and the companies involved in supplying nuclear fuel to provide adequate quantities of fuel
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
The impacts of decreases in the values of marketable equity securities maintained to provide for decommissioning, reclamation, pension benefits, 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

For information about the risks associated with the use of derivative financial instruments see Part II, Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.”

SECURITIES ACT DISCLAIMER
Certain securities described 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-K does not constitute an offer to sell or the solicitation of an offer to buy any securities. 

ITEM 1A.    RISK FACTORS
 
The business and financial results of PNMR, PNM, and TNMP are subject to a number of risks and uncertainties, including those set forth below and in MD&A, Note 16, and Note 17. TNMP provides transmission and distribution services to REPs that provide electric service to consumers in TNMP's service territories. References to customers in the risk factors discussed below also encompass the customers of these REPs who are the ultimate consumers of electricity transmitted and distributed through TNMP's facilities.
 
Regulatory Factors
 
The profitability of PNMR's utilities depends on being able to recover their costs through regulated rates and earn a fair return on invested capital.
 
The rates PNM charges its customers are regulated by the NMPRC and FERC. TNMP is regulated by the PUCT. The Company is in a period requiring significant capital investment and is projecting total construction expenditures for the years 2013-2017 to be $1,781.9 million. See Note 14. The Company anticipates a trend toward increasing costs, for which it will have to seek regulatory recovery. These include or are related to:
 
Environmental compliance expenditures
New asset construction related to generation, transmission, and distribution systems necessary to provide electric service
The regulatory mandate to generate power from renewable resources

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Increased regulation related to nuclear safety
Fuel costs
Costs related to pension and benefits
Increased interest costs to finance capital investments
Depreciation
 
At the same time the Company's costs are increasing, there are factors placing downward pressures on the demand for power, thereby reducing load growth in the Company's service territories. These include:

Adverse economic conditions
Reductions in costs of energy efficiency technology
Unpredictable weather patterns
Reduced new sources of demand
Changing customer behaviors

The combination of costs increasing relatively rapidly and the slowing of customer demand places upward pressure on the per unit prices that must be charged by the Company to recover its costs. This upward pressure on unit prices results in additional efforts by customers to reduce consumption. Without timely cost recovery and the authorization to earn a reasonable return on invested capital, the Company's liquidity and results of operations could be negatively impacted.
 
Under New Mexico law, utilities may propose the use of a future test year in establishing rates. As with any forward looking financial information, a future test year presents challenges that are inherent in the forecasting process. Forecasts of both operating and capital expenditures necessitate reliance on many assumptions concerning future conditions and operating results. Accordingly, if PNM chooses to request rates based on a future test year, but cannot successfully support it, cash flows and results of operations may be negatively impacted. This could result from not being able to withstand challenges from regulators and intervenors regarding the utility's capability to make reasonable forecasts.
 
PNM recovers the cost of fuel for its generation facilities through its FPPAC. The coal supply contracts that provide fuel for SJGS and Four Corners expire in 2017 and 2016. Coal supply has not been arranged for periods after the existing contracts expire. It is possible that extended contracts with the existing suppliers or new contracts for coal from alternative sources could result in higher prices. Although PNM believes such costs would continue to be recovered through the FPPAC, there can be no assurance that full recovery would continue to be allowed.
 
PNMR's utilities are subject to numerous federal, state, and local environmental laws and regulations that may significantly limit or affect their operations and financial results.
 
Compliance with federal, state, and local environmental laws and regulations, including those addressing climate change, air quality, CCBs, discharges of wastewater and streams originating from fly ash and bottom ash handling facilities, cooling water, and other matters, may result in increased capital, operating, and other costs. These costs could include remediation, containment, civil liability, and monitoring expenses. PNMR, PNM, and TNMP cannot predict how they would be affected if existing environmental laws and regulations were to be revised or reinterpreted, or if new environmental statutes and rules were to be adopted. See Note 16.
 
EPA has issued its BART determinations for both SJGS and Four Corners under the program to address regional haze in the “four corners” area, which would reduce the levels of NOx emitted at both plants. Significant capital expenditures would be required for the installation of SCR technology at both generating stations and operating costs would increase. On February 15, 2013, PNM, NMED, and EPA agreed to pursue a revised plan regarding SJGS, which is discussed in Note 16.
 
EPA, environmental advocacy groups, other organizations, and some other federal and state agencies are predicted to focus considerable attention to GHG from power generation facilities, including their role in climate change. PNM depends on fossil-fueled generation for a significant share of its electricity. Therefore, it could be exposed to possible future GHG regulations imposed by New Mexico and/or the federal government. Any such regulations could result in additional operating restrictions on facilities and increased generation and compliance costs.
 
CCBs from the operation of SJGS are currently being used in the reclamation of a surface coal mine. These CCBs consist of fly ash, bottom ash, and gypsum. Any new regulation that would affect the reclamation process, including CCBs being classified as hazardous waste by EPA, could significantly increase the costs of the disposal of CCBs.
 

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A regulatory body may identify a site requiring environmental cleanup and designate PNM or TNMP as a responsible party. There is also uncertainty in quantifying exposure under environmental laws that impose joint and several liability on all potentially responsible parties. Failure to comply with environmental laws and regulations, even if caused by factors beyond PNM's or TNMP's control, may result in the assessment of civil or criminal penalties and fines.
 
PNMR and its operating subsidiaries may underestimate the costs of environmental compliance, liabilities, and litigation due to the uncertainty currently inherent in these factors. Although there is uncertainty about the timing and form of regulations regarding climate change, CCBs, and other power plant emissions, such regulations could have a material impact on operations. It is possible that requirements to comply with the final BART determinations, combined with the financial impact of possible future climate change regulation or legislation, if any, other environmental regulations, the result of litigation, the adequacy and timeliness of cost recovery mechanisms, and other business considerations, could jeopardize the economic viability of Four Corners and/or SJGS or the ability of individual participants to continue participation in those plants. Timely regulatory recovery of costs associated with any environmental-related regulations would be needed to maintain a strong financial and operational profile. The above factors could adversely affect the Company's business, financial position, results of operations, and liquidity.

PNMR, PNM, and TNMP are subject to complex government regulation unrelated to the environment, which may have a negative impact on their businesses, financial position and results of operations.
 
To operate their businesses, PNMR, PNM, and TNMP are required to have numerous permits and approvals from a variety of regulatory agencies. Regulatory bodies with jurisdiction over the utilities include the NMPRC, NMED, PUCT, TCEQ, ERCOT, FERC, NRC, EPA, and NERC. Oversight by these agencies cover many aspects of the Company`s utility operations including: siting, construction, and operation of facilities; the purchase of power under long-term contracts; conditions of service; the issuance of securities; and rates charged to customers.
 
FERC has issued a number of rules pertaining to preventing undue discrimination in transmission services and electric reliability standards. A rule issued in 2011 revised the determination of total transmission capability under the reliability standards for transmission systems. The order could potentially reduce the total transmission capacity that we use to deliver our generation resources to customers. Such reductions could require us to acquire additional transmission rights or assets, which could involve substantial investments and a significant amount of time to accomplish.
 
PNMR and its subsidiaries are unable to predict the impact on their business and operating results from future actions of any agency regulating us. Changes in existing regulations or the adoption of new ones could result in additional expenses and/or changes in our business operations. In turn, operating results could be adversely impacted. 
 
