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[May 02, 2014]

TEXAS NEW MEXICO POWER CO - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) The following Management's Discussion and Analysis of Financial Condition and Results of Operations for PNMR is presented on a combined basis, including certain information applicable to PNM and TNMP. The MD&A for PNM and TNMP is presented as permitted by Form 10-Q General Instruction H(2). This report uses the term "Company" when discussing matters of common applicability to PNMR, PNM, and TNMP. A reference to a "Note" in this Item 2 refers to the accompanying Notes to Condensed Consolidated Financial Statements (Unaudited) included in Item 1, unless otherwise specified. Certain of the tables below may not appear visually accurate due to rounding.


MD&A FOR PNMR EXECUTIVE SUMMARY Overview and Strategy PNMR is a holding company with two regulated utilities serving approximately 748,000 residential, commercial, and industrial customers and end-users of electricity in New Mexico and Texas. PNMR's electric utilities are PNM and TNMP.

Strategic Goals PNMR is focused on achieving the following strategic goals: • Earning authorized returns on its regulated businesses • Maintaining investment grade credit ratings • Providing a top-quartile total return to investors In conjunction with these goals, PNM and TNMP are dedicated to: • Achieving industry-leading safety performance • Maintaining strong plant performance and system reliability • Delivering a superior customer experience • Demonstrating environmental leadership in its business operations Earning Authorized Returns on Regulated Businesses PNMR's success in accomplishing its strategic goals is highly dependent on continued favorable regulatory treatment for its utilities and their strong operating performance. The Company has multiple strategies to achieve favorable regulatory treatment, all of which have as their foundation a focus on the basics: safety, operational excellence, and customer satisfaction, while engaging stakeholders to build productive relationships.

Both PNM and TNMP seek cost recovery for their investments through general rate cases and various rate riders. The PUCT has approved mechanisms that allow TNMP to recover capital invested in transmission and distribution projects without having to file a general rate case, which allows for more timely recovery. The PUCT approved TNMP's most recent request for additional investments in transmission assets on March 13, 2014. The NMPRC has approved rate riders for renewable energy and energy efficiency that also allow for more timely recovery of investments and improve the ability to earn authorized returns from PNM's retail customers. Recently, PNM completed rate proceedings for all of its FERC regulated transmission customers and for NEC, its largest wholesale generation services customer, which improved PNM's returns for providing those services. In addition, PNM currently has a pending case before FERC in which it is requesting an increase in rates charged to transmission customers based on a formula rate mechanism. However, Gallup, PNM's second largest customer for wholesale generation services, has informed PNM that it will obtain power from another utility at the end of the current contract on June 29, 2014. Additional information about rate filings is provided in Note 17 of the Notes to Consolidated Financial Statements in the 2013 Annual Reports on Form 10-K and in Note 12.

Fair and timely rate treatment from regulators is crucial to PNM and TNMP earning their allowed returns, which is critical for PNMR's ability to achieve its strategic goals. PNMR believes that if the utilities earn their allowed returns, it would be viewed positively by credit rating agencies and would further improve the Company's ratings, which could lower costs to utility customers.

66 -------------------------------------------------------------------------------- Table of Contents Also, earning allowed returns should result in increased earnings for PNMR, which would lead to increased total returns to investors.

PNM's interest in PVNGS Unit 3 is currently excluded from NMPRC jurisdictional rates. While PVNGS Unit 3's financial results are not included in the authorized returns on its regulated business, it impacts PNM's earnings and has been demonstrated to be a valuable asset. Power generated from PNM's 134 MW interest in PVNGS Unit 3 is currently sold into the wholesale market and any earnings or losses are attributable to shareholders. As part of compliance with the requirements for BART at SJGS discussed below, PNM has requested NMPRC approval to include PVNGS Unit 3 as a jurisdictional resource in the determination of rates charged to customers in New Mexico beginning in 2018.

Maintaining Investment Grade Credit Ratings PNM is committed to maintaining investment grade credit ratings. The credit ratings for PNMR, PNM, and TNMP were set forth under the heading Liquidity in the MD&A contained in the 2013 Annual Reports on Form 10-K. As discussed under the subheading Liquidity in MD&A - Liquidity and Capital Resources below, S&P raised the corporate credit ratings and senior debt ratings for PNMR, PNM, and TNMP, as well as the preferred stock rating for PNM, on April 5, 2013. S&P retained the outlook as stable for all entities. On June 21, 2013, Moody's changed the ratings outlook for PNMR, PNM, and TNMP to positive from stable. On January 30, 2014, Moody's raised the credit ratings for PNMR, PNM and TNMP by one notch, while maintaining the positive outlook. All of the Company's credit ratings issued by both Moody's and S&P are now investment grade. On April 30, 2014, S&P changed the outlook for PNMR, PNM, and TNMP to positive from stable.

Providing Top-Quartile Total Returns to Investors PNMR's strategic goal to provide top quartile total return to investors over the 2012 to 2016 period is based on five-year ongoing earnings per share growth plus five-year average dividend yield from a group of regulated electric utility companies with similar market capitalization. Top quartile total return currently is equal to an average annual rate of 10 percent to 13 percent.

