v ) for approval to 2 and 3, issuance of certificates of ... › ~ › media › files › p ›...

BEFORE THE NEW MEXICO PUBLIC REGULATION COM~IISSION

IN THE MATTER OF THE APPLICATION ) OF PUBLIC SERVICE COMPANY OF NE\V ) ~tEXICO FOR APPROVAL TO ABAl~DON ) SAN JUAN GENERATING STATION UNITS ) 2 AND 3, ISSUANCE OF CERTIFICATES ) OF PUBLIC CONVENIENCE AND ) NECESSITY FOR REPLACE~IENT PO\VER ) RESOURCES, ISSUANCE OF ACCOUNTING ) ORDERS AND DETERMINATION OF ) RELATED RATEMAKING PRINCIPLES AND) TREATMENT, )

) PUBLIC SERVICE COMPANY OF NEW ) ~IEXICO, )

) Applicant )

______________________________)

Case No. 13-00 _____ -UT

DIRECT TESTIMONY AND EXHIBITS

OF

TERRY R. HORN

December 20, 2013

NMPRC CASE NO. 13- -UT INDEX TO THE DIRECT TESTIMONY OF TERRY R. HORN

WITNESS FOR PUBLIC S.ERVICE COlVIPANY OF NEW MEXICO

I. INTRODUCTION AND PURPOSE ....................................................................... I

II. FINANCING APPROACH AND LIQUIDITY IMPLICATIONS ......................... 3

III. CREDIT RATING IMPLICATIONS ...................................................................... 7

IV. PALO VERDE UNIT 3 VALUATION CONTEXT ............................................. l8

V. PALO VERDE UNIT 3 DECOMMISSIONING TRUST STATUS .................... 20

VI. PALO VERDE UNITS 1 AND 2 PLANS ............................................................ 27

VII. CONCLUSION ...................................................................................................... 30

PNM Exhibit TRH-1

PNM Exhibit TRH-2

PNM Exhibit TRH-3

PNM Exhibit TRH-4

PNM Exhibit TRH-5

AFFIDAVIT

Resume of Teny R. Horn

Moody's Investors Service report dated June 24, 2013 titled Credit Opinion: Public Service Company of New Mexico

Standard & Poor's report dated April 5, 2013, titled PNM Resources and Subsidiary Corporate Credit Ratings Raised to "BBB": Outlook Stable

Moody's Investors Service report dated July 29, 2013, titled PNM Resources and UNS Energy: San Juan Plant Generating Some Closure

Standard & Poor's report dated March 10, 2008, titled PNM Resources' Outlook Revised to Negative

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DIRECT TESTI~IONY UF TERRY R. HORN

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I. INTRODUCTION AND PURPOSE

PLEASE STATE YOUR NAME, POSITION AND BUSINESS ADDRESS.

My name is Terry R. Horn. I am Vice President and Treasurer for Public Service

Company of New Mexico ("PNM" or the "Company"). My address is 414 Silver

A venue, SW, Albuquerque, New Mexico 87102.

PLEASE DESCRIBE YOUR RESPONSIBILITIES AS VICE PRESIDENT

A .. ~D TREASURER OF PNM.

As Vice President and Treasurer, I am responsible for leading PNM's treasury

and risk management functions. In that role, I am responsible for liquidity, cost

of capital, capital structure, financings, cash management, and relationships with

the credit rating agencies, and commercial and investment banks. I am also

responsible for the investment performance of the portfolios accumulated for

pension obligations, nuclear decommissioning liabilities, retiree medical

commitments and other corporate purposes, as well as overseeing the risk

management activities of insurance, credit risk and commodity market risk of gas

and electricity. I have similar responsibilities for PNM's holding company, PNM

Resources, Inc. ("PNM Resources'' or "PNMR") as well as for PNM Resources'

other subsidiaries. At PNMR, I am also responsible for the Investor Relations

function.

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DIRECT TESTIJ\!IONY OF TERRY R. HORN

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HAVE YOU PREv10USL Y TESTlllED L'i UTILITY REGULATION

PROCEEDINGS?

Yes I have. Attached is PNM Exhibit TRH-1 that summarizes my experience.

WliAT IS THE PURPOSE OF YOUR DIRECT TESTIJ\!IONY?

The purpose of my testimony is to support PNM' s Application in this case. In doing so

I will discuss PNM's fmancing approach a'>sociated with its projected five-year capital

spending, including the capital expenditures required to comply \vith the Revised State

Implementation Plan ("Revised SIP"), which involves installation of selective non-

catalytic reduction technology ("SNCR'') at San Juan Generating Station ("SJGS"')

Units 1 and 4 and the retirement of SJGS Units 2 and 3, and the implications of the five-

year capital budget for PNM's liquidity and credit ratings. I will show that approval of

PNM' s Application by the Commission. including establishing the ratemaking treatment

for associated costs, will be viewed favorably by the capital markets, helping PNM to

maintain its investment grade credit rating for the ultimate benefit of both customers and

shareholders, providing for lower cost capital to finance the costs related to installing

SNCR a'> well a'> other capital investment<; that will be required to serve customer needs

in the next few years, given both customer growth and the abandonment of SJGS Units

2 and 3. In addition, I will provide some context regarding the fair valuation of Palo

Verde Nuclear Generating Station ('"PVNGS" or "Palo Verde") Unit 3 for ratemaking

purposes. I will also desctibe the current status of the PVNGS Unit 3 nuclear

decommissioning trust ("NDT') and propose the structure for the PVNGS Unit 3 NDT

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DIRECT TESTIMONY OF TERRY R. HORN

N.MPRC CASE NO. 13-00 -UT

with PVNGS Unit 3 as a jurisdictional resource. Finally, I will discuss the status of

PNM' s Iea'>ing anangements for PVNGS Units I and 2.

II. FINANCING APPROACH AND LIQUIDITY IlVIPLICATIONS

HO\V IS PNM LIKELY TO FINANCE THE EXPENDITURES RELATED

TO THE APPLICATION AND THE REST OF ITS FIVE-YEAR CAPITAL

BUDGET?

The Company utilizes the cash flow from operations to provide funds for both

constmction and operational expenditures. If there is a shortfall of cash tlow from

operations, PNM typically finances that shortfall using its revolving credit facilities,

which total $400 million today and are anticipated to total $450 million by January of

2014 (the "Revolvers"). TI1e costs of PNM's five-year capital budget including those

resulting from its Application in this case will be financed in the same fashion. Once

PNM ha'l a sufficient amount of short-tem1 debt (typically $200-$300 million) on the

Revolvers, the Company will pursue issuing longer-term bonds in the public market to

more closely match the long-tenn nature of the assets being financed and restore the

Company's liquidity under the Revolvers. In addition to using cash flow from

operations, PNMR will contribute equity, as necessary, to ensure that the capital

structure remains properly balanced to maintain an investment grade credit rating.

WHAT ARE PNl\1'S EXISTING LIQUIDITY SOURCI<~S?

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N~IPRC CASE NO. 13-00 -UT

PNNI's shmt-tenn liquidity arrangements include a S400 million revolving credit facility

that matures in October of 2018, as approved by the Commission in Case No. 10-00269-

UT; a $50 million revolving credit facility that is anticipated to be in place by January of

2014 and mature in January of 2018, as approved by the Commission in Ca~e No. 13-

00295-UT; and a $100 million inter-company loan facility with PNM Resources, as

authorized in Case No. 10-00269-UT.

WHAT ARE THE OUTSTANDING BALANCES UNDER PNM'S

CURRENT LIQUIDITY SOURCES?

As of November 30, 2013, there were no bon-owings tmder PNM's Revolvers or the

inter-company loan agreement with PNMR.

WHY IS IT IMPORTANT TO MATCH LONG-TERM ASSETS \VITH

LONG-TERM FINANCING?

A general principle of fmancing is to match the length of the fmancing with the useful

life of the asset being financed. For exan1ple, under this principle one should pay ca'ih

for a meal since it is an immediately constm1ed asset. The purchase of a car that will be

useful for five years should be fmanced with a loan of no more than five years. A home

can support a thirty-year mortgage because of the long useful life of the a<~set. There are

many more considerations that a corporate entity takes into account when making

fmancing decisions, but generally there is consistency between the useful life of the

assets ~md the underlying financing.

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\VHAT PORTION OF PNl\;l'S J<TVE-YEAR CAPITAL BUDGET IS :FOR

EXPENDITURES RELATED TO PNM'S APPLICATION?

The projected costs related to this Application represent a significant increase in

PNM's capital budget and financing requirements. PNM's core capital budget for

2013 through 2017 is $1.2 billion which excludes expenditures related to the

Revised SIP. The capital related to the Revised SIP is estimated to add

approximately $358 million over the period, which includes approximately $82

million for SNCR construction, including balanced draft conversion, and

approximately $276 million for the construction of new facilities to help offset the

lost capacity from the shutdown of SJGS Units 2 and 3. This amount of

additional spending assumes that PNM's interest in PVNGS Unit 3 is added to

rate base to serve New Mexico retail customers. If PNM has to build additional

replacement power instead of using PVNGS Unit 3, then the capital spending

would be higher. PNM cannot fund its core capital expenditures and Revised

SIP-related expenditures with cash flow from operations alone. It will be

necessary for PNM to use shmt-term debt under its Revolvers, as described

above, to fund a portion of the capital expenditures and ultimately obtain long-

term financing during this period through debt issuances and possible PNMR

equity contributions in order to repay borrowings under the Revolvers. It will

also be important for PNM to maintain a properly balanced capital structure

during this time.

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\VHAT IS A PROPERLY BALANCED CAPITAL STRUCTURE?

A properly balanced utility capital stmcture is one that is comprised of debt and

equity in proportions that are balanced so as to minimize the long-term after-tax

cost of capital for the benefit of customers. Interest paid on debt is tax deductible

so generally a corporation benefits from its use. However, if too much debt is in

the capital structure, the risk of default increases, credit ratings deteriorate. and

the cost of debt increases, offsetting any tax benefits, and the availability of

financing becomes less certain. The cost of equity is not tax deductible and is

generally more expensive than debt because it is a riskier investment, but in spite

of this, equity is required to balance the debt in a capital structure. Greater

amounts of equity in a capital structure reduce default risk, resulting in higher

credit ratings, a lower cost of debt and better access to debt financing when

needed. Therefore, there is an optimal balance of debt and equity needed in a

capital structure to minimize the long-term after-tax cost of capital. This optimal

balance of debt and equity differs by industry, and often by company within an

industry, because of varying risk attributes of different industries and companies.

Industries with more business risk, such as high tech, would have less debt.

Industries with less business risk, like regulated utilities, can support more

financial risk and therefore more debt. Generally, an appropriate range for

electric utilities is an approximate mix of 50% debt and 5Wfo equity, plus or minus

5%. PNM's current capital structure, which was used in Case No. 12-00007-UT

to calculate PNM's weighted average cost of capital, is 48.89% debt, 0.50%

preferred equity, and 50.61% equity. Looking forward for the period of 2013 to

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2017, PNM has more than $1.5 billion of capital expenditures forecast, including

the Revised SIP, some of which will require external financing. Therefore it is

essential that PNM maintain its credit ratings above investment grade so that the

cost of financing these expenditures is as low as possible.

\VILL THE PROPOSED SHUTDO\VN OF SJGS lJNITS 2 Al\i'D 3 AI<"'FECT

THE POLLUfiON CONTROL REVENUE BONDS ISSUED BY THE CITY

OFF ~flNGTON ON BEHALF OF PNM FOR THOSE U~1TS?

No, a shutdown of SJGS Units 2 and 3 will not have any effect on the associated

pollution control revenue bonds. This lower cost debt will remain in PNM's capital

structure even with the retirement of these unit'i. There are currently $509.5 million of

tax-exempt bonds issued by the City of Farmington on behalf of PNM, a portion of

which were used to fund pollution control equipment on SJGS Units 2 and 3. These

bonds can remain outstanding and PNM will remain obligated to pay the principal and

interest on the bonds, regardless of the retirement of Unit'i 2 and 3. The City of

Farmington has no obligation for any payments on the bonds <md that will not change

with the retirement of Units 2 and 3.

III. CREDIT RATING IMPLICATIONS

WHAT ARE CREDIT RATINGS AND HO\V ARE THEY USED?

Credit ratings are assigned to a company's debt by credit rating agencies such as

Moody's Investors Services ("Moody's") and Standard & Poor's Rating Services

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("S&P"). The ratings ret1ect the agencies' assessment of the risk that a company

will default on the debt, and not be able to make interest or principal payments.