Operational Factors
 
The financial performance of PNMR, PNM, and TNMP may be adversely affected if power plants and transmission and distribution systems do not operate reliably and efficiently.
 
Our financial performance depends on the successful operation of PNM's generation assets, as well as the transmission and distribution systems of PNM and TNMP. Unscheduled or longer than expected maintenance outages, breakdown or failure of equipment or processes due to aging infrastructure, other performance problems with the electric generation assets, severe weather conditions, accidents and other catastrophic events, acts of war or terrorism, disruptions in the supply and delivery of fuel, and other factors could result in PNM's load requirements being larger than available system generation capacity. In addition, unplanned outages of generating units and extensions of scheduled outages occur from time to time and are an inherent risk of the Company's business. If these were to occur, PNM would be required to purchase electricity in either the wholesale market or spot market at the then-current market price. There can be no assurance that sufficient electricity would be available at reasonable prices, or available at all. The failure of transmission or distribution facilities may also affect PNM`s and TNMP`s ability to deliver power. These potential generation, distribution, and transmission problems, and any service interruptions related to them, could result in lost revenues and additional costs.

PNMR, PNM, and TNMP are subject to information security breaches and risks of unauthorized access to their systems.
 
The Company functions in a highly regulated industry that requires the continued operation of sophisticated information technology systems and network infrastructure, some of which are deemed to be critical infrastructure under NERC guidelines. Certain of the Company's systems are interconnected with external networks. In the regular course of business, the utilities handle a range of sensitive security and customer information. PNM and TNMP are subject to different agencies' laws and rules concerning safeguarding and maintaining the confidentiality of this information.


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In the event a party desires to disrupt the bulk power or transmission systems in the United States, the Company's computer systems could be subject to cyber attack.  Despite implementation of security measures, the technology systems are vulnerable to disability, failures, or unauthorized access.  A successful cyber attack or other similar failure of the systems could impact the reliability of PNM's generation and PNM's and TNMP's transmission and distribution systems, including the possible unauthorized shutdown of our facilities. Such an event could lead to significant disruptions of business operations, including the Company's ability to serve and bill customers and to process other financial information. A major cyber incident could lead to increased regulatory oversight, litigation, fines, other remedial action, and reputational damage. The costs incurred to investigate and remediate a cyber security attack could be significant. If the technology systems were to fail or be breached and not recovered in a timely way, critical business functions could be impaired and sensitive confidential data could be compromised. A security breach of the Company's information systems could have a material adverse impact on the operations and financial condition of PNMR, PNM, and TNMP.
 
Customer electricity usage could be reduced by increases in prices we charge and other factors.  This could result in underutilization of PNM's generating capacity, as well as the capacities of PNM's and TNMP's transmission and distribution systems.  Should this occur, operating and capital costs might not be fully recovered, and financial performance thus negatively impacted.
 
Many factors influence customers' electricity purchases.  These include, but are not limited to:
 
Rates charged by PNM and TNMP
Rates charged by REPs utilizing TNMP's facilities to deliver power
Availability and cost of alternative sources of power
National, regional, or local economic conditions
 
These factors and others may prompt customers to institute energy efficiency measures or take other actions that would result in lower power consumption. If customers bypass or underutilize our facilities through self-generation, through renewable or other energy resources, technological change, or other measures, our revenues would be negatively impacted.  
 
PNM's and TNMP's service territories include several military bases and federally funded national laboratories, as well as large industrial customers that have significant direct and indirect impacts on the local economies where they operate.  We do not directly provide service to any of the military bases or national laboratories, but do provide service to large industrial customers. Our business could be hurt from the impacts on the local economies associated with these customer groups, as well as directly from the large industrial customers, for a number of reasons, including:
 
Federally-mandated base closures or significant curtailment of the activities at the bases or national laboratories
Closure of industrial facilities or significant curtailment of their activities
 
Another factor that could negatively impact us is that initiatives are periodically undertaken in various localities to municipalize or otherwise take over Company facilities.  If any such municipalization initiative is successful, the result could be a material reduction in the usage of our facilities.
 
Should any of the above factors result in our facilities being underutilized, our financial position, operational results, and cash flows could be significantly impacted.
 
Demand for power could exceed supply capacity, resulting in increased costs for purchasing capacity in the open market or building additional generation facilities.
 
PNM is obligated to supply power to retail customers and certain wholesale customers. At peak times, power demand could exceed PNM's available generation capacity. Market or competitive forces may require PNM to purchase capacity on the open market or build additional generation capabilities. Regulators or market conditions may not permit PNM to pass all of these purchases or construction costs on to their customers. If that occurs, PNM may not be able to recover these costs fully. Or, there may be a lag between when costs are incurred and when regulators permit recovery in customers' rates. These situations could have negative impacts on results of operations and cash flows.
 
There are inherent risks in the ownership and operation of nuclear facilities.
 
PNM has a 10.2% undivided interest in PVNGS, representing 17.2% of PNM's total owned and leased generating capacity. Portions of the interests in Units 1 and 2 are held under leases. PVNGS is subject to environmental, health, and financial risks,


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including, but not limited to:
 
The ability to obtain adequate supplies of nuclear fuel and water
The ability to dispose of spent nuclear fuel
Decommissioning of the plant
Securing the facilities against possible terrorist attacks
Unscheduled outages due to equipment failures
 
PNM maintains trust funds designed to provide adequate financial resources for decommissioning at the end of the expected life of the PVNGS units. However, if the units are decommissioned before their planned date, these funds may prove to be insufficient. PNM also has external insurance coverage to minimize its financial exposure to some risks. However, it is possible that liabilities associated with nuclear operations could exceed the amount of insurance coverage. See Note 16.
 
The NRC has broad authority under federal law to impose licensing and safety-related requirements for the operation of nuclear generation facilities. In the event of noncompliance, the NRC has the authority, depending upon the NRC's assessment of the severity of the situation, to impose monetary civil penalties or a progressively increased inspection regime. This could ultimately result in the shutdown of a unit, the removal of a unit from service until compliance is achieved, or both. Increased costs resulting from penalties, a heightened level of scrutiny, and/or implementation of plans to achieve compliance with NRC requirements could adversely affect the financial condition, results of operations, and cash flows of PNMR and PNM.
 
The PVNGS participants have no reason to anticipate a serious nuclear incident at PVNGS. However, if an incident did occur, it could materially and adversely affect the results of operations and financial condition of PNM and PNMR. A major incident at a nuclear facility anywhere in the world could cause the NRC to limit or prohibit the operation or licensing of any domestic nuclear unit. For example, as a result of the March 2011 earthquake and tsunami that caused significant damage to the Fukushima Daiichi Nuclear Power Plant in Japan, there may be additional regulations or other changes that would affect PVNGS.
 
Costs of decommissioning, remediation, and restoration of nuclear and fossil-fueled power plants, as well as related coal mines, could exceed the estimates of PNMR and PNM, which could negatively impact results of operations and liquidity.
 
PNM has interests in a nuclear power plant, two coal-fired power plants, and several natural gas-fired power plants. PNM is obligated to pay for the costs of decommissioning its share of the power plants. PNM is also obligated to pay for its share of the costs of decommissioning the mines that supply coal to the coal-fired power plants. Rates charged by PNM to its customers, as approved by the NMPRC, include a provision for recovery of certain costs of decommissioning, remediation, and restoration. The NMPRC has established a cap on decommissioning costs for the surface coal mines. In the event any of these costs exceed current estimates and PNM is unsuccessful in recovering the expenses through increased rates, results of operations will be negatively impacted.
  