PNMR's long-term target is a dividend payout ratio of 50 percent to 60 percent of its ongoing earnings. Ongoing earnings, which is a non-GAAP financial measure, excludes certain non-recurring, infrequent, and other items from earnings determined in accordance with GAAP. The annual common stock dividend was raised by 16 percent in February 2012, 14 percent in February 2013, and 12 percent in December 2013. PNMR expects to provide above-average dividend growth in the near-term and to manage the payout ratio to meet its long-term target.

The Board will continue to evaluate the dividend on an annual basis, considering sustainability and growth, capital planning, and industry standards.

Business Focus In addition to its strategic goals, PNMR's strategy and decision-making are focused on safely providing reliable, affordable, and environmentally responsible power to create enduring value for customers and communities. To accomplish this, PNMR works closely with customers, stakeholders, legislators, and regulators to ensure that resource plans and infrastructure investments benefit from robust public dialogue and balance the diverse needs of our communities.

Reliable and Affordable Power PNMR and its utilities are keenly aware of the roles they play in enhancing economic vitality in their New Mexico and Texas service territories. Management believes that maintaining strong and modern electric infrastructure is critical to ensuring reliability and economic growth. When considering expanding or relocating to other communities, businesses consider energy affordability and reliability to be important factors. PNM and TNMP strive to balance service affordability with infrastructure investment to maintain a high level of electric reliability and to deliver a superior customer experience. The utilities also work to ensure that rates reflect actual costs of providing service.

Investing in PNM's and TNMP's infrastructure is critical to ensuring reliability and meeting future energy needs. Both utilities have long-established records of providing customers with top-tier electric reliability.

In September 2011, TNMP began its deployment of smart meters in homes and businesses across its Texas service area. Through March 31, 2014, TNMP had completed installation of more than 142,000 smart meters, which is approximately 62% of the anticipated total. TNMP's deployment is expected to be completed in 2016.

As part of the State of Texas' long-term initiative to create a smart electric grid, installation of smart meters will ultimately give consumers more data about their energy consumption and help them make more informed decisions. In 2014, TNMP will install a new outage management system that will leverage capabilities of the smart meters to enhance TNMP's responsiveness 67 -------------------------------------------------------------------------------- Table of Contents to outages.

During the 2011 to 2013 period, PNM and TNMP together invested $937.5 million in utility plant, including substations, power plants, nuclear fuel, and transmission and distribution systems. In 2012, PNM announced plans for the 40 MW natural gas-fired La Luz peaking generating station to be located near Belen, New Mexico. PNM filed a request in May 2013 with the NMPRC for approval to construct the La Luz plant, which is expected to begin in 2014, with the facility going into service in 2016. PNM also announced an agreement to purchase Delta, a 132 MW gas-fired peaking facility, which has served PNM jurisdictional needs under a 20-year PPA since 2000. The purchase has been approved by the NMPRC and FERC. PNM anticipates closing on the Delta purchase in the second quarter of 2014.

Environmentally Responsible Power PNMR has a long-standing record of environmental stewardship. PNMR's environmental focus has been in three key areas: • Developing strategies to meet regional haze rules at the coal-fired SJGS as cost-effectively as possible while providing broad environmental benefits • Preparing to meet New Mexico's increasing renewable energy requirements as cost-effectively as possible •Increasing energy efficiency participation Another area of emphasis is the reduction of the amount of fresh water used during electricity generation at PNM's power plants. The fresh water used per MWh generated has dropped by 21.0% since 2002, primarily due to the growth of renewable energy sources, the expansion of Afton to a combined-cycle plant that has both air and water cooling systems, and the use of gray water for cooling at Luna. In addition to the above areas of focus, the Company is also working to reduce the amount of solid waste going to landfills through increased recycling and reduction of waste. The Company has performed well in this area in the past and has set goals for even further reductions.

Renewable Energy PNM's 2013 renewable procurement strategy almost doubled PNM's existing solar capacity with the addition of 21.5 MW of utility-owned solar capacity. In addition to the solar expansion, the 2013 plan included a 20-year agreement to purchase energy from a geothermal facility built near Lordsburg, New Mexico. The facility began providing power to PNM in January 2014. The current output of the facility is 4 MW and future expansion may result in up to 10 MW of generation capacity. PNM's 2014 renewable procurement strategy calls for the construction of an additional 23 MW of utility-owned solar capacity, a 20-year PPA for the output of an existing 102 MW wind energy center beginning in 2015, and the purchase of RECs in 2014 and 2015 to meet the RPS.

In addition to PNM's utility-owned PV solar facilities, PNM also owns the 500 KW PNM Prosperity Energy Storage Project, which uses advanced batteries to store solar power and dispatch the energy either during high-use periods or when solar production is limited. The project features one of the largest combinations of battery storage and PV energy in the nation and involves extensive research and development of smart grid concepts. The facility was the nation's first solar storage facility fully integrated into a utility's power grid.

PNM also purchases 204 MW of wind power and power from a customer-owned distributed solar generation program having an installed capacity of 30.5 MW at the end of 2013. These renewable resources are key means for PNM to meet the RPS and related regulations, which require PNM to achieve prescribed levels of energy sales from renewable sources, if that can be accomplished without exceeding the RCT cost limit set by the NMPRC.