Potential lenders use credit ratings as a measure of the risk of default and typically

charge a lower interest rate to borrowers with higher credit ratings. Conversely,

borTOwers with lower credit ratings are perceived to be riskier, and will typically

need to pay a higher interest rate on debt. Equity investors also consider credit

ratings and typically require higher equity retums on investments in firms that

have lower credit ratings.

WHAT ARE THE CATEGORIES OF CREDIT RATINGS?

Moody's and S&P use similar categories of credit ratings as shown in the table below,

wid1 Aaa or AAA representing the highest credit ratings.

Moody's Category S&P Category

Aaa AAA Investment Grade A a AA

Ratings A A Baa BBB

Ba BB B B

Below Investment Caa CCC Grade Ratings Ca cc

c c -- D

Within each rating category. Moody's assigns a number between 1 and 3 while S&P

assigns a "+" or ·'-" to fwther distinguish ratings within that category. For example a

rating from Moody's of Baal is higher than Baa2 or Baa3, and a rating from S&P of

BBB+ is higher than BBB or BBB-. In addition. the rating agencies assign a Positive.

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Negative or Stable outlook to the credit rating, which indicates whether their next action

is likely to be an upgrade, downgrade or no change to the existing rating.

WliAT IS A.~ INVESTJ\tlENT GRADE RATING?

A rating of at least Baa3 from Moody's or BBB- from S&P is considered an investment

grade rating. Debt that is rated investment grade can be held by a larger mliverse of

investors and generally has a lower interest rate because it is considered less risky than

debt that is rated below investment grade. In addition, companies that are rated below

investment grade may not be able to access capital in capital-constrained market

conditions, except possibly under very onerous tenns and conditions.

WHAT FACTORS COULD CAUSE A DOWNGRADE IN PNM'S CREDIT

RATINGS?

In its report on June 24, 2013, PNM Exhibit TRH-2, page 4, Moody's stated that

PNM's rating could be downgraded "if we believe the New Mexico regulatory

framework has become less supportive or predictable such that there is an adverse

rate case ruling or cost recovery disallowances; or if there was deterioration in

PNM's financial metrics ..... " In its report on April 5, 2013, PNM Exhibit TRH-3,

page 5, S&P cited similar factors that could cause a rating downgrade and noted

that, "Failure to adequately manage regulatory risks could result in lower ratings

before any deterioration in credit measures." Moody's states in its July 29, 2013,

report titled "PNM Resources and UNS Energy: San Juan Plant Generating Some

Closure", PNM Exhibit TRH-4, page 1:

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An ability to recover and earn a return on !the Revised SIP-related! investments in a timely manner is important for both utilities [PNM and Tucson Electric Power ("TEP")J to maintain their financial metrics at cmTent levels as the regulatory environments in New Mexico and Arizona have been exhibiting increased supportiveness.

That said, if recovery is less timely, leading to liquidity issues or an increased risk of stranded investment, their credit profiles may suffer. Moreover, should additional liquidity or time constraints arise from material changes to the proposed SIP, there could be an impact on safety and reliability as well as operating performance, which would be credit negative.

Later in that same report. page 7, Moody's states:

We think PNM and TEP are well positioned to recover the costs of environmental compliance associated with the revised SIP through regulated rates. However, in the event that recovery is less timely, leading to a stress on liquidity or an increased risk of stranded investment, credit profiles may suffer, absent some form of mitigating action.

\VILL GRANTING PNM'S APPLICATION AS REQUESTED BE

HELPFUL IN KEEPING FINANCING COSTS DO\VN?

Yes. The cost of capital, both debt and equity, is directly related to the risk of

repayment. If the perceived risk of repayment is high, then the cost of the capital

is higher than it would be if the risk of repayment and corr-esponding uncertainty

were lower. As indicated in the reports cited above, in assessing the risk of

repayment for a regulated utility, rating agencies, and ultimately potential lenders

and investors, place substantial weight on their assessment of the regulatory

environment in which the utility operates. Granting PNM' s Application,

including providing the accounting order described by Mr. Sategna addressing the

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undepreciated investment in SJGS Units 2 and 3, as well as approving the

proposed valuation for the additional capacity in SJGS Unit 4 and for inclusion of

PVNGS Unit 3 in rate base, will be seen by the rating agencies and providers of

debt and equity capital as evidence of lower risk and uncertainty resulting from a

supportive regulatory environment. Therefore, the cost of the capital will be

lower, creating savings for customers.

\VHAT ARE PNM's CURRENT CREDIT RATINGS?

Moody's and S&P rate PNM's senior unsecured debt at Baa3 I BBB, respectively,

which are both investment grade ratings. The outlook at Moody's is Positive and

the outlook at S&P is Stable. Recent rating agency reports indicate that they

expect the Company to continue its efforts to maintain financial stability,

including targeting a balanced capital structure, accompanied by rate recovery to

support any new debt. PNM's credit ratings or outlook could be revised

downward if adverse rate case rulings or cost recovery disallowances result in a

deterioration of cash t1ow, or if there is uncertainty regarding the adequate and

timely recovery of significant costs such as those associated with PNM's

Application regarding the Revised SIP.

HO\V CRITICAL IS IT FOR PNM TO MAINTAIN ITS INVESTl\1ENT

GRADE CREDIT RATING?

It is especially critical at this juncture because of PNM' s capital expenditure and

financing requirements during the next five years. Investors and lenders use PNM' s

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credit ratings to determine their willingness to invest in or lend funds to PNM, and at

what price. The rating agencies typically will formally reassess a company's credit

ratings annually and in conjunction with a major capital expenditure program and

fmancing. Investors and lenders commonly rely on the credit ratings published by the

rating agencies to detennine the rettun that they require on their capital. Given the

global financial tmcertainty that has existed over the last few years, and still exists, if

PNNl' s credit ratings were to again fall below investment grade, investors and lenders

could decide not to lend to, or invest in PNM. Credit ratings therefore impact not only

the cost of PNM' s capital, but may also have a direct impact on PNM' s access to capital.

The rating agencies continually review PNM' s current and projected financial health,

which is materially affected by capital expenditures ::md the fmancing for those

expenditures. Regulatory risk is a critical factor in determining a utility's credit rating.

Therefore, a regulatory environment that aHows for timely cost recovery of pmdent

expenditures is a positive consideration for a utility achieving and maintaining an

investment grade rating. Therefore, for PNM to maintain its access to capital and fund

the necessary capital expenditures on favorable terms, it must e!h'>ure that it maintains

investment grade status. This will ensure that PNM can continue to have access to

favorably priced capital, even in the face of some adverse or unpredictable event or

some structural shift in capital markets. Any delays, uncertainties or denials in the

recovery could hurt PNM's credit quality.

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HAS PN.M'S ACCESS TO THE CAPITAL l\1ARKETS BEEN ADVERSELY

IMPACTED IN THE PAST DUE TO ITS CREDIT RATINGS?

Yes. In late 2007 to mid-2008, PNM was downgraded three times in a very short

period of time to a below investment grade rating of BB+ by S&P and to Baa3 by

Moody's, its lowest investment grade rating, while placing the Company on

review for possible further downgrade. These actions resulted from the credit

rating agencies' concerns about PNM' s deteriorating credit metrics and their

reactions to a Recommended Decision in PNM's 2007 rate case (Case No. 07-

00077-UT) which recommended approving only about 30% of PNM's requested

revenue increase and denial of a fuel and purchased power cost adjustment clause

("FPPCAC"). The one-step Moody's downgrade resulted from the final order in

that case that improved the rate relief slightly, to about 44% of the initial request

and postponed the decision on a FPPCAC. The Commission ultimately approved

a FPPCAC for PNM, significantly improving cash tlows, and resulting in no

fmther adverse credit action by Moody's, which allowed PNM to at least maintain

a split credit rating at the time i.e., S&P rated PNM below investment grade and

Moody's rated PNM at its lowest investment grade level.

At the same time. the global financial crisis that began in 2008 impaired access to

the capital markets for all but the highest rated borrowers. Indeed, prior to the

Commission's action authorizing a FPPCAC, PNM had been advised by debt

underwriters that PNM' s deteriorating financial condition and the uncertainty

about the outcome of the FPPCAC and the 2007 rate case would prevent PNM

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from issuing long-term debt, at any cost, in the then-existing capital-constrained

market. S&P noted in its March 10, 2008, report titled ·'PNM Resources' Outlook

Revised to Negative", PNM Exhibit TRH-5, page 2:

The negative outlook reflects our perception of increased regulatory risk at PNM that, if not managed or mitigated, could harm credit quality and lead to lower ratings for PNMR and its subsidiaries .... The hearing examiner's recommendation in PNM's pending electric rate case ... could lead to weaker credit metrics than previously expected if adopted by the New Mexico Public Service !sic} Commission.... In addition, the company's liquidity position is stretched and maturities coming due in 2008 will necessitate access to markets.

\\'hen PNM \Vas finally able to access the capital markets, it had to pay an interest

rate of 7.95% on $350 million of 10-year fixed rate bonds, which was

significantly higher than the rate of approximately 5.00% that it would have paid

had it been investment grade. This difference translates into an additional $10.3

million of annual interest, or $103 million over the 10-year term of the bonds. In

the best of times, PNM needs to maintain investment grade credit ratings to

minimize financing costs. But as demonstrated by PNM's past experience,

investment grade ratings are especially important when capital markets are

volatile and there is uncertainty in the market. Although capital markets today are

not in the crisis mode that existed in 2008, there remains a considerable level of

uncertainty and volatility.

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vVHAT EFFECT WILL Tffi~ RATE TREATMENT OF CNDEPRECIATED

INVESTl\,'fENT IN SJGS UNITS 2 AND 3 HAVE ON PNM'S CREDIT

RATINGS AND COST OF CAPITAL?

The San Juan Units 2 and 3 were fm::mced with approximately 50% long-tenn debt and

50% shareholders' equity. As the depreciation associated with those assets is recovered

in rates, the resulting cash t1ow is used to pay the interest, p1incipal, and dividends due

on the underlying financing. This regulatory constmct of connecting asset depreciation

and cost recovery is an important reason utilities have the ability to finance on favorable

tenns and conditions, and is an important consideration when rating agencies decide on

the credit ratings for a utility.

Moody's states in its July 29, 2013, report titled PNM Resources and UNS

Energy: San Juan Plant Generating Some Closure, PNM Exhibit TRH-4: "At

March, 31, 2013, PNM's net book value of Units 2 and 3 was approximately $290

million. PNM's ability to recover and earn a return on these stranded investments

as well as the costs incurred to retire the two units, in a timely manner, 1s

important in maintaining its financial metrics at cmTcnt levels.''

If the Commission were to decide to not allow PNM to fully recover its tmdepreciated

investment in San Juan Units 2 and 3, it vvould be negatively viewed by the rating

agencies for at least three reasons. First, the rating agencies vvould be concerned

because PNM still has debt outstanding from the fmancing of those assets for which it is

no longer being reimbursed by customers. That outstanding debt, interest and principal,

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still has to be paid, which would put incremental financial strains on the Company.

Second, equity investment by shareholders would be lost, making the Company much

riskier and resulting in higher cost'> to raise equity capital when needed in the future.

Third, the rating agencies would be concemed about whether the Commission has

decided to be less supportive of the fmancial health of the Company and even possibly

punitive, especially since, in authorizing ab:mdonment of the two tmits for which full

recovery would continue to be allowed in the absence of abandonment, the Commission

will be confirming that the Company has acted in the public interest to identify an

approach that is lower cost for customers, reduces the risk of future cost increases, and

provides additional enviromnental benefits. 1bese concerns could cause the rating

agencies to downgrade PNM, in tum causing our cost of capital to increa.;;e.

COULD ADEQUATE Ai~D TIMELY COST RECOVERY RESULT IN AN

lJPGRADE OF PNM'S CREDIT RATING?

Yes. Granting adequate and timely cost recovery would be viewed favorably by the

rating agencies and would contribute to maintaining and improving PNM' s credit rating.

On June 24,2013, Moody's raised PNM's ratings outlook to Positive from Stable, PNM

Exhibit TRH-2, and stated at page 4:

'"TI1e positive outlook reflects our expectation that the New Mexico regulatory environment continues to improve, financial metrics will remain consistent with US regulated electric utilities in the upper end of the Baa range and that the tirneline for the San Juan environmental compliance requirements play out such that PNM is able to recover prudently incurred costs and investments in a timely mam1er."

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8

9

10

II

12

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14

15

16

17

18

19

Q.

A.

DIRECT TESTilVIONY OF TERRY R. HORt~


Clearly, the credit rating agencies are monitoring the Commission's treatment of these

required envirorm1ental compliance expenditures. Therefore, approval of PNM' s

Application by the Commission would strengthen the rationale for an upgrade in PNM's

credit rating.

