TMCNet:  PUBLIC SERVICE CO OF NEW MEXICO - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

[November 01, 2013]

PUBLIC SERVICE CO OF NEW MEXICO - 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 744,000 residential, commercial, and industrial customers and end-users of electricity in New Mexico and Texas.

Strategic Goals PNMR is focused on achieving the following strategic goals: • Earning authorized returns on its regulated businesses • Continuing to improve 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 and customer satisfaction • Maintaining strong plant performance and reliability 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. The Company has multiple strategies to achieve favorable regulatory treatment, all of which have as their foundation a focus on the basics: managing the Company's business and serving customers well, 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 and allow for more timely recovery of amounts invested in TNMP's systems. In 2011 and 2012, PNM made significant progress toward the goal of achieving authorized returns for its retail customers. In 2012, PNM saw additional progress toward achieving authorized returns for its transmission and generation customers regulated by FERC. PNM and TNMP completed several rate proceedings before their state regulators in 2011, 2012, and early 2013. 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. Additional information about rate filings is provided in Note 17 of the Notes to Consolidated Financial Statements in the 2012 Annual Reports on Form 10-K and in Note 11.

Fair and timely rate treatment from regulators is crucial to achieving PNMR's strategic goals because it leads to PNM and TNMP earning their allowed returns.

PNMR believes that if the utilities earn their allowed returns, it would be viewed positively by rating agencies and would further improve credit ratings, which could lower costs to customers. Also, earning allowed returns should result in increased earnings for PNMR, which should lead to increased total returns to investors.

PNM's interest in PVNGS Unit 3 is excluded from NMPRC jurisdictional rates.

While PVNGS Unit 3's financial contribution is not calculated in the authorized returns on its regulated business, it impacts PNM's earnings and has 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 71-------------------------------------------------------------------------------- Table of Contents and any earnings or losses are attributable to shareholders. PNM may request NMPRC approval to include PVNGS Unit 3 in the calculation of rates charged to customers in New Mexico as part of compliance with the requirements for BART at SJGS discussed below.

Continuing to Improve 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 2012 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.

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 and by 14 percent in February 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 PNMR 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 there is a direct connection between electric infrastructure to ensure reliability and economic growth. When considering expanding or relocating to other communities, businesses consider energy affordability and energy reliability to be important factors. PNM and TNMP strive to balance service affordability with infrastructure investment to maintain a high level of electric reliability. 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 ensure reliability and meet 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 September 30, 2013, TNMP had completed installation of more than 120,000 smart meters. 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, the smart meter rollout will ultimately give consumers more energy consumption data 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 to outages.

During the 2010 to 2012 period, PNM and TNMP together invested $803.7 million in substations, power plants, and transmission and distribution systems in New Mexico and Texas. In 2012, PNM announced its planned 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 for construction of the La Luz project, 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.

Closing on the purchase is anticipated in early 2014.

72-------------------------------------------------------------------------------- Table of Contents Environmentally Responsible Power PNMR has a long-standing record of environmental stewardship. In 2012 and 2013, its environmental focus has been in three key areas: •Preparing to meet New Mexico's increasing renewable energy requirements as cost-effectively as possible • Developing strategies to meet regional haze rules at the coal-fired SJGS as cost effectively as possible while providing broad environmental benefits •Increasing energy efficiency participation Another area of emphasis is the reduction of the amount of fresh water used during the generation of power at PNM's power plants. The fresh water used per MWh generated has dropped by 22.3% 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, in 2013, the Company also will be 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 In 2012, PNM filed and the NMPRC approved PNM's 2013 renewable procurement strategy. The approved strategy will almost double PNM's existing solar capacity with the addition of 21.5 MW of utility-owned solar capacity having an estimated cost of almost $50 million. In addition to the solar expansion, the 2013 proposal includes a 20-year agreement to purchase energy from a geothermal facility to be built near Lordsburg, New Mexico. The 10 MW facility will be the first geothermal project for the PNM system. On July 1, 2013, PNM filed its 2014 renewable procurement strategy with the NMPRC. The 2014 plan calls for the construction of an additional 23 MW of utility-owned solar capacity having an estimated cost of $46.7 million, a 20 year PPA for the output of an existing 100 MW wind energy center, 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 with the Electric Power Research Institute, East Penn Manufacturing Co., Northern New Mexico College, Sandia National Laboratories, and the University of New Mexico. When the facility went online in September 2011, it was the nation's first solar storage facility fully integrated into a utility's power grid.

