UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2013~~March 31, 2014



Commission File	Name of Registrants, State of Incorporation,	I.R.S. Employer
Number	Address and Telephone Number	Identification No.
001-32462	PNM Resources, Inc.	85-0468296
	(A New Mexico Corporation)
	414 Silver Ave. SW
	Albuquerque, New Mexico 87102-3289
	(505) 241-2700

001-06986	Public Service Company of New Mexico	85-0019030
	(A New Mexico Corporation)
	414 Silver Ave. SW
	Albuquerque, New Mexico 87102-3289
	(505) 241-2700

002-97230	Texas-New Mexico Power Company	75-0204070
	(A Texas Corporation)
	577 N. Garden Ridge Blvd.
	Lewisville, Texas 75067
	(972) 420-4189

Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.



PNM Resources, Inc. ~~("PNMR"~~(“PNMR”)	YES	ü	NO
Public Service Company of New Mexico ~~("PNM"~~(“PNM”)	YES	ü	NO
Texas-New Mexico Power Company ~~("TNMP"~~(“TNMP”)	YES		NO	ü

(NOTE: As a voluntary filer, not subject to the filing requirements, TNMP filed all reports under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months.)

Indicate by check mark whether each registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).



PNMR	YES	ü	NO
PNM	YES	ü	NO
TNMP	YES	ü	NO

Table of Contents

Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated

filer

Accelerated

filer

Non-accelerated

filer

Smaller Reporting Company

PNMR

PNM

TNMP

Indicate by check mark whether any of the registrants is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES NO ü

As of ~~October~~April 25, ~~2013~~2014, 79,653,624 shares of common stock, no par value per share, of PNMR were outstanding.

The total number of shares of common stock of PNM outstanding as of ~~October~~April 25, ~~2013~~2014 was 39,117,799 all held by PNMR (and none held by non-affiliates).

The total number of shares of common stock of TNMP outstanding as of ~~October~~April 25, ~~2013~~2014 was 6,358 all held indirectly by PNMR (and none held by non-affiliates).

PNM AND TNMP MEET THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS (H) (1) (a) AND (b) OF FORM 10-Q AND ARE THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION (H) (2).

This combined Form 10-Q is separately filed by PNMR, PNM, and TNMP. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to the other registrants. When this Form 10-Q is incorporated by reference into any filing with the SEC made by PNMR, PNM, or TNMP, as a registrant, the portions of this Form 10-Q that relate to each other registrant are not incorporated by reference therein.

Table of Contents

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

INDEX



	Page No.
GLOSSARY	4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
PNM RESOURCES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings	7
Condensed Consolidated Statements of Comprehensive Income	8
Condensed Consolidated Statements of Cash Flows	9
Condensed Consolidated Balance Sheets	11
Condensed Consolidated Statement of Changes in Equity	13
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings	14
Condensed Consolidated Statements of Comprehensive Income	15
Condensed Consolidated Statements of Cash Flows	16
Condensed Consolidated Balance Sheets	18
Condensed Consolidated Statement of Changes in Equity	20
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings	21
Condensed Consolidated Statements of Comprehensive Income	22
Condensed Consolidated Statements of Cash Flows	23
Condensed Consolidated Balance Sheets	24
Condensed Consolidated Statement of Changes in Common Stockholder's Equity	26
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	27
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	7166
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	9489
ITEM 4. CONTROLS AND PROCEDURES	9792
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS	9893
ITEM 1A. RISK FACTORS	9893
ITEM 5. OTHER INFORMATION	93
ITEM 6. EXHIBITS	9994
SIGNATURE	~~100~~96

Table of Contents

GLOSSARY



Definitions:
Afton		Afton Generating Station
AFUDC		Allowance for Funds Used During Construction
ALJ		Administrative Law Judge
AMS		Advanced Meter System
AOCI		Accumulated Other Comprehensive Income
APS		Arizona Public Service Company, which is the operator and a co-owner of PVNGS and Four Corners
BACT		Best Available Control Technology
BART		Best Available Retrofit Technology
BHP		BHP Billiton, Ltd, the parent of SJCC
Board		Board of Directors of PNMR
BTU		British Thermal Unit
CAA		Clean Air Act
CCB		Coal Combustion Byproducts
CCN		Certificate of Convenience and Necessity
CO₂		Carbon Dioxide
CTC		Competition Transition Charge
D.C. Circuit		United States Court of Appeals for the District of Columbia Circuit
Delta		Delta-Person Generating Station
DOE		United States Department of Energy
DOI		United States Department of Interior
EGU		Electric Generating Unit
EIB		New Mexico Environmental Improvement Board
EIP		Eastern Interconnection Project
EIS		Environmental Impact Statement
EPA		United States Environmental Protection Agency
ERCOT		Electric Reliability Council of Texas
ESA		Endangered Species Act
Exchange Act		Securities Exchange Act of 1934
FASB		Financial Accounting Standards Board
FERC		Federal Energy Regulatory Commission
FIP		Federal Implementation Plan
~~First Choice~~		~~FCP Enterprises, Inc. and Subsidiaries~~
Four Corners		Four Corners Power Plant
FPPAC		Fuel and Purchased Power Adjustment Clause
GAAP		Generally Accepted Accounting Principles in the United States of America
Gallup		City of Gallup, New Mexico
GHG		Greenhouse Gas Emissions
GWh		Gigawatt hours
IBEW		International Brotherhood of Electrical Workers
IRP		Integrated Resource Plan
~~IRS~~		~~Internal Revenue Service~~
KW		Kilowatt
KWh		Kilowatt Hour
Lightning Dock Geothermal		Lightning Dock geothermal power facility, also known as the Dale Burgett Geothermal Plant
Lordsburg		Lordsburg Generating Station
Luna		Luna Energy Facility
MD&A		~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations
~~MMBTU~~		~~Million BTUs~~
~~Moody's~~		~~Moody's Investor Services, Inc.~~

Table of Contents



MMBTU		Million BTUs
Moody’s		Moody’s Investor Services, Inc.
MW		Megawatt
MWh		Megawatt Hour
NAAQS		National Ambient Air Quality Standards
Navajo Acts		Navajo Nation Air Pollution Prevention and Control Act, Navajo Nation Safe Drinking Water Act, and Navajo Nation Pesticide Act
NDT		Nuclear Decommissioning Trusts for PVNGS
NEC		Navopache Electric Cooperative, Inc.
NERC		North American Electric Reliability Council
New Mexico Wind		New Mexico Wind Energy Center
Ninth Circuit		United States Court of Appeals for the Ninth Circuit
~~NMAG~~		~~New Mexico Attorney General~~
NMED		New Mexico Environment Department
~~NMIEC~~		~~New Mexico Industrial Energy Consumers Inc.~~
NMPRC		New Mexico Public Regulation Commission
NOx		Nitrogen Oxides
~~NOI~~		~~Notice of Inquiry~~
NOPR		Notice of Proposed Rulemaking
NRC		United States Nuclear Regulatory Commission
NSPS		New Source Performance Standards
NSR		New Source Review
OCI		Other Comprehensive Income
OPEB		Other Post Employment Benefits
OSM		United States Office of Surface Mining Reclamation and Enforcement
PNM		Public Service Company of New Mexico and Subsidiaries
PNM 2014 Term Loan Agreement		PNM’s $175.0 Million Unsecured Term Loan Facility
PNM New Mexico Credit Facility		PNM’s $50.0 Million Unsecured Revolving Credit Facility
PNM Revolving Credit Facility		~~PNM's~~PNM’s $400.0 Million Unsecured Revolving Credit Facility
PNM Term Loan Agreement		~~PNM's~~PNM’s $75.0 Million Unsecured Term Loan Facility
PNMR		PNM Resources, Inc. and Subsidiaries
PNMR Development		PNMR Development and Management Corporation
PNMR Revolving Credit Facility		~~PNMR's~~PNMR’s $300.0 Million Unsecured Revolving Credit Facility
PNMR Term Loan Agreement		~~PNMR's~~PNMR’s $100.0 Million Unsecured Term Loan Facility
PPA		Power Purchase Agreement
PSD		Prevention of Significant Deterioration
PUCT		Public Utility Commission of Texas
PV		Photovoltaic
PVNGS		Palo Verde Nuclear Generating Station
RCRA		Resource Conservation and Recovery Act
RCT		Reasonable Cost Threshold
REA		New ~~Mexico's~~Mexico’s Renewable Energy Act of 2004
REC		Renewable Energy Certificates
Red Mesa Wind		Red Mesa Wind Energy Center
REP		Retail Electricity Provider
RMC		Risk Management Committee
RPS		Renewable Energy Portfolio Standard
~~SCE~~		~~Southern California Edison Company~~
SCR		Selective Catalytic Reduction
SEC		United States Securities and Exchange Commission

Table of Contents



SIP		State Implementation Plan
SJCC		San Juan Coal Company
SJGS		San Juan Generating Station
SJPPA		San Juan Project Participation Agreement
SNCR		Selective Non-Catalytic Reduction

~~Table of Contents~~



SO₂		Sulfur Dioxide
SPS		Southwestern Public Service Company
S&P		Standard and ~~Poor's~~Poor’s Ratings Services
TECA		Texas Electric Choice Act
Tenth Circuit		United States Court of Appeals for the Tenth Circuit
TNMP		Texas-New Mexico Power Company and Subsidiaries
TNMP Revolving Credit Facility		~~TNMP's~~TNMP’s $75.0 Million Revolving Credit Facility
~~TNP~~		~~TNP Enterprises, Inc. and Subsidiaries~~
~~Tri-State~~		~~Tri-State Generation and Transmission Association, Inc.~~
Valencia		Valencia Energy Facility
VaR		Value at Risk
WACC		Weighted Average Cost of Capital
WEG		WildEarth Guardians

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PNM RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2013			2012			2013			2012			2014			2013
	(In thousands, except per share amounts)												(In thousands, except per share amounts)
Electric Operating Revenues	$	399,730		$	390,411		$	1,064,993		$	1,019,646		$	328,897		$	317,665
Operating Expenses:
Cost of energy	114,674			110,777			325,039			297,342			112,614			104,706
Administrative and general	46,915			45,283			134,744			135,371			43,859			44,691
Energy production costs	41,142			40,365			131,546			131,546			47,288			43,573
Regulatory disallowances	1,735			—			1,735			—
Depreciation and amortization	42,743			42,820			125,189			122,289			41,965			40,807
Transmission and distribution costs	17,248			17,082			50,690			50,896			16,906			16,295
Taxes other than income taxes	17,534			15,934			49,739			45,218			17,512			16,889
Total operating expenses	281,991			272,261			818,682			782,662			280,144			266,961
Operating income	117,739			118,150			246,311			236,984			48,753			50,704
Other Income and Deductions:
Interest income	2,264			3,130			7,731			9,808			2,117			2,634
Gains on investments held by NDT	2,190			5,716			6,995			9,376
Gains on available-for-sale securities													2,573			1,530
Other income	3,252			2,484			7,517			6,991			1,574			1,710
Other (deductions)	(5,970		)	(3,451		)	(13,516		)	(10,719		)	(2,931		)	(3,350		)
Net other income (deductions)	1,736			7,879			8,727			15,456
Net other income and deductions													3,333			2,524
Interest Charges	30,365			30,515			92,279			90,280			29,535			31,297
Earnings before Income Taxes	89,110			95,514			162,759			162,160			22,551			21,931
Income Taxes	30,296			33,538			58,600			54,609			6,420			7,969
Net Earnings	58,814			61,976			104,159			107,551			16,131			13,962
(Earnings) Attributable to Valencia Non-controlling Interest	(4,127		)	(3,980		)	(10,904		)	(10,699		)	(3,531		)	(3,204		)
Preferred Stock Dividend Requirements of Subsidiary	(132		)	(132		)	(396		)	(396		)	(132		)	(132		)
Net Earnings Attributable to PNMR	$	54,555		$	57,864		$	92,859		$	96,456		$	12,468		$	10,626
Net Earnings Attributable to PNMR per Common Share:
Basic	$	0.68		$	0.73		$	1.16		$	1.21		$	0.16		$	0.13
Diluted	$	0.68		$	0.72		$	1.15		$	1.20		$	0.16		$	0.13
Dividends Declared per Common Share	$	0.165		$	0.145		$	0.495		$	0.435		$	0.185		$	0.165

The accompanying notes, as they relate to PNMR, are an integral part of these financial statements.

Table of Contents

PNM RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2013			2012			2013			2012			2014			2013
	(In thousands)												(In thousands)
Net Earnings	$	58,814		$	61,976		$	104,159		$	107,551		$	16,131		$	13,962
Other Comprehensive Income:
Unrealized Gain on Investment Securities:
Unrealized holding gains arising during the period, net of income tax (expense) of $(4,143), $(4,972), $(7,544) and $(15,409)	6,322			7,587			11,512			23,511
Reclassification adjustment for (gains) included in net earnings, net of income tax expense of $925, $4,248, $3,639 and $12,786	(1,411		)	(6,481		)	(5,551		)	(19,509		)
Unrealized Gain on Available-for-Sale Securities:
Unrealized holding gains arising during the period, net of income tax (expense) of $(1,332) and $(3,111)													2,047			4,747
Reclassification adjustment for (gains) included in net earnings, net of income tax expense of $1,283 and $529													(1,972		)	(807		)
Pension Liability Adjustment:
Reclassification adjustment for amortization of experience (gain) loss recognized as net periodic benefit cost, net of income tax expense (benefit) of $(631), $(476), $(1,893) and $(1,428)	960			727			2,880			2,181
Reclassification adjustment for amortization of experience (gain) loss recognized as net periodic benefit cost, net of income tax expense (benefit) of $(508) and $(631)													780			960
Fair Value Adjustment for Cash Flow Hedges:
Change in fair market value, net of income tax (expense) benefit of $128, $51, $127 and $150	(238		)	(92		)	(236		)	(270		)
Reclassification adjustment for (gains) losses included in net earnings, net of income tax expense (benefit) of $(19), $(16), $(54) and $(47)	35			29			99			85
Change in fair market value, net of income tax (expense) benefit of $53 and $(4)													(100		)	8
Reclassification adjustment for (gains) losses included in net earnings, net of income tax expense (benefit) of $(19) and $(17)													36			31
Total Other Comprehensive Income	5,668			1,770			8,704			5,998			791			4,939
Comprehensive Income	64,482			63,746			112,863			113,549			16,922			18,901
Comprehensive (Income) Attributable to Valencia Non-controlling Interest	(4,127		)	(3,980		)	(10,904		)	(10,699		)	(3,531		)	(3,204		)
Preferred Stock Dividend Requirements of Subsidiary	(132		)	(132		)	(396		)	(396		)	(132		)	(132		)
Comprehensive Income Attributable to PNMR	$	60,223		$	59,634		$	101,563		$	102,454		$	13,259		$	15,565

The accompanying notes, as they relate to PNMR, are an integral part of these financial statements.

Table of Contents

PNM RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended September 30,						Three Months Ended March 31,
	2013			2012			2014			2013
	(In thousands)						(In thousands)
Cash Flows From Operating Activities:
Net earnings	$	104,159		$	107,551		$	16,131		$	13,962
Adjustments to reconcile net earnings to net cash flows from operating activities:
Depreciation and amortization	157,856			153,992			51,949			51,818
Deferred income tax expense	57,878			55,141			6,276			7,795
Net unrealized (gains) losses on commodity derivatives	(5,858		)	3,076			2,761			4,902
Realized (gains) on investments held by NDT	(6,995		)	(9,376		)
Realized (gains) on available-for-sale securities							(2,573		)	(1,530		)
Stock based compensation expense	4,315			2,748			2,131			1,903
Regulatory disallowances	1,735			—
Other, net	1,444			(2,037		)	1,005			(351		)
Changes in certain assets and liabilities:
Accounts receivable and unbilled revenues	(23,731		)	(31,550		)	17,207			4,062
Materials, supplies, and fuel stock	(724		)	(6,769		)	5,894			944
Other current assets	(6,667		)	(4,225		)	8,344			2,335
Other assets	21,656			(9,499		)	6,386			8,774
Accounts payable	(17,786		)	3,973			(34,373		)	(17,895		)
Accrued interest and taxes	126,218			22,336			25,813			25,430
Other current liabilities	(32,111		)	(21,681		)	(30,359		)	(38,761		)
Proceeds from governmental grants	—			21,567
Other liabilities	(70,379		)	(80,248		)	(199		)	(64,763		)
Net cash flows from operating activities	311,010			204,999			76,393			(1,375		)

Cash Flows From Investing Activities:
Additions to utility and non-utility plant	(233,928		)	(214,743		)	(83,838		)	(73,584		)
Proceeds from sales of investments held by NDT	179,336			136,305
Purchases of investments held by NDT	(181,401		)	(138,658		)
Proceeds from sale of First Choice	—			4,034
Proceeds from sales of available-for-sale securities							22,804			14,284
Purchases of available-for-sale securities							(23,612		)	(15,128		)
Return of principal on PVNGS lessor notes	23,357			23,455			10,231			10,965
Other, net	1,210			1,627			13			1,247
Net cash flows from investing activities	(211,426		)	(187,980		)	(74,402		)	(62,216		)

The accompanying notes, as they relate to PNMR, are an integral part of these financial statements.

Table of Contents

PNM RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended September 30,						Three Months Ended March 31,
	2013			2012			2014			2013
	(In thousands)						(In thousands)
Cash Flows From Financing Activities:
Short-term borrowings (repayments), net	(46,700		)	30,700			(49,200		)	84,600
Long-term borrowings	75,000			20,000			175,000			—
Repayment of long-term debt	(26,037		)	(20,000		)	(75,000		)	—
Cash paid in debt exchange	(13,048		)	—
Proceeds from stock option exercise	3,500			10,301			3,258			2,293
Awards of common stock	(12,429		)	(21,930		)	(11,639		)	(9,651		)
Dividends paid	(38,233		)	(33,454		)	(14,868		)	(11,683		)
Valencia's transactions with its owner	(13,477		)	(12,034		)
Valencia’s transactions with its owner							(4,369		)	(5,260		)
Other, net	(3,706		)	(337		)	(539		)	(584		)
Net cash flows from financing activities	(75,130		)	(26,754		)	22,643			59,715

Change in Cash and Cash Equivalents	24,454			(9,735		)	24,634			(3,876		)
Cash and Cash Equivalents at Beginning of Period	8,985			15,091			2,533			8,985
Cash and Cash Equivalents at End of Period	$	33,439		$	5,356		$	27,167		$	5,109

Supplemental Cash Flow Disclosures:
Interest paid, net of amounts capitalized	$	71,824		$	64,040		$	4,718		$	4,817
Income taxes paid (refunded), net	$	(95,472	)	$	5,302		$	(1,419	)	$	(603	)

Supplemental schedule of noncash financing activities:
Premium on long-term debt incurred in connection with debt exchange	$	23,249
Supplemental schedule of noncash investing activities:
Changes in accrued plant additions							$	(13,095	)	$	(3,847	)

The accompanying notes, as they relate to PNMR, are an integral part of these financial statements.

Table of Contents

PNM RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


	September 30, 2013		December 31, 2012		March 31, 2014		December 31, 2013
	(In thousands)				(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	33,439	$	8,985	$	27,167	$	2,533
Accounts receivable, net of allowance for uncollectible accounts of $1,391 and $1,751	110,937		87,093
Accounts receivable, net of allowance for uncollectible accounts of $1,423 and $1,423					81,611		90,251
Unbilled revenues	55,155		57,266		49,408		58,806
Other receivables	53,681		53,332		41,476		53,909
Materials, supplies, and fuel stock	60,367		59,643		61,329		67,223
Regulatory assets	38,511		39,120		27,163		24,416
Commodity derivative instruments	5,743		3,785		4,003		4,064
Income taxes receivable	5,283		101,477		5,503		7,066
Current portion of accumulated deferred income taxes					58,681		58,681
Other current assets	37,404		31,490		44,689		34,590
Total current assets	400,520		442,191		401,030		401,539
Other Property and Investments:
Investment in PVNGS lessor notes	32,542		54,325		17,757		32,200
Investments held by NDT	207,483		188,971
Available-for-sale securities					230,250		226,855
Other investments	6,725		9,139		1,813		1,835
Non-utility property, net of accumulated depreciation of $143 and $131	4,475		4,487
Non-utility property, net of accumulated depreciation of $62 and $61					4,352		4,353
Total other property and investments	251,225		256,922		254,172		265,243
Utility Plant:
Plant in service and plant held for future use	5,431,680		5,313,796		5,602,590		5,563,061
Less accumulated depreciation and amortization	1,839,481		1,774,223		1,866,635		1,838,832
	3,592,199		3,539,573		3,735,955		3,724,229
Construction work in progress	175,410		125,287		147,870		132,080
Nuclear fuel, net of accumulated amortization of $52,876 and $42,644	79,458		81,627
Nuclear fuel, net of accumulated amortization of $54,338 and $47,347					78,778		77,602
Net utility plant	3,847,067		3,746,487		3,962,603		3,933,911
Deferred Charges and Other Assets:
Regulatory assets	551,607		555,577		513,727		523,955
Goodwill	278,297		278,297		278,297		278,297
Commodity derivative instruments	4,284		352		2,474		3,002
Other deferred charges	95,814		92,757		94,723		94,263
Total deferred charges and other assets	930,002		926,983		889,221		899,517
	$	5,428,814	$	5,372,583	$	5,507,026	$	5,500,210

The accompanying notes, as they relate to PNMR, are an integral part of these financial statements.

Table of Contents

PNM RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


	September 30, 2013			December 31, 2012			March 31, 2014			December 31, 2013
	(In thousands, except share information)						(In thousands, except share information)
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Short-term debt	$	112,000		$	158,700		$	100,000		$	149,200
Current installments of long-term debt	52,530			2,530			—			75,000
Accounts payable	76,309			99,177			62,198			109,666
Customer deposits	14,171			18,176			13,065			13,456
Accrued interest and taxes	82,801			52,003			73,978			49,600
Regulatory liabilities	1,218			15,173			353			1,081
Commodity derivative instruments	1,017			1,000			5,446			2,699
Dividends declared	13,271			11,679			14,864			14,864
Current portion of accumulated deferred income taxes	258			258
Other current liabilities	62,018			75,407			42,184			77,105
Total current liabilities	415,593			434,103			312,088			492,671
Long-term Debt	1,696,311			1,669,760			1,845,338			1,670,420
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes	743,828			701,545			833,240			801,408
Accumulated deferred investment tax credits	12,598			14,242			25,314			25,855
Regulatory liabilities	456,634			423,460			463,106			460,649
Asset retirement obligations	93,519			85,893			98,076			96,135
Accrued pension liability and postretirement benefit cost	147,442			224,565			75,745			80,046
Commodity derivative instruments	1,347			1,933			907			1,094
Other deferred credits	106,554			116,523			99,671			109,805
Total deferred credits and other liabilities	1,561,922			1,568,161			1,596,059			1,574,992
Total liabilities	3,673,826			3,672,024			3,753,485			3,738,083
Commitments and Contingencies (See Note 10)
Commitments and Contingencies (See Note 11)
Cumulative Preferred Stock of Subsidiary
without mandatory redemption requirements ($100 stated value; 10,000,000 shares authorized; issued and outstanding 115,293 shares)	11,529			11,529			11,529			11,529
Equity:
PNMR common stockholders' equity:
PNMR common stockholders’ equity:
Common stock outstanding (no par value; 120,000,000 shares authorized; issued and outstanding 79,653,624 shares)	1,177,686			1,182,819			1,172,098			1,178,369
Accumulated other comprehensive income (loss), net of income taxes	(72,926		)	(81,630		)	(57,349		)	(58,140		)
Retained earnings	560,429			506,998			551,072			553,340
Total PNMR common stockholders' equity	1,665,189			1,608,187
Total PNMR common stockholders’ equity							1,665,821			1,673,569
Non-controlling interest in Valencia	78,270			80,843			76,191			77,029
Total equity	1,743,459			1,689,030			1,742,012			1,750,598
	$	5,428,814		$	5,372,583		$	5,507,026		$	5,500,210

The accompanying notes, as they relate to PNMR, are an integral part of these financial statements.

Table of Contents

PNM RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(Unaudited)


	Attributable to PNMR												Non- controlling Interest in Valencia							Attributable to PNMR															Non- controlling Interest in Valencia
	Common Stock			AOCI			Retained Earnings			Total PNMR Common Stockholder's Equity						Total Equity			Common Stock				AOCI				Retained Earnings				Total PNMR Common Stockholder’s Equity							Total Equity
	(In thousands)																			(In thousands)
Balance at December 31, 2012	$	1,182,819		$	(81,630	)	$	506,998		$	1,608,187			$	80,843			$	1,689,030
Balance at December 31, 2013																				$	1,178,369			$	(58,140	)		$	553,340			$	1,673,569		$	77,029			$	1,750,598
Proceeds from stock option exercise	3,500			—			—			3,500			—				3,500			3,258				—				—				3,258			—				3,258
Awards of common stock	(12,429		)	—			—			(12,429		)	—				(12,429		)	(11,639		)		—				—				(11,639		)	—				(11,639		)
Excess tax (shortfall) from stock-based payment arrangements	(519		)	—			—			(519		)	—				(519		)	(21		)		—				—				(21		)	—				(21		)
Stock based compensation expense	4,315			—			—			4,315			—				4,315			2,131				—				—				2,131			—				2,131
Valencia's transactions with its owner	—			—			—			—			(13,477		)		(13,477		)
Valencia’s transactions with its owner																				—				—				—				—			(4,369		)		(4,369		)
Net earnings before subsidiary preferred stock dividends	—			—			93,255			93,255			10,904				104,159			—				—				12,600				12,600			3,531				16,131
Subsidiary preferred stock dividends	—			—			(396		)	(396		)	—				(396		)	—				—				(132		)		(132		)	—				(132		)
Total other comprehensive income	—			8,704			—			8,704			—				8,704			—				791				—				791			—				791
Dividends declared on common stock	—			—			(39,428		)	(39,428		)	—				(39,428		)	—				—				(14,736		)		(14,736		)	—				(14,736		)
Balance at September 30, 2013	$	1,177,686		$	(72,926	)	$	560,429		$	1,665,189		$	78,270			$	1,743,459
Balance at March 31, 2014																				$	1,172,098			$	(57,349	)		$	551,072			$	1,665,821		$	76,191			$	1,742,012

The accompanying notes, as they relate to PNMR, are an integral part of these financial statements.