HOW WOULD A CREDIT RATING CHANGE AFFECT PNlVI'S

BORROWING COST?

A one-notch improvement in PN1.1' s credit ratings by Moody's and S&P to Baa2 I

BBB+, respectively, could result in a reduction in its current borrowing cost on new 10-

year debt of approximately 0.50%. This would reduce PNM's bonowing cost by

approximately 10% compared to debt issued at its cunent ratings, and by approximately

20% compared to debt issued assuming a one-notch downgrade. The estimated effects

of either an upgrade or downgrade on PNM's borrowing cost based on $750 million of

debt issuance are summarized in the table below. A 10-year timeframe is used for

illustrative purposes because it is the most common maturity for a debt financing and

therefore the most liquid and least-cost fonn of long-tenn financing available.

Moody's I S&P Interest Annual Interest Total Interest Ratings Rate Expense for lO Years

One-notch upgrade Baa2 /BBB+ 3.85% $29MM $289MM

Current rating Baa3/BBB 4.350( $33MM $326MM

I One-notch downgrade Ball BBB- 4.85% $36MM $364MM i ~

17

1

2 3 Q.

4

5 A.

6

7

8

9 10 Q.

11

12 A.

13

14

15

16

17

18

19

20

21

22

23

24


N:MPRC CASE NO. 13-00 -UT

IV. PALO VERDE UNIT 3 VALUATION CONTEXT

WHAT TOPICS WILL YOU DISCUSS IN THIS SECTION OF YOUR

TESTIMONY?

I will discuss the proper valuation for ratemaking purposes of PVNGS Unit 3. due to

PNM's Application for a Certificate of Public Convenience and Necessity ("CCN")

to recertify PNM's interest in PVNGS Unit 3 as a resource to serve retail New

Mexico customers.

HOW DO YOU VIEW CONCENTRIC ENERGY ADVISORS, INC.'S

("CONCENTRIC") VALUATION?

Concentric's testimony provides a range of values for PVNGS Unit 3 between

approximately $341 million ($2,542/kW) and $352 million ($2,625/kW) for the

asset as a utility resource for an integrated utility such as PNM, which I believe

reasonably represents both its value to PNM as well as the cost to acquire a similar

asset in the market. Concentric· s valuation is based upon a discounted cash t1ow

("DCF') analysis of PNM's interest in PVNGS Unit 3 that reflects a cost of capital

consistent with PNM's actual financing cost. In addition, as Mr. O'Com1ell

demonstrates in his testimony, PVNGS Unit 3 is lower cost to customers than other

alternatives up to a valuation of $3,1 00/kW. Based on my recent experience

negotiating with the owners of Palo Verde Unit I and 2 leases, Concentric's

valuation is retlective of \Vhat would be actually required to purchase an ownership

interest in Palo Verde Unit 1 or Unit 2 from one of the lessors today.

18

1 Q.

2

3 A.

4

5

6

7

8

9

10

11

12

13

14

15

16

17 Q.

18 A.

19

20

21

22

DIRECT TESTil\fONY OF TERRY R. HORN

Nl\IPRC CASE NO. 13-00 -UT

PLEASE DISCUSS PNl\1'S RECENT ATTEIVIPTS TO PURCHASE PVNGS

LEASES.

PNM purchased 29.8 MW of PVNGS lease interests in Unit 2 in a 2008 auction process

at a capital cost of approximately $2,850/kW. The purchase was approved by the

NMPRC in Case No. 08-00305-UT and, per the stipulation adopted in that case,

the value for ratemak:ing purposes was established at approximately $2,500/kW.

rvlore recently, I attempted to purchase another PVNGS Unit 2 lease in 2011. In

August of 2011, one of PNM' s lessors contacted me regarding an auction process it was

initiating to sell its 14.89 MW PVNGS Unit 2 lease interest. PNM submitted, subject to

regulatory approval, an offer of $25.3 million in cash for the lease equity and agreement

to assume a debt obligation of $12.1 million, making the total consideration offered by

PNM approxin1ately S37.3 million or $2,505/kW. The lessor advised me that there

were two higher bids and I was provided the opportmuty to increase PNM's bid. PNM

raised its bid to a total consideration of $2,578/kW. PNM's bid was not accepted and

the PVNGS Unit 2 lease was sold to another bidder, presumably at a higher price.

WHAT VALL1<: IS PNM PROPOSING FOR PVNGS UNIT 3?

PNM is proposing a value for PVNGS Unit 3 of $2,500/kW, which is consistent

with and somewhat lower than. Concentric's valuation as well as PNM's recent

attempts to purchase PVNGS leases.

19

1

2 3 Q.

4 A.

5

6

7

8

9 Q.

10 A.

11

12

13

14 Q.

15

16 A.

17

18

19

20

21

22



V. PALO VERDE UNIT 3 DECOMMISSIONING TRUST STATUS

WHAT IS THE PURPOSE OF THE NDT?

The purpose of the NDT is to provide funds for the decommissioning of the Palo Verde

nuclear milts, as required by the Nuclear Regulatory Commission ("NRC") and the

Arizona Nuclear Power Project ("ANPP") Participation Agreement, at the end of their

useful lives.

HOW IS THE NDT CURRENTLY FUNDED?

Currently, funding for the NDT for Palo Verde Units 1 and 2 is included in rates for

electric service that are paid by PNM's customers. Funding for Palo Verde Unit 3 is not

recovered in rates to PNM customers.

ARE THE FlJNDS FOR DECOlVfMISSIONING THE THREE UNITS

COMINGLED OR SEGREGATED?

The accumulated cont1ibutions and respective earnings on those fimding amounts are

segregated into separate trust accmmts for each Palo Verde Unit. Although they are

legally :md financially separated by Unit, they are mm1aged in a combined manner to

optimize investment efticiencies.

20

Q.

2

3 A.

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

DIRECT TESTil-"'ONY OF TERRY R. HORN

N.MPRC CASE NO. 13-00 -UT

\VHAT IS PNl\'1 PROPOSING FOR THE PVNGS UNIT 3 NDT IN THIS

APPLICATION?

PNM is proposing that, if as a result of this proceeding, Palo Verde Unit 3 becomes a

generation resource serving jurisdictional customers, those customers would provide

fimding through their electric rates for the PVNGS Unit 3 NOT, simihrr to the fimding

they cunently provide for PVNGS Units 1 and 2, but on a pro rata basis to recognize

that PVNGS Unit 3 has been operated as a non-jurisdictional resomce for many years.

Assuming that PNM's Application is granted, PNM's shareholders \Nill have had the

benefit of the output of PVNGS Unit 3 from its initial license date of November 25,

1987, to December 31, 2017, (1 0,995 days) and PNM' s retail customers will have the

benefit of the output from January 1, 2018, to the end of the license period of November

25, 2047, (10,921 days). Shareholders will therefore have responsibility for 50.16(Jf

(10,995 I (10,995+10,921)) and PNM's retail customers would have responsibility for

49.84% (10,921 I (10,995+10,921)) of the ultimate decomrnissioning liability. The

customers' share, of course, would be subject to allocation between the New Mexico

retail jurisdiction and the FERC jurisdiction as is generally the case for costs related to

generation asset'>. Essentially this means that customers would only have responsibility

for hmding the NOT for Palo Verde Unit 3 on a prospective basis, commencing with the

date it becomes a resource to serve them.

PNM would set up a new fund within its PVNGS Unit 3 tax qualified NOT account to

house the contributions of customers toward their pro-rata share of PVNGS Unit 3

N'DT. This would be done so that the shareholder-contributed NOT amounts (fund

21

2

3

4

5 Q.

6

7 A.

8

9

10

11

12

13

14

15

16

17

18 Q.

19

20 A.

21

22



balances at December 31, 2017, plus any future gains and losses until the ultimate

decommissioning) could be kept separate from customer contributions and gains and

losses on the customer contributions.

HOW WILL FUTURE CONTRIBUTIONS TO THE PVNGS lJNIT 3 NDT

BE DETERl\UNED?

Future cont1ibutions to the PVNGS Unit 3 NDT would be detem1ined using the same

methodology as has been historically used to deteffi1ine the contributions for the

PVNGS Unit 1 and 2 NDT's. Currently, customers contribute $1,282,036 annually for

PVNGS Unit 1 decommissioning and $1,354,833 annually for PVNGS Unit 2. I would

expect the annual customer contribution for PVNGS Unit 3 decommissioning would be

approximately $1,300,000 to provide the customers' pro-rata share of the funding for the

ultimate liability. Since shareholders have already been contributing to the NDT, this

estimated annual amotmt reflects what would be needed to fund the NDT on a

prospective basis once Palo Verde Unit 3 is included in PNM's jurisdictional supply

pmtfolio.

HO\V ARE THE ~'DT "FlJNDING CONTRIBUTIONS FOR EACH PALO

VERDE PARTICIP~~T DETERMINED?

Each of the seven PVNGS Pmticipants develops a funding plan for each PVNGS unit,

which is designed to satisfy its respective decommissioning obligations. The funding

plan for each unit is based on funding curves that establish a percentage of the

22

1

2

3 Q.

4 A.

5

6

7

8

9

10

11

12

13

14

15

16 Q.

17

18 A.

19

20

21

22

23

DIRECT TESTI~IONY O'fi"' TERRY R. HORN


decommissioning costs that a PVNGS Participant commits to have in its NDT at the end

of each year.

WHO DETERl\flNES THE REQUIRED FU~'DING CURVE?

Initial ftmding curves were developed by the individual PVNGS Pmticipant for the

PVNGS project and approved by the Termination Ftmding Committee in 1994. The

Termination Ftmding Committee comists of one representative from each of the seven

utilities that are PVNGS participant-;.

With the approval of the Te1mination Ftmding Committee, a PVNGS Participant may

modify its flmding curve in response to a material event such as a significant increase in

the estimated decommissioning costs, a marked drop in the market value of the

investments, regulatory action that causes a prolonged forced outage, the premature

decommissioning of a PVNGS Unit, or a bankruptcy proceeding involving one of the

PVNGS participants.

"VHAT ARE THE KEY ASSUMPTIONS AND l\IETHODOLOGY USED TO

DETERl\flNE THE FUNDING CURVE?

The ftmding curve developed by each PVNGS Participant and approved by the

Tennination Ftmding Committee is based on a sinking flmd methodology, i.e., periodic

deposits into an external trust. The most recent decommissioning cost estimate, an

estimate of the real rate of return on investments and a discount rate are also key

assumptions that are utilized in the funding curve development. A levelized annual

conh·ibution amount is determined based on these assumptions.

23

1 Q.

2 A.

3

4

5

6

7

8

9

10

11

12

13

14

15 Q.

16

17 A.

18

19

20

21

22

23


Nl\IIPRC CASE NO. 13-00 -UT

HOW ARE THE PVNGS NDT FUNDS INVESTED?

NDT funds are accumulated in ta'\. qualified and non-tax qualified trusts. The majority

of PNM' s PVNGS Unit 3 NDT is housed in a non-tax qualified trust due to certain

historic tax code requirements. Realized gains on non-qualified tmst investments are

taxed at the Company's corporate tax rate, approximately 39.6%. Most of the PVNGS

Unit 1 and 2 NDT monies are housed in qualified tmsts and realized gains are taxed at a

20% rate. The PVNGS NDT ftmds held by all PVNGS Participants are invested

pursuant to guidelines established by the Tennination Funding Committee. Each

PVNGS Participant sets an a-;set allocation to achieve its return objectives. The a..,set

allocation and investment styles used by PNM for its PVNGS NDT are meant to

achieve high after tax returns with a reasonable arnount of risk. To meet this objective,

the PVNGS NDT uses a growth equity approach for its domestic equity investments,

ar1d the fixed income portfolio is comprised mostly of tax-exempt rmmicipal bonds.

\VHAT IS Till: DIFFERENCE BETWEEN A TAX: QUALIFIED ACC0~1

AND A NON-TA.:X QUALIFIED ACCOUNT?

Historically, if a nuclem unit was a regulated asset such as PVNGS Units 1 and 2,

then the NDT funds could be accumulated in a tax qualified account where realized

gains were taxed at a 20% rate. If the nuclear unit was not a regulated asset, such as

PVNGS Unit 3, then the NDT funds had to be accumulated in a non-tax qualified

account and realized gains were taxed at the corporate tax rate, approximately 39.6%

for PNM. This tax regulation regarding non-regulated assets was removed from

Internal Revenue Code Section 468A by the 2005 Energy Act, effective for years

24

2

3

4 Q.

5

6 A.

7

8

9

10 Q.

11

12 A.

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14

15

16

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19

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21



beginning after December 31, 2005. Since then, PNM has been allowed to

contribute ftmds for PVNGS Unit 3 into a tax qualified trust.