PNM's existing resource portfolio includes the purchase of 204 MW of wind power.

PNM also purchases power from a customer-owned distributed solar generation program having an installed capacity of 19.8 MW at the end of 2012. Distributed generation, wind, and solar power are key means for PNM to meet the RPS established by the REA and related regulations issued by the NMPRC. These rules require a utility to achieve prescribed levels of energy sales from renewable sources within its generation mix, if that can be accomplished without exceeding the RCT cost limit set by the NMPRC, which aims to moderate the cost to consumers when utilities use more renewable resources.

PNM sought and received a waiver from the NMPRC excusing it from meeting the RPS in 2012 because the cost to achieve the full RPS would exceed the RCT. The 2013 plan will enable PNM to comply with the statutory RPS amount in 2013, but required a variance from the NMPRC's diversity requirements in 2013 while the proposed geothermal facilities are being constructed. Although this plan had been expected to enable PNM to achieve full RPS quantity and diversity compliance by 2014 without exceeding the RCT, delays in the permitting process for the geothermal facility have delayed its anticipated full-scale production in-service date to later in 2014. PNM does not believe this delay will affect its ability to comply with the 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.

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. EPA's FIP for regional haze currently in effect requires 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- 73-------------------------------------------------------------------------------- Table of Contents 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. PNM would also build a natural gas-fired peaking generating plant to be sited at SJGS to partially replace the capacity from the retired coal units. Additional base load generating capacity may also be required, which could come from some combination of PVNGS Unit 3, renewable resources, and/or additional gas-fired generation. Implementing this plan includes: • PNM submitting a new BART analysis to NMED, which occurred in April 2013 • NMED submitting a revised SIP to EIB, which occurred in May 2013 • Approval of the revised SIP by EIB, which occurred on September 5, 2013 • Submission of the revised SIP to EPA, which occurred on October 18, 2013 • EPA approval of the revised SIP • NMPRC approval of the retirement of Units 2 and 3, as well as recovery of the unrecovered investment and costs to retire those units, and plans to acquire replacement power The term sheet setting forth the non-binding agreement projects EPA final action in late 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.

In connection with the implementation of the revised plan and the retirement of SJGS Units 2 and 3, some of the SJGS participants have expressed a desire to exit their ownership in the plant. To implement the revised plan and accommodate the participants desiring to exit, the SJGS participants are negotiating 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 negotiations could result in PNM acquiring additional ownership in SJGS Unit 4. Owners of the affected units also may seek approvals of their utility commissions or governing boards.

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 is evaluating its responsibilities and obligations as operating agent under the SJPPA regarding the SJGS Unit 4 capital projects that were not approved by the participants, but has not reached a decision on how to proceed. PNM cannot predict the outcome of this matter.

On February 25, 2013, the parties filed their status reports with the Tenth Circuit. To demonstrate that progress has been made toward settling the Tenth Circuit litigation, information, including the non-binding agreement and its accompanying timeline, was submitted to the court. Following the parties' submission of their status reports, on February 28, 2013, the Tenth Circuit referred the litigation to the Tenth Circuit Mediation Office, which has authority to require the parties to attend mediation conferences to informally resolve issues in the pending appeals. Currently, proceedings for relief from the Tenth Circuit are in abeyance at PNM's request.

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. Detailed replacement power strategies also would be finalized. PNM believes adequate replacement power alternatives will be available to meet its generation needs and ensure reliability. PNM can provide no assurance that the requirements of this plan will be accomplished at all or within the required timeframes.

Additional information about BART at SJGS is contained in Note 16 of the Notes to Consolidated Financial Statements in the 2012 Annual Reports on Form 10-K and in Note 10. PNM anticipates filing for NMPRC approvals regarding BART at SJGS in late 2013 as discussed in Note 11.

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 43 percent, SO2 by 69 percent, particulate matter by 63 percent, and mercury by 99 percent.

74-------------------------------------------------------------------------------- Table of Contents 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 2012, annual energy saved as a result of PNM's portfolio of energy efficiency programs was approximately 79 GWh. This is equivalent to the consumption of approximately 10,700 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 2012 resulted in energy savings totaling an estimated 12.8 GWh.