Table of Contents

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2013			2012			2013			2012			2014			2013
	(In thousands)												(In thousands)
Electric Operating Revenues	$	326,026		$	321,731		$	863,609		$	832,242		$	262,736		$	257,894
Operating Expenses:
Cost of energy	100,200			99,217			283,715			263,009			96,626			91,660
Administrative and general	40,679			41,150			116,058			120,857			38,609			38,758
Energy production costs	41,142			40,365			131,546			131,546			47,288			43,566
Regulatory disallowances	1,735			—			1,735			—
Depreciation and amortization	25,879			24,437			77,763			72,017			27,082			25,834
Transmission and distribution costs	11,686			11,172			33,420			33,679			11,327			10,603
Taxes other than income taxes	9,488			8,417			28,613			25,386			10,500			10,234
Total operating expenses	230,809			224,758			672,850			646,494			231,432			220,655
Operating income	95,217			96,973			190,759			185,748			31,304			37,239
Other Income and Deductions:
Interest income	2,298			3,173			7,839			9,938			2,128			2,673
Gains on investments held by NDT	2,190			5,716			6,995			9,376
Gains on available-for-sale securities													2,573			1,530
Other income	2,396			1,176			5,269			4,378			1,113			1,314
Other (deductions)	(2,375		)	(1,682		)	(5,287		)	(4,553		)	(2,018		)	(1,437		)
Net other income (deductions)	4,509			8,383			14,816			19,139
Net other income and deductions													3,796			4,080
Interest Charges	20,124			19,230			59,971			56,652			19,812			19,957
Earnings before Income Taxes	79,602			86,126			145,604			148,235			15,288			21,362
Income Taxes	27,652			31,235			49,184			51,929			4,083			6,589
Net Earnings	51,950			54,891			96,420			96,306			11,205			14,773
(Earnings) Attributable to Valencia Non-controlling Interest	(4,127		)	(3,980		)	(10,904		)	(10,699		)	(3,531		)	(3,204		)
Net Earnings Attributable to PNM	47,823			50,911			85,516			85,607			7,674			11,569
Preferred Stock Dividends Requirements	(132		)	(132		)	(396		)	(396		)	(132		)	(132		)
Net Earnings Available for PNM Common Stock	$	47,691		$	50,779		$	85,120		$	85,211		$	7,542		$	11,437

The accompanying notes, as they relate to PNM, are an integral part of these financial statements.

Table of Contents

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2013			2012			2013			2012			2014			2013
	(In thousands)												(In thousands)
Net Earnings	$	51,950		$	54,891		$	96,420		$	96,306		$	11,205		$	14,773
Other Comprehensive Income:
Unrealized Gain on Investment Securities:
Unrealized holding gains arising during the period, net of income tax (expense) of $(4,143), $(4,972), $(7,544) and $(15,409)	6,322			7,587			11,512			23,511
Reclassification adjustment for (gains) included in net earnings, net of income tax expense of $925, $4,248, $3,639 and $12,786	(1,411		)	(6,481		)	(5,551		)	(19,509		)
Unrealized Gain on Available-for-Sale Securities:
Unrealized holding gains arising during the period, net of income tax (expense) of $(1,332) and $(3,111)													2,047			4,747
Reclassification adjustment for (gains) included in net earnings, net of income tax expense of $1,283 and $529													(1,972		)	(807		)
Pension Liability Adjustment:
Reclassification adjustment for amortization of experience (gain) loss recognized as net periodic benefit cost, net of income tax expense (benefit) of $(631), $(476), $(1,893) and $(1,428)	960			727			2,880			2,181
Reclassification adjustment for amortization of experience (gain) loss recognized as net periodic benefit cost, net of income tax expense (benefit) of $(508) and $(631)													780			960
Total Other Comprehensive Income	5,871			1,833			8,841			6,183			855			4,900
Comprehensive Income	57,821			56,724			105,261			102,489			12,060			19,673
Comprehensive (Income) Attributable to Valencia Non-controlling Interest	(4,127		)	(3,980		)	(10,904		)	(10,699		)	(3,531		)	(3,204		)
Comprehensive Income Attributable to PNM	$	53,694		$	52,744		$	94,357		$	91,790		$	8,529		$	16,469

The accompanying notes, as they relate to PNM, are an integral part of these financial statements.

Table of Contents

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended September 30,						Three Months Ended March 31,
	2013			2012			2014			2013
	(In thousands)						(In thousands)
Cash Flows From Operating Activities:
Net earnings	$	96,420		$	96,306		$	11,205		$	14,773
Adjustments to reconcile net earnings to net cash flows from operating activities:
Depreciation and amortization	104,161			97,086			35,950			34,655
Deferred income tax expense	49,870			52,558			4,185			6,685
Net unrealized (gains) losses on commodity derivatives	(5,858		)	3,076			2,761			4,902
Realized (gains) on investments held by NDT	(6,995		)	(9,376		)
Regulatory disallowances	1,735			—
Realized (gains) on available-for-sale securities							(2,573		)	(1,530		)
Other, net	(1,282		)	(1,005		)	1,042			(346		)
Changes in certain assets and liabilities:
Accounts receivable and unbilled revenues	(14,123		)	(26,183		)	15,018			5,467
Materials, supplies, and fuel stock	(744		)	(6,404		)	5,974			879
Other current assets	(5,187		)	(6,942		)	6,809			(84		)
Other assets	21,977			(9,425		)	6,042			8,772
Accounts payable	(4,953		)	2,353			(31,847		)	(18,857		)
Accrued interest and taxes	66,090			80,418			22,362			20,932
Other current liabilities	(43,935		)	(9,850		)	(29,609		)	(44,068		)
Proceeds from governmental grants	—			21,567
Other liabilities	(67,062		)	(75,629		)	(806		)	(64,893		)
Net cash flows from operating activities	190,114			208,550			46,513			(32,713		)

Cash Flows From Investing Activities:
Utility plant additions	(164,669		)	(144,571		)	(51,594		)	(44,389		)
Proceeds from sales of NDT investments	179,336			136,305
Purchases of NDT investments	(181,401		)	(138,658		)
Proceeds from sales of available-for-sale securities							22,804			14,284
Purchases of available-for-sale securities							(23,612		)	(15,128		)
Return of principal on PVNGS lessor notes	23,357			23,455			10,231			10,965
Other, net	1,212			(720		)	(1		)	1,220
Net cash flows from investing activities	(142,165		)	(124,189		)	(42,172		)	(33,048		)

The accompanying notes, as they relate to PNM, are an integral part of these financial statements.

Table of Contents

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended September 30,						Three Months Ended March 31,
	2013			2012			2014			2013
	(In thousands)						(In thousands)
Cash Flows From Financing Activities:
Short-term borrowings (repayments), net	(21,100		)	(66,000		)	(49,200		)	67,800
Short-term borrowings (repayments), affiliate, net							(32,500		)	—
Long-term borrowings	75,000			20,000			175,000			—
Repayment of long-term debt	—			(20,000		)	(75,000		)	—
Valencia's transactions with its owner	(13,477		)	(12,034		)
Valencia’s transactions with its owner							(4,369		)	(5,260		)
Dividends paid	(68,424		)	(18,076		)	(132		)	(132		)
Other, net	(1,727		)	(337		)	(409		)	(584		)
Net cash flows from financing activities	(29,728		)	(96,447		)	13,390			61,824

Change in Cash and Cash Equivalents	18,221			(12,086		)	17,731			(3,937		)
Cash and Cash Equivalents at Beginning of Period	3,958			12,307			21			3,958
Cash and Cash Equivalents at End of Period	$	22,179		$	221		$	17,752		$	21

Supplemental Cash Flow Disclosures:
Interest paid, net of amounts capitalized	$	49,984		$	43,167		$	4,222		$	4,304
Income taxes paid (refunded), net	$	(44,999	)	$	(63,114	)	$	(215	)	$	—

Supplemental schedule of noncash investing activities:
Changes in accrued plant additions							$	(8,133	)	$	1,128

The accompanying notes, as they relate to PNM, are an integral part of these financial statements.

Table of Contents

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


	September 30, 2013		December 31, 2012		March 31, 2014		December 31, 2013
	(In thousands)				(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	22,179	$	3,958	$	17,752	$	21
Accounts receivable, net of allowance for uncollectible accounts of $1,391 and $1,751	84,613		69,876
Accounts receivable, net of allowance for uncollectible accounts of $1,423 and $1,423					61,394		70,126
Unbilled revenues	46,473		49,085		41,874		48,992
Other receivables	52,328		50,975		40,788		52,964
Affiliate receivables	8,827		9,050		9,646		10,054
Materials, supplies, and fuel stock	57,534		56,790		58,546		64,520
Regulatory assets	34,315		36,490		23,016		19,394
Commodity derivative instruments	5,743		3,785		4,003		4,064
Income taxes receivable	35,910		80,223		3,917		4,030
Current portion of accumulated deferred income taxes					43,827		43,827
Other current assets	32,294		27,457		40,498		30,510
Total current assets	380,216		387,689		345,261		348,502
Other Property and Investments:
Investment in PVNGS lessor notes	32,542		54,325		17,757		32,200
Investments held by NDT	207,483		188,971
Available-for-sale securities					230,250		226,855
Other investments	4,380		4,034		436		445
Non-utility property	976		976		976		976
Total other property and investments	245,381		248,306		249,419		260,476
Utility Plant:
Plant in service and plant held for future use	4,217,120		4,133,532		4,339,081		4,314,016
Less accumulated depreciation and amortization	1,409,042		1,355,240		1,420,194		1,402,531
	2,808,078		2,778,292		2,918,887		2,911,485
Construction work in progress	136,679		102,329		112,093		107,344
Nuclear fuel, net of accumulated amortization of $52,876 and $42,644	79,458		81,627
Nuclear fuel, net of accumulated amortization of $54,338 and $47,347					78,778		77,602
Net utility plant	3,024,215		2,962,248		3,109,758		3,096,431
Deferred Charges and Other Assets:
Regulatory assets	402,040		431,956		377,334		384,217
Goodwill	51,632		51,632		51,632		51,632
Commodity derivative instruments	4,284		352		2,474		3,002
Other deferred charges	84,702		81,724		83,757		83,356
Total deferred charges and other assets	542,658		565,664		515,197		522,207
	$	4,192,470	$	4,163,907	$	4,219,635	$	4,227,616

The accompanying notes, as they relate to PNM, are an integral part of these financial statements.

Table of Contents

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


	September 30, 2013			December 31, 2012			March 31, 2014			December 31, 2013
	(In thousands, except share information)						(In thousands, except share information)
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES AND STOCKHOLDER’S EQUITY
Current Liabilities:
Short-term debt	$	—		$	21,100		$	—		$	49,200
Short-term debt - affiliate							—			32,500
Current installments of long-term debt							—			75,000
Accounts payable	60,049			73,914			44,663			84,643
Affiliate payables	13,462			25,340			12,315			20,498
Customer deposits	14,171			18,176			13,065			13,456
Accrued interest and taxes	52,735			30,320			50,096			27,665
Regulatory liabilities	1,218			15,172			353			1,081
Commodity derivative instruments	1,017			1,000			5,446			2,699
Dividends declared	132			132			132			132
Current portion of accumulated deferred income taxes	3,447			3,447
Other current liabilities	40,041			54,150			30,070			50,392
Total current liabilities	186,272			242,751			156,140			357,266
Long-term Debt	1,290,608			1,215,579			1,390,627			1,215,618
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes	608,366			573,881			672,136			651,239
Accumulated deferred investment tax credits	12,598			14,242			25,314			25,855
Regulatory liabilities	409,444			379,841			415,537			414,611
Asset retirement obligations	92,614			85,042			97,147			95,225
Accrued pension liability and postretirement benefit cost	134,009			208,618			72,654			76,611
Commodity derivative instruments	1,347			1,933			907			1,094
Other deferred credits	87,417			95,585			82,857			91,340
Total deferred credits and liabilities	1,345,795			1,359,142			1,366,552			1,355,975
Total liabilities	2,822,675			2,817,472			2,913,319			2,928,859
Commitments and Contingencies (See Note 10)
Commitments and Contingencies (See Note 11)
Cumulative Preferred Stock
without mandatory redemption requirements ($100 stated value; 10,000,000 authorized; issued and outstanding 115,293 shares)	11,529			11,529			11,529			11,529
Equity:
PNM common stockholder's equity:
PNM common stockholder’s equity:
Common stock outstanding (no par value; 40,000,000 shares authorized; issued and outstanding 39,117,799 shares)	1,061,776			1,061,776			1,061,776			1,061,776
Accumulated other comprehensive income (loss), net of income taxes	(72,573		)	(81,414		)	(57,022		)	(57,877		)
Retained earnings	290,793			273,701			213,842			206,300
Total PNM common stockholder's equity	1,279,996			1,254,063
Total PNM common stockholder’s equity							1,218,596			1,210,199
Non-controlling interest in Valencia	78,270			80,843			76,191			77,029
Total equity	1,358,266			1,334,906			1,294,787			1,287,228
	$	4,192,470		$	4,163,907		$	4,219,635		$	4,227,616

The accompanying notes, as they relate to PNM, are an integral part of these financial statements.

Table of Contents

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(Unaudited)

Attributable to PNM

Total PNM
Common
Stockholder's
Equity

Non-
controlling
Interest in Valencia

Common
Stock
AOCI
Retained
Earnings

Total
Equity

(In thousands)
Balance at December 31, 2012 $ 1,061,776
$ (81,414 ) $ 273,701
$ 1,254,063
$ 80,843
$ 1,334,906
Valencia's transactions with its owner —
—
—
—
(13,477 ) (13,477 )
Net earnings —
—
85,516
85,516
10,904
96,420
Total other comprehensive income —
8,841
—
8,841
—
8,841
Dividends declared on preferred stock —
—
(396 ) (396 ) —
(396 )
Dividends declared on common stock —
—
(68,028 ) (68,028 ) —
(68,028 )
Balance at September 30, 2013 $ 1,061,776
$ (72,573 ) $ 290,793
$ 1,279,996
$ 78,270
$ 1,358,266



	Attributable to PNM
									Total PNM Common Stockholder’s Equity			Non- controlling Interest in Valencia

	Common Stock		AOCI			Retained Earnings									Total Equity
	Common Stock		AOCI			Retained Earnings									Total Equity
	(In thousands)
Balance at December 31, 2013	$	1,061,776	$	(57,877	)	$	206,300		$	1,210,199		$	77,029		$	1,287,228
Valencia’s transactions with its owner	—		—			—			—			(4,369		)	(4,369		)
Net earnings	—		—			7,674			7,674			3,531			11,205
Total other comprehensive income	—		855			—			855			—			855
Dividends declared on preferred stock	—		—			(132		)	(132		)	—			(132		)
Balance at March 31, 2014	$	1,061,776	$	(57,022	)	$	213,842		$	1,218,596		$	76,191		$	1,294,787

The accompanying notes, as they relate to PNM, are an integral part of these financial statements.

Table of Contents

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2013			2012			2013			2012			2014			2013
	(In thousands)												(In thousands)
Electric Operating Revenues	$	73,704		$	68,680		$	201,384		$	187,404		$	66,161		$	59,771
Operating Expenses:
Cost of energy	14,474			11,560			41,324			34,333			15,988			13,046
Administrative and general	10,641			10,130			32,446			30,700			9,840			11,119
Depreciation and amortization	13,850			13,819			37,810			37,173			11,842			11,681
Transmission and distribution costs	5,562			5,910			17,270			17,217			5,579			5,692
Taxes other than income taxes	6,923			6,291			17,558			16,322			5,650			5,179
Total operating expenses	51,450			47,710			146,408			135,745			48,899			46,717
Operating income	22,254			20,970			54,976			51,659			17,262			13,054
Other Income and Deductions:
Interest income	—			—			—			1
Other income	820			771			1,765			1,708			420			337
Other (deductions)	(104		)	(405		)	(356		)	(464		)	(231		)	(129		)
Net other income (deductions)	716			366			1,409			1,245
Net other income and deductions													189			208
Interest Charges	6,655			7,047			20,661			21,214			6,598			7,246
Earnings before Income Taxes	16,315			14,289			35,724			31,690			10,853			6,016
Income Taxes	6,209			5,205			13,554			11,577			4,050			2,290
Net Earnings	$	10,106		$	9,084		$	22,170		$	20,113		$	6,803		$	3,726

The accompanying notes, as they relate to TNMP, are an integral part of these financial statements.

Table of Contents

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2013			2012			2013			2012			2014			2013
	(In thousands)												(In thousands)
Net Earnings	$	10,106		$	9,084		$	22,170		$	20,113		$	6,803		$	3,726
Other Comprehensive Income (Loss):
Fair Value Adjustment for Cash Flow Hedges:
Change in fair market value, net of income tax (expense) benefit of $128, $51, $127 and $150	(238		)	(92		)	(236		)	(270		)
Reclassification adjustment for (gains) losses included in net earnings, net of income tax expense (benefit) of $(19), $(16), $(54) and $(47)	35			29			99			85
Change in fair market value, net of income tax (expense) benefit of $53 and $(4)													(100		)	8
Reclassification adjustment for (gains) losses included in net earnings, net of income tax expense (benefit) of $(19) and $(17)													36			31
Total Other Comprehensive Income (Loss)	(203		)	(63		)	(137		)	(185		)	(64		)	39
Comprehensive Income	$	9,903		$	9,021		$	22,033		$	19,928		$	6,739		$	3,765

The accompanying notes, as they relate to TNMP, are an integral part of these financial statements.

Table of Contents

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended September 30,						Three Months Ended March 31,
	2013			2012			2014			2013
	(In thousands)						(In thousands)
Cash Flows From Operating Activities:
Net earnings	$	22,170		$	20,113		$	6,803		$	3,726
Adjustments to reconcile net earnings to net cash flows from operating activities:
Depreciation and amortization	40,946			41,222			12,851			12,686
Deferred income tax expense	3,901			11,337			3,665			2,448
Other, net	(13		)	(275		)	(36		)	—
Changes in certain assets and liabilities:
Accounts receivable and unbilled revenues	(9,608		)	(5,367		)	2,189			(1,405		)
Materials and supplies	20			(365		)	(81		)	65
Other current assets	(2,420		)	(709		)	2,446			218
Other assets	36			(498		)	302			(58		)
Accounts payable	(291		)	(358		)	(2,551		)	4,130
Accrued interest and taxes	14,669			4,860			335			686
Other current liabilities	(1,946		)	1,980			(1,768		)	(1,278		)
Other liabilities	2,182			(3,411		)	1,465			1,076
Net cash flows from operating activities	69,646			68,529			25,620			22,294
Cash Flows From Investing Activities:
Utility plant additions	(67,400		)	(59,801		)	(27,420		)	(24,594		)
Net cash flows from investing activities	(67,400		)	(59,801		)	(27,420		)	(24,594		)
Cash Flow From Financing Activities:
Short-term borrowings (repayments), net	12,000			—			—			25,000
Short-term borrowings (repayments) – affiliate, net	4,800			2,300			1,800			(22,700		)
Cash paid in debt exchange	(13,048		)	—
Dividends paid	(3,726		)	(11,028		)
Other, net	(2,117		)	—
Net cash flows from financing activities	(2,091		)	(8,728		)	1,800			2,300

Change in Cash and Cash Equivalents	155			—			—			—
Cash and Cash Equivalents at Beginning of Period	1			1			1			1
Cash and Cash Equivalents at End of Period	$	156		$	1		$	1		$	1

Supplemental Cash Flow Disclosures:
Interest paid, net of amounts capitalized	$	13,626		$	13,074		$	73		$	171
Income taxes paid, net	$	696		$	1,848		$	(1,204	)	$	(604	)

Supplemental schedule of noncash financing activities:
Premium on long-term debt incurred in connection with debt exchange	$	23,249
Supplemental schedule of noncash investing activities:
Changes in accrued plant additions							$	(1,109	)	$	(932	)

The accompanying notes, as they relate to TNMP, are an integral part of these financial statements.

Table of Contents

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


	September 30, 2013		December 31, 2012		March 31, 2014		December 31, 2013
	(In thousands)				(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	156	$	1	$	1	$	1
Accounts receivable	26,324		17,217		20,217		20,125
Unbilled revenues	8,682		8,181		7,534		9,814
Other receivables	1,728		2,359		1,057		1,246
Materials and supplies	2,833		2,853		2,783		2,703
Regulatory assets	4,196		2,630		4,147		5,022
Current portion of accumulated deferred income taxes	1,131		1,131		6,501		6,501
Other current assets	1,816		1,107		752		980
Total current assets	46,866		35,479		42,992		46,392
Other Property and Investments:
Other investments	281		281		245		245
Non-utility property	2,240		2,240		2,240		2,240
Total other property and investments	2,521		2,521		2,485		2,485
Utility Plant:
Plant in service and plant held for future use	1,048,474		1,009,108		1,081,881		1,074,193
Less accumulated depreciation and amortization	347,228		339,315		359,205		352,105
	701,246		669,793		722,676		722,088
Construction work in progress	27,112		19,801		33,377		16,790
Net utility plant	728,358		689,594		756,053		738,878
Deferred Charges and Other Assets:
Regulatory assets	149,567		123,621		136,393		139,738
Goodwill	226,665		226,665		226,665		226,665
Other deferred charges	8,610		8,349		8,440		8,273
Total deferred charges and other assets	384,842		358,635		371,498		374,676
	$	1,162,587	$	1,086,229	$	1,173,028	$	1,162,431

The accompanying notes, as they relate to TNMP, are an integral part of these financial statements.

Table of Contents

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


	September 30, 2013			December 31, 2012			March 31, 2014			December 31, 2013
	(In thousands, except share information)						(In thousands, except share information)
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES AND STOCKHOLDER’S EQUITY
Current Liabilities:
Short-term debt	$	12,000		$	—
Short-term debt – affiliate	33,100			28,300			$	31,200		$	29,400
Current installments of long-term debt	50,000			—
Accounts payable	7,114			8,848			8,878			12,543
Affiliate payables	2,138			4,381			2,209			3,181
Accrued interest and taxes	45,160			30,491			24,113			23,778
Other current liabilities	9,614			8,854			9,380			8,999
Total current liabilities	159,126			80,874			75,780			77,901
Long-term Debt	286,128			311,589			335,944			336,036
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes	167,674			163,710			193,887			190,197
Regulatory liabilities	46,754			43,619			47,569			46,038
Asset retirement obligations	778			732			798			782
Accrued pension liability and postretirement benefit cost	13,433			15,947			3,091			3,435
Other deferred credits	6,573			5,944			6,289			5,111
Total deferred credits and other liabilities	235,212			229,952			251,634			245,563
Total liabilities	680,466			622,415			663,358			659,500
Commitments and Contingencies (See Note 10)
Common Stockholder's Equity:
Commitments and Contingencies (See Note 11)
Common Stockholder’s Equity:
Common stock outstanding ($10 par value; 12,000,000 shares authorized;
issued and outstanding 6,358 shares)	64			64			64			64
Paid-in-capital	390,366			390,366			404,166			404,166
Accumulated other comprehensive income (loss), net of income taxes	(353		)	(216		)	(327		)	(263		)
Retained earnings	92,044			73,600			105,767			98,964
Total common stockholder's equity	482,121			463,814
Total common stockholder’s equity							509,670			502,931
	$	1,162,587		$	1,086,229		$	1,173,028		$	1,162,431

The accompanying notes, as they relate to TNMP, are an integral part of these financial statements.

Table of Contents

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN COMMON ~~STOCKHOLDER'S~~STOCKHOLDER’S EQUITY

(Unaudited)

Common Stock Paid-in Capital AOCI Retained Earnings Total Common Stockholder's Equity
(In thousands)
Balance at December 31, 2012 $ 64
$ 390,366
$ (216 ) $ 73,600
$ 463,814
Net earnings —
—
—
22,170
22,170
Total other comprehensive income —
—
(137 ) —
(137 )
Dividends declared on common stock —
—
—
(3,726 ) (3,726 )
Balance at September 30, 2013 $ 64
$ 390,366
$ (353 ) $ 92,044
$ 482,121



	Common Stock		Paid-in Capital		AOCI			Retained Earnings		Total Common Stockholder’s Equity
	(In thousands)
Balance at December 31, 2013	$	64	$	404,166	$	(263	)	$	98,964	$	502,931
Net earnings	—		—		—			6,803		6,803
Total other comprehensive income (loss)	—		—		(64		)	—		(64		)
Balance at March 31, 2014	$	64	$	404,166	$	(327	)	$	105,767	$	509,670

The accompanying notes, as they relate to TNMP, are an integral part of these financial statements.

Table of Contents

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


(1)	Significant Accounting Policies and Responsibility for Financial Statements

Financial Statement Preparation

In the opinion of management, the accompanying unaudited interim Condensed Consolidated Financial Statements reflect all normal and recurring accruals and adjustments that are necessary to present fairly the consolidated financial position at ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012~~2013, and the consolidated results of operations, ~~and~~ comprehensive income, ~~for the~~ ~~three~~ and ~~nine months ended September 30, 2013 and 2012, and the consolidated~~ cash flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2014 and 2013 ~~and 2012~~. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could ultimately differ from those estimated. Weather causes the ~~Company's~~Company’s results of operations to be seasonal in nature and the results of operations presented in the accompanying Condensed Consolidated Financial Statements are not necessarily representative of operations for an entire year.

The Notes to Condensed Consolidated Financial Statements include disclosures for PNMR, PNM, and TNMP. This report uses the term ~~"Company"~~“Company” when discussing matters of common applicability to PNMR, PNM, and TNMP. Discussions regarding only PNMR, PNM, or TNMP are so indicated. Certain amounts in the ~~2012~~2013 Condensed Consolidated Financial Statements and Notes thereto have been reclassified to conform to the ~~2013~~2014 financial statement presentation.

These Condensed Consolidated Financial Statements are unaudited. Certain information and note disclosures normally included in the annual Consolidated Financial Statements have been condensed or omitted, as permitted under the applicable rules and regulations. Readers of these financial statements should refer to ~~PNMR's, PNM's,~~PNMR’s, PNM’s, and ~~TNMP's~~TNMP’s audited Consolidated Financial Statements and Notes thereto that are included in their respective ~~2012~~2013 Annual Reports on Form 10-K.

GAAP defines subsequent events as events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued. Based on their nature, magnitude, and timing, certain subsequent events may be required to be reflected at the balance sheet date and/or required to be disclosed in the financial statements. The Company has evaluated subsequent events as required by GAAP.

Principles of Consolidation

The Condensed Consolidated Financial Statements of each of PNMR, PNM, and TNMP include their accounts and those of subsidiaries in which that entity owns a majority voting interest. PNM also consolidates the PVNGS Capital Trust and Valencia. PNM owns undivided interests in several jointly-owned power plants and records its pro-rata share of the assets, liabilities, and expenses for those plants. The agreements for the jointly-owned plants provide that if an owner were to default on its payment obligations, the non-defaulting owners would be responsible for their proportionate share of the obligations of the defaulting owner. In exchange, the non-defaulting owners would be entitled to their proportionate share of the generating capacity of the defaulting owner. There have been no such payment defaults under any of the agreements for the jointly-owned plants.

PNMR shared ~~services'~~services’ administrative and general expenses, which represent costs that are primarily driven by corporate level activities, are charged to the business segments at cost. Other significant intercompany transactions between PNMR, PNM, and TNMP include interest and income tax sharing payments, as well as dividends paid on common stock. All intercompany transactions and balances have been eliminated. See Note ~~12.~~14.