\VHAT IS THE CURRENT 1'.1lT FUNDING STATUS OF EACH OF THE

PVNGS UNITS?

As of September 30, 2013, PNM's PVNGS Unit 3 NDT is funded at approximately

72% of the latest cost study by TLG Services, Inc. (''TLG") while PNM' s PVNGS Unit

1 is at 78.6% and Unit 2 is at approximately 89.5%.

\VHY IS THE NDT FlJNDED STATUS OF PVNGS UNIT 3 AT A LOWER

LEVEL THAN FOR PVNGS UNITS 1 AND 2?

Each unit of PVNGS has a different estimate of its ultimate decommissioning

obligation. TLG's most recent cost repmt. in 2013 dollars, estimates that PNM's share

of decommissioning Unit 1 will cost $84.9 million, Unit 2 is at $80.6 million and Unit 3

is at S95.3 million for a total of $260.8 million. As of September 30, 2013, Unit 1 had

$66.7 million accumulated, Unit 2 had $72.1 million and Unit 3 had $68.7 million.

Each of these NDT accounts is properly funded and meets all the criteria prescribed by

the Tennination Funding Committee. In addition, for most of its investment history,

PVNGS Unit 3 NOT monies have been in a non-tax qualified account and taxed at a

much higher rate, thus reducing the amotmt of accumulated funding.

25

1 Q.

2

3

4 A.

5

6

7

8

9 Q.

10

11 A.

12

13

14

15 Q.

DIRECT TESTIMONY OF TERRY R. HORl~


SINCE PVNGS UNIT 3 IS F~lJED AT A 72% VERSUS 78.6% FOR lJ~l:T 1

AND 89.5% FOR UNIT 2, IS PNM WILLLNG TO CONTRIBUTE MORE TO

THE UNIT 3 NDT ACCOUNT BY JANUARY 2018?

Yes. PNM is willing to contribute funding to the Unit 3 trust so that Unit 3's ftmding is

equal to the average ftmding of Units 1 and 2 at December 31, 2017. Ctmently, the

average funding of Unit 1 and 2 is 84% which would require approximately $11 million

in cont1ibutions from shareholders into the Unit 3 NDT.

AT WHAT LEVEL OF FLJr\l])LNG ARE THE OTHER PVNGS

P ARTICIP Al~TS?

The latest public infommtion on the funding level of the various Palo Verde participants,

shown in the table below, is as of December 31, 2012.

Unit 1 Unit 2 Unit 3 Total APS 70.00% 88.57% 60.73% 72.66%

SRP 62.94% 58.76% 54.33% 58.41%

EPE 50.50% 46.759{: 39.21% 45.1 Yfr

SCE 219.00% 211.00% 193.00% 207.00%

PNM 74.35% 75.21% 58.89% 68.96%

SCPPA 113.00% 108.00CJ'c 105.00% 109.00%

LADWP 95.00% 85.00% 78.00% 86.00%

IF PVNGS UNIT 3 BECOMES A JURSIDICTIONAL ASSET, DOES P~'M

16 PROPOSE THAT CUSTOMERS REIMBURSE SHAREHOLDERS FOR

17 THEIR COI"ti1RIBUTIONS TO THE PVNGS UNIT 3 NDT?

26

1 A.

2

3

4

5 6 Q.

7

8 A.

9

10

11

12

13 Q.

14

15 A.

16

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18

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20

21

22

23

DIRECT TESTIJ\10NY OF TERRY R. HORN

~1\-IPRC CASE NO. 13-00 -UT

No. PNM is proposing that customers only ftmd the pro-rata PVNGS Unit 3

decommissioning obligations going-forward beginning January 1, 2018.

VI. PALO VERDE UNITS 1 AND 2 PLANS

WHAT ARE THE 0\VNERSHIP AND LEASING ARRANGEMENTS FOR

PNJ\-l'S GENERATION CAPACITY AT PVNGS?

PI'I'M is entitled to 10.2% of the energy generated by PVNGS which equates to 402

:MW of generation capacity equally split among Units 1, 2 and 3. 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 of7.9% in Unit 1 and 5.6% in Unit 2.

\VHY ARE THE LEASES ON PVNGS U~ITS 1 Al'\fD 2 IlVIPORT ANT FOR

PURPOSES OF PNM'S APPLICATION IN THIS CA.~E?

With the proposed abandonment of SJGS Units 2 and 3, PNM must identify additional

power supplies to replace this lost capacity and to meet customer needs. As

demonstrated in the testimony of Mr. Ortiz and Mr. O'Connell, an integrated resource

planning analysis using a twenty-year plarming horizon has been adopted by the

Commission for these purposes. As the Commission is aware, there are lease expiration

provisions in the PVNGS leases within this planning horizon that must be adch-essed.

27

1 Q.

2 A.

3

4

5

6

7

8

9

10

11 Q.

12

13 A.

14

15

16

17 Q.

18 A.

19

20

21

22

23


Nl\tfPRC CASE NO. 13-00 -UT

WHAT ARE PNl\tl'S LEASING ARRANGEMENTS FOR PVNGS lJNIT 1?

PNM has four remaining facility leases for PVNGS Unit 1 representing I 04 MW of

generation capacity. On January 6, 2012, PNM provided the lessors of each lease with

irrevocable notices that it would retain control of the lease interests upon expiration of

the initial lease tem1s in January 2015. On January 9, 2013, PNM notified each of the

lessors that it would renew the PVNGS Unit 1 leases at 50% of cun-ent lease payments

through the Maximum Option Period ("MOP'') under each lease for up to an additional

eight years to January 2023. These renewals will reduce PNM's annual lease payments

by approximately $16.5 million beginning January 15, 2015.

DO THE PVNGS UNIT 1 LEASE RENEWALS REQUIRE ADDITIONAL

NMPRC APPROVAL?

No. The exercise of the lease rene\vals under the provisions of each lease was

approved by a predecessor of the NMPRC as part of the approval for the original

leases in Case No. 1995.

WHAT ARE PNM'S LEASING ARRANGEI\1ENTS FOR PVNGS UNIT 2?

PNM hm; four remaining facility leases for PVNGS Unit 2 representing 74 MW of

generation capacity. On January 9, 2013, PNM provided inevocable notices to each of

the lessors that it will retain control of the lease interests upon expiration of the initial

lease tenus in 2016. By January 15, 2014, PNM must specify whether it \vill retain

control through the renewal of the leases or by exercising the purchase options specified

in the leases. Of the 74 MW of generation capacity, one lease (10 MW) provides for a

28

2

3

4 Q.

5

6 A.

7

8

9

10

11

12

13

14

15

16

17

18

19

20 Q.

21

22

DIRECT TESTilVIONY OF TERRY R. HORN


lease renewal MOP for up to an additional eight years to January 2024. The other three

leases (64 :N1W) have a renewal lease term that expires in January 2018.

WHAT ARE P~'lVI'S PLAl~S WITH REGARD TO THE PV'NGS UNIT 2

LEASES?

As mentioned above, PNM has w1til January 15, 2014, to advise the lessors of it:-,

intentions and no decisions have been made public to date. However, PNM has said

that it is seriously considering issuing notices to purchase three of the four PVNGS Unit

2 leases. The PVNGS Unit 1 leases have been renewed until 2023 at 50% of their

original lease costs and can be purchased in 2023 if PNM so desires. Three of the

remaining four PVNGS Unit 2 leases can only be renewed until January 2018.

Therefore, there is smmd logic to pmchase those leases at the end of their initial lease

term of January 15,2016. This also has the benefit of diversifying the purchase price

risk away from 2023, when the PVNGS Unit 1 leases will be expiring. Only one

of the four PVNGS Unit 2 leases, a 10 MW lease, has a long lease renewal term

that goes to 2024. That lease, which is very similar to the PVNGS Unit 1 leases

in renewal tem1, could be extended at half price for another 8 years, fmther

diversifying purchase price risk.

DOES THE LEASE RENEWAL OR EXERCISE 01'~ THE PURCHA._~E

OPTION UNDER EACH PVNGS UNIT 2 LEASE REQL1RE ADDITIONAL

~MPRC APPROVAL?

29

1 A.



No. The exercise of either the lease renewal or the fair market value purchase

2 option under the provisions of each lease was approved by a predecessor of the

3 NMPRC as part of the approval for the original leases in Case No. 2019 Phase I.

4

5 VII. CONCLUSION

6 7 Q. DOES TillS CONCLUDE YOUR DIRECT TESTIMONY?

8 A. Yes.

GCG#5/7359

30

PNM l~XHIBIT TRH-1

Consisting of 2 pages

PNlVI EXHIBIT TRH-1 Page 1 of 2

EDUCATIONAL AND PROFESSIONAL SUMMARY

NAJ\lE: Terry R. Hom

ADDRESS: Public Service Company of New Mexico 414 Silver Ave. SW Albuquerque, NM 87102

EDUCATIONAL EXPERIENCE: MBA--Finance, University of Houston- 1977 BBA--Finance/Economics, NMSU- 1974

BUSINESS EXPERIENCE: Public Service Company of New Mexico

Vice President and Treasurer Vice President, Strategic Planning and Development Vice President, Customer and Market Services Vice President, Corporate Secretary and

January 2008 - Present August 2007- January 2008 February 2006- July 2007

Acting Chief Financial Officer August 2005- January 2006 Vice President, Treasurer and Corporate Secretary March 2005- August 2005 Vice President and Treasurer December 1998- February 2005 Director of Financial Management, Assistant Treasurer February 1991 -December 1998 Manager, Financing Projects April 1990 - February 1991 Financing Project Manager November 1985 - March 1990

Texaco, Inc. Supervisor Information Systems/Staff Analyst Senior Analyst Analyst Senior Accountant General Accountant Accountant Jr. Accountant

NMPRC PROCEEDINGS: Case No. 2354 - Revolver/TOP Securitization Case No. 2385 -Revolver/TOP Securitization Case No. 2482 - EIP SLOB Refunding Case No. 2509 - PC Bond Refunding Case No. 2515- TOP Securitization Case No. 2545 -AIR Securitization Case No. 2587 - SGGC/SGPC Assets Sale Case No. 2596- Retirement of Drexel LOBs Case No. 2692 - Amended AIR Securitization Case No. 2700 - Purchase of PVNGS LOBs

1984 through 1985 1983 through 1984 1981 through 1983 1980 through 1981 1977 through 1980 1975 through 1977 1975

Case No. 2721 -PC Bond Refunding Case No. 2796 - Revolver/SUNS Indenture Case No. 2837 - SUNs/PVNGS Lease Financing Case No. 2989 - Plains/Tri-State Merger Case No. 3012 - $11.5 million PCB Issuance Case No. 3137- Restructuring- Parts I, II and III Case No. 3137- Holding Company Formation Case No. 3137- Global Electric Settlement

PNMEXHIBIT TRH-1 Page 2 of 2

Case No. 08-00018-UT- Acquisition of an Ownership Interest in Palo Verde Unit 2 Case No. 08-00078-UT- Abandonment, Purchase & Sale of Gas Utility Assets

and Services Case No. 08-00305-UT- Resource Stipulation for the Valencia PPA, Acquisition of

Beneficial Interest in PVNGS Unit 2 Ownership Interest, and CCNs for Luna and Lordsburg

Case No. 10-00086-UT- Revision ofPNM's Retail Electric Rates

PUCT PROCEEDINGS: Docket No. 35460- Petition of PNM Resources and Cap Rock Energy Corp.

Regarding Proposed Merger and Acquisition of Stock

FERC PROCEEDINGS: Docket Nos. ER13-685-000, ER13-687-000 and ER13-690-000

- Petition of PNM Resources to Revise Sheets in its OA TT. Coordination Tariff, and GF As Reflecting Implementation of Transmission Formula Rate.

PNM EXHIBIT TRH-2


Moony's INVESTORS SERVICE

Credit Opinion: Public Service Company of New Mexico

Global Credit Research- 24 Jun 2013

Albuquerque, New Mexico, United States

Ratings

Category Outlook Issuer Rating Senior Unsecured Parent: PNM Resources, Inc. Outlook Senior Unsecured

Contacts

Analyst Jeffrey F. Cassella/New York City William L. Hess/New York City

Key Indicators

Moody's Rating Positive

Baa3 Baa3

Positive Ba1

Phone 212.553.1665 212.553.3837

[1]Public Service Company of New Mexico ACTUAL.S (CFO Pre-W/C + Interest) I Interest Expense (CFO Pre-W/C) I Debt {CFO Pre-WIC- Dividends) I Debt Debt I Book Capitalization

1Q13LTM 4.4x

19.5"/o 17.4"/o 46.1"/o

2012 2011 2010 4.6x 5.0x 4.5x

21.2% 21.5"/o 17.9"/o 19.0"/o 18.7"/o 16.2% 45.4"/o 48.3"/o 50.5%

[1] All ratios are calculated in accordance with the Regulated Electric and Gas Utilities Rating Methodology using Moody's standard adjustments

Note: For definitions of Moody's most common ratio terms please see the accompanying _User's Guide.