General Economic and Weather Factors
General economic conditions of the state, region, and nation can affect our customers and suppliers. Economic recession or downturn may result in decreased consumption and increased bad debt expense, and could also negatively impact our suppliers, all of which could negatively impact us.
Economic activity is a key factor in PNMR subsidiaries' performance. Decreased economic activity can lead to declines in energy consumption, which could adversely affect future revenues, earnings, and growth.  Higher unemployment rates both in our service territories and nationwide could result in commercial customers ceasing operations and lower levels of income for our residential customers. These customers might then be unable to pay their bills on time, which could increase bad debt expense and negatively impact results of operations and cash flows. Economic conditions also impact the supply and/or cost of commodities and materials needed to construct or acquire utility assets or make necessary repairs.
 
The operating results of PNMR and its operating subsidiaries fluctuate on a seasonal and quarterly basis as well as being affected by weather conditions, including regional drought.
 
Electric generation, transmission, and distribution are generally seasonal businesses that vary with the demand for power. With power consumption typically peaking during the hot summer months, revenues traditionally peak during that period. As a result, quarterly operating results of PNMR and its operating subsidiaries vary throughout the year. In addition, PNMR and its operating subsidiaries have historically had less revenues resulting in earning less income when weather conditions are milder. Unusually mild weather in the future could reduce the revenues, net earnings, and cash flows of the companies.
 

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Drought conditions in New Mexico, especially in the “four corners” region, where SJGS and Four Corners are located, may affect the water supply for PNM's generating plants.  If inadequate precipitation occurs in the watershed that supplies that region, PNM may have to decrease generation at these plants. This would require PNM to purchase power to serve customers and/or reduce the ability to sell excess power on the wholesale market and reduce revenues. Drought conditions or actions taken by regulators or legislators could limit PNM's supply of water, which would adversely impact PNM's and PNMR's business. Although PNM has in place supplemental contracts and voluntary shortage sharing agreements with tribes and other water users in the “four corners” region, PNM cannot be certain these contracts will be enforceable in the event of a major drought or that it will be able to renew these contracts in the future.
 
TNMP`s service areas are exposed to extreme weather, including high winds, drought, flooding, and periodic hurricanes. These severe weather events can physically damage TNMP's owned facilities. Such an occurrence both disrupts the ability to deliver energy and increases costs. Extreme weather can also reduce customers' usage and demand for energy. These factors could negatively impact results of operations and cash flows.
 
Financial Factors
 
Disruption in the credit and capital markets may impact our growth strategy and ability to raise capital.
PNMR and its subsidiaries rely on access to both short-term money markets and longer-term capital markets as sources of liquidity for any capital requirements not satisfied by cash flow from operations, including energy infrastructure investments and new projects. In general, the Company relies on its short-term credit facilities as the initial source to finance construction expenditures. This results in increased borrowings under the facilities over time. The Company is currently projecting total construction expenditures for the years 2013-2017 to be $1,781.9 million. If PNMR or its operating subsidiaries are not able to access capital at competitive rates, or at all, PNMR's ability to finance capital requirements and implement its strategy will be limited. Disruptions in the credit markets, which could negatively impact our access to capital, could be caused by:
 
An economic recession
Declines in the health of the banking sector generally, and the failure of specific banks who are parties to our credit facilities
The bankruptcy of an unrelated energy company
War, terrorist attacks or threatened attacks
Deterioration in the overall health of the utility industry
 
If our cash flow and credit and capital resources are insufficient to fund our capital expenditure plans, we may be forced to delay important capital investments, sell assets, seek additional equity or debt capital, or restructure our debt. In addition, insufficient cash flows and capital resources may result in reductions of our credit ratings. This could harm our ability to incur additional indebtedness on acceptable terms and would result in an increase in the interest rates applicable under our credit facilities. Our cash flow and capital resources may be insufficient to pay interest and principal on our debt in the future. If that should occur, our capital raising or debt restructuring measures may be unsuccessful or inadequate to meet our scheduled debt service obligations. This could cause us to default on our obligations and further impair our liquidity.
Future reduction in our credit ratings or changing rating agency requirements could materially and adversely affect our growth, strategy, business, financial position, results of operations, and liquidity.
 
PNMR, PNM, and TNMP cannot be sure that any of their current ratings will remain in effect for any given period of time or that a rating will not be put under review for a downgrade, lowered, or withdrawn entirely by a rating agency. Downgrades or changing requirements could result in increased borrowing costs due to higher interest rates in future financings, a smaller potential pool of investors, and decreased funding sources. It also could require the provision of additional support in the form of letters of credit and cash or other collateral to various counterparties.
 
PNMR may be unable to meet its ongoing and future financial obligations and to pay dividends on its common stock if its subsidiaries are unable to pay dividends or distributions to PNMR.
 
PNMR is a holding company and has no operations of its own. PNMR's ability to meet its financial obligations and to pay dividends on its common stock primarily depends on the net income and cash flows of PNM and TNMP and their capacity to pay upstream dividends or distributions. Prior to providing funds to PNMR, PNM and TNMP have financial and regulatory obligations that must be satisfied, including among others, debt service and, in the case of PNM, preferred stock dividends.
 

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The NMPRC has placed certain restrictions on the ability of PNM to pay dividends to PNMR, including that PNM cannot pay dividends that cause its debt rating to fall below investment grade. The NMPRC has also restricted PNM from paying dividends in any year, as determined on a rolling four-quarter basis, in excess of net earnings without prior NMPRC approval. PNM is permitted to pay dividends to PNMR from prior equity contributions made by PNMR. Additionally, PNM has various financial covenants that limit the transfer of assets, through dividends or other means.
 
Further, the ability of PNMR to declare dividends depends upon:
 
The extent to which cash flows will support dividends
The Company's financial circumstances and performance
NMPRC's and PUCT's decisions in various regulatory cases currently pending and which may be docketed in the future
Conditions imposed by the NMPRC or PUCT
The effect of federal regulatory decisions and legislative acts
Economic conditions in the United States
Future growth plans and the related capital requirements
Other business considerations
 
Impairments of goodwill and long-lived assets of PNMR, PNM, and TNMP could adversely affect the Company's business, financial position, liquidity, and results of operations.
 
PNMR, PNM, and TNMP annually evaluate their recorded goodwill for impairment. They also assess long-lived assets whenever indicators of impairment exist. Factors that affect the long-term value of these assets as well as other economic and market conditions could result in impairments. Significant impairments could adversely affect our business, financial position, liquidity, and results of operations.
 
Declines in values of marketable securities held in trust funds for pension and other postretirement benefits and in the NDT could result in sustained increases in costs and funding requirements for those obligations, which may affect operational results.
 
The Company targets 31% of its pension trust funds and 70% of its trust funds for other postretirement benefits to be invested in marketable equity securities. Over one-half of funds held in the NDT are typically invested in marketable equity securities. Declines in market values could result in increased funding of the trusts as well as the recognition of losses as impairments for the NDT and additional expense for the benefit plans.
 
PNM's PVNGS leases describe certain events, including “Events of Loss” and “Deemed Loss Events”, the occurrence of which could require PNM to take ownership of the underlying assets and pay the lessors for the assets.
 