PNM makes renewable procurements consistent with the plans approved by the NMPRC. PNM believes its currently planned resources will enable it to comply with the NMPRC's diversity requirements, as amended in December 2012. PNM will continue to procure renewable resources while balancing the bill impact to customers in order to meet New Mexico's escalating RPS requirements.

68 -------------------------------------------------------------------------------- Table of Contents SJGS PNM continues its efforts to comply with the EPA regional haze rule in a manner that minimizes the cost impact to customers while still achieving broad environmental benefits. Additional information about BART at SJGS is contained in Note 16 of the Notes to Consolidated Financial Statements in the 2013 Annual Reports on Form 10-K and in Note 11.

In August 2011, EPA issued a FIP for regional haze that would require the installation of SCRs on all four units at SJGS by September 2016. Following approval by the majority of the other SJGS owners, PNM, NMED, and EPA agreed, on February 15, 2013, to pursue a revised plan that could provide a new BART path to comply with federal visibility rules at SJGS. The terms of the non-binding agreement would result in the retirement of SJGS Units 2 and 3 by the end of 2017 and the installation of SNCRs on Units 1 and 4 by the later of January 31, 2016 or 15 months after EPA approval of a revised SIP from the State of New Mexico. The revised SIP has been approved by the EIB and submitted to EPA for its approval. On April 30, 2014, EPA issued an advance copy of the proposed approval of the revised SIP. The 30-day public comment period will begin upon publication in the Federal Register. Final EPA action is expected by about the end of September 2014.

Contemporaneously with the signing of the non-binding agreement, EPA indicated in writing that if the above plan does not move forward due to circumstances outside of the control of PNM and NMED, EPA will work with the State of New Mexico and PNM to create a reasonable FIP compliance schedule to reflect the time used to develop the new state plan.

On December 20, 2013, PNM made a filing with the NMPRC requesting certain approvals necessary to effectuate the revised SIP. In this filing, PNM requests authorization to: • Retire SJGS Units 2 and 3 at December 31, 2017 and to recover over 20 years their net book value at that date along with a regulated return on those costs • Include PNM's ownership of PVNGS Unit 3 as a resource to serve New Mexico retail customers effective January 1, 2018 • Allow cost recovery for the installation of SNCR equipment and the additional equipment to comply with NAAQS requirements on SJGS Units 1 and 4 • Exchange ownership of 78 MW of PNM's capacity in SJGS Unit 3 for 78 MW in SJGS Unit 4 PNM requested the NMPRC issue its final ruling on the application no later than December 2014. On February 11, 2014, PNM's application was determined to be complete. The Hearing Examiner indicated the NMPRC should proceed with the review of PNM's application and establish a schedule that would allow NMPRC action on the application by the end of 2014. A public hearing on the application is scheduled to begin on August 19, 2014.

The December 20, 2013 filing also identifies a new 177 MW natural gas fired generation source and 40 MW of new utility-scale solar generation to replace a portion of PNM's share of the reduction in generating capacity due to the retirement of SJGS Units 2 and 3. Specific approvals to acquire these facilities and the treatment of associated costs will be requested in future filings.

In connection with the implementation of the revised plan and the proposed retirement of SJGS Units 2 and 3, some of the SJGS participants have expressed a desire to exit their ownership in the plant. As a result, the SJGS participants are attempting to negotiate a restructuring of the ownership in SJGS, as well as addressing the obligations of the exiting participants for plant decommissioning, mine reclamation, environmental matters, and certain ongoing operating costs, among other items. The SJGS participants have engaged a mediator to assist in facilitating resolution of a number of outstanding matters among the owners. Although negotiations are continuing, no agreements have been reached. Owners of the affected units also may seek approvals of their utility commissions or governing boards. The December 20, 2013 NMPRC filing was based on the status of negotiations among the SJGS owners at that time. Depending upon the terms and conditions agreed to as a result of the negotiations, including PNM's share of the capacity of SJGS Unit 4, PNM may amend its December 20, 2013 filing with the NMPRC. PNM is unable to predict the outcome of the negotiations.

PNM, as the SJGS operating agent, presented the SNCR project to the participants in Unit 1 and Unit 4 for approval in late October 2013. The project was approved for Unit 1, but the Unit 4 project did not obtain the required percentage of votes for approval. Other capital projects related to Unit 4 were also not approved by the participants. The SJPPA provides that PNM is authorized and obligated to take reasonable and prudent actions necessary for the successful and proper operation of SJGS pending resolution by the participants. PNM must evaluate its responsibilities and obligations as operating agent under the SJPPA regarding the SJGS Unit 4 capital projects that were not approved by the participants and take reasonable and prudent actions as it deems necessary. In March 2014, PNM requested that the owners of Unit 4 approve the expenditure of $1.9 million of costs critical to 69 -------------------------------------------------------------------------------- Table of Contents being able to comply with the time frame in the revised SIP with respect to Unit 4 project. The Unit 4 owners did not approve the expenditures. Thereupon, PNM issued a "Prudent Utility Practice" notice that, under the SJPPA, PNM was restarting certain critical activities to keep the Unit 4 project on schedule.