Opinion

Rating Drivers

New Mexico regulatory framework improving although challenges exist

Moderately strong financial metrics help offset weaker regulatory framework

Environment compliance costs and investment recovery will impact financial metrics over next few years

Corporate Profile

Public Service Company of New Mexico {PNM) is a vertically integrated electric utility with approximately 505,000 electricity customers in north central New Mexico, including the cities of Albuquerque, Rio Rancho, and Santa Fe, and certain areas of southern New Mexico. PNM also provides electricity to wholesale customers in New Mexico and Arizona. PNM is the principal operating subsidiary of PNM Resources, Inc. (PNMR: Ba1, positive), a utility

holding company that also owns Texas-New Mexico Power Company (TNMP: Baa2, positive). PNM accounts for about 80% of PNMR's operating assets, while TNMP accounts for essentially the remainder. PNM is regulated by the New Mexico Public Regulation Commission (NMPRC).

SUMMARY RATING RATIONALE

PNM's Baa3 senior unsecured rating reflects an improving although somewhat challenging regulatory environment; reasonable operating cost recovery mechanisms; and financial metrics that are consistent with regulated US electric utilities rated in the high Baa range.

DETAILED RATING CONSIDERATIONS

REGULATORY ENVIRONMENT IS IMPROVING

We view the New Mexico Regulatory environment is improving as we have seen signs of improved coordination between regulators, PNM, and intervenors, particularly with the finalization of the future test year rule, which helps reduce regulatory lag. In addition, PNM has reasonable cost recovery mechanisms, which include a fuel and purchased power clause and a renewable energy rider which helps streamline regulatory proceedings for renewable spending resulting in more timely recovery of some of its costs outside of a general rate case.

The New Mexico regulatory framework, historically, has not been as constructive as most US state regulatory jurisdictions in terms of predictability and timeliness of rate decisions and overall supportiveness to credit quality, but has recently shown signs of improvement. In November 2012, New Mexico voters passed measures to reduce the NMPRC's responsibilities of non-utility tasks, which allow the Commission to focus primarily on the state's utilities and utility related matters. Voters also have elected qualification requirements, based on educational background and experience, for new commissioners elected to the NMPRC. The qualification standard applies to new commissioners elected in the 2014 general election or if commissioners were appointed to fill a vacancy after July 1, 2013. We believe these changes to the Commission are credit positive.

In November 2012, the NMPRC finalized its rule that established the use of a future test year by utilities filing rate cases. The use of the historical test year had been the norm in New Mexico and combined with any lengthy duration of rate case decision process, such as PNM's last rate case settled in 15 months, created a regulatory lag such that PNM had been unable to earn its allowed ROE over a multi-year time period.

In PNM's last rate case decided and implemented in August 2011, the NMPRC's final order modified a previous stipulation agreed upon by major parties, including Staff and several intervenors, in February 2011. The approved rate increase by the NMPRC was for a $72.1 million single-step increase rather than the stipulated two-step increase of $85 million originally agreed upon in February 2011. In its final rate order, the NMPRC also reduced the allowed ROE to 10% from the 10.25% included in the proposed stipulation. In addition, the NMPRC rejected the capital additions rider. However, the final rate order did include a renewable energy rider and continued the fuel and purchased power costs (FPPCAC) recovery mechanism, albeit with some limitations. Although the NMPRC ordered a reasonable rate increase, we believe that rejecting a settlement reached between opposing parties indicated there was not adequate communication on key priorities amongst the NMPRC, Staff, intervenors, and PNM. Furthermore, PNM's recent rate case completed in 15 months was is longer than the roughly one year average across most US jurisdictions and longer than the approximate 11 month average for the NMPRC's rate cases decided over the last decade.

SOLID FINANCIAL METRICS OFFSET WEAKER REGULATORY ENVIRONMENT

PNM's moderately strong financial metrics are expected to continue and provide an offset to its below average credit supportive regulatory environment. For the twelve months ended March 31, 2013, cash flow from operations pre-working capital changes (CFO pre-W/C) to debt of 19.5%, although slightly less than the 21% averaged over the past two years, is similar to regulated US electric utilities in the high Baa range. Even excluding the tax benefits related to bonus depreciation, cash flow pre-W/C would have averaged in the high teens over the last two years, which is consistent with Baa2 rated US regulated electric utilities. In addition, for the twelve months ended March 31, 2013, PNM's cash flow interest coverage of 4.4%, again slightly below the 4.8% average over the past two years, is comparable to high Baa rated regulated US electric utilities. Again, excluding the tax benefits related to bonus depreciation, cash flow interest coverage would have been in the low 4x range which is similar to Baa2 rated US regulated electric utilities. Assuming adequate regulatory relief, we anticipate PNM's cash flow to debt and cash flow interest coverage to be at or above the current levels for the foreseeable future, which remains moderately strong for its rating.

CAPITAL SPENDING TO COMPLY WITH ENVIRONMENTAL REGULATION AND ABILITY TO RECOVER THESE INVESTMENTS WILL IMPACT FINANCIAL METRICS

On February 15, 2013, PNM, the New Mexico Environment Department (NMED), and the United States Environmental Protection Agency (EPA) entered into a non-binding agreement on a revised plan that would allow the coal-fired San Juan generating station to meet the Best Available Retrofit Technology (BART) standards and comply with federal visibility rules. The agreement would result in the retirement of the San Juan Units 2 and 3 by the end of 2017 and the installation of Selective Non-Catalytic Reduction (SNCRs) technology on Units 1 and 4 by the later of January 31, 2016 or 15 months after EPA approval of a New Mexico revised State Implementation Plan. In addition, PNM would also build a natural gas-fired peaking generating plant at the San Juan site to partially replace the capacity lost from the retired coal units. Considering that PNM's current generation mix is approximately 56% coal-fired generation and 30% nuclear, albeit both considered low cost, we view the additional gas-fired capacity to diversify the utility's generation mix is credit positive.

PNM currently owns 50% of Units 1 - 3 and about 38.5% of Unit 4. Under the revised plan, PNM's share of the estimated costs to install SNCRs and the additional equipment to comply with air quality standards on San Juan's Units 1 and 4 would be approximately $63 million. The estimated cost of building a natural gas-fired peaking generating plant at the San Juan site to replace some of the lost generating capacity would approximate $280 million. This revised plan is a departure from the more expensive previously issued ruling by the EPA in August 2011, which required the installation of Selective Catalytic Reduction (SCR) technology on all four units of the San Juan station by September 2016. The estimated cost to install SCRs on all four units of the San Juan plant would have been between approximately $824 million and $910 million, of which PNM would have been responsible for approximately half. Under the revised plan, PNM may need to put in additional base load generating capacity, which could be addressed with the inclusion of the Palo Verde nuclear plant into rate base or additional gas-fired generation.

On April1, 2013, PNM filed a BART analysis with New Mexico, and the NMED will need to submit a revised implementation plan to the New Mexico Environmental Improvement Board (NMEIB) for approval, which is projected to be in 04 2013. After approval, the NMEIB will submit the revised implementation plan to the EPA, which will likely take about a year to review. While the EPA is reviewing the implementation plan, PNM would apply for regulatory approval by the NMPRC to retire Units 2 and 3 and obtain certificates of convenience and necessity (CCNs) for the proposed replacement resources that are needed. The timing of the regulatory filing will likely be in early 2014, which will take about a year to resolve. As such, the installation of the SNCRs on Units 1 and 4 is not expected to begin until 01 2015.

Although the revised plan calls for a reduced level of additional invested capital, PNM's capital expenditure budget would increase by approximately $345 million through 2017. However, the reduced spending level will also coincide with a lower potential rate impact on rate payers. We believe PNM will not file a rate case in 2013 even though it is allowed to do so. Rather, PNM will likely wait until late 2014 or early 2015 to file its rate case in order to include the investments made for the San Juan environmental compliance. PNM's ability to recover and earn a return on these investments in a timely manner is critical to maintain its financial metrics at current levels.

Liquidity

PNM's liquidity profile appropriately supports its planned capital expenditures and dividends. We anticipate PNM's core maintenance capital expenditures to be about $150-175 million annually over the next several years. As such, we expect PNM's cash flow from operations to cover maintenance capital expenditures and dividend distributions to PNMR. We expect PNM's total capex, maintenance and growth, should total about $1.3 billion over the next five years or average about $250 million annually, which is higher than the $197 million of capital spend in 2012, but consistent with the approximate $240 million invested annually for the last five years. In 2012, PNM distributed dividends to its parent of $35 million, which reflects a lower than normal payout ratio of only 38%. However, we anticipate the payout ratio to revert back to more normalized levels of over 90% going forward. Given the high capital expenditures and dividend payout ratio, we expect PNM to incur additional debt to fund these activities but also maintain its overall capital structure at a level of around a 50% debt to capitalization.

PNM has a $400 million revolving credit facility that expires in October 2017. As of May 1, 2013, PNM had $16.2 million drawn under its credit facility, $3.5 million of letters of credit outstanding, and no cash on hand. The credit facility's only financial covenant limits debt to total capitalization of 65%. As of March 31, 2013, PNM's debt to total capitalization was approximately 52%. PNM can also borrow up to $100 million from its parent as part of an intercompany borrowing arrangement which was undrawn as of March 31, 2013. PNM has no debt maturing until2018 but it has $39 million of tax-exempt debt putable in 2015 and $57 million of tax-exempt debt putable in 2017.

Rating Outlook

The positive outlook reflects our expectation that the New Mexico regulatory environment continues to improve, financial metrics will remain consistent with US regulated electric utilities in the upper end of the Baa range and that the timeline for the San Juan environmental compliance requirements plays out such that PNM is able to recover prudently incurred costs and investments in a timely manner. The outlook also assumes that planned capital expenditures will be financed in a manner that is consistent with the entities' current financial position.

What Could Change the Rating • Up

PNM's rating could be upgraded if financial metrics remain at levels consistent with US regulated electric utilities in the high Baa rating category such that cash flow pre-W/C to debt is sustained in the high teens (excluding bonus depreciation) and we continue to observe sustained improvement in the credit supportiveness of the New Mexico regulatory environment including rate case results which allow the utility to earn an appropriate return.

What Could Change the Rating • Down

PNM's rating outlook could be stabilized or rating downgraded if we believe the New Mexico regulatory framework has become less supportive or predictable such that there is an adverse rate case ruling or cost recovery disallowances; or if there was deterioration in financial metrics including cash flow pre-W/C to debt sustained in the low teens.

Rating Factors

Public Service Company of New Mexico

Regulated Electric and Gas Utilities Industry [1][2]

Factor 1: Regulatory Framework (25%) a) Regulatory Framework Factor 2: Ability To Recover Costs And Earn Returns (25%) a) Ability To Recover Costs And Earn Returns Factor 3: Diversification (10%) a) Market Position (5%) b) Generation and Fuel Diversity (5%) Factor 4: Financial Strength, Liquidity And Key Financial Metrics (40%) a) Liquidity (10%) b) CFO pre-WC + Interest/Interest (3 Year Avg) (7.5%)

c) CFO pre-WC I Debt (3 Year Avg) (7.5%) d) CFO pre-WC- Dividends I Debt (3 Year Avg) (7.5%) e) Debt/Capitalization (3 Year Avg) (7.5%) Rating: a) Indicated Rating from Grid b) Actual Rating Assigned

*THIS REPRESENTS MOODY'S FORWARD VIEW; NOT THE VIEW OF THE ISSUER; AND UNLESS NOTED IN THE TEXT DOES NOT INCORPORATE SIGNIFICANT ACQUISITIONS OR DIVESTITURES

LTM 3131/13

Measure

4.8x

21% 19% 48%

Moody's 12-18

Month Forward View As of June

2013 Score Measure Score

Ba Baa

Baa Baa

Baa Baa Baa Baa

Baa Baa A 4.5x- A

5.0x Baa 19-24% Baa A 14-18% Baa

Baa 45-49% Baa

Baa2 Baa2 Baa3 Baa3

[1] All ratios are calculated using Moody's Standard Adjustments. [2] As of 313112013; Source: Moody's Financial Metrics

Moony's INVESTORS SERVICE

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PNM EXHIBIT TRH-3


PN Resources And Subsi ary Corporate Credit Ratings Raised To 'BBB'; Outlook Stable Primary Credit Analyst: Michael T Ferguson, CFA. CPA, New York (1) 212-438-7670; [email protected]

Secondary Contact: Gerrit W Jepsen, CFA, New York (1) 212-438-2529; [email protected]

Table

Overview

Rating Action

Rationale

Recovery Analysis

Outlook

Related Criteria And Research

Ratings List

www.standardandpoors.com

C0 StandarC: & Pocr's_ .~!1 reserved. No repfiil~ disst:mi:'ation w1thou~ Sta:cdarJ & Poor"s per:-niss1cn See Terms cf Use/D:sc:aimer on the :ast page

1

PNM Ratings Raised

Sub ~BBB'; Outlo

Corporate Credit Stable

• PNM Resources Inc. has benefitted from more favorable regulatory relationships in New Mexico and Texas.