Creating Value for Customers and Communities 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 2012, PNM hosted 23 community events throughout its service territory to assist low-income customers. Furthermore, the PNM Good Neighbor Fund provided $1.0 million of assistance with utility bills to 10,216 families in 2012.

The PNM Resources Foundation helps nonprofits become more energy efficient through Reduce Your Use grants. For 2012, the foundation awarded $0.3 million to support 55 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 $1.1 million of support. In May 2013, in connection with the PNM Resources Foundation's 30th anniversary, the foundation announced that 30 $10,000 environmental grants would be awarded in 2013. The recipients were announced in August 2013.

PNM also expanded its environmental stakeholder outreach in 2012, 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 the 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.

Economic Factors In the three and nine months ended September 30, 2013, PNM experienced decreases in weather and leap-year normalized, retail load of 1.2% and 1.5% compared to 2012. However, PNM set a new all-time record for peak use on June 27, 2013 when usage reached 2,008 MW. This compares to the previous peak of 1,973 MW. New Mexico businesses are taking a longer time to recover from the economic downturn. In particular, the Albuquerque metropolitan area continues to lag the nation in economic recovery. Based on the current trends, PNM load could be down approximately 1% for the full year 2013 compared to 2012. In the three and nine months ended September 30, 2013, TNMP's weather normalized and leap-year adjusted load increased 3.3% and 1.9% compared to 2012. In recent years, New Mexico and Texas have fared better than the national average in unemployment.

However, New Mexico's figures may be misleading due to people dropping out of the workforce. Employment growth is a better indicator. Texas growth rates are well above the national rate and New Mexico's employment growth rate is slightly positive.

Results of Operations A summary of net earnings attributable to PNMR is as follows: Three Months Ended September 30, Nine Months Ended September 30, 2013 2012 Change 2013 2012 Change (In millions, except per share amounts) Net earnings attributable to PNMR $ 54.6 $ 57.9 $ (3.3 ) $ 92.9 $ 96.5 $ (3.6 ) Average diluted common and common equivalent shares 80.3 80.4 (0.1 ) 80.5 80.4 0.1 Net earnings attributable to PNMR per diluted share $ 0.68 $ 0.72 $ (0.04 ) $ 1.15 $ 1.20 $ (0.05 ) 75-------------------------------------------------------------------------------- Table of Contents The components of the change in earnings attributable to PNMR are: Three Months Ended Nine Months Ended September 30, 2013 September 30, 2013 (In millions) PNM $ (3.1 ) $ (0.1 ) TNMP 1.0 2.1 Corporate and Other (1.2 ) (5.5 ) Net change $ (3.3 ) $ (3.6 ) PNMR's operational results were affected by the following: • 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 2012 Annual Reports on Form 10-K and Note 11 • 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 • Milder weather in 2013 than 2012 • Lower retail load at PNM partially offset by higher retail load in at TNMP • Increased income tax expense due to impairments of state tax credits and a change in state tax rate (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, TNMP has a $75.0 million revolving credit facility, which expires in September 2018. Total availability for PNMR on a consolidated basis was $755.9 million at October 25, 2013. 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 $2,054.0 million for 2013-2017, including amounts expended through September 30, 2013. The construction expenditures 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. This estimate does not include any amounts related to environmental upgrades at SJGS that ultimately may be required by EPA to address regional haze or expenditures that could be required to replace capacity should environmental control at SJGS involve shutdown of one or more SJGS units (Note 10). 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 through 2017. 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 OPERATIONSSegment 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 2 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.

