Income Taxes

PNMR

PNMR’s income taxes (benefit) consist of the following components:



	Year Ended December 31,
	2012			2011			2010
	(In thousands)
Current federal income tax	$	(1,296	)	$	1,319		$	(52,184	)
Current state income tax	(37		)	(4,208		)	(15,528		)
Deferred federal income tax	50,851			119,280			28,364
Deferred state income tax	6,921			7,462			9,522
Investment tax credit earned and deferred	708			—			—
Amortization of accumulated investment tax credits	(2,237		)	(2,318		)	(2,429		)
Total income taxes (benefit)	$	54,910		$	121,535		$	(32,255	)

PNMR’s provision for income taxes differed from the federal income tax computed at the statutory rate for each of the years shown. The differences are attributable to the following factors:



	Year Ended December 31,
	2012			2011			2010
	(In thousands)
Federal income tax at statutory rates	$	61,262		$	109,364		$	(22,183	)
First Choice goodwill	—			15,055			—
Investment tax credits	(2,237		)	(2,318		)	(2,429		)
Flow-through of depreciation items	1,284			3,659			3,995
Earnings attributable to non-controlling interest in Valencia	(4,918		)	(4,917		)	(4,747		)
State income tax	4,646			3,395			(6,312		)
Other	(5,127		)	(2,703		)	(579		)
Total income taxes (benefit)	$	54,910		$	121,535		$	(32,255	)
Effective tax rate	31.37		%	38.90		%	50.89		%

The components of PNMR’s net accumulated deferred income tax liability were:



	December 31,
	2012			2011
	(In thousands)
Deferred tax assets:
Net operating loss	$	110,989		$	86,985
Pension	26,452			50,515
Regulatory liabilities related to income taxes	53,439			49,413
Other	129,801			109,875
Total deferred tax assets	320,681			296,788
Deferred tax liabilities:
Depreciation and plant related	(759,587		)	(697,528		)
Investment tax credit	(14,242		)	(15,771		)
Regulatory assets related to income taxes	(59,471		)	(56,312		)
Stranded costs	(24,934		)	(28,439		)
Other	(178,492		)	(168,688		)
Total deferred tax liabilities	(1,036,726		)	(966,738		)
Net accumulated deferred income tax liabilities	(716,045		)	(669,950		)
Current accumulated deferred income tax (asset) liability	258			9,080
Non-current accumulated deferred income tax liability	$	(715,787	)	$	(660,870	)

The following table reconciles the change in PNMR’s net accumulated deferred income tax liability to the deferred income tax benefit included in the Consolidated Statement of Earnings:



	Year Ended
	December 31, 2012
	(In thousands)
Net change in deferred income tax liability per above table	$	46,095
Change in tax effects of income tax related regulatory assets and liabilities	942
Tax effect of mark-to-market adjustments	(570		)
Tax effect of excess pension liability	10,085
Adjustment for uncertain income tax positions	(381		)
Other	72
Deferred income taxes	$	56,243

PNM

PNM’s income taxes (benefit) consist of the following components:



	Year Ended December 31,
	2012			2011			2010
	(In thousands)
Current federal income tax	$	(12,951	)	$	(46,364	)	$	(77,691	)
Current state income tax	(1,815		)	(6,776		)	438
Deferred federal income tax	55,486			78,673			109,170
Deferred state income tax	11,522			14,212			6,939
Investment tax credit earned and deferred	708			—			—
Amortization of accumulated investment tax credits	(2,237		)	(2,318		)	(2,429		)
Total income taxes	$	50,713		$	37,427		$	36,427

PNM’s provision for income taxes differed from the federal income tax computed at the statutory rate for each of the years shown. The differences are attributable to the following factors:



