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PNM RESOURCES INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[October 31, 2014]

PNM RESOURCES INC - 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 751,000 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. PNM anticipates filing a general rate case with the NMPRC by the end of 2014. 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 requests for additional investments in transmission assets on March 13, 2014 and September 8, 2014. These approvals increase revenues by $7.1 million annually. 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, the contract to provide power to Gallup, PNM's second largest customer for wholesale generation services ended 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.

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

PNM's 134 MW interest in PVNGS Unit 3 is currently excluded from NMPRC jurisdictional rates. The power generated from that interest is currently sold into the wholesale market and any earnings or losses are attributable to shareholders. 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. 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. On April 30, 2014, S&P changed the outlook for PNMR, PNM, and TNMP to positive from stable. Currently, all of the credit ratings issued by both Moody's and S&P on the Company's debt are investment grade.

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% to 13%.

PNMR targets a dividend payout ratio of 50% to 60% 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% in February 2012, 14% in February 2013, and 12% 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 aware of the important 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 reliable electric service.

In September 2011, TNMP began its deployment of smart meters in homes and businesses across its Texas service area. Through September 30, 2014, TNMP had completed installation of more than 170,000 smart meters, which is approximately 74% of the anticipated total. TNMP's deployment is expected to be completed in 2016.

73-------------------------------------------------------------------------------- Table of Contents 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. TNMP is currently installing a new outage management system that will leverage capabilities of the smart meters to enhance TNMP's responsiveness 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. In June 2014, the NMPRC approved construction of the La Luz plant.

The facility is expected to go into service in late 2015. On July 17, 2014, PNM completed the purchase of Rio Bravo, formerly known as Delta, a 132 MW gas-fired peaking facility, which has served PNM jurisdictional needs under a 20-year PPA since 2000.

NMPRC rules require that investor owned utilities file an IRP every three years.

The IRP is required to cover a 20-year planning period and contain an action plan covering the first four years of that period. PNM filed its 2014 IRP on July 1, 2014. The four-year action plan was consistent with the replacement resources identified in PNM's application to retire SJGS Units 2 and 3 discussed below. PNM indicated that it planned to meet its anticipated long-term load growth with a combination of additional renewable energy resources, energy efficiency, and natural gas-fired facilities.

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 that also demonstrate progress in addressing proposed new federal regulations for CO2 emissions from existing power plants • 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 19% 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. As discussed below, PNM has requested approval to shut down SJGS Units 2 and 3, which would reduce water consumption at that plant by about 50%. 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 expects to continue to do so in the future.

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 capacity 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. PNM filed its 2015 renewable energy procurement plan on June 2, 2014. The plan meets RPS and diversity requirements within the RCT in 2015 and 2016. PNM's proposed new procurements include the construction of 40 MW of PNM-owned solar PV facilities in 2015, which are contemplated in PNM's application to retire SJGS Units 2 and 3 discussed below. PNM expects a decision late in 2014.

In addition to PNM's utility-owned PV solar facilities, PNM 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 has a PPA for the output from a 204 MW wind facility and purchases power from a customer-owned distributed solar generation program that had an installed capacity of 30.5 MW at the end of 2013. These renewable resources are key means 74-------------------------------------------------------------------------------- Table of Contents 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. 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. 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 have required 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 RSIP from the State of New Mexico. The RSIP has been approved by the EIB and EPA.

In December 2013, PNM made a filing with the NMPRC requesting certain approvals necessary to effectuate the RSIP. On October 1, 2014, PNM filed a stipulation with the NMPRC that, if approved, would settle this case. The stipulation was agreed to by the staff of the NMPRC, the NMAG, NMIEC, and certain other intervenors. The stipulation was opposed by New Energy Economy and certain other intervenors.

Under the terms of the stipulation, PNM would: • Retire SJGS Units 2 and 3 at December 31, 2017 and recover over 20 years 50% of their undepreciated book value at that date, after transferring $26 million to SJGS Unit 4, and earn a regulated return on those costs • Acquire an additional 132 MW of SJGS Unit 4 • Include PNM's ownership of PVNGS Unit 3 as a resource to serve New Mexico retail customers effective January 1, 2018 at a value of $221.1 million ($1,650 per KW) • Recover up to $90.6 million of costs for the installation of SNCR equipment and the additional equipment to comply with NAAQS requirements on SJGS Units 1 and 4 • Not recover approximately $20 million of increased operations and maintenance expenses and other costs incurred in connection with CAA compliance There would be no initial cost for PNM to acquire the additional 132 MW of SJGS Unit 4 although PNM's share of capital improvements, including the costs of installing SNCRs, and operating expenses would increase to reflect the increased ownership.