76-------------------------------------------------------------------------------- Table of Contents PNM The following table summarizes the operating results for PNM: Three Months Ended September 30, Nine Months Ended September 30, 2013 2012 Change 2013 2012 Change (In millions) Electric operating revenues $ 326.0 $ 321.7 $ 4.3 $ 863.6 $ 832.2 $ 31.4 Cost of energy 100.2 99.2 1.0 283.7 263.0 20.7 Margin 225.8 222.5 3.3 579.9 569.2 10.7 Operating expenses 104.7 101.1 3.6 311.4 311.5 (0.1 ) Depreciation and amortization 25.9 24.4 1.5 77.8 72.0 5.8 Operating income 95.2 97.0 (1.8 ) 190.8 185.7 5.1 Other income (deductions) 4.5 8.4 (3.9 ) 14.8 19.1 (4.3 ) Net interest charges (20.1 ) (19.2 ) (0.9 ) (60.0 ) (56.7 ) (3.3 ) Segment earnings before income taxes 79.6 86.1 (6.5 ) 145.6 148.2 (2.6 ) Income (taxes) (27.7 ) (31.2 ) 3.5 (49.2 ) (51.9 ) 2.7 Valencia non-controlling interest (4.1 ) (4.0 ) (0.1 ) (10.9 ) (10.7 ) (0.2 ) Preferred stock dividend requirements (0.1 ) (0.1 ) - (0.4 ) (0.4 ) - Segment earnings $ 47.7 $ 50.8 $ (3.1 ) $ 85.1 $ 85.2 $ (0.1 ) The following table summarizes the significant changes to electric operating revenues, cost of energy, and margin: 2012/2013 Change Three Months Ended September 30, Nine Months Ended September 30, Electric Electric Operating Cost of Operating Cost of Revenues Energy Margin Revenues Energy Margin (In millions) Customer usage/load $ (1.3 ) $ - $ (1.3 ) $ (6.4 ) $ - $ (6.4 ) Weather (5.0 ) - (5.0 ) (4.9 ) - (4.9 ) Transmission and other (2.5 ) (0.7 ) (1.8 ) 14.9 17.0 (2.1 ) Wholesale rate increases 0.5 - 0.5 2.5 - 2.5 Energy efficiency rider (1.4 ) - (1.4 ) (1.7 ) - (1.7 ) Renewable energy rider 3.8 1.6 2.2 15.0 6.3 8.7 Unregulated margin 0.9 (0.4 ) 1.3 3.1 (2.5 ) 5.6 Net unrealized economic hedges 9.3 0.5 8.8 8.9 (0.1 ) 9.0 Net change $ 4.3 $ 1.0 $ 3.3 $ 31.4 $ 20.7 $ 10.7 77-------------------------------------------------------------------------------- Table of Contents The following table shows electric operating revenues by customer class and average number of customers: Three Months Ended September 30, Nine Months Ended September 30, 2013 2012 Change 2013 2012 Change (In millions, except customers) Residential $ 122.9 $ 126.1 $ (3.2 ) $ 319.8 $ 318.9 $ 0.9 Commercial 119.1 120.4 (1.3 ) 319.5 317.1 2.4 Industrial 21.2 22.6 (1.4 ) 57.7 59.9 (2.2 ) Public authority 8.2 8.1 0.1 20.0 19.3 0.7 Economy service 7.8 6.8 1.0 23.9 17.7 6.2 Other retail 0.4 2.3 (1.9 ) 6.2 9.5 (3.3 ) Transmission 10.5 10.8 (0.3 ) 28.5 29.3 (0.8 ) Firm-requirements wholesale 10.1 10.5 (0.4 ) 31.0 28.8 2.2 Other sales for resale 18.2 15.8 2.4 52.0 35.4 16.6 Mark-to-market activity 7.6 (1.7 ) 9.3 5.0 (3.7 ) 8.7 $ 326.0 $ 321.7 $ 4.3 $ 863.6 $ 832.2 $ 31.4 Average retail customers (thousands) 508.3 505.6 2.7 507.8 505.3 2.5 The following table shows GWh sales by customer class: Three Months Ended September 30, Nine Months Ended September 30, 2013 2012 Change 2013 2012 Change (Gigawatt hours) Residential 955.8 975.7 (19.9 ) 2,543.0 2,573.3 (30.3 ) Commercial 1,049.8 1,103.5 (53.7 ) 3,001.8 3,064.1 (62.3 ) Industrial 272.2 300.3 (28.1 ) 798.8 858.4 (59.6 ) Public authority 78.4 84.0 (5.6 ) 205.0 211.1 (6.1 ) Economy service 174.9 171.3 3.6 528.6 454.6 74.0 Firm-requirements wholesale 157.6 162.0 (4.4 ) 484.8 485.8 (1.0 ) Other sales for resale 564.2 536.9 27.3 1,592.4 1,263.4 329.0 3,252.9 3,333.7 (80.8 ) 9,154.4 8,910.7 243.7 For the three and nine months ended September 30, 2013, retail sales were lower compared to 2012 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 growth in average retail customers of 0.5%. Weather negatively impacted revenues and margin during the three and nine months ended September 30, 2013.