The “Events of Loss” generally relate to casualties, accidents, and other events at PVNGS, including the occurrence of specified nuclear events, which would severely adversely affect the ability of the operating agent, APS, to operate, and the ability of PNM to earn a return on its interests in PVNGS.  The “Deemed Loss Events” consist primarily of legal and regulatory changes (such as issuance by the NRC of specified violation orders, changes in law making the sale and leaseback transactions illegal, or changes in law making the lessors liable for nuclear decommissioning obligations). PNM believes that the probability of such “Events of Loss” or “Deemed Loss Events” occurring is remote for the following reasons: (1) to a large extent, prevention of “Events of Loss” and some “Deemed Loss Events” is within the control of the PVNGS participants through the general PVNGS operational and safety oversight process; and (2) other “Deemed Loss Events” would involve a significant change in current law and policy. PNM is unaware of any proposals pending or being considered for introduction in Congress, or in any state legislative or regulatory body that, if adopted, would cause any of those events. See Note 7.
 
Governance Factors
 
Provisions of PNMR's organizational documents, as well as several other statutory and regulatory factors, will limit another party's ability to acquire PNMR and could deprive PNMR's shareholders of the opportunity to receive a takeover premium for shares of PNMR's common stock.
 
PNMR's restated articles of incorporation and by-laws include a number of provisions that may have the effect of discouraging persons from acquiring large blocks of PNMR's common stock, or delaying or preventing a change in control of

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PNMR. The material provisions that may have such an effect include:
 
Authorization for the Board to issue PNMR's preferred stock in series and to fix rights and preferences of the series (including, among other things, voting rights and preferences with respect to dividends and other matters)
Advance notice procedures with respect to any proposal other than those adopted or recommended by the Board
Provisions specifying that only a majority of the Board, the chairman of the Board, the chief executive officer, or holders of at least one-tenth of all of PNMR's shares entitled to vote may call a special meeting of stockholders
 
Under the New Mexico Public Utility Act, NMPRC approval is required for certain transactions that may result in PNMR's change in control or exercise of control, including ownership of 10% or more of PNMR's voting stock. Certain acquisitions of PNMR's outstanding voting securities also require FERC approval.

ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.

ITEM 2.
PROPERTIES
PNMR
The significant properties owned by PNMR include those owned by PNM and TNMP and are disclosed below.
PNM
See Sources of Power in Part I, Item. 1 Business above for information on PNM’s owned and leased capacity in electric generating stations. As of December 31, 2012, PNM owned, jointly owned, or leased, 3,189 circuit miles of electric transmission lines, 5,843 miles of distribution overhead lines, 5,631 cable miles of underground distribution lines (excluding street lighting), and 276 substations. PNM’s electric transmission and distribution lines are generally located within easements and rights-of-way on public, private, and Native American lands. PNM leases interests in PVNGS Units 1 and 2 and related property, Delta, EIP and associated equipment, data processing, communication, office and other equipment, office space, vehicles, and real estate. PNM also owns and leases service and office facilities in Albuquerque and in other areas throughout its service territory. See Note 7 for additional information concerning leases, including notices given to the lessors under the PVNGS Unit 1 leases in 2013 that PNM would renew the leases. See Note 9 for additional information about the Delta operating lease, including the potential purchase of Delta. As discussed in Note 16, PNM has agreed to exercise its option to purchase the leased portion of the EIP at expiration of the lease at fair market value of $7.7 million.
TNMP
TNMP’s facilities consist primarily of transmission and distribution facilities located in its service areas. TNMP also owns and leases service and office facilities in other areas throughout its service territory. As of December 31, 2012, TNMP owned 966 circuit miles of overhead electric transmission lines, 7,060 pole miles of overhead distribution lines, 1,083 circuit miles of underground distribution lines, and 108 substations. Substantially all of TNMP's property is pledged to secure its first mortgage bonds. See Note 6.

ITEM 3.
LEGAL PROCEEDINGS
See Note 16 and Note 17 for information related to the following matters for PNMR, PNM, and TNMP, incorporated in this item by reference.
Note 16

The Clean Air Act - Regional Haze – SJGS
The Clean Air Act - Regional Haze – Four Corners
The Clean Air Act - Four Corners BART FIP Challenge
The Clean Air Act - WildEarth Guardians' Petition for Review of EPA's Approval of New Mexico Regional Haze SIP
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

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Santa Fe Generating Station
Coal Combustion Byproducts Waste Disposal - Sierra Club Allegations
PVNGS Water Supply Litigation
San Juan River Adjudication
Complaint Against Southwestern Public Service Company
Navajo Nations Allottee Matters
Transmission Issues
Note 17

PNM - Renewable Portfolio Standard
PNM - Renewable Energy Rider
PNM - Energy Efficiency and Load Management
PNM-2011 Integrated Resource Plan
PNM - Emergency FFPAC
PNM - Transmission Rate Case
PNM - Application for Approvals to Purchase Delta
PNM - Formula Transmission Rate Case
PNM - Firm-Requirements Wholesale Customer Rate Case
TNMP - Advance Meter System Deployment and Surcharge Request
TNMP - Remand of ERCOT Transmission Rates for 1999 and 2000
TNMP - Transmission Cost of Service Rates

ITEM 4.
MINE SAFETY DISCLOSURES
Not Applicable.

SUPPLEMENTAL ITEM - EXECUTIVE OFFICERS OF PNM RESOURCES, INC.
All officers are elected annually by the Board of PNMR. Executive officers, their ages as of February 22, 2013 and offices held with PNMR for the past five years, or other companies if less than five years with PNMR, are as follows:
Name
 
Age
 
Office
 
Initial Effective Date
P. K. Collawn
 
54
 
Chairman, President, and Chief Executive Officer
 
January 2012
 
 
 
 
President and Chief Executive Officer
 
March 2010
 
 
 
 
President and Chief Operating Officer
 
August 2008
 
 
 
 
President, Utilities
 
June 2007
C. N. Eldred
 
59
 
Executive Vice President and Chief Financial Officer
 
July 2007
P. V. Apodaca
 
61
 
Senior Vice President, General Counsel and Secretary
 
January 2010
 
 
 
 
University Counsel, University of New Mexico
 
May 2006
R. E. Talbot
 
52
 
Senior Vice President and Chief Operating Officer
 
January 2012
 
 
 
 
Chief Operating Officer, Power Supply and Power Delivery - Indianapolis Power and Light Company
 
June 2011
 
 
 
 
Senior Vice President, Power Supply - Indianapolis Power and Light Company
 
February 2007
R. N. Darnell
 
55
 
Senior Vice President, Public Policy
 
December 2011
 
 
 
 
Vice President, Regulatory Affairs
 
April 2008
 
 
 
 
Director, Regulatory Administration South - Xcel Energy
 
January 2007
T. G. Sategna
 
59
 
Vice President and Corporate Controller
 
October 2003

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PART II
 
ITEM 5.
MARKET FOR PNMR’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

PNMR’s common stock is traded on the New York Stock Exchange (Symbol: PNM). Ranges of sales prices of PNMR’s common stock, reported as composite transactions, and dividends declared on the common stock for 2012 and 2011, by quarters, are as follows:
Quarter Ended
Range of
Sales Prices
 
Dividends
 
High
 
Low
 
Per Share
2012
 
 
 
 
 