~~Dividends on Common Stock~~

Dividends on PNMR's common stock are declared by its Board. The timing of the declaration of dividends is dependent on the timing of meetings and other actions of the Board. This has historically resulted in dividends considered to be attributable to the second quarter of each year being declared through actions of the Board during the third quarter of the year. The Board declared dividends on common stock considered to be for the second quarter of ~~$0.165~~ ~~per share in July 2013 and~~ ~~$0.145~~ in July 2012, which are reflected as being in the second quarter within "Dividends Declared per Common Share" on the PNMR Condensed Consolidated Statements of Earnings. The Board declared dividends on common stock considered to be for the ~~third~~ ~~quarter of~~ ~~$0.165~~ ~~per share in September 2013 and~~ ~~$0.145~~ ~~in September 2012, which are reflected as being in the~~ ~~third~~ ~~quarter within "Dividends Declared per Common Share" on the PNMR Condensed Consolidated Statements of Earnings.~~

Table of Contents

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


(2)	Earnings Per Share

~~PNM declared~~In accordance with GAAP, dual presentation of basic and ~~paid cash dividends on its common stock to PNMR of~~ ~~$68.0 million~~diluted earnings per share is presented in the ~~nine months ended September 30, 2013. PNM declared a cash dividend on its common stock to PNMR~~Condensed Consolidated Statements of ~~$16.8 million~~ ~~in September 2012, which was paid in October 2012, and declared and paid a dividend~~Earnings of ~~$17.7 million~~ ~~in June 2012. TNMP declared and paid cash dividends to PNMR~~PNMR. Information regarding the computation of ~~$3.7 million~~ ~~and~~ ~~$11.0 million~~ ~~in the~~ ~~nine months ended September 30, 2013 and 2012. TNMP dividends paid in 2012 were recorded~~earnings per share is as ~~reductions of paid-in-capital.~~follows:



	Three Months Ended
	March 31,
	2014		2013
	(In thousands, except per share amounts)
Net Earnings Attributable to PNMR	$	12,468	$	10,626
Average Number of Common Shares:
Outstanding during period	79,654		79,654
Vested awards of restricted stock	182		211
Average Shares - Basic	79,836		79,865
Dilutive Effect of Common Stock Equivalents ⁽¹⁾:
Stock options and restricted stock	551		715
Average Shares - Diluted	80,387		80,580
Net Earnings Per Share of Common Stock:
Basic	$	0.16	$	0.13
Diluted	$	0.16	$	0.13


⁽¹⁾	Excludes the effect of out-of-the-money options for 486,016 shares of common stock at March 31, 2014.

~~New Accounting Pronouncements~~

~~Information concerning recently issued accounting pronouncements that have not been adopted by the Company is presented below.~~

~~Accounting Standards Update 2013-11 - Income Taxes: Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists~~

The FASB released guidance that requires entities to present an unrecognized tax benefit in the financial statements as a reduction to a deferred tax asset for net operating losses in certain circumstances. The guidance is to be applied prospectively and is effective for annual and interim reporting periods beginning after December 15, 2013, with early adoption permitted. The Company is still analyzing the impacts of this new standard and when to adopt it. However, it appears that the new standard will result in substantially all of the Company's liability for unrecognized tax benefits being reclassified from being reflected in liability accounts to being reflected as reductions of deferred tax assets. Adoption of this standard is not expected to impact earnings.


~~(2)~~(3)	Segment Information

The following segment presentation is based on the methodology that management uses for making operating decisions and assessing performance of its various business activities. A reconciliation of the segment presentation to the GAAP financial statements is provided.

PNM

PNM includes the retail electric utility operations of PNM that are subject to traditional rate regulation by the NMPRC. PNM provides integrated electricity services that include the generation, transmission, and distribution of electricity for retail electric customers in New Mexico. PNM also provides generation service to firm-requirements wholesale customers and sells electricity into the ~~general~~ wholesale market, as well as providing transmission services to third parties. The sale of electricity into the wholesale market includes the optimization of ~~PNM's~~PNM’s jurisdictional capacity, as well as the capacity ~~excluded~~ from PVNGS Unit 3, which is not included in retail rates. FERC has jurisdiction over wholesale and transmission rates.

TNMP

TNMP is an electric utility providing regulated transmission and distribution services in Texas under the TECA. ~~TNMP's~~TNMP’s operations are subject to traditional rate regulation by the PUCT.

Corporate and Other

The Corporate and Other segment includes PNMR holding company activities, primarily related to corporate level debt and PNMR Services Company.

The following tables present summarized financial information for PNMR by segment. PNM and TNMP each operate in only one segment. Therefore, tabular segment information is not presented for PNM and TNMP.

Table of Contents

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

PNMR SEGMENT INFORMATION



	PNM			TNMP			Corporate and Other			Consolidated
Three Months Ended March 31, 2014	(In thousands)
Electric operating revenues	$	262,736		$	66,161		$	—		$	328,897
Cost of energy	96,626			15,988			—			112,614
Margin	166,110			50,173			—			216,283
Other operating expenses	107,724			21,069			(3,228		)	125,565
Depreciation and amortization	27,082			11,842			3,041			41,965
Operating income	31,304			17,262			187			48,753
Interest income	2,128			—			(11		)	2,117
Other income (deductions)	1,668			189			(641		)	1,216
Net interest charges	(19,812		)	(6,598		)	(3,125		)	(29,535		)
Segment earnings (loss) before income taxes	15,288			10,853			(3,590		)	22,551
Income taxes (benefit)	4,083			4,050			(1,713		)	6,420
Segment earnings (loss)	11,205			6,803			(1,877		)	16,131
Valencia non-controlling interest	(3,531		)	—			—			(3,531		)
Subsidiary preferred stock dividends	(132		)	—			—			(132		)
Segment earnings (loss) attributable to PNMR	$	7,542		$	6,803		$	(1,877	)	$	12,468

At March 31, 2014:
Total Assets	$	4,219,635		$	1,173,028		$	114,363		$	5,507,026
Goodwill	$	51,632		$	226,665		$	—		$	278,297


	PNM			TNMP			Corporate and Other			Consolidated			PNM			TNMP			Corporate and Other			Consolidated
Three Months Ended September 30, 2013	(In thousands)
Three Months Ended March 31, 2013													(In thousands)
Electric operating revenues	$	326,026		$	73,704		$	—		$	399,730		$	257,894		$	59,771		$	—		$	317,665
Cost of energy	100,200			14,474			—			114,674			91,660			13,046			—			104,706
Margin	225,826			59,230			—			285,056			166,234			46,725			—			212,959
Other operating expenses	104,730			23,126			(3,282		)	124,574			103,161			21,990			(3,703		)	121,448
Depreciation and amortization	25,879			13,850			3,014			42,743			25,834			11,681			3,292			40,807
Operating income	95,217			22,254			268			117,739			37,239			13,054			411			50,704
Interest income	2,298			—			(34		)	2,264			2,673			—			(39		)	2,634
Other income (deductions)	2,211			716			(3,455		)	(528		)	1,407			208			(1,725		)	(110		)
Net interest charges	(20,124		)	(6,655		)	(3,586		)	(30,365		)	(19,957		)	(7,246		)	(4,094		)	(31,297		)
Segment earnings (loss) before income taxes	79,602			16,315			(6,807		)	89,110			21,362			6,016			(5,447		)	21,931
Income taxes (benefit)	27,652			6,209			(3,565		)	30,296			6,589			2,290			(910		)	7,969
Segment earnings (loss)	51,950			10,106			(3,242		)	58,814			14,773			3,726			(4,537		)	13,962
Valencia non-controlling interest	(4,127		)	—			—			(4,127		)	(3,204		)	—			—			(3,204		)
Subsidiary preferred stock dividends	(132		)	—			—			(132		)	(132		)	—			—			(132		)
Segment earnings (loss) attributable to PNMR	$	47,691		$	10,106		$	(3,242	)	$	54,555		$	11,437		$	3,726		$	(4,537	)	$	10,626

Nine Months Ended September 30, 2013
Electric operating revenues	$	863,609		$	201,384		$	—		$	1,064,993
Cost of energy	283,715			41,324			—			325,039
Margin	579,894			160,060			—			739,954
Other operating expenses	311,372			67,274			(10,192		)	368,454
Depreciation and amortization	77,763			37,810			9,616			125,189
Operating income	190,759			54,976			576			246,311
Interest income	7,839			—			(108		)	7,731
Other income (deductions)	6,977			1,409			(7,390		)	996
Net interest charges	(59,971		)	(20,661		)	(11,647		)	(92,279		)
Segment earnings (loss) before income taxes	145,604			35,724			(18,569		)	162,759
Income taxes (benefit)	49,184			13,554			(4,138		)	58,600
Segment earnings (loss)	96,420			22,170			(14,431		)	104,159
Valencia non-controlling interest	(10,904		)	—			—			(10,904		)
Subsidiary preferred stock dividends	(396		)	—			—			(396		)
Segment earnings (loss) attributable to PNMR	$	85,120		$	22,170		$	(14,431	)	$	92,859

At September 30, 2013:
At March 31, 2013:
Total Assets	$	4,192,470		$	1,162,587		$	73,757		$	5,428,814		$	4,155,257		$	1,098,942		$	116,561		$	5,370,760
Goodwill	$	51,632		$	226,665		$	—		$	278,297		$	51,632		$	226,665		$	—		$	278,297
Additions to utility and non-utility plant included in accounts payable	$	15,995		$	544		$	1,668		$	18,207

~~Table of Contents~~

~~PNM RESOURCES, INC. AND SUBSIDIARIES~~

~~PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES~~

~~TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

PNM TNMP
Corporate
and Other
Consolidated
Three Months Ended September 30, 2012 (In thousands)
Electric operating revenues $ 321,731
$ 68,680
$ —
$ 390,411
Cost of energy 99,217
11,560
—
110,777
Margin 222,514
57,120
—
279,634
Other operating expenses 101,104
22,331
(4,771 ) 118,664
Depreciation and amortization 24,437
13,819
4,564
42,820
Operating income 96,973
20,970
207
118,150
Interest income 3,173
—
(43 ) 3,130
Other income (deductions) 5,210
366
(827 ) 4,749
Net interest charges (19,230 ) (7,047 ) (4,238 ) (30,515 )
Segment earnings (loss) before income taxes 86,126
14,289
(4,901 ) 95,514
Income taxes (benefit) 31,235
5,205
(2,902 ) 33,538
Segment earnings (loss) 54,891
9,084
(1,999 ) 61,976
Valencia non-controlling interest (3,980 ) —
—
(3,980 )
Subsidiary preferred stock dividends (132 ) —
—
(132 )
Segment earnings (loss) attributable to PNMR $ 50,779
$ 9,084
$ (1,999 ) $ 57,864

Nine Months Ended September 30, 2012
Electric operating revenues $ 832,242
$ 187,404
$ —
$ 1,019,646
Cost of energy 263,009
34,333
—
297,342
Margin 569,233
153,071
—
722,304
Other operating expenses 311,468
64,239
(12,676 ) 363,031
Depreciation and amortization 72,017
37,173
13,099
122,289
Operating income (loss) 185,748
51,659
(423 ) 236,984
Interest income 9,938
1
(131 ) 9,808
Other income (deductions) 9,201
1,244
(4,797 ) 5,648
Net interest charges (56,652 ) (21,214 ) (12,414 ) (90,280 )
Segment earnings (loss) before income taxes 148,235
31,690
(17,765 ) 162,160
Income taxes (benefit) 51,929
11,577
(8,897 ) 54,609
Segment earnings (loss) 96,306
20,113
(8,868 ) 107,551
Valencia non-controlling interest (10,699 ) —
—
(10,699 )
Subsidiary preferred stock dividends (396 ) —
—
(396 )
Segment earnings (loss) attributable to PNMR $ 85,211
$ 20,113
$ (8,868 ) $ 96,456

At September 30, 2012:
Total Assets $ 4,073,331
$ 1,060,062
$ 126,814
$ 5,260,207
Goodwill $ 51,632
$ 226,665
$ —
$ 278,297
Additions to utility and non-utility plant included in accounts payable $ 6,056
$ 886
$ 1,063
$ 8,005

Table of Contents

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


~~(3)~~(4)	Accumulated Other Comprehensive Income (Loss)

Information regarding accumulated other comprehensive income (loss) for the ~~nine~~three months ended ~~September 30,~~March 31, 2014 and 2013 is as follows:


	Accumulated Other Comprehensive Income (Loss)												Accumulated Other Comprehensive Income (Loss)
	Unrealized						Fair Value						Unrealized						Fair Value
	Gain on			Pension			Adjustment						Gain on			Pension			Adjustment
	Investment			Liability			for Cash Flow						Available-for-			Liability			for Cash Flow
	Securities			Adjustment			Hedges			Total			Sale Securities			Adjustment			Hedges			Total
	(In thousands)												(In thousands)
PNMR
Balance at December 31, 2012	$	16,406		$	(97,820	)	$	(216	)	$	(81,630	)
Balance at December 31, 2013													$	25,748		$	(83,625	)	$	(263	)	$	(58,140	)
Amounts reclassified from AOCI (pre-tax)	(9,190		)	4,773			153			(4,264		)	(3,255		)	1,288			55			(1,912		)
Income tax impact of amounts reclassified	3,639			(1,893		)	(54		)	1,692			1,283			(508		)	(19		)	756
Other OCI changes (pre-tax)	19,056			—			(363		)	18,693			3,379			—			(153		)	3,226
Income tax impact of other OCI changes	(7,544		)	—			127			(7,417		)	(1,332		)	—			53			(1,279		)
Net change after income taxes	5,961			2,880			(137		)	8,704			75			780			(64		)	791
Balance at September 30, 2013	$	22,367		$	(94,940	)	$	(353	)	$	(72,926	)
Balance at March 31, 2014													$	25,823		$	(82,845	)	$	(327	)	$	(57,349	)


PNM
Balance at December 31, 2012	$	16,406		$	(97,820	)	$	—	$	(81,414	)
Balance at December 31, 2013												$	25,748		$	(83,625	)	$	—	$	(57,877	)
Amounts reclassified from AOCI (pre-tax)	(9,190		)	4,773			—		(4,417		)	(3,255		)	1,288			—		(1,967		)
Income tax impact of amounts reclassified	3,639			(1,893		)	—		1,746			1,283			(508		)	—		775
Other OCI changes (pre-tax)	19,056			—			—		19,056			3,379			—			—		3,379
Income tax impact of other OCI changes	(7,544		)	—			—		(7,544		)	(1,332		)	—			—		(1,332		)
Net change after income taxes	5,961			2,880			—		8,841			75			780			—		855
Balance at September 30, 2013	$	22,367		$	(94,940	)	$	—	$	(72,573	)
Balance at March 31, 2014												$	25,823		$	(82,845	)	$	—	$	(57,022	)


TNMP
Balance at December 31, 2012	$	—	$	—	$	(216	)	$	(216	)
Balance at December 31, 2013											$	—	$	—	$	(263	)	$	(263	)
Amounts reclassified from AOCI (pre-tax)	—		—		153			153			—		—		55			55
Income tax impact of amounts reclassified	—		—		(54		)	(54		)	—		—		(19		)	(19		)
Other OCI changes (pre-tax)	—		—		(363		)	(363		)	—		—		(153		)	(153		)
Income tax impact of other OCI changes	—		—		127			127			—		—		53			53
Net change after income taxes	—		—		(137		)	(137		)	—		—		(64		)	(64		)
Balance at September 30, 2013	$	—	$	—	$	(353	)	$	(353	)
Balance at March 31, 2014											$	—	$	—	$	(327	)	$	(327	)

Table of Contents

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	Accumulated Other Comprehensive Income (Loss)
	Unrealized						Fair Value
	Gain on			Pension			Adjustment
	Available-for-			Liability			for Cash Flow
	Sale Securities			Adjustment			Hedges			Total
	(In thousands)
PNMR
Balance at December 31, 2012	$	16,406		$	(97,820	)	$	(216	)	$	(81,630	)
Amounts reclassified from AOCI (pre-tax)	(1,336		)	1,591			48			303
Income tax impact of amounts reclassified	529			(631		)	(17		)	(119		)
Other OCI changes (pre-tax)	7,858			—			12			7,870
Income tax impact of other OCI changes	(3,111		)	—			(4		)	(3,115		)
Net change after income taxes	3,940			960			39			4,939
Balance at March 31, 2013	$	20,346		$	(96,860	)	$	(177	)	$	(76,691	)



PNM
Balance at December 31, 2012	$	16,406		$	(97,820	)	$	—	$	(81,414	)
Amounts reclassified from AOCI (pre-tax)	(1,336		)	1,591			—		255
Income tax impact of amounts reclassified	529			(631		)	—		(102		)
Other OCI changes (pre-tax)	7,858			—			—		7,858
Income tax impact of other OCI changes	(3,111		)	—			—		(3,111		)
Net change after income taxes	3,940			960			—		4,900
Balance at March 31, 2013	$	20,346		$	(96,860	)	$	—	$	(76,514	)



TNMP
Balance at December 31, 2012	$	—	$	—	$	(216	)	$	(216	)
Amounts reclassified from AOCI (pre-tax)	—		—		48			48
Income tax impact of amounts reclassified	—		—		(17		)	(17		)
Other OCI changes (pre-tax)	—		—		12			12
Income tax impact of other OCI changes	—		—		(4		)	(4		)
Net change after income taxes	—		—		39			39
Balance at March 31, 2013	$	—	$	—	$	(177	)	$	(177	)

Pre-tax amounts reclassified from AOCI related to ~~"Unrealized~~“Unrealized Gain on ~~Investment Securities"~~Available-for-Sale Securities” are included in ~~"Gains~~“Gains on ~~investments held by NDT"~~available-for-sale securities” in the Condensed Consolidated Statements of Earnings. Pre-tax amounts reclassified from AOCI related to ~~"Pension~~“Pension Liability ~~Adjustment"~~Adjustment” are reclassified to ~~"Operating~~“Operating Expenses - Administrative and ~~general"~~general” in the Condensed Consolidated Statements of Earnings. ~~Approximately~~For the ~~19.6%~~three months ended March 31, 2014 and 2013, approximately 23.2% and 15.0% of the amount reclassified ~~is then~~was capitalized into construction work in process and approximately ~~1.1%~~2.7% isand 2.5% was capitalized into other accounts. Pre-tax amounts reclassified from AOCI related to ~~"Fair~~“Fair Value Adjustment for Cash Flow ~~Hedges"~~Hedges” are reclassified to ~~"Interest Charges"~~“Interest Charges” in the Condensed Consolidated Statements of Earnings. An insignificant amount ~~is then~~was capitalized as AFUDC. The income tax impacts of all amounts reclassified from AOCI are included in ~~"Income Taxes"~~“Income Taxes” in the Condensed Consolidated Statements of Earnings.

Table of Contents

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


~~(4)~~(5)	Variable Interest Entities

GAAP determines how an enterprise evaluates and accounts for its involvement with variable interest entities, ~~including determining the primary beneficiary of a variable interest entity, by~~ focusing primarily on whether the enterprise has the power to direct the activities that most significantly impact the economic performance of a variable interest entity. GAAP also requires continual reassessment of the primary beneficiary of a variable interest entity. Additional information concerning ~~PNM's~~PNM’s variable interest entities is contained in Note 9 of the Notes to Consolidated Financial Statements in the ~~2012~~2013 Annual Reports on Form 10-K.

Valencia

PNM has a PPA to purchase all of the electric capacity and energy from Valencia, a ~~145~~158 MW natural gas-fired power plant near Belen, New Mexico, through May 2028. A third-party built, owns, and operates the facility while PNM is the sole purchaser of the electricity generated. PNM is obligated to pay fixed operations and maintenance and capacity charges in addition to variable ~~operations~~operation and maintenance charges under this PPA. For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2014 and 2013,, PNM paid $4.8 million and ~~$14.1~~$4.7 million for fixed charges and $~~0.7~~0.2 million and ~~$1.0~~$0.1 million ~~for variable charges. For the~~ ~~three and nine~~ ~~months ended~~ ~~September 30, 2012, PNM paid~~ ~~$4.8 million~~ ~~and~~ ~~$14.0 million~~ ~~for fixed charges and~~ ~~$0.6 million~~ ~~and~~ ~~$0.9 million~~ for variable charges. PNM does not have any other financial obligations related to Valencia. The assets of Valencia can only be used to satisfy obligations of Valencia and creditors of Valencia do not have any recourse against ~~PNM's~~PNM’s assets. PNM has concluded that the third party entity that owns Valencia is a variable interest entity and that PNM is the primary beneficiary of the entity under ~~GAAP.~~GAAP since PNM has the power to direct the activities that most significantly impact the economic performance of Valencia and will absorb the majority of the variability in the cash flows of the plant. As the primary beneficiary, PNM consolidates the entity in its financial statements. The assets and liabilities of Valencia set forth below are immaterial to PNM and, therefore, not shown separately on the Condensed Consolidated Balance Sheets. The ~~owner's~~owner’s equity and net income of Valencia are considered attributable to non-controlling interest.

~~During the term of the PPA, PNM has the option to purchase and own up to~~ ~~50%~~ ~~of the plant or the variable interest entity.~~

~~The PPA specifies that the purchase price would be the greater of (i)~~ ~~50%~~ ~~of book value reduced by related indebtedness or (ii)~~ ~~50%~~ ~~of fair market value. On October 8, 2013, PNM notified the owner of Valencia that PNM may exercise the option to purchase~~ ~~50%~~ ~~of the plant. As provided in the PPA, an appraisal process will be initiated if the parties fail to reach agreement on fair market value within~~ 60 ~~days. After the purchase price has been determined, PNM may in its sole discretion determine whether or not it desires to exercise its option to purchase the~~ ~~50%~~ interest. In that regard, PNM will evaluate all its alternatives with respect to Valencia with the goal of achieving a fair and economical benefit for its customers. Also, PNM is in the process of developing its 2014 IRP (Note 11). Through this process, PNM will evaluate all of its resource options including Valencia to determine the optimal way to serve its customers. If PNM decides to exercise its option, the approval of the NMPRC and FERC would be required, which process could take up to 15 ~~months. Since the purchase price is yet to be established, PNM cannot determine whether or not it will exercise its option or if required regulatory approvals would be received.~~

Summarized financial information for Valencia is as follows:

Results of Operations


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2013			2012			2013			2012			2014			2013
	(In thousands)												(In thousands)
Operating revenues	$	5,453		$	5,358		$	15,150		$	14,916		$	4,931		$	4,775
Operating expenses	(1,326		)	(1,378		)	(4,246		)	(4,217		)	(1,400		)	(1,571		)
Earnings attributable to non-controlling interest	$	4,127		$	3,980		$	10,904		$	10,699		$	3,531		$	3,204

Financial Position



	March 31,		December 31,
	2014		2013
	(In thousands)
Current assets	$	2,780	$	2,658
Net property, plant, and equipment	74,433		75,137
Total assets	77,213		77,795
Current liabilities	1,022		766
Owners’ equity – non-controlling interest	$	76,191	$	77,029

During the term of the PPA, PNM has the option to purchase and own up to 50% of the plant or the variable interest entity.

The PPA specifies that the purchase price would be the greater of (i) 50% of book value reduced by related indebtedness or (ii) 50% of fair market value. On October 8, 2013, PNM notified the owner of Valencia that PNM may exercise the option to purchase 50% of the plant. As provided in the PPA, an appraisal process has been initiated since the parties failed to reach agreement on

Table of Contents

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~Financial Position~~

September 30, December 31,
2013 2012
(In thousands)
Current assets $ 3,457
$ 3,655
Net property, plant, and equipment 75,841
77,953
Total assets 79,298
81,608
Current liabilities 1,028
765
Owners' equity – non-controlling interest $ 78,270
$ 80,843
fair market value within 60 days. After the purchase price has been determined through the appraisal process, PNM may in its sole discretion determine whether or not it desires to exercise its option to purchase the 50% interest. In that regard, PNM will evaluate all its alternatives with respect to Valencia with the goal of achieving a fair and economical benefit for its customers. Also, PNM is in the process of developing its 2014 IRP (Note 12). Through this process, PNM will evaluate all of its resource options, including Valencia, to determine the optimal way to serve its customers. If PNM decides to exercise its option, the approval of the NMPRC and FERC would be required, which process could take up to 15 months. Since the purchase price is yet to be established, PNM cannot determine whether or not it will exercise its option or if required regulatory approvals would be received.

PVNGS Leases

PNM leases interests in Units 1 and 2 of PVNGS under arrangements, which were entered into in 1985 and 1986, that are accounted for as operating leases. PNM is not the legal or tax owner of the leased assets. The leases provide PNM ~~has~~with an option to purchase the leased assets at appraised value at the end of the ~~leases, but~~leases. PNM does not have a fixed price purchase option and does not provide residual value guarantees. ~~As set forth in the~~The leases also provide PNM ~~has~~with options to renew the leases at fixed rates ~~which represent~~ ~~50%~~ ~~of the amounts during the original terms of~~set forth in the leases for two years beyond the termination of the original lease terms. The option periods on ~~all of the Unit 1~~certain leases ~~and one of the Unit 2 leases, amounting to~~ ~~14%~~ ~~of the Unit 2 capacity under lease,~~ may be further extended for up to an additional six years ~~(the "Maximum Option Period")~~ if the appraised remaining useful lives and fair value of the leased assets are greater than parameters set forth in the leases. ~~As discussed in~~See Note 97 of the Notes to Consolidated Financial Statements in the ~~2012~~2013 Annual Reports on Form 10-K and Note 6, for additional information regarding the leases and actions PNM notified each of the lessors of the Unit 1 leases that it will extend each Unit 1 lease for the Maximum Option Period upon the expiration of the basic lease term on January 15, 2015. In addition, PNM notified each of the lessorshas taken with respect to its renewal and purchase options. Under GAAP, these renewal options are considered to be variable interests in the ~~Unit 2 leases that PNM will "retain"~~trusts and result in the assets leased under that lease upon the expiration of the basic lease term on January 15, 2016. PNM will be required to specify by notice to each of the lessors by January 15, 2014, whether on January 15, 2016 it will extend the Unit 2 leases or purchase the leased assets. PNM is unable to predict the outcome or impact of these matters.trusts being considered variable interest entities.

PNM is only obligated to make payments to the trusts for the scheduled semi-annual lease payments, which, net of amounts that will be returned to PNM through its ownership in related lessor notes and the Unit 2 beneficial trust, aggregate $~~52.6~~36.5 million as of ~~September 30, 2013~~March 31, 2014 over the remaining original terms of the ~~leases.~~leases and $145.2 million during the renewal terms of the leases that PNM elected to renew. Under certain circumstances (for example, final shutdown of the plant, the NRC issuing specified violation orders with respect to PVNGS, or the occurrence of specified nuclear events), PNM would be required to make specified payments to the beneficial owners and take title to the leased interests. If such an event had occurred as of ~~September 30, 2013~~March 31, 2014, PNM could have been required to pay the beneficial owners up to $~~154.1~~144.7 million, which would result in PNM taking ownership of the leased assets and termination of the leases. Other than as discussed in Note 6, PNM has no other financial obligations or commitments to the trusts or the beneficial owners. Creditors of the trusts have no recourse to ~~PNM's~~PNM’s assets other than with respect to the contractual lease payments. PNM has no additional rights to the assets of the trusts other than the use of the leased assets.