Cooling degree days were 10.1% and 9.8% lower for the three and nine months ended September 30, 2013 compared to the same period in 2012. PNM's weather normalized and leap-year adjusted retail sales were lower in 2013 than in 2012 by 1.9% in the first quarter, 1.4% in the second quarter, 1.2% in the third quarter, and 1.5% for the nine months ended September 30. However, total KWh sales, excluding normalization, decreased 4.4% and 2.4% for the three and nine months ended September 30, 2013 compared to 2012. Based on the current trends, retail KWh sales could be down approximately 1% for the full year 2013 compared to 2012 on a weather normalized and leap-year adjusted basis.

PNM provides economy energy services to a major customer. In spite of the increase in KWh sales to this customer for the three and nine months ended September 30, 2013 compared to 2012, there is only a minor impact in margin resulting from providing ancillary services. Other changes in revenues and cost of energy are a pass through with no impact to margin. Other sales for resale revenues and volumes increased for the three months and nine months ended September 30, 2013, primarily due to reduced off-system sales at SJGS in 2012 resulting from the fire incident at the mine providing coal to SJGS and additional energy available for off-system sales in 2013 due to the reduction in retail load. Increased off-system sales from SJGS are included in PNM's FPPAC and do not impact margin. See Note 10 for more discussion on the SJGS mine fire incident.

78-------------------------------------------------------------------------------- Table of Contents Higher energy imbalance volumes related to contracts that are settled through an exchange of power rather than cash combined with lower transmission revenues due to expiration of contracts resulted in a decrease in margin of $1.8 million and $2.1 million in the three and nine months ended September 30, 2013 compared to 2012. Increases in rates charged to wholesale firm-requirements customers (Note 11) increased revenue and margin by $0.5 million and $2.5 million for the three and nine months ended September 30, 2013 compared to 2012.

PNM offers several energy efficiency programs and initiatives to its retail customers regulated by the NMPRC. In addition, PNM is allowed to earn incentives on these programs, based on energy savings of the programs. PNM recovers these energy efficiency program costs and incentives via a rate rider. For the three months and nine months ended September 30, 2013, revenues and margin from the energy efficiency rider were lower by $1.4 million and $1.7 million, primarily driven by lower energy efficiency billings, which were partly offset by additional incentives earned in 2013 compared to those earned in 2012. Changes in energy efficiency revenues are offset by changes in operating expenses.

In August 2012, PNM implemented its renewable energy rider, a mechanism approved by the NMPRC, which recovers renewable energy procurement costs, including the investment in and an allowed return on the 22 MW of PNM-owned solar PV facilities constructed to meet the RPS. See Note 11. For the three months and nine months ended September 30, 2013, this rider increased revenues by $3.8 million and $15.0 million and cost of energy, reflecting the purchase of RECs, by $1.6 million and $6.3 million. These revenues include a return on investment of $0.9 million and $2.8 million for the three and nine months ended September 30, 2013 compared to $0.3 million for the three and nine months ended September 30, 2012. The remaining revenues from this rider recover renewable energy operating, depreciation, and interest expenses.

For the three months and nine months ended September 30, 2013, higher unregulated revenues of $0.9 million and $3.1 million and margin of $1.3 million and $5.6 million, primarily associated with PNM's share of PVNGS Unit 3, were due to higher market power prices on sales compared to 2012. In addition, PNM incurred an expense of $2.0 million for gas imbalance settlements in the three months ended September 30, 2012 that did not recur in 2013.

Changes in unrealized mark-to-market gains and losses are based on economic hedges in place for sales and fuel costs not covered under the FPPAC, primarily associated with PVNGS Unit 3. Unrealized gains of $7.7 million for the three months ended September 30, 2013 compared to unrealized losses of $1.1 million for the three months ended September 30, 2012, increased margin by $8.8 million.