March 31
$
18.94

 
$
17.52

 
$
0.145

June 30
19.54

 
17.84

 
0.145

September 30
21.42

 
19.75

 
0.145

December 31
22.32

 
20.05

 
0.145

Fiscal Year
22.32

 
17.52

 
0.580

2011
 
 
 
 
 
March 31
$
15.16

 
$
12.96

 
$
0.125

June 30
17.10

 
14.46

 
0.125

September 30
17.14

 
12.75

 
0.125

December 31
19.17

 
15.81

 
0.125

Fiscal Year
19.17

 
12.75

 
0.500


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 $0.125 per share in July 2011 and $0.145 per share in July 2012, which are reflected as being in the second quarter above. The Board declared dividends on common stock considered to be for the third quarter of $0.125 per share in September 2011 and $0.145 per share in September 2012, which are reflected as being in the third quarter above. On December 4, 2012 and February 28, 2013, the Board declared quarterly dividends of $0.145 and $0.165 per share. PNMR targets a long-term dividend payout ratio of 50% to 60% of consolidated earnings. During the period it was outstanding, PNMR's Series A convertible preferred stock was entitled to receive dividends equivalent to any dividends paid on PNMR common stock as if the preferred stock had been converted into common stock.
On February 22, 2013, there were 11,469 holders of record of PNMR’s common stock. All of the outstanding common stock of PNM and TNMP is held by PNMR.
See Note 5 for a discussion on limitations on the payments of dividends and the payment of future dividends, as well as dividends paid by PNM and TNMP.
See Part III, Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Preferred Stock
PNM is not aware of any active trading market for its cumulative preferred stock. Quarterly cash dividends were paid on PNM’s outstanding cumulative preferred stock at the stated rates during 2011 and 2012. PNMR purchased and retired all of its outstanding convertible preferred stock, Series A, effective September 23, 2011. TNMP does not have any preferred stock outstanding.
Sales of Unregistered Securities
None.


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ITEM 6.
SELECTED FINANCIAL DATA
The selected financial data and comparative operating statistics for PNMR should be read in conjunction with the Consolidated Financial Statements and Notes thereto and MD&A. On January 30, 2009, PNM completed the sale of its gas operations, which are considered discontinued operations and excluded from continuing operations information in the table below. PNMR sold First Choice on November 1, 2011. First Choice is included in the following information through October 31, 2011.
PNM RESOURCES, INC. AND SUBSIDIARIES
 
2012
 
2011
 
2010
 
2009
 
2008
 
(In thousands except per share amounts and ratios)
Total Operating Revenues from Continuing Operations
$
1,342,403

 
$
1,700,619

 
$
1,673,517

 
$
1,647,744

 
$
1,959,522

Earnings (Loss) from Continuing Operations
$
120,125

 
$
190,934

 
$
(31,124
)
 
$
65,933

 
$
(297,565
)
Net Earnings (Loss)
$
120,125

 
$
190,934

 
$
(31,124
)
 
$
136,734

 
$
(262,937
)
Net Earnings (Loss) Attributable to PNMR
$
105,547

 
$
176,359

 
$
(45,215
)
 
$
124,316

 
$
(270,644
)
Earnings (Loss) from Continuing Operations Attributable to PNMR per Common Share
 
 
 
 
 
 
 
 
 
Basic
$
1.32

 
$
1.98

 
$
(0.49
)
 
$
0.58

 
$
(3.66
)
Diluted
$
1.31

 
$
1.96

 
$
(0.49
)
 
$
0.58

 
$
(3.66
)
Net Earnings (Loss) Attributable to PNMR per Common Share
 
 
 
 
 
 
 
 
 
Basic
$
1.32

 
$
1.98

 
$
(0.49
)
 
$
1.36

 
$
(3.24
)
Diluted
$
1.31

 
$
1.96

 
$
(0.49
)
 
$
1.36

 
$
(3.24
)
Cash Flow Data
 
 
 
 
 
 
 
 
 
Net cash flows from operating activities
$
281,349

 
$
292,240

 
$
287,352

 
$
87,706

 
$
88,625

Net cash flows from investing activities
$
(285,895
)
 
$
19,778

 
$
(275,906
)
 
$
379,726

 
$
(320,715
)
Net cash flows from financing activities
$
(1,560
)
 
$
(312,331
)
 
$
(10,683
)
 
$
(593,435
)
 
$
354,943

Total Assets
$
5,372,583

 
$
5,204,613

 
$
5,225,083

 
$
5,359,921

 
$
6,147,982

Long-Term Debt, including current installments
$
1,672,290

 
$
1,674,013

 
$
1,565,847

 
$
1,567,331

 
$
1,584,705

Common Stock Data
 
 
 
 
 
 
 
 
 
Market price per common share at year end
$
20.51

 
$
18.23

 
$
13.02

 
$
12.65

 
$
10.08

Book value per common share at year end
$
20.19

 
$
19.76

 
$
17.90

 
$
19.13

 
$
19.13

Tangible book value per share at year end
$
16.70

 
$
16.27

 
$
14.10

 
$
15.33

 
$
15.31

Average number of common shares outstanding - diluted
80,417

 
89,757

 
91,557

 
91,671

 
83,468

Dividends declared per common share
$
0.580

 
$
0.500

 
$
0.500

 
$
0.500

 
$
0.605

Capitalization
 
 
 
 
 
 
 
 
 
PNMR common stockholders’ equity
48.9
%
 
48.3
%
 
47.8
%
 
49.6
%
 
49.3
%
Convertible preferred stock

 

 
3.1

 
3.0

 
3.0

Preferred stock of subsidiary, without mandatory redemption requirements
0.3

 
0.3

 
0.4

 
0.3

 
0.3

Long-term debt
50.8

 
51.4

 
48.7

 
47.1

 
47.4

 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%

Note: The book value per common share at year end, tangible book value per share at year end, average number of common shares outstanding, and return on average common equity reflect the Series A convertible preferred stock as if it was converted into common stock at the date of its issuance on November 17, 2008 through September 23, 2011.
 

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PNM RESOURCES, INC. AND SUBSIDIARIES
COMPARATIVE OPERATING STATISTICS
 
2012
 
2011
 
2010
 
2009
 
2008
 
(In thousands)
PNM Revenues
 
 
 
 
 
 
 
 
 
Residential
$
409,005

 
$
390,380

 
$
355,905

 
$
320,965

 
$
296,121

Commercial
413,332

 
386,383

 
355,699

 
330,552

 
326,408

Industrial
103,991

 
94,883

 
85,576

 
79,540

 
100,665

Public authority
25,495

 
23,970

 
21,302

 
19,770

 
19,135

Transmission
39,373

 
43,637

 
38,667

 
36,075

 
33,161

Firm-requirements wholesale
39,390

 
34,127

 
31,870

 
29,048

 
46,854

Other sales for resale
47,321

 
69,318

 
121,729

 
140,314

 
345,948

Mark-to-market activity
892

 
4,214

 
(3,599
)
 
151

 
56,560

Other
13,465

 
10,377

 
9,979

 
11,594

 
18,090

Total PNM Revenues
$
1,092,264

 
$
1,057,289

 
$
1,017,128

 
$
968,009

 
$
1,242,942

TNMP Revenues
 
 
 
 
 
 
 
 
 
Residential
$
103,255

 
$
100,290

 
$
83,645

 
$
74,739

 
$
71,673

Commercial
88,258

 
84,896

 
77,474

 
73,346

 
72,786

Industrial
13,405

 
13,065

 
12,342

 
12,113

 
13,849

Other
45,222

 
39,607

 
39,127

 
32,434

 
31,974

Total TNMP Revenues
$
250,140

 
$
237,858

 
$
212,588

 
$
192,632

 
$
190,282

First Choice Revenues
 
 
 
 
 
 
 
 
 
Residential
$

 
$
260,161

 
$
305,834

 
$
349,629

 
$
407,350

Commercial

 
166,498

 
159,785

 
160,998

 
205,518

Trading gains (losses)

 

 
(4
)
 
14

 
(49,931
)
Other

 
12,791

 
17,588

 
18,177

 
19,287

Total First Choice Revenues
$

 
$
439,450

 
$
483,203

 
$
528,818

 
$
582,224


Notes: PNM Gas, which was sold on January 30, 2009, is reported as discontinued operations and has been excluded from the above table.