PNM has evaluated the PVNGS lease arrangements, including the notices, ~~discussed~~amendments, and agreements referred to above, and concluded that it does not have the power to direct the activities that most significantly impact the economic performance of the trusts and, therefore, is not the primary beneficiary of the trusts under GAAP. PNM has recorded no assets or liabilities related to the trusts other than the accrual of lease payments between the scheduled payment dates, which were $11.8 million at ~~September 30, 2013~~March 31, 2014 and $26.0 million at December 31, ~~2012~~2013, that are included in other current liabilities on the Condensed Consolidated Balance Sheets. ~~For additional information regarding these leases, see Risk Factors, MD&A – Off Balance Sheet Arrangements and Note 7 of the Notes to Consolidated Financial Statements in the~~ ~~2012~~ ~~Annual Reports on Form 10-K.~~

Delta

PNM has a 20-year PPA expiring in 2020 covering the entire output of Delta, which is a variable interest under GAAP. PNM also controls the dispatch of the generating plant, which impacts the variable payments made under the PPA and impacts the economic performance of the entity that owns Delta. PNM makes fixed and variable payments to Delta under the PPA. For the three ~~and nine~~ months ended

~~Table of Contents~~

~~PNM RESOURCES, INC. AND SUBSIDIARIES~~

~~PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES~~

~~TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~September 30, 2013~~,March 31, 2014 and 2013, PNM incurred fixed capacity charges of $1.6 million and $~~4.8~~1.6 million and variable energy charges of $~~0.7~~0.2 million and $~~1.3~~0.2 million under the PPA. ~~For the~~ ~~three and nine~~ ~~months ended~~ ~~September 30, 2012, PNM incurred fixed capacity charges of~~ ~~$1.6 million~~ ~~and~~ ~~$4.7 million~~ ~~and variable energy charges of~~ ~~$0.3 million~~ ~~and~~ ~~$0.6 million. PNM's~~PNM’s only quantifiable obligation under the PPA is to make the fixed payments, which as of ~~September 30, 2013~~March 31, 2014, aggregated $~~40.7~~37.7 million through the end of the ~~PPA in~~ ~~2020~~.PPA. PNM will also pay variable costs, which cannot be quantified since the amounts are based on how much the generating plant is in operation.

This arrangement was entered into prior to December 31, 2003 and PNM was unsuccessful in obtaining the information necessary to determine if it is the primary beneficiary of the entity that owns Delta, or to consolidate that entity if it were determined that PNM is the primary beneficiary. Accordingly, PNM was unable to make those determinations and, as provided in GAAP, accounted for this PPA as an operating lease.

Table of Contents

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In December 2012, PNM entered into an agreement with the owners of Delta under which PNM would purchase the entity that owns Delta. At closing PNM would make a cash payment of $23.0 million, which would be adjusted for actual working capital compared to a targeted working capital and certain prepayments of debt. Delta ~~had~~has project financing debt, which PNM would retire at closing of the purchase, ofamounting to $~~16.9~~15.4 million at ~~September 30, 2013~~March 31, 2014, including $~~3.2~~3.3 million due by ~~September 30, 2014~~March 31, 2015. FERC approved the purchase on February 26, 2013 and the NMPRC approved the purchase on June 26, 2013. Closing is subject to the seller remedying specified operational, NERC compliance, and environmental issues, as well as other customary closing conditions. ~~Closing~~PNM and Delta are working with the City of Albuquerque and EPA in order to remedy certain environmental issues. PNM anticipates closing of the purchase ~~is anticipated to occur~~ in ~~early~~the second quarter of 2014.

Delta informed PNM that at ~~September 30,~~March 31, 2014 and December 31, 2013,, it had total assets of $~~25.3~~23.2 million, and $23.7 million, including net property, plant, and equipment of $~~21.0~~19.7 million, and $20.3 million, and total liabilities of $~~18.9~~17.4 million. and $18.2 million. Delta also indicated its revenue for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2014 and 2013 was $~~2.8~~1.8 million and $~~6.8~~1.8 million and its net earnings were $~~0.6~~0.3 million and $~~0.9~~0.2 million. Consolidation of Delta would be immaterial to the Condensed Consolidated Balance Sheets of PNMR and PNM. Since all of ~~Delta's~~Delta’s revenues and expenses are attributable to its PPA arrangement with PNM, the primary impact of consolidating Delta to the Condensed Consolidated Statements of Earnings of PNMR and PNM would be to reclassify ~~Delta's~~Delta’s net earnings from operating expenses and reflect such amount as earnings attributable to a non-controlling interest, without any impact to net earnings attributable to PNMR and PNM.


~~(5)~~(6)	Lease Commitments

The Company leases office buildings, vehicles, and other equipment under operating leases. In addition, PNM leases interests in Units 1 and 2 of PVNGS and an interest in the EIP transmission line. Additional information concerning the Company’s lease commitments is contained in Note 7 of the Notes to Consolidated Financial Statements in the 2013 Annual Reports on Form 10-K.

The PVNGS leases were scheduled to expire on January 15, 2015 for the four Unit 1 leases and January 15, 2016 for the four Unit 2 leases. Each of the leases provides PNM with an option to purchase the leased assets at fair market value at the end of the lease. In addition, the leases provide PNM with options to renew the leases at fixed rates set forth in each of the leases for two years beyond the termination of the original lease terms. The option periods on certain leases may be further extended for up to an additional six years (the “Maximum Option Period”) if the appraised remaining useful lives and fair values of the leased assets are greater than parameters set forth in the leases. The rental payments during the renewal option periods would be 50% of the amounts during the original terms of the leases.

Following procedures set forth in the PVNGS leases, PNM notified each of the lessors under the Unit 1 leases that it would elect to renew those leases for the Maximum Option Period on the expiration date of the original leases. In addition, PNM notified the lessor under the one Unit 2 lease containing the Maximum Option Period provision that it would elect to renew that lease for the Maximum Option Period on the expiration date of the original lease. On December 11, 2013, PNM and each of the Unit 1 lessors entered into amendments to each of the Unit 1 leases setting forth the terms and conditions that will implement the extension of the term of the lease through the agreed upon Maximum Option Period expiring on January 15, 2023. Similarly, on March 18, 2014, PNM and the lessor under the one Unit 2 lease containing the Maximum Option Period provision entered into an amendment to that lease setting forth the terms and conditions that will implement the extension of the term of the lease through the agreed upon Maximum Option Period expiring on January 15, 2024.

For the three PVNGS Unit 2 leases which do not contain the Maximum Option Period provisions, PNM, following procedures set forth in the leases, notified each of the lessors that PNM would elect to purchase the assets underlying those leases on the expiration date of the original leases. On February 25, 2014, PNM and the lessor under one of the Unit 2 leases entered into a letter agreement that establishes that the purchase price, representing the fair market value, to be paid by PNM for the assets underlying that lease will be $78.1 million on January 15, 2016. This lease is for 31.2494 MW of the entitlement from PVNGS Unit 2. The lease remains in existence and PNM will record the purchase at the termination of the lease on January 15, 2016.

On May 1, 2014, PNM and the trusts that are the lessors under the other two PVNGS Unit 2 leases signed a letter agreement that establishes a binding agreement regarding the purchase price, representing the fair market value, to be paid by PNM for the assets underlying those leases of $85.2 million on January 15, 2016. These leases are for 32.76 MW of the entitlement from

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PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

PVNGS Unit 2. PNMR Development, a wholly-owned subsidiary of PNMR, is also a party to the letter agreement, which constitutes a letter of intent providing PNMR Development with the option, subject to approval by the Board and negotiation of definitive documents, to acquire the entities that own the leased assets at any time from June 1, 2014 through January 14, 2016. The early purchase price would be equal to the January 15, 2016 purchase price discounted to the actual purchase date. The early purchase amount would be $79.9 million on June 1, 2014 and would escalate to $85.2 million on January 14, 2016. The consideration paid to the lessor on an early purchase would include an additional amount equal to the discounted value of the lessors’ equity return portion of the future lease payments. Such additional consideration would be $5.8 million on June 1, 2014 and would decline to $1.2 million on January 14, 2016. PNMR and PNM are unable to predict whether or not the early purchase will occur.


(7)	Fair Value of Derivative and Other Financial Instruments

Energy Related Derivative Contracts

Overview

The primary objective for the use of derivative instruments, including energy contracts, options, and futures, is to manage price risk associated with forecasted purchases of energy and fuel used to generate electricity, as well as managing anticipated generation capacity in excess of forecasted demand from existing customers. The ~~Company's~~Company’s energy related derivative contracts manage commodity risk. PNM is required to meet the demand and energy needs of its retail and firm-requirements wholesale customers. PNM is exposed to market risk for its share of PVNGS Unit 3 and the needs of its firm-requirements wholesale customers not covered under a FPPAC. ~~PNM's~~PNM’s operations are managed primarily through a net asset-backed strategy, whereby ~~PNM's~~PNM’s aggregate net open forward contract position is covered by its forecasted excess generation capabilities or market purchases. PNM could be exposed to market risk if its generation capabilities were to be disrupted or if its load requirements were to be greater than ~~anticipated, to the extent not covered by the FPPAC.~~anticipated. If all or a portion of load requirements were required to be covered as a result of such unexpected situations, commitments would have to be met through market purchases. Additional information concerning the ~~Company's~~Company’s energy related derivative contracts, including how commodity risk is managed, is contained in Note 8 of the Notes to Consolidated Financial Statements in the ~~2012~~2013 Annual Reports on Form 10-K.

Commodity Risk

Marketing and procurement of energy often involve market risks associated with managing energy commodities and establishing open positions in the energy markets, primarily on a short-term basis. PNM routinely enters into various derivative instruments such as forward contracts, option agreements, and price basis swap agreements to economically hedge price and volume risk on power commitments and fuel requirements and to minimize the effect of market fluctuations in wholesale portfolios.

~~Table of Contents~~

~~PNM RESOURCES, INC. AND SUBSIDIARIES~~

~~PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES~~

~~TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

PNM monitors the market risk of its commodity contracts using VaR calculations to maintain total exposure within management-prescribed limits in accordance with approved risk and credit policies.

Accounting for Derivatives

Under derivative accounting and related rules for energy contracts, the Company accounts for its various derivative instruments for the purchase and sale of energy based on the ~~Company's~~Company’s intent. Energy contracts that meet the definition of a derivative under GAAP and do not qualify, or are not designated, for the normal ~~sales~~purchases and ~~purchases~~normal sales exception are recorded on the balance sheet at fair value at each period end. The changes in fair value are recognized in earnings unless specific hedge accounting criteria are met and elected. Normal ~~sales~~purchases and ~~purchases~~normal sales are not marked to market and are reflected in results of operations when the underlying transactions ~~physically~~ settle.

During the ~~nine~~three months ended ~~September 30, 2013~~March 31, 2014 and the year ended December 31, ~~2012,~~2013, the Company was not hedging its exposure to the variability in future cash flows from commodity derivatives through designated cash flows hedges. The contracts recorded at fair value that do not qualify or are not designated for cash flow hedge accounting are classified as economic hedges. Economic hedges are defined as derivative instruments, including long-term power agreements, used to economically hedge generation assets, purchased power and fuel costs, and customer load requirements. Changes in the fair value of economic hedges are reflected in results of operations and are classified between operating revenues and cost of energy according to the intent of the ~~economic~~ hedge. The Company ~~does not enter into speculative~~has no trading transactions.

Table of Contents

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Fair value is defined under GAAP as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value is based on current market quotes as available and is supplemented by modeling techniques and assumptions made by the Company to the extent quoted market prices or volatilities are not available. External pricing input availability varies based on commodity location, market liquidity, and term of the agreement. Valuations of derivative assets and liabilities take into account nonperformance risk including the effect of ~~counterparties'~~counterparties’ and the ~~Company's~~Company’s credit risk. The Company regularly assesses the validity and availability of pricing data for its derivative transactions. Although the Company uses its best judgment in estimating the fair value of these instruments, there are inherent limitations in any estimation technique.

Commodity Derivatives

Commodity derivative instruments that are recorded at fair value, all of which are accounted for as economic hedges, are summarized as follows:


	Economic Hedges						Economic Hedges
	September 30, 2013			December 31, 2012			March 31, 2014			December 31, 2013
PNMR and PNM	(In thousands)						(In thousands)
Current assets	$	5,743		$	3,785		$	4,003		$	4,064
Deferred charges	4,284			352			2,474			3,002
	10,027			4,137			6,477			7,066

Current liabilities	(1,017		)	(1,000		)	(5,446		)	(2,699		)
Long-term liabilities	(1,347		)	(1,933		)	(907		)	(1,094		)
	(2,364		)	(2,933		)	(6,353		)	(3,793		)
Net	$	7,663		$	1,204		$	124		$	3,273

Included in the above table are $~~2.3~~3.0 million of current assets and $~~3.8~~2.3 million of deferred charges at March 31, 2014 and $3.0 million of current assets and $3.0 million of deferred charges at December 31, 2013 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. Certain of ~~PNM's~~PNM’s commodity derivative instruments ~~included~~ in the above table are subject to master netting agreements whereby assets and liabilities could be offset in the settlement process. The Company does not offset fair value, cash collateral, and accrued payable or receivable amounts recognized for derivative instruments under master netting arrangements and the above table reflects the gross amounts of assets and liabilities. The amounts that could be offset under master netting agreements were immaterial at March 31, 2014 and December 31, 2013.

At March 31, 2014 and December 31, 2013, PNMR and PNM had no amounts recognized for the legal right to reclaim cash collateral. However, at March 31, 2014 and December 31, 2013, amounts posted as cash collateral under margin arrangements were $3.1 million and $2.8 million for both PNMR and PNM. PNMR and PNM had obligations to return cash collateral of approximately $0.1 million at March 31, 2014 and $0.2 million at December 31, 2013. Cash collateral amounts are included in other current assets and other current liabilities on the Condensed Consolidated Balance Sheets.

PNM has a NMPRC approved hedging plan to manage fuel and purchased power costs related to customers covered by its FPPAC. The table above includes $0.4 million of current assets and $0.6 million of current liabilities at March 31, 2014 and $0.4 million of current assets and $0.1 million of current liabilities at December 31, 2013 related to this plan. The offsets to these amounts are recorded as regulatory assets and liabilities on the Condensed Consolidated Balance Sheets.

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PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

payable or receivable amounts recognized for derivative instruments under master netting arrangements and the above table reflects the gross amounts of assets and liabilities. The amounts that could be offset under master netting agreements were immaterial at ~~September 30, 2013~~ ~~and December 31, 2012.~~

At ~~September 30, 2013~~ ~~and~~ ~~December 31, 2012, PNMR and PNM had no amounts recognized for the legal right to reclaim cash collateral. In addition, at~~ ~~September 30, 2013~~ ~~and~~ ~~December 31, 2012, amounts posted as cash collateral under margin arrangements were~~ ~~$2.0 million~~ ~~and~~ ~~$1.9 million~~ ~~for both PNMR and PNM. PNMR and PNM had no obligation to return cash collateral at~~ ~~September 30, 2013~~ ~~and~~ ~~December 31, 2012. Cash collateral amounts are included in other current assets on the Condensed Consolidated Balance Sheets.~~

~~PNM has a NMPRC approved hedging plan to manage fuel and purchased power costs related to customers covered by its FPPAC. The table above includes~~ ~~$0.6 million~~ ~~of current assets,~~ ~~$0.1 million~~ ~~of deferred charges and~~ ~~$0.1 million~~ ~~of current liabilities at~~ ~~September 30, 2013~~ ~~and less than~~ ~~$0.1 million~~ ~~of current assets at~~ ~~December 31, 2012~~ ~~related to this plan. The offsets to these amounts are recorded as regulatory assets and liabilities on the Condensed Consolidated Balance Sheets.~~

The following table presents the effect of mark-to-market commodity derivative instruments on earnings, excluding income tax ~~effects and settlements, of commodity derivative instruments that are recorded at fair value.~~effects. Commodity derivatives had no impact on OCI for the periods presented.


	Economic Hedges											Economic Hedges
	Three Months Ended						Nine Months Ended					Three Months Ended
	September 30,						September 30,					March 31,
	2013			2012			2013		2012			2014			2013
PNMR and PNM	(In thousands)											(In thousands)
Electric operating revenues	$	7,077		$	(740	)	$	5,743	$	897		$	(4,151	)	$	(4,603	)
Cost of energy	(72		)	263			421		(278		)	189			756
Total gain (loss)	$	7,005		$	(477	)	$	6,164	$	619		$	(3,962	)	$	(3,847	)

Commodity contract volume positions are presented in MMBTU for gas related contracts and in MWh for power related contracts. The table below presents ~~PNMR's~~PNMR’s and ~~PNM's~~PNM’s net buy (sell) volume positions:


	Economic Hedges			Economic Hedges
	MMBTU	MWh		MMBTU	MWh
September 30, 2013
March 31, 2014
PNMR and PNM	980,000	(3,801,738	)	775,000	(3,287,548	)
December 31, 2012
December 31, 2013
PNMR and PNM	1,127,500	(2,477,520	)	905,000	(3,343,783	)

In connection with managing its commodity risks, the Company enters into master agreements with certain counterparties. If the Company is in a net liability position under an agreement, some agreements provide that the counterparties can request collateral from the Company if the ~~Company's~~Company’s credit rating is downgraded; other agreements provide that the counterparty may request collateral to provide it with ~~"adequate assurance"~~“adequate assurance” that the Company will perform; and others have no provision for collateral.

The table below presents information about the ~~Company's~~Company’s contingent requirements to provide collateral under commodity contracts having an objectively determinable collateral provision that are in net liability positions and are not fully collateralized with cash. Contractual liability represents commodity derivative contracts recorded at fair value on the balance sheet, determined on an individual contract basis without offsetting amounts for individual contracts that are in an asset position and could be offset under master netting agreements with the same counterparty. The table only reflects cash collateral that has been posted under the existing contracts and does not reflect letters of credit under the ~~Company's~~Company’s revolving credit facilities that have been issued as collateral. Net exposure is the net contractual liability for all contracts, including those designated as normal purchases and normal sales, offset by existing cash collateral and by any offsets available under master netting agreements, including both asset and liability positions.



Contingent Feature – Credit Rating Downgrade	Contractual Liability		Existing Cash Collateral		Net Exposure
	(In thousands)
March 31, 2014
PNMR and PNM	$	2,981	$	—	$	1,913
December 31, 2013
PNMR and PNM	$	2,398	$	—	$	2,152

Sale of Power from PVNGS Unit 3

Because PNM’s 134 MW share of Unit 3 at PVNGS is not included in retail rates, that unit’s power is being sold in the wholesale market. Since January 1, 2011, PNM has been selling power from its interest in PVNGS Unit 3 at market prices. As of March 31, 2014, PNM had contracted to sell 100% of PVNGS Unit 3 output through 2015, at market price plus a premium.

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PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

collateral. Net exposure is the net contractual liability for all contracts, including those designated as normal purchases and sales, offset by existing cash collateral and by any offsets available under master netting agreements, including both asset and liability positions.

Contingent Feature –
Credit Rating Downgrade
Contractual Liability Existing Cash Collateral

Net Exposure
(In thousands)
September 30, 2013
PNMR and PNM $ 2,250
$ —
$ 2,224
December 31, 2012
PNMR and PNM $ 2,933
$ —
$ 2,777

~~Sale of Power from PVNGS Unit 3~~

~~Since~~ ~~January 1, 2011, PNM has been selling power from its interest in PVNGS Unit 3 at market prices. As of~~ ~~September 30, 2013, PNM had contracted to sell~~ ~~100%~~ ~~of PVNGS Unit 3 output through 2015, at market price plus a premium.~~ PNM has established fixed rates, which average approximately $37 per MWh, for substantially all of these sales through the end of ~~2013~~2014 through ~~derivative contracts~~hedging arrangements that are accounted for as economic hedges. PNM is also ~~substantially~~partially hedged for ~~2014.~~2015.

Non-Derivative Financial Instruments

The carrying amounts reflected on the Condensed Consolidated Balance Sheets approximate fair value for cash, receivables, and payables due to the short period of maturity. Available-for-sale securities are carried at fair ~~value, which include unrealized gains on securities which have not been recognized in net earnings.~~value. Available-for-sale securities for PNMR and PNM consist of PNM assets held in the NDT for its share of decommissioning costs of PVNGS and a trust for ~~PNM's~~PNM’s share of post-term reclamation

costs related to the coal mines serving SJGS ~~which investments are included in "other investments" on the Condensed Consolidated Balance Sheet.~~(Note 11). The fair value and gross unrealized gains of investments in available-for-sale securities are presented in the following table. At March 31, 2014 and December 31, 2013, the fair value of available-for-sale securities included $225.8 million and $222.5 million for the NDT and $4.4 million and $4.4 million for the mine reclamation trust.


	September 30, 2013				December 31, 2012				March 31, 2014				December 31, 2013
	Unrealized Gains		Fair Value		Unrealized Gains		Fair Value		Unrealized Gains		Fair Value		Unrealized Gains		Fair Value
			(In thousands)
PNMR and PNM											(In thousands)
Cash and cash equivalents	$	—	$	24,414	$	—	$	4,628	$	—	$	4,246	$	—	$	3,356
Equity securities:
Domestic value	10,519		34,967		5,223		30,044		14,558		41,055		14,523		39,460
Domestic growth	23,355		67,527		15,212		51,650		23,002		74,517		25,656		76,292
International and other	1,543		16,159		247		14,868		1,671		17,264		1,040		16,633
Fixed income securities:
U.S. Government	262		16,711		1,305		32,592		377		20,662		158		21,941
Municipals	1,120		37,074		4,069		43,861		2,659		61,158		1,018		58,568
Corporate and other	221		14,553		1,100		14,868		458		11,348		207		10,605
	$	37,020	$	211,405	$	27,156	$	192,511	$	42,725	$	230,250	$	42,602	$	226,855

~~Table of Contents~~

~~PNM RESOURCES, INC. AND SUBSIDIARIES~~

~~PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES~~

~~TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

The proceeds and gross realized gains and losses on the disposition of available-for-sale securities for PNMR and PNM are shown in the following table. Realized gains and losses are determined by specific identification of costs of securities sold.


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
	2013			2012			2013			2012			2014			2013
	(In thousands)												(In thousands)
Proceeds from sales	$	103,230		$	90,518		$	179,336		$	136,305		$	22,804		$	14,284
Gross realized gains	$	2,611		$	6,263		$	8,962		$	11,029		$	3,119		$	1,391
Gross realized (losses)	$	(1,202	)	$	(5,131	)	$	(2,920	)	$	(7,055	)	$	(545	)	$	(407	)

Held-to-maturity securities are those investments in debt securities that the Company has the ability and intent to hold until maturity. Held-to-maturity securities consist of the investment in PVNGS lessor notes and certain items within other investments.

At ~~September 30, 2013, the available-for-sale and held-to-maturity debt securities had the following final maturities:~~

Fair Value
Available-for-Sale Held-to-Maturity
PNMR and PNM PNMR PNM
(In thousands)
Within 1 year $ 1,284
$ 4,840
$ 1,138
After 1 year through 5 years 16,768
55,310
53,956
After 5 years through 10 years 8,027
—
—
After 10 years through 15 years 3,277
—
—
After 15 years through 20 years 5,512
—
—
After 20 years 33,470
—
—
$ 68,338
$ 60,150
$ 55,094

The Company has no available-for-sale or held-to-maturity securities for which carrying value exceeds fair value. There are no impairments considered to be ~~"other~~“other than ~~temporary"~~temporary” that are included in AOCI and not recognized in earnings.

Table of Contents

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

At March 31, 2014, the available-for-sale and held-to-maturity debt securities had the following final maturities:



	Fair Value
	Available-for-Sale		Held-to-Maturity
	PNMR and PNM		PNMR		PNM
	(In thousands)
Within 1 year	$	2,798	$	11,968	$	11,968
After 1 year through 5 years	21,550		33,618		32,903
After 5 years through 10 years	11,895		—		—
After 10 years through 15 years	8,521		—		—
After 15 years through 20 years	10,705		—		—
After 20 years	37,699		—		—
	$	93,168	$	45,586	$	44,871

Fair Value Disclosures

The Company determines the fair values of its derivative and other financial instruments based on the hierarchy established in GAAP, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. GAAP describes three levels of inputs that may be used to measure fair value. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity ~~can~~has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Level 3 inputs used in determining fair values for the Company consist of internal valuation models.

For ~~the NDT and reclamation trust investments,~~available-for-sale securities, Level 2 fair values are provided by the trustee utilizing a pricing service. The pricing provider predominantly uses the market approach using bid side market value based upon a hierarchy of information for specific securities or securities with similar characteristics. For commodity derivatives, Level 2 fair values are determined based on market observable inputs, which are validated using multiple broker quotes, including forward price, volatility, and interest rate curves to establish expectations of future prices. Credit valuation adjustments are made for estimated credit losses based on the overall exposure to each counterparty. For long-term debt, Level 2 fair values are provided by an external pricing service. The pricing service primarily utilizes quoted prices for similar debt in active markets when determining fair value. For investments categorized as Level 3, primarily the PVNGS lessor notes and other investments, fair values were determined by

~~Table of Contents~~

~~PNM RESOURCES, INC. AND SUBSIDIARIES~~

~~PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES~~

~~TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

discounted cash flow models that take into consideration discount rates that are observable for similar type assets and liabilities. Management of the Company independently verifies the information provided by pricing services.

~~The Company records any transfers between fair value hierarchy levels as of the end of each calendar quarter. There were no transfers between levels during the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2013~~ ~~and~~ ~~2012~~.

~~Items recorded at fair value on the Condensed Consolidated Balance Sheets are presented below:~~

GAAP Fair Value Hierarchy
Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2)
September 30, 2013 (In thousands)
PNMR and PNM
Decommissioning and reclamation investments:
   Cash and cash equivalents $ 24,414
$ 24,414
$ —
   Equity securities:
     Domestic value 34,967
34,967
—
     Domestic growth 67,527
67,527
—
International and other 16,159
16,159
—
   Fixed income securities:
     U.S. government 16,711
14,949
1,762
     Municipals 37,074
—
37,074
     Corporate and other 14,553
—
14,553
           $ 211,405
$ 158,016
$ 53,389

Commodity derivative assets $ 10,027
$ —
$ 10,027
Commodity derivative liabilities (2,364 ) —
(2,364 )
          Net $ 7,663
$ —
$ 7,663

December 31, 2012
PNMR and PNM

Decommissioning and reclamation investments:

   Cash and cash equivalents $ 4,628
$ 4,628
$ —
   Equity securities:

     Domestic value 30,044
30,044
—
     Domestic growth 51,650
51,650
—
     International and other 14,868
14,868
—
   Fixed income securities:
     U.S. government 32,592
27,737
4,855
     Municipals 43,861
—
43,861
     Corporate and other 14,868
—
14,868
           $ 192,511
$ 128,927
$ 63,584

Commodity derivative assets $ 4,137
$ —
$ 4,137
Commodity derivative liabilities (2,933 ) —
(2,933 )
          Net $ 1,204
$ —
$ 1,204

~~There were no Level 3 fair value measurements at~~ ~~September 30, 2013~~ ~~or December 31, 2012.~~

Table of Contents

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~The carrying amounts and fair values of investments in PVNGS lessor notes, other investments, and long-term debt, which are not~~Items recorded at fair value on the Condensed Consolidated Balance Sheets are presented ~~below:~~below by level of the fair value hierarchy. There were no Level 3 fair value measurements at March 31, 2014 and December 31, 2013 for items recorded at fair value.