Unrealized gains of $5.9 million for the nine months ended September 30, 2013 compared to unrealized losses of $3.1 million for the nine months ended September 30, 2012, increased margin by $9.0 million. Included in the 2013 gains is $6.0 million related to contracts, which were entered into in July 2013, for the sale of energy from PVNGS Unit 3 for 2014 and 2015 at market price plus a premium.

For the three and nine months ended September 30, 2013, operating expenses increased $3.6 million and decreased $0.1 million compared to 2012. In the three months ended September 30, 2013, higher maintenance expenses at Four Corners and PNM's natural gas-fired plants increased operating expense $0.5 million and $0.2 million. In the nine months ended September 30, 2013, lower outage costs at PVNGS, SJGS, and PNM's natural gas-fired plants of $1.2 million, $0.3 million, and $1.1 million were partially offset by increased outage costs at Four Corners of $1.5 million. Lower labor, health care, pension, and retiree medical expenses reduced operating expenses by $0.5 million and $2.2 million for the three and nine months ended September 30, 2013 compared to 2012. Higher capitalized administrative and general expenses of $1.0 million and $2.0 million decreased operating expenses for the three and nine months ended September 30, 2013. Lower allocation of corporate expenses of $0.9 million due to business restructuring in 2012 reduced operating expenses for the nine months ended September 30, 2013.

Improved collection experience in 2013 decreased bad debt expense by $0.4 million for the nine months ended September 30, 2013 further decreasing operating expenses. These decreases were partially offset in the three and nine months ended September 30, 2013 by higher incentive compensation expense of $0.8 million and $2.5 million and higher property, regulatory, and payroll taxes of $0.7 million and $1.8 million. In addition, during the three months ended September 30, 2013, PNM concluded that certain costs that had been deferred as regulatory assets were no longer probable of recovery and recorded a regulatory disallowance of $1.7 million increasing operating expenses compared to 2012.

For the three and nine months ended September 30, 2013, depreciation expense increased by $1.5 million and $5.8 million compared to 2012, primarily due to amortization of previously deferred costs related to the 22 MW of PNM-owned solar PV facilities, which are being recovered through a rate rider beginning in August 2012, as well as higher depreciation due to an increase in utility plant in service.

79-------------------------------------------------------------------------------- Table of Contents Other income (deductions) decreased $3.9 million and $4.3 million for the three and nine months September 30, 2013 compared to 2012. Lower income from investments held by the NDT decreased other income by $3.7 million and $1.9 million in the three and nine months ended September 30, 2013 compared to 2012.

Lower interest income on PVNGS lessor notes of $0.6 million and $1.7 million reduced other income due to lower outstanding balances. During the three and nine months ended September 30, 2013, PNM made commitments of $0.8 million and $1.0 million to support employment and other economic activities in the "four corners" area, including the Navajo Nation, which further decreased earnings.

These decreases were partially offset by higher equity AFUDC of $0.6 million and $0.2 million for the three and nine months ended September 30, 2013 compared to 2012.

For the three and nine months ended September 30, 2013, interest expense increased $0.9 million and $3.3 million compared to 2012, primarily due to the deferral in 2012 of interest costs associated with the 22 MW of PNM-owned solar PV facilities, which are now being recovered through a rate rider.