First Choice is included through October 31, 2011, when it was sold by PNMR.




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PNM RESOURCES, INC. AND SUBSIDIARIES
COMPARATIVE OPERATING STATISTICS
 
2012
 
2011
 
2010
 
2009
 
2008
PNM MWh Sales
 
 
 
 
 
 
 
 
 
Residential
3,323,544

 
3,402,842

 
3,361,472

 
3,264,378

 
3,221,894

Commercial
4,022,184

 
4,043,796

 
4,015,999

 
3,899,121

 
4,029,802

Industrial
1,771,316

 
1,560,867

 
1,449,933

 
1,454,480

 
1,657,580

Public authority
279,169

 
282,062

 
263,424

 
249,554

 
253,079

Firm-requirements wholesale
651,972

 
650,356

 
677,508

 
689,740

 
1,123,539

Other sales for resale
1,652,225

 
2,076,869

 
2,203,787

 
3,996,317

 
5,095,183

Total PNM MWh Sales
11,700,410

 
12,016,792

 
11,972,123

 
13,553,590

 
15,381,077

TNMP MWh Sales
 
 
 
 
 
 
 
 
 
Residential
2,714,511

 
2,862,337

 
2,699,601

 
2,582,555

 
2,533,025

Commercial
2,353,135

 
2,360,998

 
2,260,505

 
2,216,870

 
2,206,155

Industrial
2,727,126

 
2,578,877

 
2,241,452

 
1,983,165

 
2,094,789

Other
103,856

 
108,664

 
103,341

 
107,091

 
107,524

Total TNMP MWh Sales
7,898,628

 
7,910,876

 
7,304,899

 
6,889,681

 
6,941,493

First Choice MWh Sales
 
 
 
 
 
 
 
 
 
Residential

 
2,006,437

 
2,267,836

 
2,441,550

 
2,547,490

Commercial

 
1,538,203

 
1,363,746

 
1,218,949

 
1,471,400

Total First Choice MWh Sales

 
3,544,640

 
3,631,582

 
3,660,499

 
4,018,890


Notes:
Under TECA, consumers in Texas can choose any REP to provide energy. TNMP delivers energy to consumers within its service area regardless of the REP chosen. Therefore, TNMP earns revenue for energy delivery and REPs earn revenue on the usage of that energy by its customers. The MWh reported above for TNMP and First choice include 836,599, 1,012,842, 1,131,907, and 1,563,260 MWh used by consumers of TNMP in 2011, 2010, 2009, and 2008, who chose First Choice as their REP.

PNM Gas, which was sold on January 30, 2009, is reported as discontinued operations and has been excluded from the above table.

First Choice is included through October 31, 2011, when it was sold by PNMR.
    


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PNM RESOURCES, INC. AND SUBSIDIARIES
COMPARATIVE OPERATING STATISTICS
 
2012
 
2011
 
2010
 
2009
 
2008
PNM Customers
 
 
 
 
 
 
 
 
 
Residential
450,507

 
448,979

 
447,789

 
445,637

 
442,647

Commercial
54,953

 
54,468

 
54,005

 
53,787

 
53,059

Industrial
251

 
252

 
260

 
270

 
284

Other sales for resale
36

 
28

 
46

 
44

 
55

Other
952

 
983

 
1,003

 
991

 
991

Total PNM Customers
506,699

 
504,710

 
503,103

 
500,729

 
497,036

TNMP Consumers
 
 
 
 
 
 
 
 
 
Residential
193,550

 
192,356

 
190,809

 
188,812

 
187,888

Commercial
36,819

 
37,208

 
37,356

 
37,728

 
38,548

Industrial
70

 
73

 
72

 
73

 
74

Other
2,037

 
2,092

 
2,099

 
2,059

 
2,115

Total TNMP Consumers
232,476

 
231,729

 
230,336

 
228,672

 
228,625

First Choice Customers
 
 
 
 
 
 
 
 
 
Residential

 
176,577

 
172,506

 
183,605

 
192,306

Commercial

 
44,485

 
41,695

 
41,371

 
45,125

Total First Choice Customers

 
221,062

 
214,201

 
224,976

 
237,431

PNMR Generation Statistics
 
 
 
 
 
 
 
 
 
Net Capability - MW, including wind and solar
2,537

 
2,547

 
2,631

 
2,711

 
2,713

Coincidental Peak Demand - MW
1,948

 
1,938

 
1,973

 
1,866

 
1,901

Average Fuel Cost per MMBTU
$
2.308

 
$
2.267

 
$
2.064

 
$
1.895

 
$
2.404

BTU per KWh of Net Generation
10,289

 
10,441

 
10,237

 
10,277

 
10,269


Notes:
The consumers reported above for TNMP include 64,732, 70,366, 80,718, and 92,090 consumers of TNMP for 2011, 2010, 2009, and 2008, who chose First Choice as their REP. These TNMP customers are also included in the First choice customers.
    
PNM Gas, which was sold on January 30, 2009, is reported as discontinued operations and has been excluded from the above table.

First Choice is as of October 31, 2011, when it was sold by PNMR.

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ITEM 7.
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-K General Instruction I (2). A reference to a “Note” in this Item 7 refers to the accompanying Notes to Consolidated Financial Statements included in Part II, Item 8, unless otherwise specified. Certain of the tables below may not appear visually accurate due to rounding.
MD&A FOR PNMR
EXECUTIVE SUMMARY
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.
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

In conjunction with these goals, PNM and TNMP are dedicated to:

Achieving industry-leading safety performance and customer satisfaction
Maintaining strong plant performance and reliability

Earning Authorized Returns on Regulated Businesses

PNMR's success in accomplishing its strategic goals is highly dependent on continued favorable regulatory treatment for its utilities. The Company has multiple strategies to achieve favorable regulatory treatment, all of which have as their foundation a focus on the basics: managing the Company's business and serving our customers well, while engaging stakeholders to build productive relationships.

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 allow for more timely recovery of amounts invested in TNMP's systems. In 2011, PNM made significant progress toward the goal of achieving authorized returns for its retail customers. In 2012, PNM saw additional progress toward achieving authorized returns for its transmission and generation customers regulated by FERC.

PNM and TNMP completed several rate proceedings before their state regulators in 2011 and 2012. PNM has two rate cases pending before FERC and one that was completed in early 2013. Additional information about rate filings is provided in Note 17.
PNM previously announced that it intended to file a request for an increase in the rates charged to New Mexico retail customers in mid-2013, but is currently re-evaluating when this filing will occur, 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, and improved operating results at PNM.