GAAP Fair Value Hierarchy
Carrying Amount Fair Value Level 1 Level 2 Level 3
September 30, 2013 (In thousands)
PNMR
Long-term debt $ 1,748,841
$ 1,929,828
$ —
$ 1,926,126
$ 3,702
Investment in PVNGS lessor notes $ 53,300
$ 55,094
$ —
$ —
$ 55,094
Other investments $ 2,803
$ 6,941
$ 739
$ —
$ 6,202
PNM
Long-term debt $ 1,290,608
$ 1,400,109
$ —
$ 1,400,109
$ —
Investment in PVNGS lessor notes $ 53,300
$ 55,094
$ —
$ —
$ 55,094
Other investments $ 458
$ 458
$ 458
$ —
$ —
TNMP
Long-term debt $ 336,128
$ 393,122
$ —
$ 393,122
$ —
Other investments $ 281
$ 281
$ 281
$ —
$ —

December 31, 2012
PNMR
Long-term debt $ 1,672,290
$ 1,969,362
$ —
$ 1,966,725
$ 2,637
Investment in PVNGS lessor notes $ 77,682
$ 84,198
$ —
$ —
$ 84,198
Other investments $ 5,599
$ 6,965
$ 774
$ —
$ 6,191
PNM
Long-term debt $ 1,215,579
$ 1,385,433
$ —
$ 1,385,433
$ —
Investment in PVNGS lessor notes $ 77,682
$ 84,198
$ —
$ —
$ 84,198
Other investments $ 494
$ 494
$ 494
$ —
$ —
TNMP
Long-term debt $ 311,589
$ 418,166
$ —
$ 418,166
$ —
Other investments $ 281
$ 281
$ 281
$ —
$ —



				GAAP Fair Value Hierarchy
	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
March 31, 2014	(In thousands)
PNMR and PNM
Available-for-sale securities
Cash and cash equivalents	$	4,246		$	4,246	$	—
Equity securities:
Domestic value	41,055			41,055		—
Domestic growth	74,517			74,517		—
International and other	17,264			17,264		—
Fixed income securities:
U.S. Government	20,662			18,909		1,753
Municipals	61,158			—		61,158
Corporate and other	11,348			2,385		8,963
	$	230,250		$	158,376	$	71,874

Commodity derivative assets	$	6,477		$	—	$	6,477
Commodity derivative liabilities	(6,353		)	—		(6,353		)
Net	$	124		$	—	$	124

December 31, 2013
PNMR and PNM
Available-for-sale securities
Cash and cash equivalents	$	3,356		$	3,356	$	—
Equity securities:
Domestic value	39,460			39,460		—
Domestic growth	76,292			76,292		—
International and other	16,633			16,633		—
Fixed income securities:
U.S. Government	21,941			20,194		1,747
Municipals	58,568			—		58,568
Corporate and other	10,605			2,245		8,360
	$	226,855		$	158,180	$	68,675

Commodity derivative assets	$	7,066		$	—	$	7,066
Commodity derivative liabilities	(3,793		)	—		(3,793		)
Net	$	3,273		$	—	$	3,273

The Company records any transfers between fair value hierarchy levels as of the end of each calendar quarter. There were no transfers between levels during the three months ended March 31, 2014 and 2013.

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PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


~~(6)~~	~~Earnings Per Share~~

~~In accordance with GAAP, dual presentation~~The carrying amounts and fair values of ~~basic~~investments in PVNGS lessor notes, other investments, and ~~diluted earnings per share is presented in~~long-term debt, which are not recorded at fair value on the Condensed Consolidated ~~Statements of Earnings of PNMR. Information regarding the computation of earnings per share is as follows:~~Balance Sheets are presented below:

Three Months Ended Nine Months Ended
September 30, September 30,
2013 2012 2013 2012
(In thousands, except per share amounts)
Net Earnings Attributable to PNMR $ 54,555
$ 57,864
$ 92,859
$ 96,456
Average Number of Common Shares:
Outstanding during period 79,654
79,654
79,654
79,654
Vested awards of restricted stock
177
114
194
156
Average Shares - Basic 79,831
79,768
79,848
79,810
Dilutive Effect of Common Stock Equivalents ⁽¹⁾:

Stock options and restricted stock 503
622
608
600
Average Shares - Diluted 80,334
80,390
80,456
80,410
Net Earnings Per Share of Common Stock:
Basic $ 0.68
$ 0.73
$ 1.16
$ 1.21
Diluted $ 0.68
$ 0.72
$ 1.15
$ 1.20


⁽¹⁾	~~Excludes the effect of out-of-the-money options for~~ ~~793,010~~ ~~shares of common stock at~~ ~~September 30, 2013~~.



					GAAP Fair Value Hierarchy
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
March 31, 2014	(In thousands)
PNMR
Long-term debt	$	1,845,338	$	2,040,868	$	—	$	2,040,868	$	—
Investment in PVNGS lessor notes	$	42,472	$	44,871	$	—	$	—	$	44,871
Other investments	$	1,813	$	2,529	$	681	$	—	$	1,848
PNM
Long-term debt	$	1,390,627	$	1,515,097	$	—	$	1,515,097	$	—
Investment in PVNGS lessor notes	$	42,472	$	44,871	$	—	$	—	$	44,871
Other investments	$	436	$	436	$	436	$	—	$	—
TNMP
Long-term debt	$	335,944	$	396,195	$	—	$	396,195	$	—
Other investments	$	245	$	245	$	245	$	—	$	—

December 31, 2013
PNMR
Long-term debt	$	1,745,420	$	1,905,230	$	—	$	1,905,230	$	—
Investment in PVNGS lessor notes	$	52,958	$	57,279	$	—	$	—	$	57,279
Other investments	$	1,835	$	3,196	$	690	$	—	$	2,506
PNM
Long-term debt	$	1,290,618	$	1,382,938	$	—	$	1,382,938	$	—
Investment in PVNGS lessor notes	$	52,958	$	57,279	$	—	$	—	$	57,279
Other investments	$	445	$	445	$	445	$	—	$	—
TNMP
Long-term debt	$	336,036	$	390,814	$	—	$	390,814	$	—
Other investments	$	245	$	245	$	245	$	—	$	—


~~(7)~~(8)	Stock-Based Compensation

PNMR has various stock-based compensation programs, including stock options, restricted stock, and performance shares granted under the Performance Equity Plan ~~("PEP"~~(“PEP”). In 2011, the Company changed its approach to awarding stock-based compensation. As a result, no stock options have been granted ~~in 2013 or 2012~~since 2010 and awards of restricted stock have increased. Certain restricted stock awards are subject to achieving performance or market targets and some of these awards also have ~~service~~time vesting requirements. Other awards of restricted stock are only subject to time vesting requirements. Additional information concerning stock-based compensation under the PEP is contained in Note 13 of the Notes to Consolidated Financial Statements in the ~~2012~~2013 Annual Reports on Form 10-K.

Restricted stock under the PEP refers to awards of stock subject to vesting, performance, or market conditions rather than to shares with contractual post-vesting restrictions. Generally, the awards vest ratably over three years from the grant date of the award. However, certain awards with performance or market conditions vest upon satisfaction of those conditions. In addition, plan provisions provide that upon retirement, participants become 100% vested in stock awards.

The stock-based compensation expense related to stock options and restricted stock awards without performance or market conditions is amortized to compensation expense over the requisite vesting period, which is generally three years. However, compensation expense for awards to participants that are retirement eligible on the ~~award~~grant date is recognized immediately at the ~~award~~grant date and is not amortized. Compensation expense for performance-based shares is recognized ratably over the performance period and is adjusted periodically to reflect the level of achievement expected to be attained. Compensation expense related to ~~market-based shares is recognized ratably over the measurement period, regardless of the actual level of achievement, provided the employees meet their service requirements. At~~ ~~September 30, 2013~~ ~~and~~ ~~December 31, 2012, PNMR had unrecognized expense related to stock awards of~~ ~~$5.7 million~~ ~~and~~ ~~$3.8 million~~.

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PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~The Company uses~~market-based shares is recognized ratably over the ~~Black Scholes option pricing model~~measurement period, regardless of the actual level of achievement, provided the employees meet their service requirements. At March 31, 2014 and December 31, 2013, PNMR had unrecognized expense related to ~~estimate the fair value~~stock awards of ~~stock option awards based on multiple factors, including historical exercise patterns of employees in relatively homogeneous groups with respect to exercise~~$8.1 million and ~~post-vesting employment termination behaviors, expected exercising patterns for these same homogeneous groups, and both the implied and historical volatility of PNMR's stock price.~~ $4.6 million.

The grant date fair value for restricted stock and stock awards with Company internal performance targets is determined based on the market price of PNMR common stock on the date of the agreements reduced by the present value of future dividends, which will not be received prior to vesting, applied to the total number of shares that are anticipated to vest, although the number of performance shares that ultimately vest cannot be determined until after the performance periods end. The grant date fair value of stock awards with market targets is determined using Monte Carlo simulation models, which provide grant date fair values that include an expectation of the number of shares to ~~vest.~~vest at the end of the measurement period.

The following table summarizes the weighted-average assumptions used to determine the awards grant date fair value:


	Nine Months Ended September 30,						Three Months Ended March 31,
Restricted Shares and Performance Based Shares	2013			2012			2014			2013
Expected quarterly dividends per share	$	0.165		$	0.145		$	0.185		$	0.165
Risk-free interest rate	0.34		%	0.65		%	0.71		%	0.38		%

Market-Based Shares
Dividend yield	2.86		%	3.45		%	2.82		%	2.86		%
Expected volatility	25.11		%	43.98		%	25.11		%	25.11		%
Risk-free interest rate	0.36		%	1.04		%	0.64		%	0.36		%

The following table summarizes activity in stock options and restricted stock awards, including performance-based and market-based shares, for the ~~nine~~three months ended ~~September 30, 2013~~March 31, 2014:


	Stock Option Shares		Weighted- Average Exercise Price		Restricted Stock		Weighted- Average Grant Date Fair Value		Stock Option Shares		Weighted- Average Exercise Price		Restricted Stock		Weighted- Average Grant Date Fair Value
Outstanding at beginning of period	1,992,700		$	20.72	353,722		$	14.03	1,343,666		$	20.63	315,305		$	17.87
Granted	—		$	—	249,113		$	20.03	—		$	—	223,348		$	20.79
Exercised	(260,579	)	$	13.43	(275,988	)	$	15.92	(182,407	)	$	17.86	(262,358	)	$	16.53
Forfeited	—		$	—	(8,366	)	$	18.37	(17,151	)	$	26.43	—		$	—
Expired	(292,644	)	$	27.23	—		$	—	(13,501	)	$	25.82	—		$	—
Outstanding at end of period	1,439,477		$	20.72	318,481		$	17.88	1,130,607		$	20.92	276,295		$	21.55

Included as restricted stock granted and exercised in the table above are ~~100,953~~112,864 shares that were based upon achieving performance or market targets for ~~2012.~~2013. The Board approved these shares in February ~~2013, including shares with~~2014 (based upon achieving market targets, weighted at ~~near~~60%, at maximum ~~levels.~~levels, and performance targets, weighted at 40%, at below threshold levels for the 2011 through 2013 performance period).

~~PNMR also has share agreements that provide~~PNMR’s stock-based compensation program provides for performance or market targets through ~~2015.~~2016. Excluded from the above table are maximums of ~~188,129~~198,369, ~~198,369~~179,811, and ~~179,811~~175,735 restricted stock shares for periods ending in ~~2013,~~ 2014, 2015, and ~~2015~~2016 that would be awarded if all performance or market criteria are achieved and all executives remain eligible.

In March 2012, the Company entered into a retention award agreement with its Chairman, President, and Chief Executive Officer under which she would receive 135,000 shares of ~~PNMR's~~PNMR’s common stock if the Company meets specific market targets at the end of 2016 and she remains an employee of the Company. If the Company achieves specific market targets at the end of ~~2014 and she remains an employee of the Company, she would receive~~ ~~35,000~~ ~~of the total shares at that time. The retention award~~

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PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2014 and, with certain exceptions, she remains an employee of the Company, she would receive 35,000 of the total shares at that time. The retention award was made under the PEP and was approved by the Board on February 28, 2012. The above table does not include any restricted stock shares under the retention award agreement.

At ~~September 30, 2013~~March 31, 2014, the aggregate intrinsic value of stock options outstanding, all of which are exercisable, was $~~6.7~~8.0 million with a weighted-average remaining contract life of ~~3.56~~3.39 years. At ~~September 30, 2013~~March 31, 2014, the exercise price of ~~793,010~~486,016 outstanding stock options is greater than the closing price of PNMR common stock on that date; therefore, those options have no intrinsic value.

The following table provides additional information concerning stock options and restricted stock activity, including performance-based and market-based shares:


	Nine Months Ended September 30,				Three Months Ended March 31,
Stock Options	2013		2012		2014		2013
Weighted-average grant date fair value of options granted	$	—	$	—	$	—	$	—
Total fair value of options that vested (in thousands)	$	625	$	1,058	$	—	$	620
Total intrinsic value of options exercised (in thousands)	$	2,466	$	4,515	$	1,469	$	1,824

Restricted Stock
Weighted-average grant date fair value	$	20.03	$	15.63	$	20.79	$	19.82
Total fair value of restricted shares that vested (in thousands)	$	4,395	$	4,755	$	4,336	$	3,871


~~(8)~~(9)	Financing

Additional information concerning financing activities, including a TNMP cash-flow hedge that establishes a fixed interest rate on a variable rate loan, is contained in Note 6 of the Notes to Consolidated Financial Statements in the ~~2012~~2013 Annual Reports on Form 10-K.

Financing Activities

On January 8, 2014, PNM entered into a new $50.0 million unsecured revolving credit facility (the “PNM New Mexico Credit Facility”) by and among PNM, the lenders identified therein, U.S. Bank National Association, as Administrative Agent, and BOKF, NA dba Bank of Albuquerque, as Syndication Agent. The nine participating lenders are all banks that have a significant presence in New Mexico and PNM’s service territory or are headquartered in New Mexico. The PNM New Mexico Credit Facility expires on January 8, 2018 and contains covenants and conditions similar to those in the PNM Revolving Credit Facility.

On March 5, 2014, PNM entered into a new $175.0 million Term Loan Agreement (the “PNM 2014 Term Loan Agreement”) among PNM and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Lender and Administrative Agent. On March 5, 2014, PNM used a portion of the funds borrowed under the PNM 2014 Term Loan Agreement to repay all amounts outstanding under PNM’s existing $75.0 million PNM Term Loan Agreement. PNM also used the funds to repay other short-term amounts outstanding. The PNM Term Loan Agreement would otherwise have terminated on October 21, 2014. There were no prepayment penalties paid in connection with the termination of the PNM Term Loan Agreement. The PNM 2014 Term Loan Agreement bears interest at a variable rate, which was 1.11% at March 31, 2014, must be repaid on or before September 4, 2015, and is reflected as long-term debt on the Condensed Consolidated Balance Sheets. The PNM 2014 Term Loan Agreement includes customary covenants, including requirements to not exceed a maximum consolidated debt-to-consolidated capitalization ratio and customary events of default. The PNM 2014 Term Loan Agreement has a cross default provision and a change of control provision.

The existing TNMP 2011 Term Loan Agreement has an outstanding balance of $50.0 million that must be repaid by June 30, 2014. On December 9, 2013, TNMP entered into an agreement (the “TNMP 2013 Bond Purchase Agreement”), which provides that TNMP will issue $80.0 million aggregate principal amount of 4.03% first mortgage bonds, due 2024 (the “Series 2014A Bonds”). The terms of the TNMP 2013 Bond Purchase Agreement provide that, subject to satisfaction of certain conditions, TNMP will issue the Series 2014A Bonds on or about June 27, 2014. TNMP anticipates using $50.0 million of the proceeds from the

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PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

issuance to repay the TNMP 2011 Term Loan Agreement at its maturity and using the remaining proceeds to reduce short-term debt under the TNMP Revolving Credit Facility and/or TNMP’s intercompany borrowings from PNMR. In accordance with GAAP, borrowings under the TNMP 2011 Term Loan Agreement, which are due on June 30, 2014, are reflected as being long-term in the Condensed Consolidated Balance Sheet since the TNMP 2013 Bond Purchase Agreement demonstrates TNMP’s ability and intent to re-finance the TNMP 2011 Term Loan Agreement on a long-term basis.

Short-term Debt

PNMR has a revolving credit financing capacity of $300.0 million under the PNMR Revolving Credit Facility. PNM has a revolving credit financing capacity of $400.0 million under the PNM Revolving Credit Facility. Both of these facilities currently expire on October 31, 2018. ~~In December 2012, PNMR borrowed~~ ~~$100.0 million~~ ~~under the PNMR Term Loan Agreement, which matures in December 2013.~~ TNMP has a revolving credit financing capacity of $75.0 million under the TNMP Revolving Credit Facility that is secured by $75.0 million aggregate principal amount of TNMP first mortgage ~~bonds. On September 18, 2013, the TNMP Revolving Credit Facility was amended~~bonds and ~~restated to extend its maturity from December 16, 2015 to~~matures on September 18, 2018. PNM also has the PNM New Mexico Credit Facility, a $50.0 million unsecured revolving credit facility that expires on January 8, 2018. At ~~September 30, 2013~~March 31, 2014, there were no borrowings outstanding under any of these facilities and the weighted average interest rate was ~~1.31%~~1.01% for borrowings outstanding under the twelve-month PNMR Term Loan Agreement, ~~1.44%~~ ~~for the PNM Term Loan Agreement, and~~ ~~1.30%~~ ~~for the TNMP Revolving Credit Facility.~~which matures in December 2014. Short-term debt outstanding consisted of:


	September 30,		December 31,		March 31,		December 31,
Short-term Debt	2013		2012		2014		2013
	(In thousands)				(In thousands)
PNM – Revolving credit facility	$	—	$	21,100
PNM:
Revolving credit facility					$	—	$	49,200
PNM New Mexico Credit Facility					—		—
TNMP – Revolving credit facility	12,000		—		—		—
PNMR:
Revolving credit facility	—		37,600		—		—
PNMR Term Loan Agreement	100,000		100,000		100,000		100,000
	$	112,000	$	158,700	$	100,000	$	149,200

~~Table of Contents~~

~~PNM RESOURCES, INC. AND SUBSIDIARIES~~

~~PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES~~

~~TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

At ~~October~~April 25, ~~2013~~2014, PNMR, PNM, and TNMP had $291.4 million, $396.8 million, and $~~67.7~~68.7 million of availability under their respective revolving credit facilities, including reductions of availability due to outstanding letters of ~~credit.~~credit, and PNM had $50.0 million of availability under the PNM New Mexico Credit Facility. Total availability at ~~October~~April 25, ~~2013~~2014, on a consolidated basis, was $~~755.9~~806.9 million for PNMR. As of ~~October~~April 25, ~~2013~~2014, TNMP had $~~43.0~~41.2 million in borrowings from PNMR under their intercompany loan agreement. At ~~October~~April 25, ~~2013~~2014, PNMR, PNM and TNMP had consolidated invested cash of $~~6.5~~2.0 million, $~~15.7~~9.3 million, and none.

~~Financing Activities~~

~~On March 6, 2013, TNMP commenced an offer to exchange any and all of TNMP's~~ ~~$265.5 million~~ ~~aggregate principal amount outstanding~~ ~~9.50%~~ ~~First Mortgage Bonds, due 2019, Series 2009A, for a new series of~~ ~~6.95%~~ ~~First Mortgage Bonds, due 2043, Series 2013A, and up to~~ ~~$140~~ ~~in cash for each~~ ~~$1,000~~ ~~of bonds exchanged. Settlement of the exchange offer occurred on April 3, 2013. Upon settlement, TNMP issued~~ ~~$93.2 million~~ of ~~6.95%~~ ~~First Mortgage Bonds and paid an aggregate of~~ ~~$13.0 million~~ ~~in cash in exchange for~~ ~~$93.2 million~~ of ~~9.50%~~ ~~First Mortgage Bonds, in addition to payment of accrued and unpaid interest on the exchanged bonds. The exchange resulted in the recording of a~~ ~~$23.2 million~~ ~~premium on the~~ ~~6.95%~~ First Mortgage Bonds reflecting the contractual interest rate being in excess of the market rate of interest on the date of the exchange. A regulatory asset was recorded offsetting the premium and the cash consideration paid in the exchange.

~~On April 22, 2013, PNM entered into a~~ ~~$75.0 million~~ Term Loan Agreement (the "PNM Term Loan Agreement") among PNM, the lenders identified therein, and Union Bank, N.A., as Administrative Agent. Funding of the PNM Term Loan Agreement occurred on April 22, 2013, at which time the funds were used to repay ~~$75.0 million~~ ~~in borrowings made under the PNM Revolving Credit Facility. The PNM Term Loan Agreement bears interest at a variable rate, which was~~ ~~1.44%~~ at ~~September 30, 2013~~, must be repaid on or before October 21, 2014, and is reflected as long-term debt on the Condensed Consolidated Balance Sheets. The PNM Term Loan Agreement includes customary covenants, including requirements to not exceed a maximum consolidated debt-to-consolidated capitalization ratio and customary events of default. The PNM Term Loan Agreement has a cross default provision and a change of control provision.

~~In the nine months ended September 30, 2013, PNMR purchased~~ ~~$23.0 million~~ ~~aggregate principal amount of its outstanding~~ ~~9.25%~~ ~~Senior Unsecured Notes, Series A, due 2015, for~~ ~~$26.0 million~~ ~~plus accrued and unpaid interest.~~

~~On October 2, 2013, the NMPRC approved PNM's application to enter into a new revolving credit facility of up to~~ ~~$50.0 million~~ ~~with banks operating in New Mexico. PNM anticipates entering into a facility in late 2013.~~

~~In October 2013, the second of the~~ ~~two~~1~~-year extension options for the PNMR Revolving Credit Facility and the PNM Revolving Credit Facility were exercised extending the expiration of both facilities to October 31, 2018.~~


~~(9)~~(10)	Pension and Other Postretirement Benefit Plans

PNMR and its subsidiaries maintain qualified defined benefit pension plans, postretirement benefit plans providing medical and dental benefits, and executive retirement programs ("(“PNM ~~Plans"~~Plans” and ~~"TNMP Plans"~~“TNMP Plans”). PNMR maintains the legal obligation for the benefits owed to participants under these plans.

Additional information concerning pension and OPEB plans is contained in Note 12 of the Notes to Consolidated Financial Statements in the ~~2012~~2013 Annual Reports on Form 10-K. Annual net periodic benefit cost (income) for the plans is actuarially determined using the methods and assumptions set forth in that note and is recognized ratably throughout the year.

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PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

PNM Plans

The following tables present the components of the PNM ~~Plans'~~Plans’ net periodic benefit cost:


	Three Months Ended September 30,																Three Months Ended March 31,
	Pension Plan						OPEB Plan						Executive Retirement Program				Pension Plan						OPEB Plan						Executive Retirement Program
	2013			2012			2013			2012			2013		2012		2014			2013			2014			2013			2014		2013
	(In thousands)																(In thousands)
Components of Net Periodic
Benefit Cost
Service cost	$	—		$	—		$	65		$	54		$	—	$	—	$	—		$	—		$	45		$	65		$	—	$	—
Interest cost	7,035			8,058			1,029			1,324			180		219		7,541			7,035			1,159			1,028			205		180
Expected return on plan assets	(10,482		)	(10,325		)	(1,261		)	(1,225		)	—		—		(9,511		)	(10,482		)	(1,410		)	(1,261		)	—		—
Amortization of net (gain) loss	3,710			2,629			1,061			972			58		21		3,255			3,710			556			1,061			52		58
Amortization of prior service cost	19			79			(336		)	(336		)	—		—		(241		)	19			(336		)	(336		)	—		—
Net periodic benefit cost	$	282		$	441		$	558		$	789		$	238	$	240	$	1,044		$	282		$	14		$	557		$	257	$	238

	Nine Months Ended September 30,
	Pension Plan						OPEB Plan						Executive Retirement Program
	2013			2012			2013			2012			2013		2012
	(In thousands)
Components of Net Periodic
Benefit Cost
Service cost	$	—		$	—		$	195		$	162		$	—	$	—
Interest cost	21,106			24,174			3,085			3,972			540		657
Expected return on plan assets	(31,447		)	(30,975		)	(3,782		)	(3,675		)	—		—
Amortization of net (gain) loss	11,130			7,887			3,182			2,916			174		63
Amortization of prior service cost	57			237			(1,008		)	(1,008		)	—		—
Net periodic benefit cost	$	846		$	1,323		$	1,672		$	2,367		$	714	$	720

PNM does not anticipate making any contributions to its pension trust in 2014 due to the current funded status of the pension plan. PNM made contributions to its pension plan trust of ~~zero~~ ~~and~~ $60.0 million in the three ~~and nine~~ months ended ~~September 30, 2013~~ ~~and~~ ~~zero~~ ~~and~~ ~~$77.7 million~~ ~~in the~~ ~~three and nine~~ ~~months ended~~ ~~September 30, 2012. PNM does not anticipate making additional contributions to its pension trust in~~ March 31, 2013. Based on current law, including recent amendments to funding requirements, and estimates of portfolio performance, ~~PNM estimates minimum required~~ contributions ~~for its~~to the PNM pension plan trust ~~would~~for 2015-2018 are estimated to total $~~49.1~~61.5 million ~~for 2014-2017. Minimum required~~. These anticipated contributions were developed using current funding assumptions, ~~including~~with discount rates of ~~4.8%~~5.2% to ~~5.2%~~5.5%. Actual amounts required to be funded in the future will depend on the actuarial assumptions at that time, including the appropriate discount rate. PNM may make additional contributions at its discretion. PNM made contributions to the OPEB trust of $0.8 million and $~~2.4~~0.5 million in the three ~~and nine~~ months ended ~~September 30, 2013~~March 31, 2014 and ~~$0.8 million~~ ~~and~~ ~~$2.4 million~~ ~~in the~~ ~~three and nine~~ ~~months ended~~ ~~September 30, 2012~~.2013. PNM expects to make contributions ~~during~~ ~~2013~~ to the OPEB trust ~~to total~~totaling $3.3 million. in 2014 and $14.0 million for 2015-2018. Disbursements under the executive retirement program, which are funded by PNM and considered to be contributions to the plan, were $0.4 million and $~~1.1~~0.4 million in the three ~~and nine~~ months ended ~~September 30,~~March 31, 2014 and 2013 ~~and~~ ~~$0.4 million~~ ~~and~~ ~~$1.1 million~~ ~~in the~~ ~~three and nine~~ ~~months ended~~ ~~September 30, 2012~~ and are expected to total $1.5 million during ~~2013~~2014.