TNMP The following table summarizes the operating results for TNMP: Three Months Ended September 30, Nine Months Ended September 30, 2013 2012 Change 2013 2012 Change (In millions) Electric operating revenues $ 73.7 $ 68.7 $ 5.0 $ 201.4 $ 187.4 $ 14.0 Cost of energy 14.5 11.6 2.9 41.3 34.3 7.0 Margin 59.2 57.1 2.1 160.1 153.1 7.0 Operating expenses 23.1 22.3 0.8 67.3 64.2 3.1 Depreciation and amortization 13.9 13.8 0.1 37.8 37.2 0.6 Operating income 22.3 21.0 1.3 55.0 51.7 3.3 Other income (deductions) 0.7 0.4 0.3 1.4 1.2 0.2 Net interest charges (6.7 ) (7.0 ) 0.3 (20.7 ) (21.2 ) 0.5 Segment earnings before income taxes 16.3 14.3 2.0 35.7 31.7 4.0 Income (taxes) (6.2 ) (5.2 ) (1.0 ) (13.6 ) (11.6 ) (2.0 ) Segment earnings $ 10.1 $ 9.1 $ 1.0 $ 22.2 $ 20.1 $ 2.1 The following table summarizes the significant changes to total electric operating revenues, cost of energy, and margin: 2012/2013 Change Three Months Ended September 30, Nine Months Ended September 30, Electric Electric Operating Cost of Operating Cost of Revenues Energy Margin Revenues Energy Margin (In millions) Rate increases $ 1.4 $ - $ 1.4 $ 3.4 $ - $ 3.4 Customer usage/load 0.5 - 0.5 1.2 - 1.2 Customer growth 0.4 - 0.4 1.2 - 1.2 Demand based customers 1.0 - 1.0 2.6 - 2.6 Weather (0.1 ) - (0.1 ) (1.4 ) - (1.4 ) Recovery of third-party transmission costs 2.9 2.9 - 7.4 7.0 0.4 AMS surcharge (0.1 ) - (0.1 ) 2.0 - 2.0 CTC surcharge (1.0 ) - (1.0 ) (2.8 ) - (2.8 ) Other - - - 0.4 - 0.4 Net change $ 5.0 $ 2.9 $ 2.1 $ 14.0 $ 7.0 $ 7.0 80-------------------------------------------------------------------------------- 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 September 30, Nine Months Ended September 30, 2013 2012 Change 2013 2012 Change (In millions, except consumers) Residential $ 36.4 $ 33.2 $ 3.2 $ 84.1 $ 79.9 $ 4.2 Commercial 24.0 22.7 1.3 69.8 65.1 4.7 Industrial 3.2 3.2 - 9.6 10.1 (0.5 ) Other 10.1 9.6 0.5 37.9 32.3 5.6 $ 73.7 $ 68.7 $ 5.0 $ 201.4 $ 187.4 $ 14.0 Average consumers (thousands) (1) 235.3 233.6 1.7 234.7 232.7 2.0 (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 September 30, Nine Months Ended September 30, 2013 2012 Change 2013 2012 Change (Gigawatt hours) Residential 963.6 930.4 33.2 2,176.2 2,173.4 2.8 Commercial 714.7 692.5 22.2 1,854.2 1,796.7 57.5 Industrial 686.1 695.4 (9.3 ) 1,920.3 2,025.6 (105.3 ) Other 27.6 26.5 1.1 77.3 78.0 (0.7 ) 2,392.0 2,344.8 47.2 6,028.0 6,073.7 (45.7 ) For the three and nine months ended September 30, 2013, revenues and margin increased by $1.4 million and $3.4 million compared to 2012 due to transmission cost of service rate increases in September 2012, March 2013, and September 2013. See Note 10. TNMP experienced positive year to date average customer growth of 0.9%. Weather had only minor impacts on results for the third quarter of 2013, but milder weather in the second quarter of 2013 compared to 2012 resulted in decreased revenues and margin of $1.4 million for the nine months ended September 30, 2013. For the three and nine months ended September 30, 2013, TNMP's weather normalized and leap-year adjusted retail KWh sales are up 3.3% and 1.9%. However, total retail KWh sales, excluding normalization, increased 2.0% and decreased 0.8% for the three and nine months ended September 30, 2013 compared to 2012.

Demand based revenues and margin for the three and nine months ended September 30, 2013 increased by $1.0 million and $2.6 million compared to 2012.

This primarily results from TNMP, under a PUCT approved tariff, lowering the power factor billing threshold from 700 KW to 300 KW.

The AMS surcharge decreased revenues and margin by $0.1 million for the three months and increased revenues and margins by $2.0 million for the nine months 2013 compared to 2012, which amounts are offset by changes in operating expenses and depreciation. A decrease in the CTC surcharge rate decreased revenues and margin by $1.0 million and $2.8 million for the three and nine months ended September 30, 2013 compared to 2012, which amounts are offset by decreases in depreciation and amortization expense.

Customer related expense and administrative and general expense associated with the installation of additional meters under the AMS deployment decreased operating expenses $0.7 million for the three months and increased operating expense $0.5 million for the nine months ended September 30, 2013 compared to 2012. Higher property and sales tax expense of $0.6 million and $1.2 million increased operating expenses for the three and nine months ended September 30, 2013. Higher energy efficiency program expense of $0.4 million and $1.1 million increased operating expenses for the three and nine months ended September 30, 2013 81-------------------------------------------------------------------------------- Table of Contents compared to 2012, which amounts are offset by increases in operating revenue under TNMP's energy efficiency cost recovery factor. Higher employee benefits expense of $0.3 million and $0.6 million and higher incentive compensation expense of $0.2 million and $0.9 million also increased operating expenses for the three and nine months ended September 30, 2013 compared to 2012.