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 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

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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.

Continuing to Improve Credit Ratings
PNM is committed to maintaining investment grade credit ratings. See the subheading Liquidity included in the full discussion of Liquidity and Capital Resources below for the specific credit ratings for PNMR, PNM, and TNMP. 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.
Providing Top-Quartile Total Returns to Investors
PNMR's strategic goal to provide top quartile total return to investors is based on five-year ongoing EPS growth along with five-year average dividend yield. Top quartile total return currently is equal to an average annual rate of 10 percent to 13 percent. The annual common stock dividend was raised by 16 percent in February 2012 and 14 percent in February 2013.

PNMR's long-term target is a dividend payout ratio of 50 percent to 60 percent of its ongoing earnings. Ongoing earnings, which is a non-GAAP financial measure, excludes certain non-recurring, infrequent, and other items from earnings determined in accordance with GAAP. PNMR expects to provide above-average dividend growth in the near-term and to manage the payout ratio to meet its long-term target. The PNMR board will continue to evaluate the dividend on an annual basis, considering sustainability and growth, capital planning, and industry standards.

Business Focus

In addition to its strategic goals, PNMR's strategy and decision-making are focused on safely providing reliable, affordable, and environmentally responsible power to create enduring value for customers and communities.

To accomplish this, 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.

Reliable and Affordable Power
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 to ensure reliability 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. Through the end of 2012, TNMP had completed installation of more than 75,000 smart meters. TNMP's deployment is expected to be completed in 2016.
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. In 2013, TNMP will install a new outage management system that will leverage capabilities of the smart meters to enhance the company's responsiveness to outages.

During the 2010 to 2012 period, PNM and TNMP together invested $803.7 million in substations, power plants, and transmission and distribution systems in New Mexico and Texas. In 2012, PNM announced the site for its planned 40 MW natural gas-fired peaking generating station. Construction is expected to begin in 2014, with the facility going into service in 2016. PNM also announced an agreement to purchase Delta, a 132 MW gas-fired peaking facility, which has served PNM jurisdictional needs under a 20-year purchase power agreement since 2000.
Environmentally Responsible Power
PNMR has a long-standing record of environmental stewardship. In 2012, its environmental focus was in three key areas:

Preparing to meet New Mexico's increasing renewable energy requirements as cost-effectively as possible
Developing strategies to meet regional haze rules at the coal-fired SJGS as cost effectively as possible while providing broad environmental benefits
Increasing energy efficiency participation

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Renewable Energy
In 2012, PNM filed and the NMPRC approved PNM's 2013 renewable procurement strategy. The approved strategy will almost double PNM's solar capacity with the addition of 21.5 MW of utility-owned solar capacity estimated cost of almost $50 million. In addition to the solar expansion, the 2013 proposal includes a 20-year agreement to purchase energy from a geothermal facility to be built near Lordsburg. The 10 MW facility will be the first geothermal project for the PNM system.
In addition to the 22 MW of solar currently available through the five plants constructed in 2011, PNM also owns a sixth facility, the 500-KW PNM Prosperity Energy Storage Project, which 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.
PNM's resource portfolio includes the purchase of 204 MW of wind power. PNM also purchases power from a customer-owned distributed solar generation program having an installed capacity of 19.8 MW at 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.
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. The 2013 plan will enable PNM to comply with the statutory RPS amount in 2013, but required a variance from the NMPRC's diversity requirements in 2013 while the proposed geothermal facilities are being constructed. This plan is expected to enable PNM to achieve full RPS quantity and diversity compliance by 2014 without exceeding the RCT. PNM will continue to procure renewable resources while balancing the bill impact to customers in order to meet New Mexico's escalating RPS requirements.
SJGS
PNM continues its efforts to comply with the EPA regional haze rule in a manner that minimizes the cost impact to customers while still achieving broad environmental benefits. The FIP for regional haze requires the installation of SCRs on all four units at SJGS by September 2016. PNM is challenging EPA's proposal in court and administratively within EPA.
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 proposed by the State of New Mexico to meet the regional haze regulations. Additional information about BART at SJGS is contained in Note 16.
On February 15, 2013, PNM, NMED, and EPA agreed to pursue a revised plan that could provide a new BART path to comply with federal visibility rules at SJGS. The terms of the non-binding agreement would result in the retirement of SJGS Units 2 and 3 by the end of 2017 and the installation of SNCRs on Units 1 and 4 by the later of January 31, 2016 or 15 months after EPA approval of a revised SIP. PNM would also build a natural gas plant in the Four Corners region to partially replace the capacity from the retired coal units. Implementing this plan would include:

NMED development of a revised SIP
Approval of the revised SIP by EIB
EPA approval of the revised SIP
NMPRC approval of the retirement of Units 2 and 3 and plans to acquire replacement power

The term sheet setting forth the non-binding agreement projects EIB approval for October 2013, with EPA final action in late 2014. Contemporaneously with the signing of the non-binding agreement, EPA indicated in writing that if the above plan does not move forward due to circumstances outside of the control of PNM and NMED, EPA will work with the state and PNM to create a reasonable FIP compliance schedule to reflect the time used to develop the new state plan. PNM is also exploring potential additional areas of relief, including relief from the Tenth Circuit.

In connection with the implementation of the plan, retirement of SJGS Units 2 and 3 could result in shifts in ownership among SJGS owners as may be agreed upon by the owners of the affected units. Owners of the affected units also may seek approvals of their utility commissions or governing boards.


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On February 25, 2013, the parties filed their status reports with the Tenth Circuit.  To demonstrate that progress has been made toward settling the Tenth Circuit litigation, information, including the non-binding agreement and its accompanying timeline, was submitted to the court. Following the parties' submission of their status reports, on February 28, 2013, the Tenth Circuit referred the litigation to the Tenth Circuit Mediation Office, which has authority to require the parties to attend mediation conferences to informally resolve issues in the pending appeals.
This plan would achieve similar visibility improvements as the installation of SCRs on all four units at SJGS. It has the added advantage of reducing other emissions beyond NOx, including SO2, particulate matter, CO2, and mercury. Detailed replacement power strategies also would be finalized. PNM believes adequate replacement power alternatives will be available to meet its generation needs and ensure reliability. PNM can provide no assurance that the requirements of this plan will be accomplished at all or within the required timeframes.
In order to be able to install SCRs on all four units of SJGS by the compliance deadline set forth in the FIP, PNM entered into a contract in October 2012 with an engineering, procurement, and construction contractor to install SCRs on behalf of the SJGS owners. The construction contract, which includes termination provisions in the event that SCRs are determined in the future to be unnecessary, has been suspended through November 1, 2014.
In addition to the regional haze rule, SJGS is required to comply with other rules currently being developed or implemented that affect coal-fired generating units. Because of $320 million in environmental upgrades completed in 2009, SJGS is well positioned to outperform the mercury limit imposed by EPA in the 2011 Mercury and Air Toxics Standards. The major environmental upgrades on each of the four units at SJGS 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 43 percent, SO2 by 69 percent, particulate matter by 64 percent, and mercury by 99 percent.
Energy Efficiency
    