• lve are raising our corporate credit ratings to 'BBB' from 'BBB-' on PNM Resources Inc. and its utility subsidiaries, Texas-New Mexico Power Co. and Public Service Co. of New Mexico. The outlook is stable. We are also raising our issue-level ratings on PNl'-'1 Resources Inc.'s senior unsecured notes to 'B8B-' from '88+', Texas-New Mexico Power Co.'s senior secured notes to 'A-' from '888~'. and Public Service Co. of New Mexico's senior unsecured notes to '888' from '888-'.

• The financial risk proflle is sufficient to sustain the higher rating, owing to better cash flows in recent years due to the divestiture of unregulated businesses.

• The stable outlook reflects our expectation that the company will continue to maintain financial stability, including executing its capital program without increasing leverage, and achieve steady progress in improving regulatory relationships in New Mexico.

On April 5, 2013, Standard & Poor's Ratings Services raised its corporate credit rating on PNM Resources Inc., Texas-New Mexico Power Co., and Public Service Co. of New Mexico to '888' from '888-'. The outlook is stable. We also raised our issue-level ratings on PNM Resources Inc.'s senior unsecured notes to '883-' from '88+', Texas-New Mexico Power Co.'s senior secured notes to 'A-' from 'BBB+', and Public Service Co. of New Mexico's senior unsecured notes to 'BBB' from 'BBB-'.

The "excellent" business risk profile reflects our view of stable regulatory operatior"s tempered by challenges managing regulatory relationsl:ips in New Mexico, which has historically been considered one of the least credit-supportive jurisdictions for utilities. Recent rate cases between 2008

and 2011, however, have been much more favorable, and have allowed more timely recovery of relevant costs; in addition, the state's cap-and-trade law, which was to have taken effect in 2013, was overturned in February 2012. While we still consider New fviexico to be one of the least credit-supportive regulatory environments, we view the company's ability to manage regulatory risks as a key factor in the business risk assessment, in addition to other factors that

Standard & Poor's I Research I April 5, 2013 2

Research Upd,Jte: PN1vf Resources And Subsidiary Corporate Credit Ratings Raised To 'BBB '; Outlook Stable

influence business risk. Texas-New Mexico Power's regulated transmission and distribution operations are stable and also support the business risk profile, but chey continue to constitute a smaller part of the company.

Public Service Co. of New Mexico's latest rate case, completed in 2011, yielded a $72 million increase. However, the elimlnation of a phase-in delay a!ld a reduced case stay--out period offset this impact, and we expect this will lead to improved financial measures. This followed previous settlements that also improved financial measures and ir1cluded a permane!lt power cost adjustment (PCA) mechanism, a provisio!l that we view as supportive to credit quality because it mitigates exposure to fuel costs and power purchase costs.

In February 2013, the company, the U.S. Environmental Protection Agency, and the governor of New Mexico agreed to a revised enviromne!ltal plan for Sa!l Juan Generating Station, which will result in the retirement of units 2 and 3 by the end of 2017, as well as the installation of selective noncatalytic reduction technology on units l and 4 by early 2016. This agreement is currently nonbinding, subject to development of a state implementation plan and other approvals. We consider this to be an effective compromise, capping what was at times a somewhat contentious debate.

We score PN!Vl Resources' management and governance as "satisfactory". In our opinion, the company's management has consistently effected positive regulatory outcomes in recent years and has been proactive in its effort to divest unregulated businesses. The company has been able to effectively plan for future capital expenditures, which could become significant.

We consider the financlal risk profile to be •aggressive" based on consolidated financial results. Under our base-case forecast, on a consolidated basis, we expect adjusted funds from operations (FFO) to debt of 20% and debt to capital of 55%. Consolidated adjusted FFO to debt was 18.4% for the 12 months ended Dec. 31, 2012. This coverage is in line with what we expect for the aggressive financial risk profile. The consolidated adjusted leverage was 55.9% as of Dec. 31, 2012. PN:vl Resources must keep its adjusted FFO to debt at more than 12% to maintain the aggressive financial risk profile.

PNM Resources' consolidated liquidity is "strong" under our corporate liquidity methodology, which categorizes liquidity under five standard descriptors. Under our analysis, projected sources of liquidity (mainly operating cash flow and available bank lines) exceed projected uses (mainly necessary capital spending, debt maturities, and common dividends!, absent access to capital markets, by more than 1.5x for the upcoming 12 months and by more than 1x over the next 24 months. As of Feb. 22, 2013, available consolidated liquidity (including reductions for letters of credit) was $603 million compared with a capacity of $775 million. The $300 million revol'J:_ng credit facility at PNM Resources and the $400 million revolving facility at Public Service Co. of New Mexico will expire in October 2017. A $75 million secured revolving credit facility at Texas-New Mexico Power will expire in December 2015. Consolidated capital spending for the 12 months ended Dec. 31,

www.standardandpoors.com 3

Research Update: PN1\'f Resources And Subsidiary Corporate Credit Ratings Raised To 'BBB': Outlook Stahle

2012, was $310 million, which was more than covered by net cash flow. However,

oeriods of higher spending or decreased net cash flows may require increased

borrowing. No ficant maturities of long-term debt will occur until 2014.

PNM R.esources' credit agreements include a financial covenant stipulating that

debt to total capitalization be no greater than 65%. As of Dec. 31, 2012, the

cornpany was complying with this covenant, and we expect ~~ co remain in

cor:1pliance for subsequent reporting periods.

We assign recovery ratings to first mortgage bonds (FMBs) issued by U.S.

utilities, which can result in issue ratings being notched above a utility's

corporate credit rating (CCR) depending on the rating category and the extent

of the collateral coverage. The FMBs issued by U.S. utilities are a form of

"secured utility bond" (SUB) that qualify for a recovery rating as defined in

our criteria (see "Collateral Coverage and Issue Notching Rules for '1+' and

'1' Recovery Ratings on Senior Bonds Secured by Utility Real Property,",

published Feb. 14, 2013)

The recovery methodology is supported by the ample historical record of 100%

recovery for secured bondholders in utility bankruptcies in the U.S. and our

view that the factors that enhanced those recoveries (limited size of the

creditor class and the durable value of utility rate-based assets during and

after a reorganization given the essential service provided and the high

replacement cost) will persist in the future.

Under our SU3 criteria, we calculate a ratio of our estimate of the value of

the collateral pledged to bondholders relative to the amount of FMBs

outstanding. FMB ratings can exceed a utility's CCR by up to one notch in the

'A' category, two notches in the 'EBB' category, and three notches in

speculative-grade categories depending on the calculated ratio.

TN!v'!P' s FMBs benefit from a first-priorit.y lien on substantially all of the

utility's real property owned or subsequently acquired. Collateral coverage of

more than l.Sx supports a recovery rating of 'l+' and an issue rating two

notches above the CCR.

The stable outlook reflects our expectation that the company will continue to

maintain financial stability, including executing its capital program without

increasing leverage, and achieve steady progress in improving regulatory

relationships in New t/lexico. The outlook also reflects our expectation that

cash flow protection and debt leverage measures will be in line with the

rating. Specifically, our baseline forecast includes adjusted FFO to total

debt of about 21%, total debt to EBITDA of 4.5x, and debt to total capital of

Standard & Poor's I Research I April 5, 2013

Standard & reser\'ea. No

4

Research UpcLlte: PNA1 Resources And Subsidiary Corporate Credit Ratings Raised To 'BBB'; Outlook S'tablc

55%, even during periods of large construction projects when regulatory lag

may occur.

An upgrade is possible, if the company can attain positive regulatory outcomes

that lead to adjusted FFO to debt consistently at, or exceeding, 25% and

adjusted debt to capital of less than 52%. This would likely stem from

favorable regulacory outcomes, as well as decreases in expected capital

spending related to environmental remediation.

We consider a downgrade unlikely, but we could lower the rating if adjusced

financial measures materially weaken (with adjusted FFO to debt of less chan

15%, debt to EBITDA of more than sx, and debt to capital of more than 60%) or

if management fails to execute its regulated strategy while managing

regulatory risks. The company's financial performance may deteriorate due to

rising debt leverage if it externally finances elevated capital spending

primarily with debt. Failure to adequately manage regulatory risks could

result in lower ratings before any deterioration in credit measures.

And

• Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011

• Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012

• Key Credit Factors: Business And Financial Risks In The Investor-Owned

Utilities Industry, Nov. 26, 2008

• Corporate Ratings Criteria 2008, April 15, 2008

Upgraded; Recovery rating unchanged

PNM ~esources Inc. Public Service Co. of New Mexico Texas-New Mexico Power Co. Corporate Credit Rating

PNM Resources Inc. Senior Unsecured

Public Service Co. of New Mexico Senior Unsecured Preferred Stock

Texas-New Mexico Power Co. Senior Secured

Recovery Rating

To

BBB/Stable/--

BBB-

BBB BB+

A-

1+

From

BBB-/Stable/--

BB+

BBBBB

BBB+ 1+

Complete ratings information is available to subscribers of RatingsDirect at


See

5

Research Update: PNM Resources And Subsidiary Corpor,1te Credit Ratings Raised To 'BBB'; Outlook Stable

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this rating action can be found on Standard & Poor's public Web site at

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column.

Standard & Poor's I Research I Apri15, 2013 6

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PNM EXHIBIT TRH-4



!Issuer Rating Outlook

Baa3

Positive

Tucson Electric Power Company

jlssuer Rating Outlook

BaaZ Stable


Interest Coverage

1 CFO pre-we I 21.5% 21.2% 195% Debt (CFO ore-we- 18.7% 19.0% 17.4% Div'd) I Debt Debt I Book 48.3% 45.4% 46.1%

PNM Resources and UNS Energy:

San juan Plant Generating Some Closure

'--''"·"-""-·'"'·""···c·'-'""'····'''"'"··'·'l-'''"o·'--"''····'··'·"''-'''''"''''-"'' (PNM: Baa3, positive) cmd -~--'"'''''''·-"'~""-"'·"-'" ..• ,,.,1 _ _.,". ""'y·''"·*'"'-'--'-J.. (TEP: Baa2, stable) are wdl positioned ro recover any costs and

investments associated with retiring Units 2 and 3 of the San Juan Generating Station (SJGS) and ro replace the lost capacity associated with the revised State Implemenration Plan (SIP) ruling. We think the total cost related to the SJGS environmental compliance, which includes replacing the retired capacity, could reach dose to $600 million.

" The current proposed SIP related to the SJCS environmental compliance agreed upon

"

by the State of New Mexico, the US Environmental Protection Agency (EPA) and PNM, although less cosrly than the original plan, is credit neutral to PNM and TEP, as we believe the utilities will be able to recover their incurred costs related to the plan in a timely manner.

An ability to recover and earn a return on these investments in a timely manner is important for both utilities to maintain their financial metrics at current levels as the regulatory environments in New Mexico and Arizona have been exhibiting increased supportiveness.

» That said, if recovery is less timely, leading to liquidity issues or an increased risk of stranded investment, their credit profiles may suffer. ivforeover, should additional liquidity or dme constraints arise from material changes to the proposed SIP, rhere could be an impact on safety and reliability as well as operating performance, which would be credit negative. As operaror and largest owner, PNiv1 is more exposed because PNM has rhe most generation capacity at risk.

» In 1 ')99, the EPA implemented the Regional Haze Rule in an effort to improve visibility impairment (regional haze) in national parks and wilderness areas. As a result, coal power plants. such as the San Juan Generating Station, were tJrgeted as contributing to

impairment of visibility. As such, utilities have to comply with the new laws and work wirh stares and federal agencies to devise pb.ns ro reduce visibiliry impacts.