The public hearing in the NMPRC case is scheduled to begin on January 5, 2015.

PNM expects a decision from the NMPRC in the first quarter of 2015. PNM is unable to predict if the NMPRC will approve the stipulation. If the stipulation is approved as filed, PNM anticipates it would incur a regulatory disallowance that would include the write-off of 50% of the undepreciated investment in SJGS Units 2 and 3, the write-up of the investment in PVNGS Unit 3 to the amount allowed for recovery, and other impacts of the stipulation. As further described in Note 11, PNM currently estimates the net pre-tax regulatory disallowance would be between $60 million and $70 million.

The RSIP would achieve similar visibility improvements as the installation of SCRs on all four units at SJGS at a lower cost to PNM customers. It has the added advantage of reducing other emissions beyond NOx, including SO2, particulate matter, CO2, and mercury, as well as reducing water usage.

The December 20, 2013 filing also identified 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. The additional solar capacity is included in PNM's 2015 renewable procurement strategy. A proposed stipulated settlement, which is pending approval before the NMPRC, would provide that the additional solar capacity be recovered in base rates rather than through the renewable energy rider. Specific approval for the additional gas facility and the treatment of associated costs will be addressed in future filings.

75-------------------------------------------------------------------------------- Table of Contents 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 non-binding resolution, approved by the SJGS Coordination Committee on June 26, 2014, identifies the participants who would be exiting active participation in SJGS effective December 31, 2017, and participants, including PNM, who would retain an interest in the ongoing operation of one or more units of SJGS. The non-binding resolution provides the essential terms of restructured ownership of SJGS between the exiting participants and the remaining participants and addresses other related matters. Also, on June 26, 2014, a non-binding term sheet was approved by all of the remaining participants that provides the essential terms of restructured ownership of SJGS among the remaining participants. The non-binding resolution and term sheet recognize that prior to executing a binding restructuring agreement, the remaining participants will need to have greater certainty in regard to the economic cost and availability of fuel for SJGS for the period after December 31, 2017. See Coal Supply in Note 11, for additional information. In September 2014, the SJGS participants executed a binding Fuel and Capital Funding Agreement to implement certain provisions of the above resolution, including payment by the remaining participants of capital costs for the Unit 4 SNCR project starting July 1, 2014, and acquisition by PNM of the exiting participants' coal inventory as of January 1, 2015. The Fuel and Capital Funding Agreement is subject to acceptance by FERC. Other definitive agreements among the participants are being negotiated.

PNM cannot predict if final agreements will be executed.

A number of regulatory approvals are required to implement the proposed ownership restructuring of SJGS. Final binding agreements relating to the ownership restructuring are subject to the approval of each participant's board or other decision-making body and are subject to required regulatory approvals.

PNM is unable to predict the outcome of the negotiations, whether definitive agreements will be reached among the owners, or whether required approvals will be obtained.

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. PNM is authorized and obligated under the SJPPA to take reasonable and prudent actions necessary for the successful and proper operation of SJGS pending resolution by the participants. In March 2014 and again in June 2014, PNM requested that the owners of Unit 4 approve certain expenditures critical to being able to comply with the time frame in the RSIP with respect to Unit 4 project. The Unit 4 owners did not approve either of the requests. Thereupon, PNM issued "Prudent Utility Practice" notices that, under the SJPPA, PNM was continuing certain critical activities to keep the Unit 4 project on schedule.

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, including recently proposed rules on GHG under Section 111(d) of the CAA.

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%, SO2 by 60%, particulate matter by 69%, and mercury by 99%.

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 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, 76-------------------------------------------------------------------------------- Table of Contents 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.

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 gas-fired La Luz 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 avoided.

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.

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. In 2014, the PNM Resources Foundation launched a new grant program designed to help nonprofit organizations build more vibrant communities. Power Up Grants in the aggregate amount of $500,000 were awarded to 24 nonprofits in New Mexico and Texas for projects ranging from creating community gathering spaces to revitalizing neighborhood parks to building a youth sports field.

In Texas, community outreach is centered first on local relationships, specifically with community leaders, nonprofit organizations and key customers in areas served by TNMP. Community liaisons serve in each of TNMP's three geographic business areas, reaching out and ensuring productive lines of communication between TNMP and its customer base.

