TXNM

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2011, for PNM Resources, Inc. (PNMR) and its subsidiaries, Public Service Company of New Mexico (PNM) and Texas-New Mexico Power Company (TNMP). PNMR operates regulated electric utilities in New Mexico and Texas, along with competitive retail energy businesses (First Choice) and an investment in Optim Energy. The filing notes that PNM and TNMP are filing under reduced disclosure formats as wholly-owned subsidiaries.

Key Financial Metrics (Six Months Ended June 30, 2011)

Material Changes vs. Prior Period

• Significant Earnings Decline: Net earnings attributable to PNMR for the three months ended June 30, 2011, dropped to $4.1 million from $22.9 million in the same period in 2010. This represents a decrease of $18.8 million.
• Regulatory Disallowances: The primary driver of the earnings decline was the recording of regulatory disallowances totaling $21.4 million for the six months ended June 30, 2011 ($17.5 million at PNM and $3.9 million at TNMP). These were recorded in anticipation of final regulatory orders regarding rate cases and interest rate compliance tariffs.
• Optim Energy Impact: PNMR fully impaired its investment in Optim Energy at December 31, 2010. Consequently, no equity losses were recorded in 2011, whereas 2010 included an $8.2 million equity loss. This absence of a loss in 2011 partially offset the regulatory disallowances.
• First Choice Performance: First Choice segment earnings decreased by $10.0 million for the quarter due to losses on unrealized economic hedges ($2.3 million) compared to gains in 2010, despite revenue growth driven by customer usage.
• TNMP Rate Increases: TNMP revenues and margins increased due to the implementation of a $10.25 million base rate increase effective February 1, 2011.

Guidance, Outlook, and Risks

• Regulatory Outcomes: On August 8, 2011 (subsequent to the period end), the New Mexico Public Regulation Commission (NMPRC) issued a final order in PNM's 2010 Electric Rate Case. The order approved a $72.1 million rate increase but required PNM to forego $10.0 million in fuel cost recovery and disallow $7.5 million in other costs. PNM recorded these disallowances as of June 30, 2011.
• Environmental Compliance (BART): The EPA issued a final Federal Implementation Plan (FIP) on August 5, 2011, requiring the installation of Selective Catalytic Reduction (SCR) technology at the San Juan Generating Station (SJGS) to meet regional haze rules. PNM estimates this will cost approximately $750 million to $1 billion for the station (PNM's share ~46.3%). PNM plans to appeal the decision but expects to seek cost recovery from ratepayers.
• Optim Energy Strategy: PNMR is assessing strategic alternatives for its 50% interest in Optim Energy. The company has no contractual obligation to provide additional funding and does not anticipate making contributions in the near term.
• Liquidity: PNMR maintains $588.6 million in remaining availability under its revolving credit facilities as of August 2, 2011. The company believes internal cash generation and credit facilities are sufficient to meet capital requirements for the next 12 months.
• Climate Change: The company faces uncertainty regarding potential federal and state regulations on greenhouse gas emissions, which could require significant capital expenditures and impact the economic viability of fossil-fuel generating plants.

Investor Verification Checklist

• Regulatory Disallowance Impact: Verify the final impact of the NMPRC's August 8, 2011 order on PNM's future rate base and the specific composition of the $17.5 million disallowance recorded in Q2 2011.
• SJGS SCR Costs: Monitor the status of PNM's appeal against the EPA's FIP requiring SCR technology at SJGS and the potential timeline for cost recovery from ratepayers.
• Optim Energy Status: Track the progress of strategic alternatives for Optim Energy and any potential requests for additional capital contributions from PNMR.
• First Choice Hedging: Review the volatility of First Choice's earnings due to mark-to-market adjustments on economic hedges, which significantly impacted Q2 2011 results.
• Debt Maturities: Note that PNMR and PNM revolving credit facilities expire in August 2012 and will require refinancing or replacement.