PNM cannot predict the outcome of this matter.

This revised BART plan would achieve similar visibility improvements as the installation of SCRs on all four units at SJGS. It has the added advantage of reducing other emissions beyond NOx, including SO2, particulate matter, CO2, and mercury, as well as reducing water usage. PNM has begun taking steps to prepare for the potential installation of SNCRs on Units 1 and 4. In May 2013, PNM entered into an SNCR equipment and related services contract with an SNCR technology provider, but has not yet entered into a construction and procurement contract. PNM can provide no assurance that the requirements of this plan will be accomplished at all or within the required timeframes.

In addition to the regional haze rule, SJGS is required to comply with other rules currently being developed or implemented that affect coal-fired generating units. Because of environmental upgrades completed in 2009, SJGS is well positioned to outperform the mercury limit imposed by EPA in the 2011 Mercury and Air Toxics Standards. The major environmental upgrades on each of the four units at SJGS have significantly reduced emissions of NOx, SO2, particulate matter, and mercury. Since 2006, SJGS has reduced NOx emissions by 41 percent, SO2 by 60 percent, particulate matter by 69 percent, and mercury by 99 percent.

Energy Efficiency Energy efficiency also plays a significant role in helping to keep customers' electricity costs low while continuing to meet their energy needs. PNM's and TNMP's energy efficiency and load management portfolios continue to achieve robust results. In 2013, annual energy saved as a result of PNM's portfolio of energy efficiency programs was approximately 75 GWh. This is equivalent to the annual consumption of approximately 10,200 homes in PNM's service territory.

PNM's load management and energy efficiency programs also help lower peak demand requirements. TNMP's energy efficiency programs in 2013 resulted in energy savings totaling an estimated 17.0 GWh. This is equivalent to the annual consumption of approximately 1,650 homes in TNMP's service territory.

Creating Value for Customers and Communities The Company strives to deliver a superior customer experience by understanding the dynamic needs of its customers through ongoing market research, identifying and establishing best-in-class services and programs, and proactively communicating and engaging with customers at a regional and community level. In 2013, PNM refocused its efforts to improve the customer experience through an integrated marketing and communications strategy that encompassed brand repositioning and advertising, customer service improvements, and strategic customer and stakeholder engagement. As part of this effort, in February 2014, PNM launched an updated website that provides an increase in self-service options for customers, as well as a mobile platform.

Integrated communication around known satisfaction drivers, including billing and payment options, bill redesign, energy efficiency, and environmental and community stewardship ensured PNM retained traction from prior efforts, as well as gained new ground in critical areas, notably corporate citizenship perceptions. PNM's perceived value to customers has also improved.

Recognizing the importance of environmental stewardship to customers and other stakeholders, PNM expanded engagement with environmental stakeholders to promote ongoing dialogue and input. Similarly, PNM also proactively communicated with communities about its efforts and plans related to environmental stewardship.

Customers took note of PNM's efforts in this area. A nationally recognized customer satisfaction benchmark revealed gains in awareness of PNM's efforts to improve environmental impact, as well as customer perceptions around the commitment to preserving the environment now and for future generations.

Benchmark data also demonstrates positive movement in the communication component of the customer experience.

Through outreach, collaboration, and various community-oriented programs, PNMR has a demonstrated commitment to build productive relationships with stakeholders, including customers, regulators, legislators, and intervenors.

Building off work that began in 2008, PNM has continued outreach efforts to connect low-income customers with nonprofit community service providers offering support and help with such needs as utility bills, food, clothing, medical programs, services for seniors, and weatherization. In 2013, PNM hosted 22 community events throughout its service territory to assist low-income customers. Furthermore, the PNM Good Neighbor Fund provided $0.3 million of assistance with utility bills to 3,610 families in 2013. In 2013, PNM committed funding of $0.9 million to the PNM Good Neighbor Fund.

70 -------------------------------------------------------------------------------- Table of Contents The PNM Resources Foundation helps nonprofits become more energy efficient through Reduce Your Use grants. In 2013, PNMR committed funding of $3.5 million to the PNM Resources Foundation. For 2013, the foundation awarded $0.2 million to support 56 projects in New Mexico to provide shade structure installations, window replacements, and efficient appliance purchases. Since the program's inception in 2008, Reduce Your Use grants have provided nonprofit agencies in New Mexico with a total of $1.4 million of support. In 2013, in connection with the PNM Resources Foundation's 30th anniversary, the foundation awarded thirty $10,000 environmental grants to nonprofit agencies.

PNM continues to expand its environmental stakeholder outreach, piloting small environmental stakeholder dialogue groups on key issues such as renewable energy and energy efficiency planning. PNM also employed proactive stakeholder outreach in two key projects - the development of PNM's renewable energy procurement plans that involved distributed solar energy developers early in the conversation and the siting of the planned gas-fired peaking generation facility near Belen, New Mexico, which featured in-depth community involvement and education early in the planning stages of the project. In both cases highly favorable outcomes were achieved, and controversial negative media coverage was virtually eliminated.