TNMP maintains long-standing relationships with several key nonprofit organizations, including agencies that support children and families in crisis, food banks, environmental organizations, and educational nonprofits, through employee volunteerism and corporate support. TNMP also actively participates in safety fairs and demonstrations in addition to supporting local chambers of commerce in efforts to build their local economies.

TNMP's energy efficiency program provides unique offers to multiple customer groups, including residential, commercial, government, education, and nonprofit customers. These programs not only enable peak load and consumption reductions, particularly important when extreme weather affects Texas' electric system, but they also demonstrate TNMP's commitment to more than just delivering electricity by partnering with customers to optimize their energy usage.

Economic Factors In the three and nine months ended September 30, 2014, PNM experienced decreases in weather normalized retail load of 0.2% and 1.9% compared to 2013. New Mexico's economy still lags the nation in post-recession recovery. In the three and 77-------------------------------------------------------------------------------- Table of Contents nine months ended September 30, 2014, TNMP's weather normalized retail load increased 1.8% and 3.2% compared to 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 September 2014.

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 September 30, Nine Months Ended September 30, 2014 2013 Change 2014 2013 Change (In millions, except per share amounts) Net earnings attributable to PNMR $ 55.7 $ 54.6 $ 1.1 $ 97.3 $ 92.9 $ 4.4 Average diluted common and common equivalent shares 80.2 80.3 (0.1 ) 80.3 80.5 (0.2 ) Net earnings attributable to PNMR per diluted share $ 0.69 $ 0.68 $ 0.01 $ 1.21 $ 1.15 $ 0.06 The components of the change in earnings attributable to PNMR are: Three Months Ended Nine Months Ended September 30, 2014 September 30, 2014 (In millions) PNM $ (2.5 ) $ (12.1 ) TNMP 2.3 6.5 Corporate and Other 1.3 10.0 Net change $ 1.1 $ 4.4 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 toConsolidated Financial Statements in the 2013 Annual Reports on Form 10-K and Note 12 • Milder weather in 2014 than 2013 • 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 and a tax rate change in New Mexico 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 $814.0 million at October 24, 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 $2,608.5 million for 2014-2018, including amounts expended through September 30, 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 78-------------------------------------------------------------------------------- Table of Contents 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 September 30, Nine Months Ended September 30, 2014 2013 Change 2014 2013 Change (In millions) Electric operating revenues $ 335.0 $ 326.0 $ 9.0 $ 873.4 $ 863.6 $ 9.8 Cost of energy 115.1 100.2 14.9 304.4 283.7 20.7 Margin 219.9 225.8 (5.9 ) 569.1 579.9 (10.8 ) Operating expenses 101.8 104.7 (2.9 ) 315.7 311.4 4.3 Depreciation and amortization 27.5 25.9 1.6 81.6 77.8 3.8 Operating income 90.6 95.2 (4.6 ) 171.7 190.8 (19.1 ) Other income (deductions) 3.7 4.5 (0.8 ) 15.0 14.8 0.2 Net interest charges (20.1 ) (20.1 ) - (59.9 ) (60.0 ) 0.1 Segment earnings before income taxes 74.2 79.6 (5.4 ) 126.8 145.6 (18.8 ) Income (taxes) (25.1 ) (27.7 ) 2.6 (42.3 ) (49.2 ) 6.9 Valencia non-controlling interest (3.7 ) (4.1 ) 0.4 (11.1 ) (10.9 ) (0.2 ) Preferred stock dividend requirements (0.1 ) (0.1 ) - (0.4 ) (0.4 ) - Segment earnings $ 45.2 $ 47.7 $ (2.5 ) $ 73.0 $ 85.1 $ (12.1 ) 79-------------------------------------------------------------------------------- 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 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 $ (0.3 ) $ - $ (0.3 ) $ (9.3 ) $ - $ (9.3 ) Weather (3.0 ) - (3.0 ) (8.7 ) - (8.7 ) FPPAC 13.6 13.6 - 12.5 12.5 - Economy service 1.5 1.5 - 6.0 5.8 0.2 Rio Bravo purchase - (1.3 ) 1.3 - (1.3 ) 1.3 Gallup wholesale contract (1.5 ) (0.3 ) (1.2 ) (0.6 ) (0.3 ) (0.3 ) Renewable energy rider 1.8 0.6 1.2 7.5 2.6 4.9 Energy efficiency rider 1.4 - 1.4 2.9 - 2.9 Unregulated margin 1.1 (0.2 ) 1.3 3.4 (2.3 ) 5.7 Net unrealized economic hedges (4.3 ) 0.1 (4.4 ) (5.2 ) 0.6 (5.8 ) Other (1.3 ) 0.9 (2.2 ) 1.3 3.1 (1.7 ) Net change $ 9.0 $ 14.9 $ (5.9 ) $ 9.8 $ 20.7 $ (10.8 ) 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, 2014 2013 Change 2014 2013 Change (In millions, except customers) Residential $ 127.2 $ 122.9 $ 4.3 $ 317.6 $ 319.8 $ (2.2 ) Commercial 127.7 119.1 8.6 326.6 319.5 7.1 Industrial 21.3 21.2 0.1 54.4 57.7 (3.3 ) Public authority 8.0 8.2 (0.2 ) 19.2 20.0 (0.8 ) Economy service 9.3 7.8 1.5 29.9 23.9 6.0 Other retail (1.2 ) 0.4 (1.6 ) 4.0 6.2 (2.2 ) Transmission 9.5 10.5 (1.0 ) 28.3 28.5 (0.2 ) Firm-requirements wholesale 8.1 10.1 (2.0 ) 30.0 31.0 (1.0 ) Other sales for resale 21.9 18.2 3.7 63.5 52.0 11.5 Mark-to-market activity 3.2 7.6 (4.4 ) (0.1 ) 5.0 (5.1 ) $ 335.0 $ 326.0 $ 9.0 $ 873.4 $ 863.6 $ 9.8 Average retail customers (thousands) 511.4 508.3 3.1 510.6 507.8 2.8 80-------------------------------------------------------------------------------- Table of Contents The following table shows GWh sales by customer class: Three Months Ended September 30, Nine Months Ended September 30, 2014 2013 Change 2014 2013 Change (Gigawatt hours) Residential 936.1 955.8 (19.7 ) 2,442.2 2,543.0 (100.8 ) Commercial(1) 1,069.5 1,067.8 1.7 2,942.7 3,001.8 (59.1 ) Industrial 254.6 272.2 (17.6 ) 737.2 798.8 (61.6 ) Public authority 74.3 78.4 (4.1 ) 189.0 205.0 (16.0 ) Economy service 188.8 174.9 13.9 572.4 528.6 43.8 Firm-requirements wholesale 105.7 157.6 (51.9 ) 415.9 484.8 (68.9 ) Other sales for resale 602.0 564.2 37.8 1,725.0 1,592.4 132.6 3,231.0 3,270.9 (39.9 ) 9,024.4 9,154.4 (130.0 ) (1) 2013 numbers reflect an addition of 18.0 GWh, previously included in the three months ended September 30, 2013.