:•:::;

The San Juan Generating Sotion (SJGS) is a coal-tired power plant near Emningron, Nlv1. PNM is the operaror of the plant and owns approximately 46% of rhe aggregate power capacity from the plant. However, an ,,dditional eight electric utilities, co-operatives, municipalities and po\ver agencies also have an ownership stake in the pianr (see Figure 1 ). SJGS is an important source of power generation for PNM as well as the orher eight owners. In operation since 1 97.'3, SJGS contains 4 boilers (Units 1 -- 4) and generates about 1,700 M\X7 ofiow cost electricity serving New Mexico, Arizona, Utah and Calif(Hnia. The plant burns thermal coal from the BHP Bill iron S,m Juan underground mine.

F\GURE 1

San juan Generating Station Current Ownership

{,•

PNM Resources 50.0% 170

Tucson Electric Power 50.0% 170

Unit 1 Total 100.0% 340

2 PNM Resources 50.0% 170

Tucson Electric Power 50.0% 170

Unit 2 Total 100.0% 340

3 P N M Resources 50.0% 248

Southern California Public Power Authority 41.7% 207

Tri-State Generation and Transmission Association 8.3% 41 ----------- -------------------- ----- -----~---

Unit 3 Total 100.0% 496

4 PNM Resources 38.5% 195

M-5-R Public Power Agency, CA 28.8% 146

City of Anaheim, CA 100% 51

City of Farmington, NM 85% 43

Los Alamos County, NM 7.2% 37

Utah Associated Municipal Power Systems 7.0% 35

Unit 4 Total 100.0% 507

Total Units 1 - 4 1,683

Source Company Filings

In 1999, the EPA implemented the Regional Haze Rule, under rhe Clean Air Acr, in an effort to

improve visibility impairment or regional haze in 156 federal areas including national parks and wilderness areas. As a result, coal power plants, such as SJGS, were identif-Ied as contributing ro impairment ofYisibility. As such, uriliries have to comply with the new laws and vvork with states and federal agencies to devise implementation plans to limit air pollutant emissions known to cause visibility degradation.

Implementation plans developed by states must include ent(Jrceable measures and strategies tor reducing visibility-impairing pollution and idemiFj facilities that will require the installation of best andable retrofit technology (BART) cot:rrols.

In 2005. the EPA issued a second ruiemaking and published guidelines for states to determine BART requirements f()r tacilities built benveen 1962 and 1977 that have the potential to emit more rhan 250 tons per year of visibility impairing pollution. If it was determined that these emissions could reasonably be anticipated to cause or contribute to visibility impairment in any of the 156 protected f-ederal areas. then BART must be installed hy 2018. SJGS feli under these requiremems.

Furthermore, as part of a lawsuit settlement in 2005, PNM agreed to several major environmental improYemenrs at SJGS which were implemented over a four year period completed in 2009 t(Jr a total cosr of approximately $320 million. PN!vf has been recovering these costs and earning a return on rhe investments through its current rates. The plant upgrades reduced emissions of tour main air pollutants including nitrogen oxide. sulfur dioxide, particulate matter and mercury. As a result, the mercury removal rate at the plant is abom 99. 9%.

In June 2011, the state of New Mexico submitted its implementation plan to imrall selective noncaulytic reduction technology (SNCR\ at SJCS to reduce nitrogen oxide emissions. However, in 1\ugust 2011, the EPA filed its Federal Implememation Plan (FIP), which required the installation of selective catalytic reduction technology (SCR) on all t(mr units at SJGS by September 21, 20 l (J.

After several months of lirig3tion cmd numerous discussions amongst PNM, rhe New Mexico Environmental Department (NMED), the EPA and other parties, a revised draft SIP emerged.

On February 15, 2013, PNM, NMED ,md the EPA outlined terms of a new non-binding agreement on a revised plan that would allow SJGS ro meet the BART standards and comply with federal visibility rules. In general, we viev,: the revised settlement as credit positive, as it removes a potentially large Lmcertainty and is evidence of a more collaborative settlement hamework in NM.

The agreement would result in the retirement of the San Juan Units 2 and 3 by the end of 2017 and the installation of Sl\;CRs technology on Units l and 4 by the later of January 31, 2016 or 15 months after EPA approval of rhe New Mexico revised SIP, which is expected by the end of 2014. In addition, PN M would also build a natural gas-tired peaking generating plant at the San Ju,m site to partially replace the capacity lost from rhe retired coal units.

Additionally, due to the expected retirement of Units 2 and 3, a re-·balancing in the ownership of the remaining l:nits l and 4 could result if agreed upon by the existing owners, which would include PNM obtaining additional ownership and generating capacity in Unit 4. PNIVI has stared that they are interested in adding 78M\V' of existing capacity from Unit 4 ro its ownership, which would increase PN1Yfs ownership of Unit 4 to 5.).8%J. PNM's combined ownership of the remaining Units 1 and 4 would increase to an aggregate of 52%.

Under the revised plan, the estimated costs ro instali SNCR technology and the additional equipment to comply with air quality sramlards on San Juan's Units l and 4 is .tpproximately $120 rniilion, which is considerably less costly than the approximately S900 million estimated rota! cost associated with the EPA's original FIP is,ued in August 2011. Thus, the local, collaborative settlement reduces the total expected cost of a Federally mandated FIP by more than $700 million.

As a result of the expected re-balancing in ownership of the remaining Units 1 and 4, PNM's share of the estimated costs would be approximately $63 million based on irs proje([ed combined ownership of 52fVo. TEP's estimated ailocated cost to install the SNCR technology associated with TEP's '50°0 owner5hip of Unit 1 is approximately $25 million.

The revised plan is a departure from the more expensive previously issued fiP by the EPA in Augu't 2011, which required the installation of SCR technology on all t(mr uni rs of the Sanjuan station bv September 2016. See figure 2 for the differences in estimated tmal capital expenditures under each proposed plan.

~!GlJRE 2

CapEx Requirement Under Proposed Plans

PNM $379- $419 1

TEP $180- $200

l- Pt'-lH 46~_.-:, sha"e of estirr,atrd CCJS.~ range (A $824- $910 m:aicn

2 - Hoody'; estimate

Source: Comp:my Filings

$63 $281 $344

$25 $200 2 $225

The revised SlP calls for the retirement of Units 2 and 3, which accounts for a combined 836 J\1\V of generating capacity that needs to be replaced. As 50% mvner of Units 2 and 3. PNJ\-1 needs to replace 418 MW, while TEP needs to replace the 170MW associated with its 50% ownership of Cnit 2.

··'··'·'-''·'·'·':".~'··'+ (Aa3, stable) needs to replace the 207 iv1W of generating capacity related to its 41.7'!1(J ownership oft..: nit 3, while c'•··''-·''·"''"·"-·.:c'"-'·'·''·'·"-'·'·''·''···"''·'·'·' L'.''"-'''''!'"'·"'·!:LcLo:".'C1·~'-~!0,'·''1.''·~ (Baal, stable) ;vill need to find a substitute source for the 41 1\-f\V of power associated with its 8.2'!/,J ownership stake of Unit 3.

P;\M indicated it intends to replace 340 MW of its tonl418 M\Xi generating capacity being retired through the acquisition and/or construction of gas-fired capacity as well as the potential for nuclear capacity from P~M's ownership of the Palo Verde ~uclear Generating Stadon (PVNGS). \'i?ith respect to the remaining 78 M\X! of capacity needed to be replenished, PNM expects to obtain the additional megawatts from another partial owner of San Juan's Unit 4 through an anticipated agreed upon re-allocation of owner5hip. The majoritv of the replacement power ( 150-200 ,'\1\Xt) will come from a natural gas-fired peaking generation plant located at the San Juan station as well as a 40 ,'\1\V

gas-fired peaking plant. PNM estimates the cost of building and acquiring the gas generated power would approximate $281 million. PNM is also looking at the possibility of adding its l0.2')b

ownership share of the Palo Verde Unit 3 nuclear generating capacity (134 M\Xt') into rate base to

supplement the loss of the retired coal capacity. The ability to bring PVNGS into rate base would be a

credit po~irive as it t'nhances their ability to recover costs and earn a rerum on rhe nuclear plant particularly considering the current low whole.sale power prices.

Although PNM's current fuel mix capacity is reasonably diversitled (see Figure 3), the utility's generation of electricity in 2012 was more heavily weighted towards its coal Hred generadon considering 56% of its l 0.947 G\X'h was sourced from coal (see figure 1.). \Ve believe rhe additional gas-fired capacity provides P~M a larger opportunity to furrher diversifY its fuel generation mix as well as reduce its carbon footprint. Assuming the additional natural gas-fired generation replacement power is installed, P~M's generation capacity would be funher diversiHed (see Figure 4). However, increased proportion of natural gas capacity would increase the utility's exposure to natural gas commodity prices.

F!GURE 3

PNM's 2012 Generation Capacity

Rer,ewab~es

Nudear 16%

Source. Comparrv FiFn0s

fiGURE 4

PNM's Estimated Generation Capacity

Nuclear 16%

Renewables 9%

PNM's 2012 Energy Generation- 10,947 GWh

Renewabtes

30%

Source: Com anv Fi{mas

'F:o.J~!'!f'.JrgJ: .. ~"'Pif>9·nitJJ~n (UNS: Baa3, stable), parent ofTEP, conrinues to evaluate its opportunities to replace the 170 M\V of generation associated with TEP's 50'+'o ownership share of Unit 2, which

will be retired as parr of rhe revised SIP. U~S Energy issued a request for proposal to better understand the price points around acquiring or building gas-fired gener:ltion plants and will compare those costs with long-term potential power purchase agreements. For 2012, TEP's generation capacity was 6Jf!'i1 coal-tired and 29% gas-fired with the remaining 8% a combination of sources including mlar

power (see Figure 6). Assuming the 170 M'X1 of coal capacity thJt is being retired through the Cnit 2 shut-down is replaced by gas-fired generation, we view a reduction ofTEP's high reliance on coal, despite it being a low cost fuel would increase the utility's fuel diversification and be viewed as a credit positive (see Figure 7).

FIG~RE 6

TEP's 2012 Generation Capacity Other

63%

)(;urce Con1Ddn Fr!inas

FICUR!:7

TEP's Estimated Generation Capacity

8%

Coal 56%

We think PNM and TEP are well positioned to recover the costs of environmemal compliance associated with the revised SJP through regulated rates. Hmvever, in rhe event rhar recovery is less timely, leading ro a stre>s on liquidity or <ln increased risk of stranded inve~tment, credit profiles may surfer, absent some form of mitigating action.

;\!though the revised plan calls for a reduced level of invested capital compared to the original August 2011 plan, PNM's c1pital expenditure budget (see Figure 8) would increase by approximately $344 million through 2017. [n addition, reduced spending levels associ<tted with the revised SIP will likely coincide with a lower potential rate impact on rate payers.

We expect P0JM to make filings with the New Mexico Public Regulation Commission (NMPRC) iu December 2013 for recovery of investment related to rhe abandonment of Units 2 and 3 as well as investments associated with the identified replacement resources and other remaining costs related to

rhe BART c:ompliance. Although rhe filings are intended to identifY the methods of cost recovery and return on investment, we do not expect the ~J\1PRC to decide the actual rate impact on customers until P~M's next general rate case which we anticipate in the 2015 to 2016 timeframe.

At March .31, 2013, PNM's net book value ofUnirs 2 and 3 was approximately $290 million. P~M's ability to recover and earn a return on these stranded inve~tments as well a; the costs incurred to retire the two tmirs, in a timely manner, is important in maintaining its financial merrics at current levels.

f1CURE 8

PNM's Projected CapEx

$600

$500

$100 c

~ 5300

S2GO

$1(}0

so 2013 2014 2015 2016 2017

The impact on TEP is less significant compared to that of Pi'\M based on TEP's estimated cost of $25 million. ~or included in TEP's five-year capital expenditure rorecast (see Figure 9) is the estimated cost to replace the 170 MW of generation TEP is losing upon the closure of Unit 2. As previously menrioned, lJ0;S Energy is contemplating several alternatives to identify the rephcement power needed. IfTEP elected to build a gas-H red generation plant to replace the total 170 1vf'X1 of generating capacity, we estimate the cost to be about S200 million.

As of Jv1arch 31, 2013, the book value of Unit 2 was approximately $115 million and we expect TEP would request approval from the Arizona Corporation Commission (ACC) to recover from its nte payers all costs associated with the retirement of this unit including stranded costs as well as any additional costs associated with replacing the lost power generation. Furthermore, TEP' s recenrly approved June 2015 rate case includes a rider r()r environmental compliance spending, which would allow TEP ro recover a portion of its environmental spend up to a certain limit. Moody's views environmental riders as credit supportive since rhey reduce regulatorv lag in recovering mandated capital expenditures.