In Texas, community outreach has focused on supporting employee volunteerism, as well as customer education to address questions about the ongoing smart meter deployment. TNMP also offers energy efficiency programs specific to government buildings and schools and has successfully used the programs to improve customer relationships.

Economic Factors In the three months ended March 31, 2014, PNM experienced a decrease in weather normalized retail load of 2.9% compared to the same period in 2013. New Mexico's economy still lags the nation in post-recession recovery. In the three months ended March 31, 2014, TNMP's weather normalized retail load increased 8.1% compared to the same period in 2013. In recent years, New Mexico and Texas have fared better than the national average in unemployment although the unemployment rate in New Mexico exceeded the national average in March 2013.

However, employment growth is a stronger predictor of load. Texas' employment growth rates are well above the national rate, while New Mexico's employment remains relatively flat.

Results of Operations A summary of net earnings attributable to PNMR is as follows: Three Months Ended March 31, 2014 2013 Change (In millions, except per share amounts) Net earnings attributable to PNMR $ 12.5 $ 10.6 $ 1.9 Average diluted common and common equivalent shares 80.4 80.6 (0.2 ) Net earnings attributable to PNMR per diluted share $ 0.16 $ 0.13 $ 0.03 The components of the change in earnings attributable to PNMR are: Three Months Ended March 31, 2014 (In millions) PNM $ (3.9 ) TNMP 3.1 Corporate and Other 2.6 Net change $ 1.9 PNMR's operational results were affected by the following: • Lower retail load at PNM partially offset by higher retail load in at TNMP • Rate increases for PNM and TNMP - additional information about these rate increases is provided in Note 17 of the Notes to Consolidated Financial Statements in the 2013 Annual Reports on Form 10-K and Note 12 • Milder weather in PNM's service territory in 2014 than 2013 71 -------------------------------------------------------------------------------- Table of Contents • Net unrealized gains and losses on mark-to-market economic hedges for sales and fuel costs not recoverable under PNM's FPPAC • Higher prices for sales of power from PVNGS Unit 3 • Increased income tax expense in 2013 due to impairments of state tax credits that did not recur in 2014 (Note 13) • Other factors impacting results of operation for each segment are discussed under Results of Operations below Liquidity and Capital Resources The Company has revolving credit facilities that provide capacities for short-term borrowing and letters of credit of $300.0 million for PNMR and $400.0 million for PNM, both of which expire in October 2018. In addition, PNM has a $50.0 million revolving credit facility, which expires in January 2018, with banks having a significant presence in New Mexico and TNMP has a $75.0 million revolving credit facility, which expires in September 2018. Total availability for PNMR on a consolidated basis was $806.9 million at April 25, 2014. The Company utilizes these credit facilities and cash flows from operations to provide funds for both construction and operational expenditures. PNMR also has intercompany loan agreements with each of its subsidiaries.

The Company projects that its total capital requirements, consisting of construction expenditures and dividends, will total $2,564.5 million for 2014-2018, including amounts expended through March 31, 2014. The construction expenditures include estimated amounts related to environmental upgrades at SJGS to address regional haze and the identified sources of replacement capacity under the revised plan for compliance described in Note 11. The construction expenditures also include additional renewable resources anticipated to be required to meet the RPS, additional peaking resources needed to meet needs outlined in PNM's current IRP, and environmental upgrades at Four Corners. In addition to internal cash generation, the Company anticipates that it will be necessary to obtain additional long-term financing in the form of debt refinancing, new debt issuances, and/or new equity in order to fund its capital requirements during the 2014-2018 period. The Company currently believes that its internal cash generation, existing credit arrangements, and access to public and private capital markets will provide sufficient resources to meet the Company's capital requirements.

RESULTS OF OPERATIONS Segment Information The following discussion is based on the segment methodology that PNMR's management uses for making operating decisions and assessing performance of its various business activities. See Note 3 for more information on PNMR's operating segments.

The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto. Trends and contingencies of a material nature are discussed to the extent known. Refer also to Disclosure Regarding Forward Looking Statements and to Part II, Item 1A. Risk Factors.