For the three and nine months ended September 30, 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. Although New Mexico's economy was not hit as hard by the recession as some other states, it has been reported that Albuquerque is recovering the slowest among the nation's 100 largest metro areas. For the quarter, employment growth was flat for both New Mexico and Albuquerque and, after an increase in the New Mexico unemployment rate to 7.0% in the first quarter of 2014, the unemployment rate has decreased to 6.6%. In spite of the economic pressures, PNM experienced year to date average retail customer growth of 0.6%. PNM's weather normalized retail KWh sales were 0.2% and 1.9% lower for the three and nine months ended September 30, 2014 compared to 2013, which decreased revenues and margin $0.3 million and $9.3 million for the three and nine months ended September 2014. Weather negatively impacted revenues and margin by $3.0 million and $8.7 million during the three and nine months ended September 30, 2014 compared to 2013. Cooling degree days were 4.5% and 7.6% lower for the three and nine months ended September 30, 2014 compared to the same period in 2013. In addition, heating degree days were 13.8% lower for the three months ended March 31, 2014 than in 2013. Cooling degree days only have a minor impact on the first quarter of any year, whereas heating degree days only have a minor impact on the second and third quarter.

PNM implemented new rates for Gallup, its second largest wholesale customer, in July 2013 under a one-year agreement, which improved revenues and margins $0.9 million for the six months ended June 30, 2014 compared to 2013. 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 ended on June 29, 2014.

PNM's revenues for power sold under the Gallup contract decreased $3.4 million for the three months ended September 30, 2014 compared to 2013. PNM's revenues for power sold under the Gallup contract totaled $11.7 million during 2013.