	Year Ended December 31,
	2012			2011			2010
	(In thousands)
Federal income tax at statutory rates	$	54,710		$	37,088		$	37,551
Investment tax credits	(2,237		)	(2,318		)	(2,429		)
Flow-through of depreciation items	1,268			3,656			3,994
Earnings attributable to non-controlling interest in Valencia	(4,918		)	(4,917		)	(4,747		)
State income tax	6,500			4,797			4,747
Other	(4,610		)	(879		)	(2,689		)
Total income taxes	$	50,713		$	37,427		$	36,427
Effective tax rate	32.44		%	35.32		%	33.95		%

The components of PNM’s net accumulated deferred income tax liability were:



	December 31,
	2012			2011
	(In thousands)
Deferred tax assets:
Net operating loss	$	93,980		$	72,615
Pension	32,532			54,270
Regulatory liabilities related to income taxes	48,027			43,578
Other	55,629			47,263
Total deferred tax assets	230,168			217,726
Deferred tax liabilities:
Depreciation and plant related	(624,724		)	(570,278		)
Investment tax credit	(14,242		)	(15,771		)
Regulatory assets related to income taxes	(48,726		)	(45,331		)
Other	(134,046		)	(123,098		)
Total deferred tax liabilities	(821,738		)	(754,478		)
Net accumulated deferred income tax liabilities	(591,570		)	(536,752		)
Current accumulated deferred income tax liability	3,447			16,562
Non-current accumulated deferred income tax liability	$	(588,123	)	$	(520,190	)

The following table reconciles the change in PNM’s net accumulated deferred income tax liability to the deferred income tax benefit included in the Consolidated Statement of Earnings:



	Year Ended
	December 31, 2012
	(In thousands)

Net change in deferred income tax liability per above table	$	54,818
Change in tax effects of income tax related regulatory assets and liabilities	1,054
Tax effect of mark-to-market adjustments	(506		)
Tax effect of excess pension liability	10,085
Adjustment for uncertain income tax positions	(370		)
Other	398
Deferred income taxes	$	65,479

TNMP

TNMP’s income taxes consist of the following components:



	Year Ended December 31,
	2012			2011			2010
	(In thousands)
Current federal income tax	$	9,152		$	(3,578	)	$	3,532
Current state income tax	1,822			1,981			1,766
Deferred federal income tax	4,406			15,507			4,775
Deferred state income tax	(28		)	(29		)	(29		)
Total income taxes	$	15,352		$	13,881		$	10,044

TNMP’s provision for income taxes differed from the federal income tax computed at the statutory rate for each of the periods shown. The differences are attributable to the following factors:



	Year Ended December 31,
	2012			2011			2010
	(In thousands)
Federal income tax at statutory rates	$	14,735		$	12,648		$	9,109
State income tax	1,185			1,288			1,148
Other	(568		)	(55		)	(213		)
Total income taxes	$	15,352		$	13,881		$	10,044
Effective tax rate	36.47		%	38.41		%	38.59		%

The components of TNMP’s net accumulated deferred income tax liability at December 31, were:



	December 31,
	2012			2011
	(In thousands)
Deferred tax assets:
Regulatory liabilities related to income taxes	$	5,412		$	5,835
Other	16,702			16,043
Total deferred tax assets	22,114			21,878
Deferred tax liabilities:
Depreciation and plant related	(133,686		)	(125,270		)
Stranded costs	(24,934		)	(28,439		)
Regulatory assets related to income taxes	(10,745		)	(10,981		)
Other	(15,328		)	(14,113		)
Total deferred tax liabilities	(184,693		)	(178,803		)
Net accumulated deferred income tax liabilities	(162,579		)	(156,925		)
Current accumulated deferred income tax (asset)	(1,131		)	(2,272		)
Non-current accumulated deferred income tax liability	$	(163,710	)	$	(159,197	)

The following table reconciles the change in TNMP’s net accumulated deferred income tax liability to the deferred income tax benefit included in the Consolidated Statement of Earnings:



	Year Ended
	December 31, 2012
	(In thousands)
Net change in deferred income tax liability per above table	$	5,654
Change in tax effects of income tax related regulatory assets and liabilities	(112		)
Adjustments for uncertain income tax positions	(905		)
Other	(259		)
Deferred income taxes	$	4,378