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 2012, annual energy saved as a result of PNM's portfolio of energy efficiency programs was approximately 71,000 MWh. This is equivalent to the consumption of approximately 9,600 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 2012 resulted in energy savings totaling an estimated 12,839 MWh.
Creating Value for Customers and Communities
Through outreach, collaboration, and various community-oriented programs, PNMR has a demonstrated commitment to build productive relationships with stakeholders, including customers, regulators, legislators, and intervenors.
Building off work that began in 2008, PNM has continued outreach efforts to connect low-income customers with nonprofit community service providers offering support and help with such needs as utility bills, food, clothing, medical programs, services for seniors, and weatherization. In 2012, PNM hosted 23 community events throughout its service territory to assist low-income customers. Furthermore, the PNM Good Neighbor Fund provided $1.0 million of assistance with utility bills to 10,216 families in 2012.
The PNM Resources Foundation helps nonprofits become more energy efficient through Reduce Your Use grants. For 2012, the foundation awarded $0.3 million to support 55 projects in New Mexico to provide shade structure installations, window replacements, and efficient appliance purchases. Since the program's inception in 2008, Reduce Your Use grants have provided nonprofit agencies in New Mexico with a total of $1.1 million of support.
PNM also expanded its environmental stakeholder outreach in 2012, piloting small environmental stakeholder dialogue groups on key issues such as renewable energy and energy efficiency planning. PNM also employed proactive stakeholder outreach in two key projects - the development of the PNM's renewable energy procurement plans that involved distributed solar energy developers early in the conversation and the siting of the planned gas-fired peaking generation facility in Valencia County, which featured in-depth community involvement and education early in the planning stages of the project. In both cases highly favorable outcomes were achieved, and controversial negative media coverage was virtually eliminated.

Economic Factors
    
In 2012, PNM experienced a decrease in weather-normalized, retail load of 0.7% and TNMP experienced an increase in weather-normalized, retail load of 3.7% compared to 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

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workforce. 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.

Results of Operations

A summary of net earnings (loss) attributable to PNMR is as follows:
 
Year Ended December 31,
 
Change
 
2012
 
2011
 
2010
 
2012/2011
 
2011/2010
 
 
 
(In millions, except per share amounts)
 
 
 
 
 
 
Net earnings (loss)
$
105.5

 
$
176.4

 
$
(45.2
)
 
$
(70.9
)
 
$
221.6

Average common and common equivalent shares
80.4

 
89.8

 
91.6

 
(9.4
)
 
(1.8
)
Net earnings (loss) per diluted share
$
1.31

 
$
1.96

 
$
(0.49
)
 
$
(0.65
)
 
$
2.45


The components of the changes in earnings (loss) from continuing operations attributable to PNMR by segment are:
 
Change
 
2012/2011
 
2011/2010
 
(In millions)
PNM
$
37.0

 
$
(2.8
)
TNMP
4.4

 
6.3

First Choice
(24.1
)
 
0.1

Corporate and Other
(88.2
)
 
95.1

Optim Energy, including impairment

 
122.9

  Net change
$
(70.9
)
 
$
221.6

PNMR's operational results were affected by the following:

Exit from unregulated businesses - As discussed above, PNMR sold First Choice in 2011, resulting in a pre-tax gain of $174.9 million, which was included in the Corporate and Other segment. Additionally, PNMR wrote-off its investment in Optim Energy in 2010, recognizing a pre-tax impairment loss of $188.2 million. In addition to the impacts of these transactions, results of operations only include Optim Energy through December 31, 2010 and First Choice through October 31, 2011. 
Rate increases for PNM and TNMP - Additional information about these rate increases is provided in Note 17
Decrease in the number of common and common equivalent shares, primarily due to PNMR's purchase of its equity as described in Note 6
Other factors impacting results of operation for each segment are discussed under Results of Operations below

Liquidity and Capital Resources
The Company has revolving credit facilities that provide capacities for short-term borrowing and letters of credit of $300.0 million for PNMR and $400.0 million for PNM, both of which expire in October 2017. In addition, TNMP has a $75.0 million revolving credit facility, which expires in December 2015. Total availability for PNMR on a consolidated basis was $603.0 million at February 22, 2013. 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 $2,047.4 million for 2013-2017. The construction expenditures include additional renewable resources anticipated to be required to meet the RPS, additional peaking resources needed to meet needs outlined in PNM's current IRP, and environmental upgrades at Four Corners . This estimate does not include any amounts related to environmental upgrades at SJGS that ultimately may be required by EPA to address regional haze (Note 16) or expenditures that could be required to replace capacity should environmental control at SJGS involve shutdown of one or more SJGS units. 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 during the 2013-2017 period. 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 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 in Part I, Item 1 and to Part II, Item 7A. Risk Factors.
PNM
The table below summarizes operating results for PNM:
 
Year Ended December 31,
 
Change
 
2012
 
2011
 
2010
 
2012/2011
 
2011/2010
 
(In millions)
Total revenues
$
1,092.3

 
$
1,057.3

 
$
1,017.1

 
$
35.0

 
$
40.2

Cost of energy
353.6

 
362.2

 
352.3

 
(8.6
)
 
9.9

Margin
738.6

 
695.1

 
664.9

 
43.5

 
30.2

Operating expenses
435.4

 
438.8

 
424.5

 
(3.4
)
 
14.3

Depreciation and amortization
97.3

 
94.8

 
92.3

 
2.5

 
2.5

Operating income
205.9

 
161.4

 
148.1

 
44.5

 
13.3

Other income (deductions)
26.5

 
19.9

 
31.6

 
6.6

 
(11.7
)
Net interest charges
(76.1
)
 
(75.3
)
 
(72.4
)
 
(0.8
)
 
(2.9
)
Earnings before income taxes
156.3

 
106.0

 
107.3

 
50.3

 
(1.3
)
Income (taxes)
(50.7
)
 
(37.4
)
 
(36.4
)
 
(13.3
)
 
(1.0
)
Valencia non-controlling interest
(14.1
)
 
(14.0
)
 
(13.6
)
 
(0.1
)
 
(0.4
)
Preferred stock dividend requirements
(0.5
)
 
(0.5
)
 
(0.5
)
 

 

Segment earnings
$
91.0

 
$
54.0

 
$
56.8

 
$
37.0

 
$
(2.8
)

The table below summarizes the significant changes to total revenues, cost of energy, and margin:
 
2012/2011 Change
 
2011/2010 Change
 
Total
Revenues
 
Cost of
Energy
 

Margin
 
Total
Revenues
 
Cost of
Energy
 

Margin
 
(In millions)
Retail rate increases
$
40.3

 
$

 
$
40.3

 
$
32.1

 
$

 
$
32.1

Retail load, fuel, and transmission
(15.9
)
 
(10.6
)
 
(5.4
)
 
28.3

 
10.7

 
17.5

Wholesale rate increase
4.0

 

 
4.0

 
 
 
 
 
 
Unregulated margins
(5.9
)
 
1.1

 
(7.0
)
 
(41.0
)
 
0.9

 
(41.9
)
Energy efficiency rider
8.9

 

 
8.9

 
13.0

 

 
13.0

Renewable rider
6.9

 
2.0

 
4.9

 

 

 

Net unrealized economic hedges
(3.3
)
 
(1.1
)
 
(2.2
)
 
7.8

 
(1.7
)
 
9.5

Total increase (decrease)
$
35.0

 
$
(8.6
)
 
$
43.5