During the three months ended September 30, 2014, decreases in revenues for the Gallup power contract were partially offset with off-system sales of $1.9 million from the power that would have otherwise been used to serve Gallup and lower fuel expense of $0.3 million.

PNM closed on the acquisition of Rio Bravo, formerly known as Delta, on July 17, 2014. Prior to acquiring Rio Bravo, PNM had a 20 year PPA covering all of the output of the facility, which PNM accounted for as an operating lease and recorded fixed and variable costs in cost of energy. As a result of the Rio Bravo acquisition, cost of energy decreased and margin increased $1.3 million for the three months ended September 30, 2014 compared to 2013. The increase in margin is partially offset by increases in operating and depreciation expenses.

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 and nine months ended September 30, 2014, this rider increased revenues by $1.8 million and $7.5 million. These revenues include a return on investment of $1.2 million and $3.7 million for the three and nine months ended September 30, 2014 compared to $0.7 million and $2.3 million for the three and nine months ended September 30, 2013.

Cost of energy, reflecting purchase of RECs and purchase of geothermal power, increased $0.6 million and $2.6 million for the three and nine months ended September 30, 2014. Revenue and margin from PNM's energy efficiency rider increased $1.4 million and $2.9 million for the three months 81-------------------------------------------------------------------------------- Table of Contents and nine months ended September 30, 2014. Revenues from these riders also recover incremental operating, depreciation, and interest expenses applicable to these programs.

For the three and nine months ended September 30, 2014, unregulated revenue increased $1.1 million and $3.4 million and unregulated margins increased $1.3 million and $5.7 million. The increased revenues are due to higher market prices for power from PVNGS Unit 3. Lower fuel costs due to the discontinuance of DOE spent nuclear fuel charges for PVNGS Unit 3 decreased cost of energy $0.2 million for the three months ended September 30, 2014 compared to 2013. In addition, gas imbalance settlements lowered cost of energy $2.1 million for the nine months ended September 30, 2014 compared to 2013.

Changes in unrealized mark-to-market gains and losses resulted from economic hedges for sales and fuel costs not covered under the FPPAC, primarily associated with PVNGS Unit 3. Unrealized gains of $3.3 million for the three months ended September 30, 2014 compared to unrealized gains of $7.7 million for the three months ended September 30, 2013, decreased margin by $4.4 million.

Unrealized gains of $0.1 million for the nine months ended September 30, 2014 compared to unrealized gains of $5.9 million for the nine months ended September 30, 2013, decreased margin by $5.8 million.

As discussed in Note 12, the NMPRC approved the continuation of PNM's FPPAC and authorized PNM to recover the remaining under-collected balance in its FPPAC balancing account over 18 months effective July 1, 2014. As a result PNM's revenues increased for the three and nine months ended September 30, 2014 compared to 2013. These revenues were offset in cost of energy with no impact on margin.

PNM provides economy energy services to a major customer. Although KWh sales to this customer increased for the three and nine months ended September 30, 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.

For the nine months ended September 30, 2014, other changes in revenue, cost of energy, and margin includes a $1.7 million increase in cost of energy and decrease in margin related to the resolution of issues covered by the arbitration with SJCC discussed in Note 11. As part of the approval of the continuation of PNM's FPPAC, PNM retains 10% of the revenue from off-system sales that would otherwise be passed through the FPPAC, effective as of July 1, 2013. PNM recorded revenue of $0.2 million and $1.4 million for the three and nine months ended September 30, 2014. The nine months ended September 30, 2014, includes amounts from July 1, 2013 through the NMPRC approval in April 2014.

Other also includes the impacts of off-system purchases and sales that are not passed through PNM's FPPAC.

For the three months ended September 30, 2014, operating expenses decreased $2.9 million compared to 2013. Higher maintenance expenses for outages at Four Corners, PVNGS, and natural gas-fired plants of $0.8 million, $0.3 million and $0.6 million were partially offset by lower outage expenses of $0.3 million at SJGS. Lower labor and employee benefit expenses of $1.4 million and $0.5 million decreased operating expenses for the three months ended September 30, 2014 compared to 2013. Lower property and casualty claims of $0.4 million and lower bad debt expense of $0.3 million decreased operating expenses for the three months ended September 30, 2014 compared to 2013. Higher capitalized administrative and general expenses due to higher capital expenditures decreased operating expenses by $0.9 million. Higher energy efficiency expenses of $1.2 million for the three months ended September 30, 2014, which are recovered through rider revenue as described above, increased operating expenses. 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 2014.