PNM The following table summarizes the operating results for PNM: Three Months Ended March 31, 2014 2013 Change (In millions) Electric operating revenues $ 262.7 $ 257.9 $ 4.8 Cost of energy 96.6 91.7 4.9 Margin 166.1 166.2 (0.1 ) Operating expenses 107.7 103.2 4.5 Depreciation and amortization 27.1 25.8 1.3 Operating income 31.3 37.2 (5.9 ) Other income (deductions) 3.8 4.1 (0.3 ) Net interest charges (19.8 ) (20.0 ) 0.2 Segment earnings before income taxes 15.3 21.4 (6.1 ) Income (taxes) (4.1 ) (6.6 ) 2.5 Valencia non-controlling interest (3.5 ) (3.2 ) (0.3 ) Preferred stock dividend requirements (0.1 ) (0.1 ) - Segment earnings $ 7.5 $ 11.4 $ (3.9 ) 72-------------------------------------------------------------------------------- Table of Contents The following table summarizes the significant changes to electric operating revenues, cost of energy, and margin: 2013/2014 Change Three Months Ended March 31, Electric Operating Cost of Revenues Energy Margin (In millions) Customer usage/load $ (4.2 ) $ - $ (4.2 ) Weather (3.3 ) - (3.3 ) Economy service 2.7 2.6 0.1 Wholesale rate increases 0.5 - 0.5 Renewable energy rider 4.5 2.2 2.3 Unregulated margin 1.5 (2.1 ) 3.6 Net unrealized economic hedges 3.0 0.9 2.1 Other 0.1 1.3 (1.2 ) Net change $ 4.8 $ 4.9 $ (0.1 ) The following table shows electric operating revenues by customer class and average number of customers: Three Months Ended March 31, 2014 2013 Change (In millions, except customers) Residential $ 97.6 $ 104.3 $ (6.7 ) Commercial 89.6 88.3 1.3 Industrial 15.8 17.3 (1.5 ) Public authority 5.2 5.3 (0.1 ) Economy service 10.6 7.9 2.7 Other retail 3.6 3.4 0.2 Transmission 9.1 8.7 0.4 Firm-requirements wholesale 11.5 11.5 - Other sales for resale 22.6 17.1 5.5 Mark-to-market activity (2.9 ) (5.9 ) 3.0 $ 262.7 $ 257.9 $ 4.8 Average retail customers (thousands) 510.4 507.4 3.0 The following table shows GWh sales by customer class: Three Months Ended March 31, 2014 2013 Change (Gigawatt hours) Residential 775.0 851.3 (76.3 ) Commercial 868.0 878.5 (10.5 ) Industrial 240.0 252.6 (12.6 ) Public authority 51.6 55.0 (3.4 ) Economy service 191.4 176.7 14.7 Firm-requirements wholesale 160.9 177.2 (16.3 ) Other sales for resale 583.9 532.8 51.1 2,870.8 2,924.1 (53.3 ) 73-------------------------------------------------------------------------------- Table of Contents For the three months ended March 31, 2014, retail sales were lower compared to 2013 reflecting a continued sluggish economy in New Mexico. In particular, the Albuquerque metropolitan area continues to lag the nation in economic recovery.

In spite of the economic pressures, PNM experienced year to date average retail customer growth of 0.6%. Weather negatively impacted revenues and margin $3.3 million during the three months ended March 31, 2014 as heating degree days were 13.8% lower for the three months ended March 31, 2014 compared to the same period in 2013. PNM's weather normalized retail KWh sales were 2.9% lower for the three months ended March 31, 2014 compared to 2013, which decreased revenues and margin $4.2 million. There is no clear indication regarding the future of New Mexico's economy, as it still lags the nation in post-recession recovery.

Encouraging signs such as increased economic development activity and improved tax environment are contrasted by negative indicators such as a slip in employment growth and an increase in the unemployment rate in the first quarter of 2014. PNM continues to see some customer growth, as well as increasing peak demand levels, while at the same time, usage per customer has decreased. The growth is not yet strong enough to offset the decreased usage, which appears to be the result of economic concerns, as well as energy efficiency measures.

PNM implemented new rates for Gallup, its second largest wholesale customer, in July 2013 under a one-year agreement, which improved revenues and margins $0.5 million for the three months ended March 31, 2014 compared to 2013. PNM responded to Gallup's request for proposals for long-term power supply. On March 26, 2014, Gallup notified PNM that the contract for long-term power supply had been awarded to another utility. PNM's contract with Gallup will expire on June 29, 2014. PNM's 2013 revenues for power sold under the Gallup contract were $11.7 million. See Note 12.

In August 2012, PNM implemented its renewable energy rider, which recovers renewable energy procurement costs to meet the RPS, including the 22 MW of PNM-owned solar PV facilities completed in 2011. In January 2014, PNM increased the rate charged under the rider to include the 21.5 MW of PNM-owned solar PV facilities completed in 2013. See Note 12. For the three months ended March 31, 2014, this rider increased revenues by $4.5 million and cost of energy, reflecting the purchase of RECs, by $2.2 million. These revenues include a return on investment of $1.3 million for the three months ended March 31, 2014 compared to $0.8 million for the three months ended March 31, 2013. The remaining revenues from this rider recover renewable energy operating, depreciation, and interest expenses.

For the three months ended March 31, 2014, unregulated revenue increased $1.5 million and margin increased $3.6 million. Higher market power prices for PNM's share of PVNGS Unit 3, increased revenues and margins by $1.5 million for the three months ended March 31, 2014 compared to 2013. In addition, gas imbalance settlements lowered cost of energy $2.1 million for the three months ended March 31, 2014 compared to 2013.

Changes in unrealized mark-to-market gains and losses result from economic hedges for sales and fuel costs not covered under the FPPAC, primarily associated with PVNGS Unit 3. Unrealized losses of $2.8 million for the three months ended March 31, 2014 compared to unrealized losses of $4.9 million for the three months ended March 31, 2013, increased margin by $2.1 million.