Depreciation expense associated with the AMS deployment, which is recovered through the AMS surcharge, increased $0.4 million and $1.2 million for the three and nine months ended September 30, 2013 compared to 2012. In addition, an increase in utility plant in service increased depreciation by $0.3 million and $1.0 million for the three and nine months ended September 30, 2013 compared to 2012. These increases are offset by lower amortization of the CTC regulatory asset of $0.8 million and $2.0 million for the three and nine months ended September 30, 2013 compared to 2012.

In April 2013, TNMP exchanged $93.2 million of its 9.5% First Mortgage Bonds for an equal amount of a new series of 6.95% First Mortgage Bonds. This resulted in decreases in interest expense of $0.6 million and $1.1 million during the three and nine months ended September 30, 2013, which were partially offset by increases in interest expense on short-term debt. See Note 8.

Corporate and Other The table below summarizes the operating results for Corporate and Other: Three Months Ended September 30, Nine Months Ended September 30, 2013 2012 Change 2013 2012 Change (In millions) Total revenues $ - $ - $ - $ - $ - $ - Cost of energy - - - - - - Margin - - - - - - Operating expenses (3.3 ) (4.8 ) 1.5 (10.2 ) (12.7 ) 2.5 Depreciation and amortization 3.0 4.6 (1.6 ) 9.6 13.1 (3.5 ) Operating income (loss) 0.3 0.2 0.1 0.6 (0.4 ) 1.0 Other income (deductions) (3.5 ) (0.9 ) (2.6 ) (7.5 ) (4.9 ) (2.6 ) Net interest charges (3.6 ) (4.2 ) 0.6 (11.6 ) (12.4 ) 0.8 Segment earnings (loss) before income taxes (6.8 ) (4.9 ) (1.9 ) (18.6 ) (17.8 ) (0.8 ) Income (taxes) benefit 3.6 2.9 0.7 4.1 8.9 (4.8 ) Segment earnings (loss) $ (3.2 ) $ (2.0 ) $ (1.2 ) $ (14.4 ) $ (8.9 ) $ (5.5 ) 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.

For the three and nine months ended September 30, 2013, depreciation and amortization decreased compared to 2012, primarily due to expenses of $1.5 million and $3.5 million of amortization of leasehold improvements for part of the Company's headquarters building that was abandoned and fully amortized during 2012. PNM and TNMP deferred their allocations of the accelerated amortization of leasehold improvements as regulatory assets to be recovered through rates. The related increases in operating expenses were offset by decreases in expenses for legal and consulting incurred in 2012 related to the Company's union negotiations and the restructuring of outsourcing arrangements for information technology, both of which did not recur in 2013, as well as the allocation of additional costs to PNM and TNMP in 2013, which were included in Corporate and Other in 2012.

The change in other income (deductions) during the three months and nine months ended September 30, 2013 is primarily due to losses related to premiums of $1.8 million and $3.0 million paid in 2013 for the repurchase of $14.7 million and $23.0 million principal amounts of PNMR's 9.25% Senior Unsecured Notes, Series A, due 2015. These repurchases were also primarily responsible for the decrease in net interest charges for the three and nine months ended September 30, 2013.

In addition, other income (deductions) for the three and nine months ended September 30, 2012 included a pretax gain of $1.0 million resulting from the sale of First Choice recorded in September 2012. The gain on the sale of First Choice is partially offset by lower performance on other investments during the first six months of 2012 compared to 2013.

82-------------------------------------------------------------------------------- Table of Contents During the first six months of 2013, income (taxes) benefit for Corporate and Other included the impairment of New Mexico wind energy production tax credits of $3.9 million, after federal income tax benefit, and an expense of $1.2 million due to reductions in Corporate and Other's deferred tax assets resulting from newly-enacted legislation reducing future New Mexico corporate income tax rates. No such impairments or changes occurred in the three months ended September 30, 2013 or the nine months ended September 30, 2012. See Note 13.

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