For the nine months ended September 30, 2014, operating expenses increased $4.3 million compared to 2013. Higher maintenance expenses for outages at Four Corners, PVNGS and natural gas-fired plants of $0.7 million, $0.8 million and $2.0 million were partially offset by lower maintenance expenses of $0.8 million at SJGS. Higher energy efficiency and renewable rider expenses of $2.4 million and $0.8 million increased operating expenses for the nine months ended September 30, 2014 compared to 2013. Higher property taxes of $2.0 million due to increased plant in service and higher assessed property values in Arizona and higher bad debt expense of $0.4 million increased operating expenses for the nine months ended September 30, 2014 compared to 2013. Process improvement initiatives increased operating expense $1.9 million for the nine months ended September 30, 2014 compared to 2013. These increases were partially offset by lower labor and employee benefit expenses of $1.6 million and $0.7 million decreasing operating expenses for the nine months ended September 30, 2014 compared to 2013. Lower property and casualty claims of $0.6 million decreased operating expenses for the nine months ended September 30, 2014 compared to 2013. Higher capitalized administrative and general expenses due to higher capital spend decreased operating expenses 82-------------------------------------------------------------------------------- Table of Contents $1.4 million for the nine months ended September 30, 2014 compared to 2013. The regulatory disallowance of $1.7 million in September 2013 further decreased operating expenses in 2014 compared to 2013.

Depreciation and amortization expense increased $1.6 million and $3.8 million for the three and nine months ended September 30, 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.

Other income (deductions) decreased $0.8 million for the three months ended September 30, 2014 and increased $0.2 million for the nine months ended September 30, 2014 compared to 2013. Lower interest income on PVNGS lessor notes of $0.4 million and $1.4 million due to lower outstanding balances decreased interest income for the three and nine months ended September 30, 2014 compared to 2013. Other income (deductions) also reflects the performance of the trusts for nuclear decommissioning and coal mine reclamation, including investment income, gains or losses on sales of investments, management expenses, and taxes paid by the trusts. Pre-tax gains on available-for-sale securities decreased $1.2 million for the three months ended September 30, 2014 and increased $1.3 million for nine months ended September 30, 2014 compared to 2013. In addition, gains of $0.7 million on the disposition of property in 2013 decreased other income (deductions) for the nine months ended September 30, 2014 compared to 2013. PNM recorded expenses of $0.8 million and $1.0 million during the three and nine months ended September 30, 2013 for its commitments to support employment and other economic activities in the "four corners" area, including the Navajo Nation, which did not recur in 2014.

As discussed in Note 13, in September 2014, the Company settled the IRS examination of income tax years 2003 and 2005 through 2008, including the settlement of certain issues for which the Company had previously reflected liabilities related to uncertain tax positions. As a result of the settlement, PNM recorded an additional income tax expense of $1.1 million in June 2014. An income tax benefit of $1.3 million reflected in the Corporate and Other segment offsets this amount.

