Optim Energy

Information concerning Optim Energy is discussed in Note 22 of Notes to Consolidated Financial Statements in the 2010 Annual Reports on Form 10-K. In January 2007, Optim Energy was created by PNMR and ECJV, a wholly owned subsidiary of Cascade, to serve expanding U.S. markets, principally the areas of Texas covered by ERCOT. PNMR and ECJV each have a 50 percent ownership interest in Optim Energy, a limited liability company.

Impairment Considerations

Beginning in 2009 and continuing throughout 2010, Optim Energy was affected by adverse market conditions, primarily low natural gas and power prices. In addition to these adverse market conditions, reported sales of electric generating resources within the ERCOT market area were transacted at prices (per KW of generating capacity) that were substantially below the amounts recorded for the electric generating plants underlying PNMR’s investment in Optim Energy. Under GAAP, these factors were indicators of impairment that required an impairment analysis to be performed by PNMR of its investment in Optim Energy as of December 31, 2010. PNMR’s analysis indicated that its entire investment in Optim Energy was impaired and PNMR reduced the carrying value of its investment in Optim Energy to zero at December 31, 2010. In accordance with GAAP, PNMR has not recorded losses associated with its investment in Optim Energy in 2011 as PNMR has no contractual requirement or agreement to provide Optim Energy with additional financial resources.

As a result of the adverse market conditions described above, PNMR (in collaboration with Optim Energy and ECJV) has been assessing various strategic alternatives relating to PNMR’s ownership interest in Optim Energy. PNMR has no contractual requirement or agreement to provide Optim Energy with additional financial resources and, as of the date of this report, PNMR does not anticipate making additional contributions to Optim Energy. The strategic alternative process is ongoing and no decisions have been reached.

Operational Information

Optim Energy has a bank financing arrangement that expires on May 31, 2012, which includes a revolving line of credit. This facility also provides for bank letters of credit to be issued as credit support for certain contractual arrangements entered into by Optim Energy. Cascade and ECJV have guaranteed Optim Energy’s obligations on this facility and, to secure Optim Energy’s obligation to reimburse Cascade and ECJV for any payments made under the guaranty, have a first lien on all assets of Optim Energy and its subsidiaries.

In January 2010, Optim Energy entered into one-year floating-to-fixed interest rate swaps with an aggregate notional amount of $650.0 million. The effect of these swaps was to convert $650.0 million of borrowings under Optim Energy’s credit facility from an interest rate based on the one-month LIBOR rate to a fixed rate of 1.33% through January 7, 2011, exclusive of loan guaranty fees. These swaps were accounted for as cash-flow hedges.

PNMR has no commitments or guarantees with respect to Optim Energy.

Summarized financial information for Optim Energy is as follows:

Results of Operations



	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
				(In thousands)
Operating revenues	$	77,315		$	86,871		$	151,248		$	192,465
Cost of energy	54,908			61,235			112,875			138,532
Gross margin	22,407			25,636			38,373			53,933
Non-fuel operations and maintenance expenses	9,408			6,450			18,651			16,970
Administrative and general expenses	6,356			4,944			13,293			10,556
Depreciation and amortization expense	13,126			12,852			24,739			24,909
Taxes other than income tax	2,347			3,162			4,717			6,596
Operating income (loss)	(8,830		)	(1,772		)	(23,027		)	(5,098		)
Interest charges	(3,981		)	(4,661		)	(7,965		)	(9,332		)
Other income (deductions)	195			2			263			66
Earnings (loss) before income taxes	(12,616		)	(6,431		)	(30,729		)	(14,364		)
Income taxes⁽¹⁾	94			36			141			68
Net earnings (loss)	$	(12,710	)	$	(6,467	)	$	(30,870	)	$	(14,432	)
50 percent of net earnings (loss)	$	(6,355	)	$	(3,234	)	$	(15,435	)	$	(7,216	)
Amortization of basis difference in Optim Energy	—			(624		)	—			(994		)
Post-impairment loss not recorded under GAAP	6,355			—			15,435			—
PNMR equity in net earnings (loss) of Optim Energy	$	—		$	(3,858	)	$	—		$	(8,210	)

⁽¹⁾ Represents the Texas Margin Tax, which is considered an income tax under GAAP.

Financial Position



	June 30,			December 31,
	2011			2010
	(In thousands)
Current assets	$	102,851		$	105,413
Net property plant and equipment	908,666			924,354
Other long-term assets	112,196			120,894
Total assets	1,123,713			1,150,661
Current maturities of long-term debt	717,000			—
Other current liabilities	52,220			50,226
Long-term debt	—			717,000
Other long-term liabilities	9,397			7,515
Total liabilities	778,617			774,741
Owners’ equity	$	345,096		$	375,920
50 percent of owners’ equity	$	172,548		$	187,960
PNMR basis difference in Optim Energy	193			216
Impairment of equity investment in Optim Energy	(188,176		)	(188,176		)
Post-impairment loss not recorded under GAAP	15,435			—
PNMR equity investment in Optim Energy	$	—		$	—

Revenue related to power sales and purchases is included net in operating revenues. Costs related to fuel purchases and sales are recorded net in cost of energy.

PNMR had a basis difference between its recorded investment in Optim Energy and 50 percent of Optim Energy’s equity resulting from Optim Energy’s acquisition of the Twin Oaks plant from PNMR in 2007. The portion of the basis difference related to contract amortization ended in 2010 and other basis differences, including a difference related to emission allowances that would have continued through the life of the Twin Oaks plant, were taken into account in the impairment discussed above. The basis difference adjustment detailed above relates mainly to contract amortization with insignificant offsets related to the other minor basis difference components.

Optim Energy individually valued each asset and liability of the Twin Oaks plant acquired from PNMR and the acquisition of Cogen and initially recorded them on its balance sheet at the determined fair value. For both transactions, this accounting resulted in amortization since contracts acquired were out of market and emission allowances, while acquired from government programs without cost to Optim Energy, had market value. Optim Energy recorded amortization of contracts acquired of $3.7 million and $7.3 million for the three months and six months ended June 30, 2011 and $4.2 million and $8.2 million for the three months and six months ended June 30, 2010, which decreased operating revenues. Optim Energy also recorded amortization expense on emission allowances of $1.6 million and $4.1 million for the three months and six months ended June 30, 2011 and $1.3 million and $2.6 million for the three months and six months ended June 30, 2010, which increased cost of energy.

Optim Energy has a hedging program that varies at any given time depending on current market conditions and other factors. Optim Energy has designated a long-term power and steam contract as a normal sale under GAAP. At June 30, 2011, all other transactions are designated as economic hedges that are required to be marked to market.