>>CURE 9

TEP Projected CapEx Core \oi:Opnonal Lease Purchase !m:Proposed SIP

$700

$600

$500

~ $400

E ~ $300

$200

$100

$0

Source: Compan'' F11rn s

2013 20:4 2015 1016 2017

On April l, 2013, P:'<M filed a BART analysis with rhc state of New Mexico, and the NMED submitted a draft revised implementation plan to che New Mexico Environmental Improvement Board 1Nlv1EIB) for approval, which is projected w be in Q4 2013. lf the NMEIB approves the plan. the ~lvf Governor, on behalf of the State of New ""1exico, will submit the revised implementation plan to the EPA, which \Yilllikely take about a year to review. While the EPA is reviewing the implementation plan, PNM would apply for regubrory <1pproval from the NMPRC to retire Units 2 and .3 and obtain certificates of convenience and neces'lity (CCNs) for a portion of the proposed replacement resources that are needed. The timing of the regulatorv tiling will likely be in late 2013 ro early 2014, which will take about a year ro resolve. As such, the installation of the SN CR> on Units 1 and 4 is not expected to begin until Q I 2015 with the final retirement of Units 2 and 5 on Decembtr 51, 2017. See Figure l 0 for a depiction of the SJGS revised SIP rimeline.

Upon signing of the non-binding agreement in February 2015, the EPA stated that if the timeline does not proceed as planned due to factors not controlled by PNM and the ~MED, then the EPA will work with P~M and the srate to identify a reasonable aitern<nive plan and time schedule to comply with appropriate standards.

One of the hurdles that needs to be cleared involves the pending litigation residing at the US 10'" Circuit Court of Appeals, vvhere PN ;'\fs request to delay the installation of SCRs as recommended under the EPA's August 2011 FIP was denied. The 1 Orl' Circuit referred the litigation ro the 1 0'" Circuit M"ediation Oftlce, which is asking all parties to continue to discuss the matter and inf(Jrmally resolve issues around the pending appeals. lr is expected that if the revised SIP is approved and continues towards implementation that rhe l O'h Circuit remediation would likely be resolved.

Any changes ro the proposed SlP that could cause additional liquidity or time constraints on the urilitie~ potentially impacting safety and reliability or otherwise impacting operating perf;-mnance vvould be credit negative.

fiGU1<E 10

SJGS State Implementation Plan Timeline

Q22013 Q42013 Q4 2014 Q1 2015 Q12016 Dec. 31, 2017

Source. Comoan Filmns

Public Service Company of New Mexico L T Issuer Rating: Baa3 Outlook: Posit1ve

Revenue 968 1,017 1,057 1,092 1,100

EBITDA 232 316 350 387 381

Net Property Plant & Equipment 2,808 3,002 3,146 3,158 3,164

Total Assets 3,937 4,131 4,341 4,360 4,351

Total Debt 1,527 1.702 1,689 1,594 1,662

Total Equity 1,156 1,135 1,224 1,263 1,279

Cash From Operations 156 237 305 381 261

Capital Expenditures 265 237 267 208 186

Dividends 300 29 48 35 35

CFO pre-W /C + Interest I Interest 4.2x 4.5x 5.0x 4.6x 4.4x

CFO pre-W/C I Debt 19.7% 17.9% 21.5% 21.2% 19.5%

CFO pre·W/C- Dividends I Debt 0.0% 16.2% 18.7% 19.0% 17.4%

Debt I Caprtalization 48.7% 50.5% 48.3% 45.4% 46.1%

Tucson Electric Power L T Issuer Rating: Baa2 Outlook: Stable

Revenue 1,099 1,125 1,156 1,162 1,185

EB!TDA 388 393 374 351 355

Net Property Plant & Equipment 2,267 2,416 2,664 2,764 2,785

Total Assets 2,825 3,014 3,262 3,466 3,405

Total Debt 1,431 1,488 1,572 1,581 1,524

Total Equity 643 710 825 861 863

Cash From Operations 283 316 279 268 306

Capital Expenditures 233 278 352 253 248

Dividends 60 60 0 30 30

CFO pre-W /C + interest /Interest 4.7x 4.2x 40x 4.4x 4 9x

CFO pre-W/C I Debt 20.5% 17.8% 17.1% 19.5% 22.4'Yo

CFO pre-W IC- Dividends I Debt 16.3% 13.8% 17.1% 17.6% 20.4%

Debt I Capitalization 62.5% 61.4% 59.1% 57.3% 56.1%

j)

;->

fo accPss any of these reports, click on the entry above. Note that these references are currePt as of the date of publicaticn of this report and that more recent reports may be available. All research may not be available to all clients.

.jl

Report Number: "156477

Author Jeffrey F. Cassella

Production Specialist S hubhra Bhatnagar

2013 Moody's Investors Service, lnc and/or rts licensors ar.d afiiltates (collectively,·' MOODY'S''). ft..ll rights reserved

CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. ("MIS") AND ITS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY'S ("MOODY'S PUBLICATIONS") MAY INCLUDE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY'S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAUlT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY'S OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND MOODY'S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY'S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SEll, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY'S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY'S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

All INFORMAT!O~I CONTAINED i-,EREIN IS DROTcCTED BY LAW, INCLUDING BUT ~WT LIMITED TO, COPYRIGHT :.AW, AND '-<ONE OF SUCH INfORMATION i~AY BE COPiED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSfERRED, DiSSEMINATED. REDISTRiBUTED OR RESOLD OR STORED FCR SUBSEQUENT USE FOR ANY SUCH PURPOSE, iN W'~OLE OR IN PART, IN ANY FORM CR r~ANNER OR B'i ANY ME!\NS WciATSOEVER. BY M<Y PERSON WITHOUT r~OODY'S PRIOR WRITTEr< CONSENT.

All informatfort contai:1ed herein is obtJin~d MOODY'S from sources believed by it to be accurate and reliable. Because of the poSSibd!ty of human or mechanical error as as other factors, however. at! information cor<tained r.e~ein i'i provided "AS !S'' N!thout warranty of any kind. HCODY'S adopts all necessa(y measures 50 that ~he informat1cn 1t :Jses in a credit rating :s of ~.uff:oent q:;aifty and from sources MOODY'S considers to be reliable \rtdudfrg, wf-1er, 3pprooriate, rndepet"1dent sources. Howeve;, MOODY'S IS qot an audito• and cannot in ever; i'lstance 1ndependent\y or vaUdate informat!on received in +he rat•ng prtKess. Under no c:rcumstance~ shall tv100DY'S ~ave a11y ~iability to any for (a) ;;my toss or damage whole or ;n

pa:·t caused by, resulilng fiom, or to, any error or contir.gency \Nithrn or outs: de ~he contro~ of t'--100JY'S or ary rts d1~ectcrs. fn ronnectior: with tr>e proc:...~re:nent, collen;or. cor:1pilat on, analysis, 111terpretatlc:n. communication. pubt!caticn or any such inforrr:at\or~ .. or (b) direct. i0d!rect spec;a!, or 'ncidental darrnges whatsoever wtthout lfmitat!oil, lost even if MOODI'S

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2tid not staterr~ent.s. of fact or rer:ommendat:ons to ;:Jlirchase, seU ho~d

musr make :rs OV'.:n .;,tudy and eva~ua!lon cf each securf::y it i110Y

r~G 'NARRAN7Y, EXPRESS OR trv1PL!ED, AS TO THE ACCURACY, T\MELt~,.JESS, COMPLETENESS, MERCHANTARlL!TY OK flT~~ESS FOR .ANY PARTICULAR PURPOSE OF /"HY Sl;CH RAT!NG OR OTHER OPI1'~;Qi\; OR 11-Jt=ORMA fiON IS GIVEt'J OR MI'-·DE BY IV100DY'S !N A\JY f:ORM OR t'-1ANNER \VHATSOEVER

~-!liS .. a \vhollv-owned credit securities (t;cluding corporate prror to of any

SZ,SOO,OOO.

Moody':. Corpcr3t1on ('l,1CO"), debentures, 1~0te:, ar.d ce;;:merciJi

to ~.tliS and ratit:g 5ervices rendered and procedures to address the ot

ex 1st be+wee!! d1:ectors of ~·1CO 3nd rated ePtitfes, and to the SEC an ownership mterPst in i·,1CO of more than

Relations Corporate Gov~mance · -Director and

into .ALJstralid of tHs doru:nent is pursuant to ~he Australian Fn~anciat Serv<es L1cense of !nvestors Service Pty Limited ABN 61 003 399 657AFSL 336969 und/or Hood/~ Aus!ralia Pty

oH'"c'w''"i This docurr1ef1t inter·ded to be prov,ded ::.rrl·; to clients" w1thin t'le- :neaning of sect:on 751G of th~ By conti:1utng w access this docurne:1t from 'Nith;n Austra~:a, yo~ represent :v ~-100DY'S tha-:: you are. or are the C10GHY1~nt as a represe:1lative of, a '\·1h(Ji:::sale cl:ent'' and that r:e;:her you nor the represert wiE d;rectly or dissem111Jte th!s docun;ent or its conten~s to "retail dients" w1th1n the of sect tor. of thE> Corporatlo<1s ;.\ct zoo; HOODYTS cred;t rating fS an op1nfon ~s to ~he creditwor!htress of a deb:: cb\1gatiOn the issuer, ;rot or the ~quit·; sect.:ntles o; the 'ssuer or any form of ~ecurity that is a•;ailable ~o ret a~[ clients. It vvL•uld b~ f.J:· retail clients to Make any investr;,ent deosior1 bdsed on HOODY'S credit rating If in doubt you shoulC cortact your prcfess;onal adv~se:

PNM EXHIBIT TRH-5


PNM Resources' Outlook Revised To Negative Primary Credit Analyst: Antonio Bettinelli, San Francisco (1) 415-371-5067; [email protected]

SAN FRANCISCO (Standard & Poor's) March 10, 2008--Standard & Poor's Ratings Services said today it revised its outlook to negative from stable on the credit ratings of PNM Resources Inc. (PNMR) and electric utility subsidiaries Public Service Co. of New Mexico (PNM) and Texas-New Mexico Power Co. (TNMP) _

The negative outlook reflects our perception of increased regulatory risk at PNM that, if not managed or mitigated, could harm credit quality and lead to lower ratings for PNMR and its subsidiaries. Consolidated ratings are underpinned by utility operations, which are the primary source of cash flow. The hearing examiner's recommendation in PNM's pending electric rate case for a $24 million (4.4%) increase, which compares to the company's request of $82 million (14.7 %.) , could lead to weaker credit metrics than previously expected if adopted by the New Mexico Public Service Commission.

"The negative outlook reflects our assessment that credit metrics may not return to levels needed to maintain an investment-grade rating," said Standard & Poor's credit analyst Antonio Bettinelli.

If the decision in PNM's pending electric rate case does not support credit ratings and future cash flow, a downgrade is possible if the company cannot demonstrate the ability to adequately manage its financial and business profile to maintain a 'BBB-' rating. Our outlook also reflects the company's currently stretched liquidity position. A return to stable may require consistent plant performance, solid performance in nonregulated investments, and a regulatory environment that allows PNM to reasonably collect its costs. Upside rating potential is limited at this time.

Complete ratings information is available to subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor's credit


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PNM Resources' Outlook Revised To Negative

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BEFORE THE NEW MEXICO PUBLIC REGULATION COMMISSION

IN THE MATTER OF THE APPLICATION ) OF PUBLIC SERVICE COMPANY OF NEW ) MEXICO FOR APPROVAL TO ABANDON ) SAN JUAN GENERATING STATION UNITS ) 2 AND 3, ISSUANCE OF CERTIFICATES ) OF PUBLIC CONVENIENCE AND ) NECESSITY FOR REPLACEMENT POWER ) RESOURCES, ISSUANCE OF ACCOUNTING ) ORDERS AND DETERMINATION OF ) RELATED RATEMAKING PRINCIPLES AND) TREATMENT, )

) PUBLIC SERVICE COMPANY OF NEW ) MEXICO, )

) Applicant )

AFFIDAVIT

STATE OF 1'-.TEW MEXICO ) ) ss

COUNTY OF BERNALILLO )

Case No. 13-00 -UT

TERRY R. HOIL~, Vice President and Treasurer for Public Service Company of

New Mexico, upon being duly sworn according to law, under oath, deposes and states: I have

read the foregoing Direct Testimony and Exhibits of Terry R. Horn and it is true and

accurate based on my ovvn personal knowledge and belief.

w'Lb SIGNED this __:::::--day of December, 2013.

TERRY R. HORN

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SUBSCRIBED AND SWORN to before me this __ day of December, 2013.

My Commission Expires:

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v ) for approval to 2 and 3, issuance of certificates of ... › ~ › media › files › p ›...

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