TNMP The following table summarizes the operating results for TNMP: Three Months Ended September 30, Nine Months Ended September 30, 2014 2013 Change 2014 2013 Change (Inmillions) Electric operating revenues $ 79.0 $ 73.7 $ 5.3 $ 215.6 $ 201.4 $ 14.2 Cost of energy 17.4 14.5 2.9 50.2 41.3 8.9 Margin 61.6 59.2 2.4 165.4 160.1 5.3 Operating expenses 22.3 23.1 (0.8 ) 63.7 67.3 (3.6 ) Depreciation and amortization 13.4 13.9 (0.5 ) 37.3 37.8 (0.5 ) Operating income 25.9 22.3 3.6 64.4 55.0 9.4 Other income (deductions) 0.8 0.7 0.1 1.5 1.4 0.1 Net interest charges (6.9 ) (6.7 ) (0.2 ) (20.1 ) (20.7 ) 0.6 Segment earnings before income taxes 19.8 16.3 3.5 45.8 35.7 10.1 Income (taxes) (7.4 ) (6.2 ) (1.2 ) (17.1 ) (13.6 ) (3.5 ) Segment earnings $ 12.4 $ 10.1 $ 2.3 $ 28.7 $ 22.2 $ 6.5 The following table summarizes the significant changes to total electric operating revenues, cost of energy, and margin: 83-------------------------------------------------------------------------------- Table of Contents 2013/2014 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 $ 1.6 $ - $ 1.6 $ 4.5 $ - $ 4.5 Customer usage 0.5 - 0.5 1.1 - 1.1 Customer growth 0.5 - 0.5 1.2 - 1.2 Weather (1.3 ) - (1.3 ) (1.2 ) - (1.2 ) Recovery of third-party transmission costs 2.9 2.9 - 8.9 8.9 - AMS surcharge 1.4 - 1.4 2.7 - 2.7 CTC surcharge - - - 0.4 - 0.4 Hurricane Ike surcharge (1.7 ) - (1.7 ) (4.2 ) - (4.2 ) Energy efficiency incentive 1.5 - 1.5 1.5 - 1.5 Other (0.1 ) - (0.1 ) (0.7 ) - (0.7 ) Net change $ 5.3 $ 2.9 $ 2.4 $ 14.2 $ 8.9 $ 5.3 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, 2014 2013 Change 2014 2013 Change (In millions, except consumers) Residential $ 36.6 $ 36.4 $ 0.2 $ 89.5 $ 84.1 $ 5.4 Commercial 25.1 24.0 1.1 73.5 69.8 3.7 Industrial 3.9 3.2 0.7 11.1 9.6 1.5 Other 13.4 10.1 3.3 41.5 37.9 3.6 $ 79.0 $ 73.7 $ 5.3 $ 215.6 $ 201.4 $ 14.2 Average consumers (thousands) (1) 238.9 235.3 3.6 237.7 234.7 3.0 (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, 2014 2013 Change 2014 2013 Change (Gigawatt hours) Residential 938.8 963.6 (24.8 ) 2,227.9 2,176.2 51.7 Commercial 731.6 714.7 16.9 1,926.7 1,854.2 72.5 Industrial 715.1 686.1 29.0 2,032.2 1,920.3 111.9 Other 26.5 27.6 (1.1 ) 75.9 77.3 (1.4 ) 2,412.0 2,392.0 20.0 6,262.7 6,028.0 234.7 84-------------------------------------------------------------------------------- Table of Contents For the three and nine months ended September 30, 2014, revenues and margin increased by $1.6 million and $4.5 million compared to 2013 due to transmission rate increases in March 2013, September 2013, March 2014, and September 2014.

See Note 12. TNMP experienced positive year to date average customer growth of 1.3%, increasing revenues and margin by $0.5 million and $1.2 million for the three and nine months ended September 30, 2014 compared to 2013. Higher weather normalized usage per customer increased revenues and margin by $0.5 million and $1.1 million for the three and nine months ended September 30, 2014 compared to 2013. TNMP's weather normalized retail KWh sales increased 1.8% and 3.2% for the three and nine months ended September 30, 2014 compared to 2013. Milder weather decreased revenues and margins by $1.3 million and $1.2 million for the three and nine months ended September 30, 2014 compared to 2013. For the three and nine months ended September 30, 2014 compared to 2013, cooling degree days were 4.0% and 3.4% lower. Due to the climate in TNMP's service territories, variances in cooling degree days have a much larger impact than variances in heating degree days.

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 $2.9 million and $8.9 million for the three and nine months ended September 30, 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 by the same amounts.

The AMS surcharge increased revenues and margin by $1.4 million and $2.7 million for the three and nine months ended September 30, 2014 compared to 2013. The CTC surcharge increased revenues and margin by $0.4 million for the nine months ended September 30, 2014 compared to 2013, but was flat for the three months ended September 30. The Hurricane Ike surcharge decreased revenues and margin by $1.7 million and $4.2 million for the three and nine months ended September 30, 2014 compared to 2013. The Hurricane Ike surcharge was terminated in November of 2013 due to full recovery of costs associated with this item. Changes in revenues and margins from these surcharges are offset by changes in operating expenses and depreciation and amortization.

TNMP earned an energy efficiency incentive bonus for having achieved demand savings for the 2013 program year that exceeded its goal. This incentive was approved by the PUCT on September 11, 2014 and increased revenues and margin by $1.5 million for the three and nine months ended September 30, 2014. See Note 12.