PNM provides economy energy services to a major customer. In spite of the increase in KWh sales to this customer for the three months ended March 31, 2014 compared to 2013, there is only a minor impact in margin resulting from providing ancillary services. Other changes in revenues and cost of energy for this customer are a pass through with no impact to margin. Other drivers of changes in revenue, cost of energy, and margin include lower consumption by firm-requirements wholesale customers and off-system sales and purchases not included in PNM's FPPAC.

For the three months ended March 31, 2014, operating expenses increased $4.5 million compared to 2013. In the three months ended March 31, 2014, higher maintenance expenses for outages at San Juan, Four Corners, and PNM's natural gas-fired plants of $1.0 million, $0.7 million, and $1.0 million were partially offset by lower maintenance expenses of $0.5 million at PVNGS. Higher Arizona property taxes increased operating expenses of $0.9 million for the three months ended March 31, 2014 compared to 2013. Bad debt expense increased $0.6 million in the three months ended March 31, 2014 compared to 2013. Higher renewable rider expenses of $0.4 million, which is offset in revenue, increased operating expenses for the three months ended March 31, 2014 compared to 2013. In addition, higher pension and retiree medical expense of $0.2 million increased operating expenses for the three months ended March 31, 2014 compared to 2013.

Depreciation and amortization expense increased $1.3 million in the three months ended March 31, 2014 compared to 2013 due to additions to utility plant in service, including 21.5 MW of PNM-owned solar PV facilities. Depreciation on the PNM-owned solar PV facilities is recovered through the renewable energy rider discussed above.

74 -------------------------------------------------------------------------------- Table of Contents Other income (deductions) decreased $0.3 million for the three months ended March 31, 2014 compared to 2013. Higher income from investments held by the NDT of $0.8 million were offset by retirements of PVNGS Unit 3 plant in service of $0.7 million and lower interest income on PVNGS lessor notes of $0.5 million due to lower outstanding balances.

For the three months ended March 31, 2014, interest expense decreased $0.2 million compared to 2013, primarily due to lower short-term borrowings expense partially offset by interest expense on new long-term borrowings under the $175.0 million PNM 2014 Term Loan Agreement. See Note 9.

TNMP The following table summarizes the operating results for TNMP: Three Months Ended March 31, 2014 2013 Change (In millions) Electric operating revenues $ 66.2 $ 59.8 $ 6.4 Cost of energy 16.0 13.0 3.0 Margin 50.2 46.7 3.4 Operating expenses 21.1 22.0 (0.9 ) Depreciation and amortization 11.8 11.7 0.1 Operating income 17.3 13.1 4.2 Other income (deductions) 0.2 0.2 - Net interest charges (6.6 ) (7.2 ) 0.6 Segment earnings before income taxes 10.9 6.0 4.9 Income (taxes) (4.1 ) (2.3 ) (1.8 ) Segment earnings $ 6.8 $ 3.7 $ 3.1 The following table summarizes the significant changes to total electric operating revenues, cost of energy, and margin: 2013/2014 Change Three Months Ended March 31, Electric Operating Cost of Revenues Energy Margin (In millions) Rate increases $ 1.5 $ - $ 1.5 Demand based customers 0.7 - 0.7 Customer usage/load 0.5 - 0.5 Customer growth 0.3 - 0.3 Weather 0.5 - 0.5 Recovery of third-party transmission costs 3.0 3.0 - AMS surcharge 0.9 - 0.9 CTC surcharge 0.4 - 0.4 Other (1.4 ) - (1.4 ) Net change $ 6.4 $ 3.0 $ 3.4 75-------------------------------------------------------------------------------- Table of Contents The following table shows total electric operating revenues by retail tariff consumer class, including intersegment revenues, and average number of consumers: Three Months Ended March 31, 2014 2013 Change (In millions, except consumers) Residential $ 26.8 $ 22.9 $ 3.9 Commercial 23.2 20.9 2.3 Industrial 3.5 3.0 0.5 Other 12.7 13.0 (0.3 ) $ 66.2 $ 59.8 $ 6.4 Average consumers (thousands) (1) 236.7 234.1 2.6 (1) TNMP provides transmission and distribution services to REPs that provide electric service to consumers in TNMP's service territories.

The number of consumers above represents the customers of these REPs.

Under TECA, consumers in Texas have the ability to choose any REP to provide energy.

The following table shows GWh sales by retail tariff consumer class: Three Months Ended March 31, 2014 2013 Change (Gigawatt hours) Residential 642.1 561.4 80.7 Commercial 540.1 478.3 61.8 Industrial 648.1 552.5 95.6 Other 23.5 21.5 2.0 1,853.8 1,613.7 240.1 For the three months ended March 31, 2014, revenues and margin increased by $1.5 million compared to 2013 due to transmission rate increases in March 2013, September 2013, and March 2014. See Note 12. TNMP experienced customer growth of 1.1%, increasing revenues and margin by $0.3 million for the three months ended March 31, 2014 compared to 2013. Higher weather normalized usage per customer increased revenues and margin by $0.5 million for the three months ended March 31, 2014 compared to 2013. TNMP's weather normalized retail KWh sales increased 8.1% for the three months ended March 31, 2014 compared to 2013. Colder temperatures in the three months ended March 31, 2014 compared to 2013, resulted in increased revenues and margin of $0.5 million. For the three months ended March 31, 2014 compared to 2013, heating degree days were 30.1% higher, which was partially offset by cooling degree days being 36.8% lower.