GAAP requires that the Company recognize only the impact of tax positions that, based on their technical merits, are more likely than not to be sustained upon an audit by the taxing authority. A reconciliation of unrecognized tax benefits (expenses) is as follows:



	PNMR			PNM			TNMP
	(In thousands)
Balance at December 31, 2009	$	22,591		$	(218	)	$	6,796
Additions based on tax positions related to 2010	13,514			12,136			992
Reductions for tax positions of prior years	—			—			—
Settlements	—			—			—
Balance at December 31, 2010	36,105			11,918			7,788
Additions based on tax positions related to 2011	(790		)	(717		)	(74		)
Reductions for tax positions of prior years	(15,735		)	(449		)	(13		)
Settlements	—			—			—
Balance at December 31, 2011	19,580			10,752			7,701
Additions based on tax positions related to 2012	2,046			1,152			—
Reductions for tax positions of prior years	(2,428		)	(1,522		)	(905		)
Settlements	—			—			—
Balance at December 31, 2012	$	19,198		$	10,382		$	6,796

Included in the balance at December 31, 2012 are $5.0 million and $0.8 million of unrecognized tax benefits that, if recognized, would affect the effective tax rate for PNMR and PNM. None of TNMP’s unrecognized tax benefits at December 31, 2012 would affect the effective tax rate if recognized. The Company believes that it is reasonably possible that approximately $5.5 million of PNMR’s unrecognized tax expenses, $0.4 million of PNM’s unrecognized tax benefits, and $6.8 million of TNMP’s unrecognized tax expenses will be reduced or settled in 2013 as a result of the conclusion of income tax examinations.

Estimated interest income related to refunds the Company expects to receive is included in Other Income and estimated interest expense and penalties related to potential cash settlements are included in Interest Expense in the Consolidated Statements of Earnings (Loss). Interest income (expense) related to income taxes is as follows:



	PNMR		PNM		TNMP
	(In thousands)
2012	$	243	$	244	$	(3	)
2011	$	467	$	401	$	2
2010	$	397	$	465	$	(8	)

Accumulated accrued interest receivable (payable) related to income taxes is as follows:



	PNMR			PNM			TNMP
	(In thousands)
December 31, 2012:
Accumulated accrued interest receivable	$	3,796		$	3,796		$	—
Accumulated accrued interest payable	$	(1,108	)	$	(23	)	$	(116	)
December 31, 2011:
Accumulated accrued interest receivable	$	3,552		$	3,552		$	—
Accumulated accrued interest payable	$	(1,107	)	$	(23	)	$	(113	)

The Company files a federal consolidated and several consolidated and separate state income tax returns. The tax years prior to 2003 are closed to examination by either federal or state taxing authorities. Tax year 2003 is open for examination only for certain items. Tax year 2004 is closed to examination by federal and state taxing authorities. Other tax years are open to examination by federal and state taxing authorities. At December 31, 2012, the Company has $223.6 million of federal net operating loss carryforwards that expire beginning in 2030 and $25.2 million of federal tax credit carryforwards that expire beginning in 2023. State net operating losses expire beginning in 2015 and vary from federal due to differences between state and federal tax law. In 2010 and 2012, PNMR impaired $2.6 million and $0.7 million of New Mexico wind energy production tax credit carry forwards. These credits were not expected to be utilized prior to their expiration due to the Company's net operating loss position. PNMR has additional New Mexico wind energy production tax credit carry forwards that expire beginning in 2013. On January 3, 2013, the American Taxpayer Relief Act of 2012, which extended fifty percent bonus depreciation, was signed into law. Due to provisions in the act, taxes payable to the state of New Mexico for 2013 will be reduced and PNMR anticipates that, in accordance with GAAP, it will be required to impair an additional $1.5 million of New Mexico wind energy production tax credits in the first quarter of 2013.