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~~(Unaudited)~~

TNMP Plans

The following tables present the components of the TNMP ~~Plans'~~Plans’ net periodic benefit cost (income):


	Three Months Ended September 30,																Three Months Ended March 31,
	Pension Plan						OPEB Plan						Executive Retirement Program				Pension Plan						OPEB Plan						Executive Retirement Program
	2013			2012			2013			2012			2013		2012		2014			2013			2014			2013			2014		2013
	(In thousands)																(In thousands)
Components of Net Periodic
Benefit Cost (Income)
Service cost	$	—		$	—		$	75		$	61		$	—	$	—	$	—		$	—		$	59		$	75		$	—	$	—
Interest cost	772			909			141			156			9		11		798			772			155			141			10		9
Expected return on plan assets	(1,212		)	(1,331		)	(126		)	(129		)	—		—		(1,132		)	(1,212		)	(133		)	(126		)	—		—
Amortization of net (gain) loss	262			115			—			(52		)	—		—		166			262			(31		)	—			—		—
Amortization of prior service cost	—			—			14			14			—		—		—			—			8			14			—		—
Net Periodic Benefit Cost (Income)	$	(178	)	$	(307	)	$	104		$	50		$	9	$	11	$	(168	)	$	(178	)	$	58		$	104		$	10	$	9

	Nine Months Ended September 30,
	Pension Plan						OPEB Plan						Executive Retirement Program
	2013			2012			2013			2012			2013		2012
	(In thousands)
Components of Net Periodic
Benefit Cost (Income)
Service cost	$	—		$	—		$	225		$	183		$	—	$	—
Interest cost	2,315			2,727			424			468			27		33
Expected return on plan assets	(3,637		)	(3,993		)	(377		)	(387		)	—		—
Amortization of net (gain) loss	787			345			—			(156		)	—		—
Amortization of prior service cost	—			—			43			42			—		—
Net Periodic Benefit Cost (Income)	$	(535	)	$	(921	)	$	315		$	150		$	27	$	33

~~TNMP made contributions to its pension plan trust of~~ ~~zero~~ ~~and~~ ~~$1.0 million~~ ~~in the~~ ~~three and nine~~ ~~months ended~~ ~~September 30, 2013~~ ~~and~~ ~~zero~~ ~~and~~ ~~$5.3 million~~ ~~in the~~ ~~three and nine~~ ~~months ended~~ ~~September 30, 2012~~. TNMP does not anticipate making additional contributions to its pension trust in ~~2013~~2014~~. Based on~~ due to the current ~~law, including recent amendments to funding requirements, and estimates~~funded status of ~~portfolio performance,~~the pension plan. TNMP ~~estimates there would be no minimum required~~made contributions to its pension plan trust ~~for 2014-2017. Minimum required contributions were developed using current funding assumptions, including discount rates~~ of ~~4.8%~~ ~~and~~ ~~5.2%~~. Actual amounts to be funded in the future will depend on the actuarial assumptions at that time, including the appropriate discount rate. TNMP may make additional contributions at its discretion. TNMP made contributions to the OPEB trust of ~~zero~~ ~~and~~ $~~0.3~~1.0 million in the three ~~and nine~~ months ended ~~September 30, 2013~~ ~~and~~ ~~zero~~ ~~and~~ ~~$0.3 million~~ ~~in the~~ ~~three and nine~~ ~~months ended~~ ~~September 30, 2012. TNMP does not anticipate making additional contributions to the OPEB trust in~~ ~~2013. Disbursements under the executive retirement program, which are funded by TNMP and considered to be contributions to the plan, were less than~~ ~~$0.1 million~~ ~~in the~~ ~~three and nine~~ ~~months ended~~ ~~September 30, 2013 and 2012~~ ~~and are expected to total~~ ~~$0.1 million~~ ~~during~~ March 31, 2013.

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~~(10) Commitments~~Based on current law, including recent amendments to funding requirements, and ~~Contingencies~~estimates of portfolio performance, TNMP estimates there would be no contributions to its pension plan trust for 2015-2018. The anticipated contributions were developed using current funding assumptions, including discount rates of 5.2% and 5.5%. Actual amounts to be funded in the future will depend on the actuarial assumptions at that time, including the appropriate discount rate. TNMP may make additional contributions at its discretion. TNMP made no contributions to the OPEB trust in the three months ended March 31, 2014 and 2013. TNMP expects to make contributions to the OPEB trust totaling $0.4 million in 2014 and $1.4 million for 2015-2018. Disbursements under the executive retirement program, which are funded by TNMP and considered to be contributions to the plan, were less than $0.1 million in the three months ended March 31, 2014 and 2013 and are expected to total $0.1 million during 2014.


(11)	Commitments and Contingencies

Overview

There are various claims and lawsuits pending against the Company. The Company is also subject to federal, state, and local environmental laws and regulations and periodically participates in the investigation and remediation of various sites. In addition, the Company occasionally enters into financial commitments in connection with its business operations. The Company is also involved in various legal and regulatory (Note ~~11)~~12) proceedings in the normal course of its business. It is not possible at this time for the Company to determine fully the effect of all litigation and other legal and regulatory proceedings on its financial position, results of operations, or cash flows.

With respect to some of the items listed below, the Company has determined that a loss is not probable or that, to the extent probable, cannot be reasonably estimated. In some cases, the Company is not able to predict with any degree of certainty the range of possible loss that could be incurred. Notwithstanding these facts, the Company has assessed these matters based on current information and made judgments concerning their potential outcome, giving due consideration to the nature of the claim, the amount and nature of damages sought, and the probability of success. Such judgments are made with the understanding that the outcome of any litigation, investigation, and other legal proceeding is inherently uncertain. In accordance with GAAP, the Company records liabilities for matters where it is probable a loss has been incurred and the amount of loss is reasonably estimable. The actual outcomes of the items listed below could ultimately differ from the judgments made and the differences could be material. The Company cannot make any assurances that the amount of reserves or potential insurance coverage will be sufficient to cover the cash obligations that might be incurred as a result of litigation or regulatory proceedings. The Company does not expect that any known lawsuits, environmental costs, and commitments will have a material effect on its financial condition, results of operations, or cash flows.

Additional information concerning commitments and contingencies is contained in Note 16 of the Notes to Consolidated Financial Statements in the ~~2012~~2013 Annual Reports on Form 10-K.

Commitments and Contingencies Related to the Environment

Nuclear Spent Fuel and Waste Disposal

Nuclear power plant operators are required to enter into spent fuel disposal contracts with the DOE that require the DOE to accept and dispose of all spent nuclear fuel and other high-level radioactive wastes generated by domestic power reactors. Although the Nuclear Waste Policy Act required the DOE to develop a permanent repository for the storage and disposal of spent nuclear fuel by 1998, the DOE announced that it would not be able to open the repository by 1998 and sought to excuse its performance ~~under the contract.~~of these requirements. In November 1997, the D.C. Circuit issued a decision preventing the DOE from excusing its own delay, but refused to order the DOE to begin accepting spent nuclear fuel. Based on this decision and the ~~DOE's~~DOE’s delay, a number of utilities, including APS (on behalf of itself and the other PVNGS owners, including PNM), filed damages actions against the DOE in the Court of Federal Claims. ~~The~~In 2010, the court ordered an award to the PVNGS owners ~~previously received a~~for their damages ~~award~~claim for costs incurred through December 2006. APS filed a subsequent lawsuit, on behalf of itself and the other PVNGS owners, against DOE in the Court of Federal Claims on December 19, 2012. The lawsuit alleges that from January 1, 2007 through June 30, 2011, ~~APS, as a co-owner of PVNGS, incurred~~ additional damages were incurred due to ~~DOE's~~DOE’s continuing failure to remove spent nuclear fuel and high level waste from PVNGS. ~~Activities in this legal proceeding are currently limited to review by the government of supporting information for APS's claim.~~ PNM is unable to predict the outcome of this matter.

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PNM estimates that it will incur approximately $~~42.8~~58.0 million (in ~~2010~~2013 dollars) for its share of the costs related to the on-site interim storage of spent nuclear fuel at PVNGS during the term of the operating licenses. PNM accrues these costs as a component of fuel expense as the fuel is consumed. At ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012,~~2013, PNM had a liability for interim storage costs of $~~12.4~~12.0 million and $~~13.9~~11.9 million included in other deferred credits.

On June 8, 2012, the D.C. Circuit issued its decision on a challenge by several states and environmental groups of the ~~NRC's~~NRC’s rulemaking regarding temporary storage and permanent disposal of high-level nuclear waste and spent nuclear fuel. The petitioners had challenged the ~~NRC's~~NRC’s 2010 update to the ~~agency's~~agency’s Waste Confidence Decision. The D.C. Circuit found that the ~~agency's~~agency’s 2010 Waste Confidence Decision update constituted a major federal action, which requires either an ~~environmental impact statement~~

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~~(Unaudited)~~

EIS or a finding of no significant impact from the ~~agency's~~agency’s actions. The D.C. Circuit found that the ~~NRC's~~NRC’s evaluation of the environmental risks from spent nuclear fuel was deficient, and therefore remanded the 2010 Waste Confidence Decision update for further action. In September 2012, the NRC issued a directive to its staff to proceed with development of a generic ~~environmental impact statement~~EIS to support an updated Waste Confidence Decision within 24 months. In September 2013, the NRC issued its draft EIS to support an updated Waste Confidence Decision. In late 2013, the NRC held a series of nationwide public meetings to receive stakeholder input on the draft EIS. NRC Commissioners have instructed the staff to issue the final generic EIS and rule by no later than September 2014. Untimely resolution by the NRC of the remand from the D.C. Circuit could have an adverse impact on certain NRC licensing actions. Currently, PVNGS does not have any licensing actions pending with the NRC. The petitioners had also sought a writ requiring the NRC to comply with the law and resume processing ~~DOE's~~DOE’s pending license application for a nuclear waste site at Yucca Mountain in Nevada. OnIn August ~~13,~~ 2013, the D.C. Circuit ~~granted the writ and held that~~ordered the NRC ~~must continue~~to resume reviewing the license application. PNM is unable to predict the impact of these decisions.

In 2011, the National Association of Regulatory Utility Commissioners and the Nuclear Energy Institute challenged DOE’s 2010 determination of the adequacy of the one tenth of a cent per KWh fee (the “one-mill fee”) paid by the nation’s commercial nuclear power plant owners pursuant to their individual contracts with the DOE. The fee applicable to PVNGS Units 1 and 2 is recovered by PNM in its retail rates. In June 2012, the D.C. Circuit held that DOE failed to conduct a sufficient fee analysis in making the 2010 determination. The D.C. Circuit remanded the 2010 determination to the DOE with instructions to conduct a new fee adequacy determination within six months. In February 2013, upon completion of DOE’s revised one-mill fee adequacy determination, the court reopened the proceedings. On November 19, 2013, the D.C. Circuit ordered the DOE to notify Congress of the intent to suspend collecting annual fees for nuclear waste disposal from nuclear power plant operators. On January 3, 2014, the DOE notified Congress of the intention to suspend collection of the one-mill fee, subject to Congress’ disapproval. PNM anticipates challenges to this action and is unable to predict its ultimate outcome, but is continuing to accrue the one-mill fee. In 2013, the one-mill fee for PNM’s share of the output from all three units at PVNGS amounted to $3.0 million.

The Clean Air Act

Regional Haze

In 1999, EPA developed a regional haze program and regional haze rules under the CAA. The rule directs each of the 50 states to address regional haze. Pursuant to the CAA, states have the primary role to regulate visibility requirements by promulgating SIPs. States are required to establish goals for improving visibility in national parks and wilderness areas (also known as Class I areas) and to develop long-term strategies for reducing emissions of air pollutants that cause visibility impairment in their own states and for preventing degradation in other states. States must establish a series of interim goals to ensure continued progress. The first planning period specifies setting reasonable progress goals for improving visibility in Class I areas by the year 2018. In July 2005, EPA promulgated its final regional haze rule guidelines for states to conduct BART determinations for certain covered facilities, including utility boilers, built between 1962 and 1977 that have the potential to emit more than 250 tons per year of visibility impairing pollution. If it is demonstrated that the emissions from these sources cause or contribute to visibility impairment in any Class I area, then BART must be installed by 2018.

SJGS

BART Determination Process - SJGS is a source that is subject to the statutory obligations of the CAA to reduce visibility impacts. The State of New Mexico submitted its SIP on the regional haze and interstate transport elements of the visibility rules for review by EPA in June 2011. The SIP found that BART to reduce NOx emissions from SJGS is selective non-catalytic reduction

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technology ~~("SNCR"~~(“SNCR”). Nevertheless, in August 2011, EPA published its FIP, stating that it was required to do so by virtue of a consent decree it had entered into with an environmental group in litigation concerning the interstate transport requirements of the CAA. The FIP included a regional haze BART determination for SJGS that requires installation of selective catalytic reduction technology ~~("SCR"~~(“SCR”) with stringent NOx emission limits on all four units by September 21, 2016.

PNM, the Governor of New Mexico, and NMED petitioned the Tenth Circuit to review ~~EPA's~~EPA’s decision and requested EPA to reconsider its decision. The Tenth Circuit denied petitions to stay the effective date of the rule on March 1, 2012. These parties have also formally asked EPA to stay the effective date of the rule. Several environmental groups have intervened in support of EPA. WEG also filed an action to challenge ~~EPA's~~EPA’s rule in the Tenth Circuit, seeking to shorten ~~its~~the rule’s compliance period from five years to three years and PNM has intervened in this action. Oral arguments on the merits of the FIP challenges were held in October 2012 in the Tenth Circuit. In accordance with the ~~court's~~court’s order, the parties have filed supplemental information. ~~No decision has been announced and there is no deadline for a court decision.~~

In litigation involving several environmental groups, the United States District Court for the District of Columbia entered a consent decree, which, as amended, required EPA to issue a final rulemaking on New ~~Mexico's~~Mexico’s regional haze SIP by November 15, 2012. EPA approved all components of the SIP, except for the NOx BART determination for SJGS. With respect to that element of the SIP, EPA determined that with the FIP in place, it had met its obligation under the consent decree.

Because the unchanged compliance deadline of the FIP required PNM to continue to take steps to commence installation of SCRs at SJGS, PNM entered into a contract in October 2012 with an engineering, procurement, and construction contractor to install SCRs on behalf of the SJGS owners. The construction contract, which includes termination provisions in the event that SCRs are determined in the future to be unnecessary, has been suspended through November 1, 2014. At that time, PNM estimated the total cost to install SCRs on all four units of SJGS to be between approximately $824 million and $910 million, which amounts include costs for construction management, gross receipts taxes, AFUDC, and other PNM costs, although final costs ~~would~~were to be refined

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~~(Unaudited)~~

through an ~~"open book"~~“open book” subcontractor bidding process. The costs for the project to install SCRs would also encompass installation of technology to comply with the NAAQS requirements described below.

Also, PNM had previously indicated it estimated the cost of SNCRs on all four units of SJGS to be between approximately $85 million and $90 million based on a conceptual design study. Along with the SNCR installation, additional equipment would be required to be installed to meet the NAAQS requirements described below, the cost of which had been estimated to total between approximately $105 million and $110 million for all four units of SJGS. The estimates for SNCRs and the NAAQS requirements include gross receipts taxes, AFUDC, and other PNM costs.

Based upon its current SJGS ownership interest, ~~PNM's~~PNM’s share ~~of the costs~~ under either SCRs or SNCRs ~~as described above~~ would be about 46.3%.

During 2012 and early 2013, PNM, as the operating agent for SJGS, engaged in discussions with NMED and EPA regarding an alternative to the FIP and SIP. Following approval by a 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, subject to approval by EIB and EPA. The terms of the non-binding agreement would result in the retirement of SJGS Units 2 and 3 by the end of 2017 and the installation of SNCRs on Units 1 and 4 by the later of January 31, 2016 or 15 months after EPA approval of a revised SIP.

~~NMPRC~~ Certain aspects of this alternative are subject to approval ofby the retirement of SJGS Units 2 and 3 and plans for PNM to acquire power to replace its reduced capacity from SJGS would also be part of implementation. PNM also anticipates requesting approval to recover from ratepayers the unrecovered investment in SJGS Units 2 and 3 and costs incurred to retire those units. PNM anticipates filing for the required NMPRC approvals in December 2013. On July 10, 2013, the NMPRC issued an order initiating a proceeding regarding the possible retirement of SJGS Units 2 and 3 and impacts on service reliability, and other items. The order requires PNM to make monthly presentations to the NMPRC on this matter.NMPRC. At ~~September 30, 2013, PNM's~~March 31, 2014, PNM’s net book value of its current ownership share of SJGS Units 2 and 3 was approximately $~~287~~286 million.

Due to the long lead times on certain equipment purchases, PNM is taking steps to prepare for the potential installation of SNCRs on Units 1 and 4. In April 2013, PNM issued an RFP for SNCR system design and technology. In May 2013, PNM entered into an SNCR equipment and related services contract with an SNCR technology provider, but has not yet entered into a construction and procurement contract.

In connection with the implementation of the revised plan, retirement of SJGS Units 2 and 3 could result in shifts in ownership among SJGS owners as may be agreed upon by the owners. See SJGS Ownership Restructuring Matters below. Owners of the affected units also may seek approvals of their utility commissions or governing boards.

This revised plan primarily focuses on how SJGS would meet the regional haze rule, but also indicates that PNM would build a natural gas-fired generating plant to be sited at SJGS to partially replace the capacity from the retired coal units. 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.

Contemporaneously with the signing of the non-binding agreement, EPA indicated in writing that if the terms agreed to do 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 revised SIP.

~~On February 25, 2013,~~This revised plan primarily focuses on how SJGS would meet the regional haze rule and also indicates that PNM would build a natural gas-fired generating plant in the “four corners” region to partially replace the capacity from the retired coal units. 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.

It was contemplated that the retirement of SJGS Units 2 and 3 under the revised plan might result in shifts in ownership among SJGS owners or other changes in the contractual cost sharing arrangements, as may be agreed upon by the owners. See SJGS Ownership Restructuring Matters below. Owners of the affected units also may seek approvals of their utility commissions

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or governing boards.

The parties ~~filed their~~file periodic 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 Tenth Circuit. Following the ~~parties'~~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. On October 17, 2013, the court ruled on a motion filed by PNM

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for abatement of the pending petitions for review and seeking deferral of briefing on a simultaneously filed motion to stay the EPA rule. The court placed the pending petitions for review in abeyance and set a schedule for the parties to file status reports. The court ruled that, if at any time the agreement in principle fails or is not implemented as was indicated in the term sheet and timeline, any party to the litigation may file a motion seeking to lift the abatement. PNM is continuing to evaluate the impacts of these matters, but is unable to predict their ultimate outcomes.

IfDue to the long lead times on certain equipment purchases, PNM began taking steps to prepare for the potential installation of SNCRs on Units 1 and 4. In April 2013, PNM issued an RFP for SNCR system design and technology. In May 2013, PNM entered into an SNCR equipment and related services contract with an SNCR technology provider, but has not yet entered into a construction and procurement contract.

In accordance with the revised plan, PNM submitted a new BART analysis to NMED on April 1, 2013, reflecting the terms of the non-binding agreement, including the installation of SNCRs on Units 1 and 4 and the retirement of Units 2 and 3. NMED developed a revised SIP and submitted it to the EIB for approval in May 2013. After a public hearing, the EIB approved the revised SIP in September 2013 and the revised SIP was submitted to EPA for approval on October 18, 2013. EPA deemed the SIP application complete on December 17, 2013. It is anticipated that EPA will publish its proposed action on the revised SIP within 135 days of determining it was complete. On April 30, 2014, EPA issued an advance copy of its proposed approval of the revised SIP. It is anticipated that the notice will be published in the Federal Register in mid-May 2014, which will start the 30-day public comment period that is part of the EPA process. Final EPA action on the revised SIP is expected by about the end of September 2014.

On December 20, 2013, PNM made a filing with the NMPRC requesting certain approvals necessary to effectuate the revised SIP. In this filing, PNM requests:

Permission to retire SJGS Units 2 and 3 at December 31, 2017 and to recover over 20 years their net book value at that date, currently estimated to be approximately $205 million, along with a regulated return on those costs

A CCN to include PNM’s ownership of PVNGS Unit 3, amounting to 134 MW, as a resource to serve New Mexico retail customers at a proposed value of $2,500 per KW, effective January 1, 2018

An order allowing cost recovery for PNM’s share of the installation of SNCR equipment and the additional equipment to comply with NAAQS requirements on SJGS Units 1 and 4, not to exceed a total cost of $82 million

A CCN for an exchange of capacity out of SJGS Unit 3 and into SJGS Unit 4, resulting in ownership of an additional 78 MW in Unit 4 for PNM; the net impact of this exchange and the retirement of Units 2 and 3 would be a reduction of 340 MW in PNM’s ownership of SJGS

In its filing, PNM requested the NMPRC to issue its final ruling on the application no later than December 2014. On February ~~15, 2013 plan described~~11, 2014, the Hearing Examiner issued an order finding that PNM’s application is complete. The order also stated that there was not a statutory time clock for the request to retire SJGS Units 2 and 3 and the statutory time clock on the CCN requests has not yet begun. The Hearing Examiner found that the NMPRC should proceed with the review of PNM’s application and establish a schedule that would allow NMPRC action on the application by the end of 2014. A public hearing is scheduled to begin on August 19, 2014.

The above ~~is implemented, PNM currently estimates its~~estimate of PNM’s share of the costs to install SNCRs and the additional equipment to comply with NAAQS requirements on SJGS Units 1 and 4 ~~would be approximately~~ ~~$60 million~~ to ~~$80 million, including~~includes gross receipts taxes, AFUDC, and other PNM costs. This amount ~~is based on~~and the ~~anticipation that PNM's~~above estimate of net book value of SJGS Units 2 and 3 at December 31, 2017 reflect the requested exchange of 78 MW of capacity out of SJGS Unit 3 and into SJGS Unit 4 resulting in PNM’s ownership share of SJGS Units 1 and 4 ~~would aggregate to between~~aggregating approximately 52%. The December 20, 2013 NMPRC filing identifies a new 177 MW natural gas fired generation source and ~~55%~~40. MW of new utility-

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scale solar PV generation to replace a portion of ~~PNM's~~PNM’s share of the reduction in generating capacity due to the retirement of SJGS Units 2 and ~~3 with~~3. Specific approvals to acquire these facilities and the treatment of associated costs will be made in future filings. PNM estimates the cost of these identified ~~gas-fired or solar peaking capacity~~resources would be approximately $~~299~~276.3 million. ~~Neither of these~~These amounts isare included in ~~PNM's~~PNM’s current construction expenditure forecast ~~since~~although approval of the plan isremains subject to numerous conditions. Additional base load generating capacity may be required to replace a portion of retired SJGS capacity. The nature of additional base load capacity, which has not yet been identified, could come from some combination of PVNGS Unit 3, renewable resources, and/or additional gas-fired generation. Although operating costs will be reduced due to the retirement of SJGS Units 2 and 3, the operating costs for SJGS Units 1 and 4 would increase with the installation of either SCRs or SNCRs. See ~~Note11~~Note 12 for additional information concerning ~~PNM's~~PNM’s filing for NMPRC approvals regarding these matters.

As discussed under SJGS Ownership Restructuring Matters below, the owners of SJGS are attempting to negotiate agreements concerning numerous matters, the resolution of which is necessary in order to facilitate the shutdown of SJGS Units 2 and 3 and comply with the revised SIP. PNM’s requests in the December 20, 2013 NMPRC filing were based on the status of the negotiations among the SJGS owners at that time. Although the negotiations among the SJGS owners are continuing, no agreements have been reached. PNM’s ultimate ownership percentage in SJGS Unit 4 will depend on the final resolution of the negotiations among the SJGS owners. Depending upon the terms and conditions agreed to as a result of the negotiations, including PNM’s share of the capacity of SJGS Unit 4, PNM may amend its December 20, 2013 filing with the NMPRC. However, PNM does not anticipate a change in the nature and capacity of replacement power required by PNM as a result of the on-going negotiations.

PNM can provide no assurance that the requirements of the plan agreed to on February 15, 2013 will be accomplished ~~at all or~~ within the required ~~timeframes.~~timeframes or at all. If the February 15, 2013 plan is not implemented, PNM would seek to work with NMED and EPA to develop a revised timetable for implementation of the FIP. If an agreement on a revised timetable cannot be reached, PNM will likely be unable to complete the installation of SCRs on all four units at SJGS by the FIP deadline of September 21, 2016. In such event, PNM would ~~likely~~need to rely on EPA’s pledge to work with PNM and the State of New Mexico to develop a reasonable FIP compliance plan or otherwise negotiate a solution with EPA or seek relief from ~~the compliance deadline from EPA or~~ the Tenth Circuit in order to continue to be able to operate the plant, including during the ~~completion of the~~ installation ~~process.~~process for any alternate solution. If relief is not granted, PNM could be forced to temporarily cease operation of some or all of the SJGS units. If a shutdown was required, PNM would then have to acquire temporary replacement power through short-term or open-market purchases in order to serve the needs of its customers. There can be no assurance that sufficient replacement power will be available to serve ~~PNM's~~PNM’s needs or, if available, what costs would be incurred.

PNM is unable to predict the ultimate outcome of these matters or what additional pollution control equipment will be required at SJGS. PNM will seek recovery from its ratepayers for all costs that may be incurred as a result of the CAA requirements. Although the additional equipment and other final requirements will result in additional capital and operating costs being incurred, PNM believes that its access to the capital markets is sufficient to be able to finance its share of the installation. It is possible that requirements to comply with the CAA, combined with the financial impact of possible future climate change regulation or legislation, if any, other environmental regulations, the result of litigation, and other business considerations, could jeopardize the economic viability of SJGS or the ability or willingness of individual participants to continue participation in the plant.

SJGS Ownership Restructuring Matters - As discussed in the ~~2012~~2013 Annual ~~Reports~~Report on Form 10-K, SJGS is jointly owned by PNM and eight other entities, including three participants that operate in the State of California. Furthermore, each participant does not have the same ownership interest in each unit. The ~~San Juan Project Participation Agreement ("SJPPA")~~SJPPA that governs the operation of SJGS expires on July 1, 2022 and the contract with SJCC to supply the coal requirements of the plant expires on December 31, 2017. The California participants have indicated that, under California law, they may be prohibited from making significant capital improvements to SJGS. ~~Accordingly, they believe~~The California participants have stated they would be unable to fully fund the construction of either SCRs or SNCRs at ~~SJGS. Therefore, the California participants~~SJGS and have expressed the intent to exit their ownership in SJGS no later than the expiration of the current ~~SJPPA and sooner, if possible.~~SJPPA. One other participant has also expressed a similar intent to exit ownership in the plant. The participants intending to exit ownership in SJGS currently own 50.0% of SJGS Unit 3 and 38.8% of SJGS Unit 4. PNM currently owns 50.0% of SJGS Unit 3 and 38.5% of SJGS Unit 4. PNM is unable to predict the actions of the SJGS participants. Likewise, PNM cannot predict the impact of those actions on the ownership of SJGS or the operations of SJGS and PNM.