Demand based revenues and margin for the three months ended March 31, 2014 increased by $0.7 million compared to 2013. This primarily results from TNMP, under a PUCT approved tariff, lowering the power factor billing threshold from 700 KW to 300 KW.

Differences between revenues and costs charged by third party transmission providers are deferred and recovered through a transmission cost recovery factor resulting in no impact on margin. Higher transmission cost of energy resulting from rate increases from other transmission service providers within ERCOT increased cost of energy $3.0 million for the three months ended March 31, 2014 compared to 2013. These increases in cost of energy resulted in TNMP rate increases for the recovery of third party transmission costs increasing revenue $3.0 million for the three months ended March 31, 2014 compared to 2013.

The AMS surcharge increased revenues and margin by $0.9 million for the three months ended March 31, 2014 compared to 2013, which amounts are offset by increases in operating expenses and depreciation. The CTC surcharge increased revenues and margin by $0.4 million for the three months ended March 31, 2014 compared to 2013, which amounts are also offset by increases depreciation and amortization expense. Other revenues, which include recovery of the Hurricane Ike, rate case expenses, and energy efficiency programs, were lower for the three months ended March 31, 2014 compared to 2013. These lower revenues were offset by decreases in operating expenses and depreciation and amortization. The Hurricane Ike surcharge was terminated in November of 2013 due to full recovery of costs associated with this hurricane.

76 -------------------------------------------------------------------------------- Table of Contents Operating expenses decreased $0.9 million for the three months ended March 31, 2014 compared to 2013. Lower employee healthcare claims of $0.5 million and lower property and casualty claims of $0.1 million decreased operating expense for the three months ended March 31, 2014 compared to 2013. Lower vegetation management of $0.2 million and lower labor costs of $0.2 million decreased operating expenses in the three months ended March 31, 2014 compared to 2013. In addition, lower energy efficiency program costs of $0.2 million decreased operating expense in the three months ended 2014, which is offset in revenue under TNMP's energy efficiency cost recovery factor. These decreases were offset by an increase of $0.3 million for operating expenses associated with the installation of additional meters under the AMS deployment, which is recovered through the AMS surcharge.

Depreciation and amortization increased $0.1 million for the three months ended March 31, 2014 compared to 2013. Depreciation expense associated with the AMS deployment, which is recovered through the AMS surcharge, increased $0.5 million for the three months ended March 31, 2014 compared to 2013. Depreciation expense associated with the CTC, which is recovered through the CTC surcharge, increased $0.4 million for the three months ended March 31, 2014 compared to 2013. In addition, an increase in utility plant in service increased depreciation by $0.4 million for the three months ended March 31, 2014 compared to 2013. These increases are offset by lower amortization of the Hurricane Ike costs of $1.1 million for the three months ended March 31, 2014 compared to 2013.

Interest expense decreased $0.6 million for the three months ended March 31, 2014 compared to 2013. The decrease primarily results from the April 2013 exchange of $93.2 million of TNMP's 9.5% First Mortgage Bonds for an equal amount of a new series of 6.95% First Mortgage Bonds.

Corporate and Other The table below summarizes the operating results for Corporate and Other: Three Months Ended March 31, 2014 2013 Change (In millions) Total revenues $ - $ - $ - Cost of energy - - - Margin - - - Operating expenses (3.2 ) (3.7 ) 0.5 Depreciation and amortization 3.0 3.3 (0.3 ) Operating income 0.2 0.4 (0.2 ) Other income (deductions) (0.7 ) (1.8 ) 1.1 Net interest charges (3.1 ) (4.1 ) 1.0 Segment earnings (loss) before income taxes (3.6 ) (5.4 ) 1.8 Income (taxes) benefit 1.7 0.9 0.8 Segment earnings (loss) $ (1.9 ) $ (4.5 ) $ 2.6 Operating expenses for Corporate and Other are net of amounts allocated to PNM and TNMP under shared service agreements. Changes in depreciation and amortization are offset in operating expenses as a result of allocation of these costs to other business segments. The change in operating expense is the result of lower depreciation and amortization for the three months ended March 31, 2014 compared to 2013 related to certain items of computer software that were fully depreciated in 2013 and changes in the allocation of certain items to PNM and TNMP.

The decrease in other income (deductions) during the three months ended March 31, 2014 compared to 2013 is due to losses related to corporate investments in 2013 that did not recur in 2014. Net interest charges decreased primarily due to lower interest charges resulting from the 2013 repurchase of $23.8 million principal amount of PNMR's 9.25% Senior Unsecured Notes, Series A, due 2015. The remaining decrease in net interest charges is the result of lower borrowings and lower interest rates on short-term borrowings.

77 -------------------------------------------------------------------------------- Table of Contents During the three months ended March 31, 2013, income (taxes) benefit for Corporate and Other included the impairment of New Mexico wind energy production tax credits of $1.5 million, after federal income tax benefits. No such impairment was incurred in 2014. See Note 13.

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