Operating expenses decreased $0.8 million and $3.6 million for the three and nine months ended September 30, 2014 compared to 2013. Lower employee healthcare claims of $0.6 million and $1.7 million decreased operating expense for the three and nine months ended September 30, 2014 compared to 2013. Higher capitalization of administrative and general expenses related to higher levels of construction expenditures decreased operating expenses by $0.4 million and $1.4 million for the three and nine months ended September 30, 2014 compared to 2013. Property and casualty claims and vegetation management costs decreased $0.4 million and $0.3 million for the nine months ending September 30, 2014 compared to 2013, but were flat for the three months ended September 30. These decreases were partially offset by higher operating expenses associated with the AMS deployment, which are recovered through the AMS surcharge, of $0.3 million for the three and nine months ended September 30, 2014 compared to 2013.

Depreciation and amortization decreased $0.5 million for the three and nine months ended September 30, 2014 compared to 2013. Depreciation expense associated with the AMS deployment, which is recovered through the AMS surcharge, increased $0.6 million and $1.6 million for the three and nine months ended September 30, 2014 compared to 2013 due to increased AMS deployment.

Amortization expense associated with the CTC, which is recovered through the CTC surcharge, increased $0.1 million and $0.6 million for the three and nine months ended September 30, 2014 compared to 2013. In addition, an increase in utility plant in service increased depreciation by $0.4 million and $1.2 million for the three and nine months ended September 30, 2014 compared to 2013. These increases were offset by lower amortization of the Hurricane Ike costs of $1.6 million and $3.9 million for the three and nine months ended September 30, 2014 compared to 2013.

Interest charges increased $0.2 million for the three months ended September 30, 2014 compared to 2013. The issuance of $80.0 million of long-term debt under the TNMP 2013 Bond Purchase Agreement on June 27, 2014 increased interest charges $0.8 million, offset by lower interest charge of $0.5 million due to the maturity of $50.0 million of debt under the TNMP 2011 Term Loan Agreement. See Note 9. Interest charges decreased $0.6 million for the nine months ended September 30, 2014 compared to 2013, primarily due to 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 offset by the impact of the June 2014 refinancing.

85-------------------------------------------------------------------------------- Table of Contents Corporate and Other The table below summarizes the operating results for Corporate and Other: Three Months Ended September 30, Nine Months Ended September 30, 2014 2013 Change 2014 2013 Change (In millions) Total revenues $ - $ - $ - $ - $ - $ - Cost of energy - - - - - - Margin - - - - - - Operating expenses (3.7 ) (3.3 ) (0.4 ) (10.2 ) (10.2 ) - Depreciation and amortization 3.3 3.0 0.3 9.5 9.6 (0.1 ) Operating income 0.3 0.3 - 0.7 0.6 0.1 Other income (deductions) (0.6 ) (3.5 ) 2.9 (1.6 ) (7.5 ) 5.9 Net interest charges (3.2 ) (3.6 ) 0.4 (9.6 ) (11.6 ) 2.0 Segment earnings (loss) before income taxes (3.4 ) (6.8 ) 3.4 (10.4 ) (18.6 ) 8.2 Income (taxes) benefit 1.5 3.6 (2.1 ) 6.0 4.1 1.9 Segment earnings (loss) $ (1.9 ) $ (3.2 ) $ 1.3 $ (4.4 ) $ (14.4 ) $ 10.0 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. Changes in depreciation and amortization primarily relate to the timing of the retirement and installation of certain items of computer software and changes in the allocation of certain items to PNM and TNMP.

The changes in other income (deductions) during the three and nine months ended September 30, 2014 compared to 2013 is due to amortization related to corporate investments that became fully amortized in 2013 and premiums paid on the 2013 repurchase of $23.8 million principal amount of PNMR's 9.25% Senior Unsecured Notes, Series A, due 2015 that did not recur in 2014. Net interest charges decreased primarily due to lower interest charges resulting from the 2013 debt repurchase. The remaining decrease in net interest charges is the result of lower borrowings and lower interest rates on short-term borrowings.

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 benefits, and an expense of $1.2 million due to reductions in Corporate and Other's deferred tax assets resulting from legislation reducing New Mexico Corporate income tax rates. As discussed in Note 13, in June 2014, the Company settled the IRS examination of income tax years 2003 and 2005 through 2008, including the settlement of certain issues for which the Company had previously reflected liabilities related to uncertain tax positions. At that time, an income tax benefit of $1.3 million was reflected in Corporate and Other as a result of the settlement. An additional income tax expense of $1.1 million reflected in the PNM segment offsets this amount. The remaining change in income (taxes) benefit result from income tax benefits of $0.9 million related to amendments of state and federal income tax returns during the three months ended September 30, 2014, the expiration of certain tax credits in 2013, and lower tax benefits due to lower segment losses before income taxes.

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