The SJGS participants have engaged in negotiations concerning the implementation of the revised SIP to address BART at SJGS. ~~The~~These negotiations ~~have~~ included potential shifts in ownership among participants and between ~~units~~Units 3 and 4 in order to facilitate the shutdown of ~~SJGS~~ Units 2 and 3 to comply with the revised SIP and to accommodate the intent of the participants desiring to exit ownership in SJGS. This could result in the exiting participants' ownership interests in SJGS Unit 4 being shifted to SJGS Unit 3 and certain of the continuing participants, including PNM, acquiring additional ownership interests in Unit 4. In addition,

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to exit ownership in SJGS. This could have resulted in certain of the continuing participants, including PNM, acquiring additional ownership interests in Unit 4 prior to the shutdown of SJGS Units 2 and 3. Based on the status of negotiations at the time of PNM’s December 20, 2013 NMPRC filing, PNM requested NMPRC approval to exchange 78 MW of its capacity in SJGS Unit 3 for an equal amount of capacity in SJGS Unit 4. Although negotiations are continuing, no agreements have been reached. The ultimate outcome of these negotiations could result in PNM acquiring more than 78 MW of SJGS Unit 4. The discussions among the SJGS participants regarding ~~such a~~ restructuring have also included, among other matters, the treatment of plant decommissioning obligations, mine reclamation obligations, environmental matters, and certain ongoing operating costs. ~~Although discussions are continuing, no agreements~~The SJGS participants have ~~been reached.~~engaged a mediator to assist in facilitating resolution of a number of outstanding matters among the owners. PNM is unable to predict the outcome of the negotiations.

The SJPPA requires PNM, as operating agent, to obtain approval of capital improvement project expenditures from participants who have an ownership interest in the relevant unit or common property. As provided in the SJPPA, specified percentages of both the outstanding participant shares, based on MW ownership, and the number of participants in the unit or common property must be obtained in order for a capital improvement project to be approved. PNM presented the SNCR project, including NAAQS compliance requirements, to the SJGS 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, which includes some of the California participants, 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, in its capacity as operating agent of SJGS, is authorized and obligated to take reasonable and prudent actions necessary for the successful and proper operation of SJGS pending the resolution, by arbitration or otherwise, of any inability or failure to agree by the participants. PNM ~~is evaluating~~must evaluate its responsibilities and obligations as operating agent under the SJPPA regarding the SJGS Unit 4 capital projects that were not approved by the participants ~~but has~~and take reasonable and prudent actions as it deems necessary. On March 11, 2014, PNM requested that the owners of Unit 4 approve the expenditure of $1.9 million of costs critical to being able to comply with the time frame in the revised SIP with respect to the Unit 4 project. The Unit 4 owners did not ~~reached~~approve the expenditures. Thereupon, PNM issued a ~~decision~~“Prudent Utility Practice” notice under the SJPPA indicating PNM was restarting certain critical activities to keep the Unit 4 SNCR project on ~~how to proceed.~~schedule. PNM cannot predict the outcome of this matter, its impact on ~~SJGS'~~SJGS’ compliance with the CAA, or the impact on ~~PNM's~~PNM’s financial position, ~~and~~ results of ~~operations.~~operations, and cash flows.

Four Corners

On August 6, 2012, EPA issued its final BART determination for Four Corners. The rule ~~includes~~included two compliance alternatives. ~~The first emission control strategy finalized by~~On December 30, 2013, APS notified EPA ~~would require~~that the ~~installation of post-combustion controls, including SCRs, on each of Units 1-5 at~~ Four Corners ~~to reduce NOx emissions. Under~~participants selected the ~~second emission control~~ alternative ~~the owners of Four Corners would have the option~~that required APS to close permanently Units 1-3 by January 1, 2014 and install SCR post-combustion NOx controls on each of Units 4 and 5 by July 31, 2018. PNM owns a 13% interest in Units 4 and 5, but had no ownership interest in Units 1, 2, and 3, which were shutdown by APS on December 30, 2013. For particulate matter emissions, EPA is requiring Units 4 and 5 to meet an emission limit of 0.015 lb/MMBTU and the plant to meet a 20% opacity limit, both of which are achievable through operation of the existing baghouses. Although unrelated to BART, the final BART rule also imposes a 20% opacity limitation on certain fugitive dust emissions from Four ~~Corners'~~Corners’ coal and material handling operations. ~~Under the EPA's final BART determination,~~

APS, on behalf of the Four Corners participants, ~~had until July 1, 2013~~negotiated amendments to ~~notify EPA of~~an existing facility lease with the Navajo Nation, which ~~emission control strategy~~extends the Four Corners ~~would follow~~. ~~Either alternative would involve substantial investment by~~leasehold interest from 2016 to 2041. The Navajo Nation approved these amendments in March 2011. The effectiveness of the ~~owners in additional post-combustion pollution controls and, accordingly, contemplates~~amendments also requires the ~~continued operation~~approval of ~~Four Corners for~~the DOI, as does a ~~substantial period of time. On September 24, 2013, EPA extended the date by~~related federal rights-of-way grant, which the Four Corners participants ~~must notify~~are pursuing. A federal environmental review is underway as part of the DOI review process. In March 2014, APS received a draft of the EIS in connection with the DOI review process. Comments on the draft EIS are due by the May 27, 2014. APS will also require a PSD permit from EPA ~~of their chosen BART compliance strategy from July 1~~ to ~~December 31, 2013.~~install SCR control technology at Four Corners. PNM cannot predict whether these federal approvals will be granted, and if so on a timely basis, or whether any conditions that may be attached to them will be acceptable to the Four Corners participants.

The Four Corners ~~participants'~~participants’ obligations to comply with ~~EPA's~~EPA’s final BART determinations, coupled with the financial impact of possible future climate change regulation or legislation, other environmental regulations, and other business considerations, could jeopardize the economic viability of Four Corners or the ability of individual participants to continue their participation in Four Corners.

~~PNM is continuing to evaluate the impacts of EPA's BART determination for Four Corners. PNM estimates its share of costs, including PNM's AFUDC, to be up to approximately~~ ~~$75 million~~ for post-combustion controls at Four Corners Units 4 and 5. PNM would seek recovery from its ratepayers of all costs that are ultimately incurred. PNM has no ownership interest in Four Corners Units 1, 2, and 3. PNM is unable to predict the ultimate outcome of this matter.

SCE, a participant in Four Corners, has indicated that certain California legislation may prohibit it from making emission control expenditures at Four Corners. APS and SCE entered into an asset purchase agreement, providing for the purchase by APS of SCE's ~~48%~~ interest in each of Units 4 and 5 of Four Corners. A principal remaining condition to closing is the negotiation and execution of a new coal supply contract for Four Corners on terms reasonably acceptable to APS. See Coal Supply below. APS has announced that, if APS's purchase of SCE's interests in Units 4 and 5 at Four Corners is consummated, it will shut down Units 1, 2, and 3 at Four Corners. On May 9, 2013, the Arizona Corporation Commission ("ACC"), which regulates APS, voted to re-examine the facilitation of a deregulated retail electric market in Arizona. In connection with this matter, APS announced that it would not be in a position to close the Four Corners purchase transaction with SCE until the ACC's intentions with regard to pursuing deregulation in Arizona became clearer. In September 2013, the ACC closed the deregulation docket. Certain parties have filed motions for rehearing, which are pending before the ACC. Pursuant to the asset purchase agreement, because all of the closing conditions were not originally satisfied by December 31, 2012, either APS or SCE has a right to terminate the agreement,

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~~unless~~PNM is continuing to evaluate the ~~party seeking~~impacts of EPA’s BART determination for Four Corners. PNM estimates its share of costs, including PNM’s AFUDC, to ~~terminate is then in breach. Although the ACC closed its deregulation docket, APS has reported that it cannot predict whether the closing conditions will~~ be ~~satisfied such that closing of its planned purchase of SCE's interest in~~up to approximately $80.3 million for post-combustion controls at Four Corners ~~can occur.~~Units 4 and 5. PNM would seek recovery from its ratepayers of all costs that are ultimately incurred. PNM is unable to predict the ultimate outcome of this matter.

Four Corners BART FIP Challenge

On October 22, 2012, WEG filed a petition for review in the Ninth Circuit challenging the Four Corners BART FIP. In its petition, WEG alleges that the final BART rule results in more air pollution being emitted into the air than allowed by law and that EPA failed to follow the requirements of the ESA. APS intervened in this matter and filed a motion to dismiss this lawsuit for lack of jurisdiction or alternatively to transfer the lawsuit to the Tenth Circuit. On February 25, 2013, the Ninth Circuit denied ~~APS'~~APS’ motion to dismiss, but granted the request to transfer the case to the Tenth Circuit. ~~This matter is now proceeding in~~Oral argument was presented before the Tenth ~~Circuit.~~Circuit on January 23, 2014. A decision is expected before the end of 2014. PNM cannot currently predict the outcome of this matter or the range of its potential impact.

Regional Haze Challenges

On December 27, 2012, WEG filed a petition for review in the Tenth Circuit challenging the SO₂ and particulate matter emissions elements of ~~EPA's~~EPA’s approval of New ~~Mexico's~~Mexico’s Regional Haze SIP. On February 26, 2013, HEAL Utah and other environmental groups filed petitions in the Tenth Circuit challenging ~~EPA's~~EPA’s final approval of the remaining elements of New ~~Mexico's~~Mexico’s Regional Haze SIP, as well as ~~EPA's~~EPA’s approval of the Albuquerque/Bernalillo County Air Quality Control Board SIP. PNM was granted intervention in both matters and the Tenth Circuit consolidated the two matters based on the similarity of issues. ~~This matter is now proceeding in~~Oral argument was heard before the Tenth ~~Circuit.~~Circuit on March 20, 2014. PNM is continuing to evaluate the impacts of these matters, but is unable to predict their ultimate outcomes.

~~SJGS Operating Permit Challenge~~

On February 16, 2012, EPA issued its response to a WEG petition objecting to SJGS's operating permit granted by the NMED in January 2011. In its order, EPA required NMED to provide clarification on several of the matters raised by WEG. EPA's order in this matter does not constitute a finding that the plant has violated any provision of the CAA or that it has violated any emission limits.

In August 2012, NMED issued a response to the EPA order stating that SJGS's operating permit would be reopened to make certain modifications to the permit. NMED issued a public notice regarding proposed modifications to the SJGS operating permit on September 19, 2012 and issued a revised operating permit on November 26, 2012. The revised permit includes changes to the SO₂ and particulate matter emission limits that were previously incorporated into the SJGS NSR permit. In addition, the revised permit requires PNM to submit a compliance plan to address carbon monoxide ("CO") emissions increases at SJGS Unit 2. PNM submitted a compliance plan in May 2013 and considers this matter resolved.

National Ambient Air Quality Standards ~~("NAAQS"~~(“NAAQS”)

The CAA requires EPA to set NAAQS for pollutants considered harmful to public health and the environment. EPA has set NAAQS for certain pollutants, including NOx, SO₂,ozone, and particulate matter. In 2010, EPA updated the primary NOx and SO₂ NAAQS to include a 1-hour maximum standard while retaining the annual standards for NOx and SO₂and the 24-hour SO₂ standard. New Mexico is in attainment for the 1-hour NOx NAAQS. EPA has issued draft guidance on how to determine whether areas in a state comply with the new 1-hour SO₂ NAAQS. On May 21, 2013, EPA released draft guidance on characterizing air quality in areas with limited or no monitoring data near existing SO₂ sources. This characterization will result in these areas being designated as attainment, nonattainment, or unclassified for compliance with the 1-hour SO₂ NAAQS. Several states and environmental groups have filed lawsuits challenging EPA’s decision to designate only a few areas as “nonattainment” within the 3-year deadline, while leaving the rest of the country to wait until the states either obtain better monitoring data or conduct computer modeling. Although the determination process has not been finalized, PNM believes that compliance with the 1-hour SO₂ standard may require operational changes and/or equipment modifications at SJGS. On June 4, 2013, Sierra Club and National Resource Defense Council issued a NOI to sue EPA for failure to issue non-attainment designations for areas they claim to be in violation of the 2010 1-hour SO₂ ~~standard.~~ On April 6, 2012, PNM filed an application for an amendment to its air permit for SJGS, which would be required for the installation of either SCRs or SNCRs described above. In addition, this application included a proposal by PNM to install equipment modifications for the purpose of reducing fugitive emissions, including NOx, SO₂, and particulate matter. These modifications would help SJGS meet the NAAQS. It is anticipated that this technology would be installed at the same time as the installation of regional haze BART controls, in order to most efficiently and cost effectively conduct construction activities at

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SJGS. The cost of this technology is dependent upon the type of control technology that is ultimately determined to be NOx BART at SJGS. See Regional Haze - SJGS above.

EPA finalized revisions to its NAAQS for fine particulate matter on December 14, 2012. PNM believes the equipment modifications discussed above will assist ~~with~~ the plant ~~with compliance~~in complying with the particulate matter NAAQS.

In January 2010, EPA announced it would strengthen the 8-hour ozone standard by setting a new standard in a range of 0.060-0.070 parts per million. EPA is reviewing its 2008 standard and ~~is scheduled~~has stated it intends to propose a new ~~standard~~standard. Although EPA has not announced a timeline for its review, it may release new proposed standards in ~~December 2013 and finalize it by~~ the ~~end~~second half of 2014. Depending upon where the standard for ozone is set, San Juan County, where SJGS is situated, could be designated as not attaining the standard for ozone. If that were to occur, NMED would have responsibility for bringing the county into compliance and would look at all sources of NOx and volatile organic compounds since these are the pollutants that form ground-level ozone. As a result, SJGS

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could be required to install further NOx controls to meet a new ozone NAAQS. In addition, other counties in New Mexico, including Bernalillo County, may be designated as non-attainment. PNM cannot predict the outcome of this matter, the impact of other potential environmental mitigations, or if additional NOx controls would be required at any of its affected facilities as a result of ozone non-attainment designation.

Citizen Suit Under the Clean Air Act

The operations of SJGS are covered by a Consent Decree with the Grand Canyon Trust and Sierra Club and with the NMED that includes stipulated penalties for non-compliance with specified emissions limits. Stipulated penalty amounts are placed in escrow on a quarterly basis pending review of ~~SJGS's~~SJGS’s emissions performance. In May 2011, PNM entered into an agreement with NMED and the plaintiffs to resolve a dispute over the applicable NOx emission limits under the Consent Decree. Under the agreement, so long as the NOx emissions limits imposed under the EPA FIP and the New Mexico SIP meet a specified emissions limit, and PNM does not challenge these limits, the parties' dispute is deemed settled.

In May 2010, PNM filed a petition with the federal district court seeking a judicial determination on a dispute relating to ~~PNM's~~PNM’s mercury controls. NMED and plaintiffs seek to require PNM to implement additional mercury controls. PNM estimates the implementation would increase annual mercury control costs for the entire station, which are currently $~~0.6~~0.7 million, to a total of $~~6.1~~6.6 million. ~~The~~On March 23, 2014, the court ~~appointed~~entered a ~~special master to evaluate~~stipulated order reflecting an agreement reached by the ~~technical arguments~~parties. In accordance with the stipulated order, PNM will repeat the mercury study required under the Consent Decree using sorbent traps instead of the monitoring system used in the ~~case and to address the detection and determination limits~~initial study. The results of the mercury ~~monitors at SJGS and~~study will establish the ~~appropriate brominated~~ activated carbon injection rate that maximizes mercury removal at SJGS, as required under the reduction of mercury emissions from SJGS. The special master issued a report indicating he was unable to make a determination on either of these issues. In September 2012, PNM submitted objections to certain portions of the special master report and requested an evidentiary hearing. Also in September 2012, NMED and plaintiffs filed a motion asking the court to affirm certain findings in the special master report and order PNM to conduct additional mercury testing. The parties have provided status updates to the court as required.Consent Decree. PNM cannot predict the ultimate outcome of this matter.

Section 114 Request

In April 2009, APS received a request from EPA under Section 114 of the CAA seeking detailed information regarding projects at and operations of Four Corners. EPA has taken the position that many utilities have made physical or operational changes at their plants that should have triggered additional regulatory requirements under the NSR provisions of the CAA. APS has responded to ~~EPA's~~EPA’s request. PNM is currently unable to predict the timing or content of ~~EPA's~~EPA’s response, if any, or any resulting actions.

Four Corners Clean Air Act Lawsuit

In October 2011, Earthjustice, on behalf of several environmental organizations, filed a lawsuit in the United States District Court for the District of New Mexico against APS and the other Four Corners participants alleging violations of the NSR provisions of the CAA and NSPS violations. The plaintiffs seek to have the court enjoin operations at Four Corners until APS applies for and obtains any required NSR permits and complies with the NSPS. The plaintiffs further request the court to order the payment of civil penalties, including a beneficial mitigation project. On April 2, 2012, the Four Corners participants filed motions to dismiss. The case is being held in abeyance while the parties seek to negotiate a settlement. On March 30, 2013, upon joint motion of the parties, the court issued an order deeming the motions to dismiss withdrawn without prejudice during pendency of the stay. At such time as the stay is lifted, the Four Corners owners may reinstate

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their motions to dismiss without risk of default. PNM cannot currently predict the outcome of this matter or the range of its potential impact.

WEG v. OSM NEPA Lawsuit

In February 2013, WEG filed a Petition for Review in the United States District Court of Colorado against OSM challenging federal administrative decisions affecting seven different mines in four states issued at various times from 2007 through 2012. In its petition, WEG challenges several unrelated mining plan modification approvals, which were each separately approved by OSM. Of the fifteen claims for relief in the WEG Petition, two concern ~~SJCC's~~SJCC’s San Juan mine. ~~WEG's~~WEG’s allegations concerning the San Juan mine arise from OSM administrative actions in 2008. WEG alleges various National Environmental Policy Act violations against OSM, including, but not limited to, ~~OSM's~~OSM’s alleged failure to provide requisite public notice and participation, alleged failure to analyze certain environmental impacts, and alleged reliance on outdated and insufficient documents. ~~WEG's~~WEG’s petition seeks various forms of relief, including voiding, reversing, and remanding the various mining modification approvals, enjoining the federal defendants from re-issuing the mining plan approvals for the mines, and enjoining operations at the seven mines. SJCC intervened in this ~~matter and seeks~~matter. The Court granted SJCC’s motion to sever ~~SJCC's~~its claims from the lawsuit and transfer venue to the United States District Court for the District of New Mexico. PNM cannot currently predict the outcome of this matter or the range of its potential impact.

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Navajo Nation Environmental Issues

Four Corners is located on the Navajo Reservation and is held under an easement granted by the federal government, as well as a lease from the Navajo Nation. The Navajo Acts purport to give the Navajo Nation Environmental Protection Agency authority to promulgate regulations covering air quality, drinking water, and pesticide activities, including those activities that occur at Four Corners. In October 1995, the Four Corners participants filed a lawsuit in the District Court of the Navajo Nation challenging the applicability of the Navajo Acts to Four Corners. ~~In May 2005, APS and the Navajo Nation signed~~Although an agreement was reached resolving the dispute regarding the Navajo Nation's authority to adopt operating permit regulations under the Navajo Nation Air Pollution Prevention and Control Act. As a result of this agreement, APS sought, and the courts granted, dismissal of the pending litigation in the Navajo Nation Supreme Court and the Navajo Nation District Court,claims related to the ~~extent~~CAA, the ~~claims relate to the CAA. The~~ agreement does not address or resolve any dispute relating to other aspects of the Navajo Acts. PNM cannot currently predict the outcome of these matters or the range of their potential impacts.

~~Endangered Species Act~~

In January 2011, the Center for Biological Diversity, Diné Citizens Against Ruining Our Environment, and San Juan Citizens Alliance filed a lawsuit in the United States District Court for the District of Colorado against the OSM and the DOI, alleging that OSM failed to engage in mandatory ESA consultation with the United States Fish and Wildlife Service prior to authorizing the renewal of an operating permit for the mine that serves Four Corners. The lawsuit alleges that activities at the mine, including mining and the disposal of coal combustion residue, will adversely affect several endangered species and their critical habitats. The lawsuit requested the court to vacate and remand the mining permit and enjoin all activities carried out under the permit until OSM has complied with the ESA. Neither PNM nor APS was a party to the lawsuit. On March 14, 2012, the Court entered an order dismissing the plaintiffs' lawsuit without prejudice. On May 14, 2012, the plaintiffs appealed the Court's order to the Tenth Circuit. On July 8, 2013, the Tenth Circuit entered an order dismissing the appeal, which concludes this matter.

Cooling Water Intake Structures

EPA issued its proposed cooling water intake structures rule in April 2011, which would provide national standards for certain cooling water intake structures at existing power plants and other facilities under the Clean Water Act to protect fish and other aquatic organisms by minimizing impingement mortality (the capture of aquatic wildlife on intake structures or against screens) and entrainment mortality (the capture of fish or shellfish in water flow entering and passing through intake structures). The proposed rule would require facilities such as Four Corners and SJGS to either demonstrate that impingement mortality at its cooling water intakes does not exceed a specified rate or reduce the flow at those structures to less than a specified velocity and to take certain protective measures with respect to impinged fish. The proposed rule would also require these facilities to either meet the definition of a closed cycle recirculating cooling system or conduct a ~~"structured~~“structured site-specific ~~analysis"~~analysis” to determine what site-specific controls, if any, should be required.

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The proposed rule would require existing facilities to comply with the impingement mortality requirements as soon as possible, but no later than eight years after the effective date of the rule, and to comply with the entrainment requirements as soon as possible under a schedule of compliance established by the permitting authority. EPA was required to issue a final rule by June 27, 2013; however, that date ~~has been~~was extended to ~~November 4, 2013.~~January 14, 2014. On January 10, 2014, EPA announced it would not meet that deadline. On February 10, 2014, EPA indicated it would issue the final rule by April 17, 2014 and did not intend to seek any more extensions. However, on April 16, 2014, EPA announced the final rule will not be published until May 16, 2014 due to the pending consultation activities with the U.S. Fish and Wildlife Service and the National Marine Fisheries Service. PNM and APS continue to follow the rulemaking and are performing analyses to determine the potential costs of compliance with the proposed rule. PNM is unable to predict the outcome of this matter or a range of the potential costs of compliance.

Effluent Limitation Guidelines

On June 7, 2013, EPA published proposed revised wastewater effluent limitation guidelines establishing technology-based wastewater discharge limitations for ~~steam~~fossil fuel-fired electric power plants. ~~EPA's~~EPA’s proposal offers numerous options that target metals and other pollutants in wastewater streams originating from fly ash and bottom ash handling activities, scrubber activities, and non-chemical metal cleaning ~~wastes~~waste operations. The preferred alternatives differ with respect to the scope of requirements that would be applicable to existing discharges of pollutants found in wastestreams generated at existing power plants. All four alternatives would establish a “zero discharge” effluent limit for all pollutants in fly ash transport water. However, requirements governing bottom ash transport water differ depending on which alternative EPA ~~is subject~~ultimately chooses and could range from effluent limits based on Best Available Technology Economically Achievable to ~~a consent decree deadline~~“zero discharge” effluent limits. Depending on which alternative EPA finalizes, Four Corners may be required to ~~finalize the revised guidelines by May 22, 2014.~~change equipment and operating practices affecting boilers and ash handling systems, as well as change its waste disposal techniques. PNM ~~is in the process of reviewing~~has reviewed the proposed rule and continues to assess the potential impact to SJGS and Reeves Station, the only PNM-operated power plants that would be covered by the proposed rule. ~~APS is currently assessing~~On April 9, 2014, several environmental groups agreed to allow EPA until September 30, 2015 to issue final effluent limits. Under the ~~impact~~agreement, EPA will not seek any further extensions and will follow through on a separate agreement to ~~Four Corners.~~issue a final rule on coal ash waste disposal by December 19, 2014. If EPA misses the December 19, 2014 deadline to issue a coal ash rule, then the agreement allows the environmental groups to require the EPA to issue the final effluent limits earlier. PNM is unable to predict the outcome of this matter or ~~if it will have~~ a ~~material impact on PNM's financial position, results~~range of ~~operations, or cash flows.~~the potential costs of compliance.

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Santa Fe Generating Station

PNM and the NMED are parties to agreements under which PNM installed a remediation system to treat water from a City of Santa Fe municipal supply well, an extraction well, and monitoring wells to address gasoline contamination in the groundwater at the site of the former Santa Fe Generating Station and service center. PNM believes the observed groundwater contamination originated from off-site sources, but agreed to operate the remediation facilities until the groundwater meets applicable federal and state standards or until the NMED determines that additional remediation is not required, whichever is earlier. The ~~municipal well continues to operate and meets federal drinking water standards. The~~ City of Santa Fe has ~~recently~~ indicated that since the City no longer needs the water from the well, the City would prefer to discontinue its operation and maintain it only as a backup water source. However, for ~~PNM's~~PNM’s groundwater remediation system to operate, the water well must be in service. Currently, PNM is not able to assess the duration of this project or estimate the impact on its obligations if the City of Santa Fe ceases to operate the water well.

The Superfund Oversight Section of the NMED has conducted multiple investigations into the chlorinated solvent plume in the vicinity of the site of the former Santa Fe Generating Station. In February 2008, a NMED site inspection report was submitted to EPA, which states that neither the source nor extent of contamination has been determined and also states that the source may not be the former Santa Fe Generating Station. The NMED investigation is ongoing. In January 2013, NMED notified PNM that monitoring results from April 2012 showed elevated concentrations of nitrate in three monitoring wells and an increase in free-phase hydrocarbons in another well. None of these wells are routinely monitored as part of ~~PNM's~~PNM’s obligations under the settlement agreement. In April 2013, NMED conducted the same level of testing on the wells as was conducted in April 2012, which produced similar results. PNM voluntarily agreed to conduct similar sampling activities on the site beginning in April 2014, as well as more specific “fingerprint” analysis, which may help identify potential off-site sources. PNM is unable to predict the outcome of this matter and does not believe the former generating station is the source of the nitrates or the increased levels of free-phase hydrocarbons, but no conclusive determinations have been made.

Coal Combustion Byproducts Waste Disposal

CCBs consisting of fly ash, bottom ash, and gypsum from SJGS are currently disposed of in the surface mine pits adjacent to the plant. SJGS does not operate any CCB impoundments. The Mining and Minerals Division of the New Mexico Energy, Minerals and Natural Resources Department currently regulates mine placement of ash with federal oversight by the OSM. APS disposes of CCBs in ash ponds and dry storage areas at Four Corners and also sells a portion of its fly ash for beneficial uses, such as a constituent in concrete production. Ash management at Four Corners is regulated by EPA and the New Mexico State ~~Engineer's~~Engineer’s Office.

In June 2010, EPA published a proposed rule that includes two options for waste designation of coal ash. One option is to regulate CCBs as a hazardous waste, which would allow EPA to create a comprehensive federal program for waste management and disposal of CCBs. The other option is to regulate CCBs as a non-hazardous waste, which would provide EPA with the authority to develop performance standards for waste management facilities handling the CCBs and would be enforced primarily by state

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authorities or through citizen suits. Both options allow for continued use of CCBs in beneficial applications. ~~EPA's~~EPA’s proposal does not address the placement of CCBs in surface mine pits for reclamation. An OSM CCB rulemaking team has been formed to develop a proposed rule.

On April 5, 2012, several environmental groups, including Sierra Club, filed a citizen suit in the D.C. Circuit claiming that EPA has failed to review and revise ~~RCRA's~~RCRA’s regulations with respect to CCBs. The groups allege that EPA has already determined that revisions to the CCBs regulations are ~~necessary. They also claim~~necessary and that EPA now has a non-discretionary duty to revise the regulations. The environmental groups asked the court to direct EPA to complete its review of the regulation of CCBs and a hazardous waste analytical procedure and to issue necessary revisions of such regulations as soon as possible. Two industry group members subsequently filed separate lawsuits in the D.C. Circuit seeking to ensure that disposal of coal ash would not be regulated as a hazardous waste. The environmental and industry lawsuits have been consolidated. On January 29, 2014, EPA entered into a consent decree directing EPA to publish its final action regarding whether or not to pursue the proposed non-hazardous waste option for CCBs by December 19, 2014.

PNM advocates for the non-hazardous regulation of CCBs. ~~However, if~~If CCBs are ultimately regulated as a hazardous waste, costs could increase significantly. PNM would seek recovery from its ratepayers of all costs that are ultimately incurred. PNM cannot

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predict the outcome of ~~EPA's~~EPA’s or ~~OSM's~~OSM’s proposed rulemaking regarding CCB regulation, including mine placement of CCBs, or whether these actions will have a material impact on its operations, financial position, or cash flows.

Hazardous Air Pollutants ~~("HAPs"~~(“HAPs”) Rulemaking

In December 2011, the EPA issued its final Mercury and Air Toxics Standards ~~("MATS"~~(“MATS”) to reduce emissions of heavy metals, including mercury, arsenic, chromium, and nickel, as well as acid gases, including hydrochloric and hydrofluoric gases, from coal and oil-fired electric generating units with a capacity of at least 25 MW. Existing facilities will generally have up to four years to demonstrate compliance with the new rule. ~~PNM's~~PNM’s assessment of MATS indicates that the control equipment currently used at SJGS allows the plant to meet the emission standards set forth in the ~~rule although the plant may be required to install additional monitoring equipment.~~rule. With regard to mercury, stack testing performed for EPA during the MATS rulemaking process showed that SJGS achieved a mercury removal rate of 99% or greater. APS has determined that no additional equipment will be required at Four Corners Units 4 and 5 to comply with the rule.

Other Commitments and Contingencies

Coal Supply

The coal requirements for SJGS are being supplied by SJCC, a wholly owned subsidiary of BHP. In addition to coal delivered to meet the current needs of SJGS, PNM prepays SJCC for certain coal mined but not yet delivered to the plant site. At ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012,~~2013, prepayments for coal, which are included in other current assets, amounted to $~~15.8~~16.0 million and $~~9.9~~12.3 million. These amounts reflect delivery of a portion of the prepaid coal and its utilization due to the mine fire incident described below. SJCC holds certain federal, state, and private coal leases and has an underground coal sales agreement to supply processed coal for operation of SJGS through 2017. Under the coal sales agreement, SJCC is reimbursed for all costs for mining and delivering the coal, including an allocated portion of administrative costs, and receives a return on its investment. BHP Minerals International, Inc. has guaranteed the obligations of SJCC under the coal agreement. The coal agreement contemplates the delivery of coal that would supply substantially all the requirements of SJGS through December 31, 2017.

APS purchases all of Four ~~Corners'~~Corners’ coal requirements from a supplier that iswas also a subsidiary of BHP and ~~has~~had a long-term lease of coal reserves with the Navajo Nation. ~~The Four Corners coal~~That contract ~~runs through~~was to expire on July 6, 2016 with pricing determined using an escalating base-price. InOn December ~~2012, BHP announced that it has entered into a Memorandum~~30, 2013, ownership of ~~Understanding with~~the mine was transferred to an entity owned by the Navajo Nation ~~setting out the key terms under which the~~and a new coal ~~mine would be sold to the Navajo Nation.~~supply contract for Four Corners, expiring in 2031, was entered into with that entity. The BHP subsidiary ~~would~~is to be retained as the mine manager and operator until July 2016. ~~Key terms~~Coal costs are anticipated to increase approximately 21% for the first full year of the new ~~coal supply~~ contract ~~are being finalized by~~and will further increase over the ~~Navajo Nation and the Four Corners owners. The Four Corners owners must finalize their approvals~~contract term. PNM anticipates that its share of the ~~contract. These negotiations, and the related transaction whereby full ownership of the coal mine would~~increased costs will be transferred to the Navajo Nation, are proceeding. On April 29, 2013, the Navajo Nation Tribal Council approved the creation of the new commercial enterprise with sufficient power and authority to execute the transaction with BHP. See The Clean Air Act - Regional Haze - Four Corners above. PNM is unable to predict the outcome of this matter.recovered through its FPPAC.

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In ~~2010,~~2013, PNM updated its study of the final reclamation costs for both the surface mines that previously provided coal to SJGS and the current underground mine providing coal and revised its estimates of the final reclamation costs. This estimate reflects that, with the proposed shutdown of SJGS Units 2 and 3 described above, the mine providing coal to SJGS will continue to operate through 2053, the anticipated life of SJGS. The 2013 estimate for decommissioning the Four Corners mine ~~was also revised in 2010.~~reflects the operation of the mine through 2031, the term of the new coal supply agreement. Based on the ~~2010~~2013 estimates, remaining payments for mine reclamation, in future dollars, are estimated to be $~~56.9~~55.1 million for the surface mines at both SJGS and Four Corners and $~~19.7~~93.3 million for the underground mine at SJGS as of ~~September 30, 2013.~~March 31, 2014. At ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012,~~2013, liabilities, in current dollars, of $~~23.7~~23.6 million and $~~26.8~~23.8 million for surface mine reclamation and $~~4.6~~7.9 million and $~~4.2~~7.8 million for underground mine reclamation were recorded in other deferred credits.

PNM collects a provision for surface and underground mine reclamation costs in its rates. The NMPRC has capped the amount that can be collected from ratepayers for final reclamation of the surface mines at $100.0 million. Previously, PNM recorded a regulatory asset for the $100.0 million and recovers the amortization of this regulatory asset in rates. If future estimates increase the liability for surface mine reclamation, the excess would be expensed at that time. In conjunction with the proposed shutdown of SJGS Units 2 and 3 to comply with the BART requirements of the CAA discussed under The Clean Air Act - Regional Haze - SJGS above, an updated coal mine reclamation study was requested by the SJGS participants. As discussed under Coal Combustion Byproducts Waste Disposal above, SJGS currently disposes of CCBs from the plant in the surface mine pits adjacent to the plant. ~~Although the~~The updated coal mine reclamation study ~~has not been finalized, preliminary indications are that~~indicates reclamation costs ~~for both the surface and underground mines~~ have increased, including significant increases due to the proposed shutdown of SJGS Units 2 and 3.3, although the timing of payments will be delayed. The shutdown of Units

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2 and 3 would reduce the amount of CCBs generated over the remaining life of SJGS, which could result in a significant increase in the amount of fill dirt required to remediate the ~~surface~~underground mine ~~pits~~area thereby increasing the overall reclamation costs. ~~The amount of any increase and the allocation between the surface and underground mines cannot be determined at this time. Furthermore, it~~It has not been decided how costs would be divided among the owners of ~~SJGS, which may be dependent on the final decision regarding how SJGS ownership is restructured.~~SJGS. Regulatory determinations made by the NMPRC may also affect the impact on PNM. The reclamation amounts discussed above reflect PNM’s estimates of its share of the revised costs. PNM is currently unable to determine the outcome of these matters or the range of possible ~~impact.~~impacts.

San Juan Underground Mine Fire Incident

On September 9, 2011, a fire was discovered at the underground mine owned and operated by SJCC that provides coal for SJGS. The federal Mine Safety and Health Administration ~~("MSHA"~~(“MSHA”) was notified of the incident. On September 12, 2011, SJCC informed PNM that the fire was extinguished. However, MSHA required sealing the incident area and confirmation of a noncombustible environment before allowing re-entry of the sealed area. SJCC regained entry into the sealed area of the mine in early March 2012. At that time, MSHA conducted a root cause analysis inspection of the incident area, but has not yet issued its report. SJCC has completed inspection of the mine equipment and reported no significant damage. SJCC removed the equipment from the impacted mine panel and reassembled it at a new panel face. On May 4, 2012, SJCC received approval from MSHA and resumed longwall mining operations. If further difficulties occur in the longwall mining operation, PNM and the other owners of SJGS would need to consider alternatives for operating SJGS, including running at less than full capacity or shutting down one or more units, the impacts of which cannot be determined at the current time.

The costs of the mine recovery flowed through the cost-reimbursable component of the coal supply agreement. PNM ~~anticipates that it will recover through its FPPAC~~included the portion of such costs allocable to its customers subject to New Mexico ~~regulation. PNM's~~regulation in its FPPAC. PNM’s filings with the NMPRC ~~reflect~~reflected an estimate that this incident increased coal costs and the deferral of cost recovery under the FPPAC by between $17.4 million and $21.6 million. SJCC submitted an insurance claim regarding the costs it incurred due to the mine fire and ~~has~~ informed PNM that it ~~has~~ settled with its insurance carrier. ~~PNM believes the settlement proceeds obtained by SJCC through its insurance carrier are reimbursable (in whole or in part) to the owners of SJGS through the coal sales agreement. PNM's~~PNM’s portion of the insurance recovery ~~which~~ is estimated to be $18.7 million ~~based on information received from~~. PNM has credited its FPPAC balancing account for the amount of its estimated insurance proceeds allocable to PNM’s New Mexico jurisdictional customers. SJCC ~~will be flowed through PNM's FPPAC~~is refunding the insurance recovery to the ~~extent it relates to increased~~owners of SJGS through reductions of the cost of purchases under the coal ~~costs included in the FPPAC.~~supply agreement. See Note 12.

Continuous Highwall Mining Royalty Rate

In August 2013, the DOI Bureau of Land Management ~~("BLM"~~(“BLM”) issued a proposed rulemaking that would retroactively apply the surface mining royalty rate of 12.5% to continuous highwall mining ~~("CHM"~~(“CHM”). Comments regarding the rulemaking were due on October 11, 2013, and PNM submitted comments in opposition to the proposed rule. There is no legal deadline for adoption of the final rule.

SJCC utilized the CHM technique from 2000 to 2003 and, with the approval of the Farmington, New Mexico Field Office of BLM to reclassify the final highwall as underground reserves, applied the 8.0% underground mining royalty rate to coal mined using CHM and sold to SJGS. In March 2001, SJCC learned that the DOI Minerals Management Service ~~("MMS"~~(“MMS”) disagreed

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with the application of the underground royalty rate to CHM. In August 2006, SJCC and MMS entered into a settlement agreement tolling the statute of limitations on any administrative action to recover unpaid royalties until BLM issued a final, non-appealable determination as to the proper rate for CHM-mined coal. The proposed BLM rulemaking has the potential to terminate the tolling provision of the settlement agreement, and underpaid royalties of approximately $5 million for SJGS would become due if the proposed BLM rule is adopted as proposed. ~~PNM's~~PNM’s share of any amount that is ultimately paid would be approximately 46.3%, none of which would be passed through ~~PNM's~~PNM’s FPPAC. PNM is unable to predict the outcome of this matter.

SJCC Arbitration

The coal supply agreement for SJGS provides that the participants in SJGS have the right to audit the costs billed by SJCC. An independent accounting firm has been engaged to perform audits of the costs billed under the provisions of the contract. The audit for the period from 2006 through 2009 resulted in disagreements between the SJGS participants and SJCC. As provided in the contract, certain issues have been submitted to a panel for binding arbitration. ~~In October 2013, the arbitration panel ruled on one issue and set other~~The issues ~~for hearing. The panel ruled that the SJGS participants owe SJCC~~ ~~$1.5 million~~ ~~for disputed mining costs~~. ~~PNM's share of this amount is~~ ~~$0.7 million~~ ~~of which~~ ~~$0.5 million~~ ~~will be passed through PNM's FPPAC. The remaining issues going forward to a hearing include:~~are: 1) whether the SJGS participants owe SJCC unbilled mining costsof $5.2 million or whether SJCC owes the SJGS participants overbilled mining costs of $1.1 million, and 2) whether SJCC billed the SJGS participants $~~12.9~~13.9 million as mining costs that SJCC should have considered to be capital ~~improvements,~~costs, which are not billable under the mining contract. ~~PNM's~~PNM’s share of any amounts resulting from the arbitration would be approximately 46.3%. Of ~~PNM's~~PNM’s share of the costs, approximately 33% of the first ~~remaining~~ issue as well as approximately 25% of the

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second ~~remaining~~ issue would be passed through ~~PNM's~~PNM’s FPPAC and the rest would impact earnings. A hearing ~~date~~before the arbitration panel on the remaining issues ~~has not been set.~~is scheduled to be held in May 2014. PNM is unable to predict the outcome of the arbitration hearing.

Four Corners Severance Tax Assessment

On May 23, 2013, the New Mexico Taxation and Revenue Department ~~("NMTRD"~~(“NMTRD”) issued a notice of assessment for coal severance surtax, penalty, and interest totaling approximately $30 million related to coal supplied under the coal supply agreement for Four Corners. ~~PNM's~~PNM’s share of any amounts paid related to this assessment would be approximately 8%, all of which would be passed through ~~PNM's~~PNM’s FPPAC. For procedural reasons, on behalf of the Four Corners co-owners, including PNM, the coal supplier made a partial payment of the assessment and immediately filed a refund claim with respect to that partial payment in August 2013. The NMTRD denied the refund claim. ~~Prior to year end,~~On December 19, 2013, the coal supplier and APS, on its own behalf and as operating agent for Four Corners, ~~intend to file~~filed a complaint ~~with~~in the New Mexico District Court contesting both the validity of the assessment and the refund claim denial. PNM believes the assessment and the refund claim denial are without merit, but cannot predict the outcome of this matter.

~~Nuclear Fuel~~

In late August 2012, one of PVNGS's suppliers that converts uranium concentrates to uranium hexafluoride invoked the force majeure provision in its contract when it shut down its conversion plant due to regulatory compliance issues. The issues have been resolved and the conversion plant has restarted. The PVNGS participants are continually identifying their future nuclear fuel resource needs and negotiating arrangements to fill those needs. The PVNGS participants have sufficient strategic reserves of enriched uranium such that they do not anticipate a short-term impact on nuclear fuel supplies as a result of the force majeure declaration.

PVNGS Liability and Insurance Matters

Public liability for incidents at nuclear power plants is governed by the Price-Anderson Act, which limits the liability of nuclear reactor owners to the amount of insurance available from both private sources and an industry retrospective payment plan. In accordance with the Price-Anderson Act, the PVNGS participants have insurance for public liability exposure for a nuclear incident totaling $13.6 billion per occurrence. Commercial insurance carriers provide $375 million and $13.2 billion is provided through a mandatory industry wide retrospective assessment program. If losses at any nuclear power plant covered by the program exceed the accumulated funds, PNM could be assessed retrospective premium adjustments. Based on ~~PNM's~~PNM’s 10.2% interest in each of the three PVNGS units, ~~PNM's~~PNM’s maximum potential retrospective premium assessment per incident for all three units is $38.9 million, with an annual payment limitation of $5.7 million.

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The PVNGS participants maintain ~~"all risk"~~“all risk” (including nuclear hazards) insurance for damage to, and decontamination of, property at PVNGS in the aggregate amount of $2.75 billion, a substantial portion of which must first be applied to stabilization and decontamination. These coverages are provided by Nuclear Electric Insurance Limited ~~("NEIL"~~(“NEIL”). Effective April 1, ~~2013,~~2014, a sublimit of ~~$1.5~~$2.25 billion for non-nuclear property damage losses has been enacted to the primary policy offered by NEIL. If ~~NEIL's~~NEIL’s losses in any policy year exceed accumulated funds, PNM is subject to retrospective assessments of $~~4.3~~4.8 million for each retrospective assessment declared by ~~NEIL's~~NEIL’s Board of Directors. The insurance coverages discussed in this and the previous paragraph are subject to policy conditions and exclusions.

Water Supply

Because of New ~~Mexico's~~Mexico’s arid climate and periodic drought conditions, there is concern in New Mexico about the use of water, including that used for power generation. PNM has secured groundwater rights in connection with the existing plants at Reeves Station, Delta, Afton, Luna, and Lordsburg. Water availability ~~does~~is not ~~appear to be~~ an issue for these plants at this time. However, prolonged drought, ESA activities, and a Federal lawsuit by the State of Texas ~~suing~~(suing the State of New Mexico over water ~~allocations~~allocations) could pose a threat of reduced water availability for these plants.

PNM, APS, and BHP have undertaken activities to secure additional water supplies for SJGS, Four Corners, and related mines to accommodate the possibility of inadequate precipitation in coming years. Since 2004, PNM has entered into agreements for voluntary sharing of the impacts of water shortages with tribes and other water users in the San Juan basin. This agreement has been extended through 2016. In addition, in the case of water shortage, PNM, APS, and BHP have reached agreement with the Jicarilla Apache Nation on a long-term supplemental contract relating to water for SJGS and Four Corners that runs through 2016. Although PNM does not believe that its operations will be materially affected by drought conditions at this time, it cannot forecast the weather or its ramifications, or how policy, regulations, and legislation may impact PNM should water shortages occur in the future.

In April 2010, APS signed an agreement on behalf of the PVNGS participants with five cities to provide cooling water essential to power production at PVNGS for forty years.

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PVNGS Water Supply Litigation

In 1986, an action commenced regarding the rights of APS and the other PVNGS participants to the use of groundwater and effluent at PVNGS. APS filed claims that dispute the ~~court's~~court’s jurisdiction over ~~PVNGS'~~PVNGS’ groundwater rights and their contractual rights to effluent relating to PVNGS and, alternatively, seek confirmation of those rights. In 1999, the Arizona Supreme Court issued a decision finding that certain groundwater rights may be available to the federal government and Indian tribes. In addition, the Arizona Supreme Court issued a decision in 2000 affirming the lower ~~court's~~court’s criteria for resolving groundwater claims. Litigation on these issues has continued in the trial court. No trial dates have been set in these matters. PNM does not expect that this litigation will have a material impact on its results of operation, financial position, or cash flows.

San Juan River Adjudication

In 1975, the State of New Mexico filed an action in New Mexico District Court to adjudicate all water rights in the San Juan River Stream System, including water used at Four Corners and SJGS. PNM was made a defendant in the litigation in 1976. In March 2009, President Obama signed legislation confirming a 2005 settlement with the Navajo Nation. Under the terms of the settlement agreement, the Navajo ~~Nation's~~Nation’s water rights would be settled and finally determined by entry by the court of two proposed adjudication decrees. The court ~~has ordered that settlement of the Navajo Nation's claims under the settlement agreement and entry of the proposed decrees be heard in an expedited proceeding. The court recently~~ issued an order in August 2013 finding that no evidentiary hearing iswas warranted in the Navajo Nation proceeding, and ~~that it will be issuing an order addressing~~on November 1, 2013 issued a Partial Final Judgment and Decree of the ~~issues raised~~Water Rights of the Navajo Nation approving the proposed settlement with the Navajo Nation. Several parties filed a joint motion for a new trial, which was denied by the court. A number of parties ~~at some point~~subsequently appealed to the New Mexico Court of Appeals. PNM is in the ~~future. This order must be entered no later than December 31, 2013, pursuant to~~process of entering its appearance in the ~~2005 settlement.~~appellate case. No hearing dates or deadlines have been set at this time.

~~PNM's~~PNM is participating in this proceeding since PNM’s water rights in the San Juan Basin may be affected by the rights recognized in the settlement agreement as being owned by the Navajo Nation, which comprise a significant portion of water available from sources on the San Juan River and in the San Juan Basin. ~~Therefore, PNM has elected to participate in this proceeding.~~ PNM is unable to predict the ultimate outcome of this matter or estimate the amount or range of potential loss and cannot determine the effect, if any, of any water rights adjudication on the present arrangements for water at SJGS and Four Corners. Final resolution of the case cannot be expected for several years.

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An agreement reached with the Navajo Nation in 1985, however, provides that if Four Corners loses a portion of its rights in the adjudication, the Navajo Nation will provide, for an agreed upon cost, sufficient water from its allocation to offset the loss.

Rights-of-Way Matter

On January 28, 2014, the County Commission of Bernalillo County, New Mexico passed an ordinance requiring utilities to enter into a use agreement and pay a yet to be determined fee as a condition to installing, maintaining, and operating facilities on county rights-of-way. The fee is purported to compensate the county for costs of administering, maintaining, and capital improvements to the rights-of-way. On February 27, 2014, PNM and other utilities filed a Complaint for Declaratory and Injunctive Relief in the United States District Court for the District of New Mexico challenging the validity of the ordinance. If the challenge to the ordinance is unsuccessful, PNM believes any fees paid pursuant to the ordinance would be considered franchise fees and would be recoverable from customers. PNM is unable to predict the outcome of this matter or its impact on PNM’s operations.

Complaint Against Southwestern Public Service Company

In September 2005, PNM filed a complaint under the Federal Power Act against SPS alleging SPS overcharged PNM for deliveries of energy through its fuel cost adjustment clause practices and that rates for sales to PNM were excessive. PNM also intervened in a proceeding brought by other customers raising similar arguments relating to ~~SPS'~~SPS’ fuel cost adjustment clause practices and issues relating to demand cost allocation (the ~~"Golden~~“Golden Spread ~~Proceeding"~~Proceeding”). In addition, PNM intervened in a proceeding filed by SPS to revise its rates for sales to PNM ("(“SPS 2006 Rate ~~Proceeding"~~Proceeding”). In 2008, FERC issued its order in the Golden Spread Proceeding affirming an ALJ decision that SPS violated its fuel cost adjustment clause tariffs, but shortening the refund period applicable to the violation of the fuel cost adjustment clause issues that had been ordered by the ALJ. FERC also reversed the decision of the ALJ, which had been favorable to PNM, on the demand cost allocation issues. PNM and SPS filed petitions for rehearing and clarification of the scope of the remedies that were ordered and seeking reversal of various rulings in the order. On August 15, 2013, FERC issued separate orders in the Golden Spread Proceeding and in the SPS 2006 Rate Proceeding. The order in the Golden Spread Proceeding determined that PNM was not entitled to refunds for ~~SPS'~~SPS’ fuel cost adjustment clause practices. That order and the order in the SPS 2006 Rate Proceeding decided the demand cost allocation issues using the method

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that PNM had advocated. PNM, SPS, and other customers of SPS have filed requests for rehearing of these orders and they are pending further action by FERC. PNM cannot predict the final outcome of the case at FERC or the range of possible outcomes.

Navajo Nation Allottee Matters

A putative class action was filed against PNM and other utilities in February 2009 in the United States District Court for the District of New Mexico. Plaintiffs claim to be allottees, members of the Navajo Nation, who pursuant to the Dawes Act of 1887, were allotted ownership in land carved out of the Navajo Nation and allege that defendants, including PNM, are rights-of-way grantees with rights-of-way across the allotted lands and are either in trespass or have paid insufficient fees for the grant of rights-of-way or both. In March 2010, the court ordered that the entirety of the ~~plaintiffs'~~plaintiffs’ case be dismissed. The court did not grant plaintiffs leave to amend their complaint, finding that they instead must pursue and exhaust their administrative remedies before seeking redress in federal court. In May 2010, plaintiffs filed a Notice of Appeal with the Bureau of Indian Affairs ~~("BIA"~~(“BIA”), which was denied by the BIA Regional Director. In May 2011, plaintiffs appealed the Regional ~~Director's~~Director’s decision to the DOI, Office of Hearings and Appeals, Interior Board of Indian Appeals. Following briefing on the merits, on August 20, 2013, that board issued a decision upholding the Regional ~~Director's~~Director’s decision that the allottees had failed to perfect their appeals, and dismissed the ~~allottees'~~allottees’ appeals, without prejudice. The allottees have not refiled their appeals. Although this matter was dismissed without prejudice, PNM considers the matter concluded. However, PNM continues to ~~participate in~~monitor this matter in order to preserve its interests regarding any PNM-acquired ~~rights-of-way implicated in the appeal. PNM cannot predict the outcome of the proceeding or the range of potential outcomes at this time.~~rights-of-way.

In a separate matter, in September 2012, forty-three landowners claiming to be Navajo allottees filed a notice of appeal with the BIA appealing a March 2011 decision of the BIA Regional Director regarding renewal of a right-of-way for a PNM transmission line. The allottees, many of whom are also allottees in the above matter, generally allege that they were not paid fair market value for the right-of-way, that they were denied the opportunity to make a showing as to their view of fair market value, and thus denied due process. On January 6, 2014, PNM ~~is participating in~~received notice that the BIA, Navajo Region, requested a review of an appraisal report on 58 allotment parcels. After review, the BIA concluded it would continue to rely on the values of the original appraisal. On March 27, 2014, while this matter ~~in order to preserve its interests regarding~~was stayed, the ~~right-of-way implicated in the appeal. PNM cannot predict the outcome of the proceeding or the range of potential outcomes at this time.~~

~~TGP Complaint~~

~~On March 2, 2012, TGP Granada, LLC and its affiliate (collectively, "TGP")~~allottees filed a ~~complaint at FERC against PNM and Tortoise Capital Resources Corp. ("TTO"). PNM owns~~ ~~60%~~ ofmotion to dismiss their appeal with prejudice. On April 2, 2014, the ~~EIP and leases the other~~ ~~40%~~ ~~from TTO. PNM's lease of the portion of the EIP owned by TTO expires on April 1, 2015. The lease provides PNM the option, with~~ 24 ~~months advance notice, of purchasing the leased assets at the end of the lease for fair market value, as well as options to renew the lease.~~

TGP's filing requested FERC to direct PNM and TTO to identify the party that will immediately assume the obligation of making transmission capacity on the EIP available to customers for use after the April 1, 2015 expiration of the EIP lease agreement. TGP also requested a declaratory order or waiver regarding certain provisions of PNM's Open Access Transmission Tariff to allow its affiliate to change the point-of-receipt associated with a transmission service agreement related to the EIP without losing its

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transmission service priority. On July 5, 2012, FERC issued an order denying TGP's requests for declaratory order and waiver. In addition, FERC directed PNM, in consultation with TTO, to identify the party that will provide long-term transmission service over the leased portion of the EIP.

On November 1, 2012, PNM and TTO entered into a definitive agreement for PNM to exercise the option to purchase on April 1, 2015 the leased capacity at fair market value, which the parties agreed would be ~~$7.7 million~~. The lease remains in existence and PNM will record the purchase at the termination of the lease on April 1, 2015. The definitive agreement sets forth the terms and conditions under which PNM would also assume responsibility for scheduling long-term transmission service on the leased capacity. In November 2012, PNM requested the necessary FERC approvals for the definitive agreement. In January 2013, FERC approved PNM's requests. On February 8, 2013, FERC issued an order dismissing as moot a motion filed by TGP for clarification of FERC's July 5, 2012 order. Since no rehearing request orallotees’ appeal was ~~filed, the February 8, 2013 order is final and non-appealable.~~dismissed with prejudice concluding this matter.


~~(11)~~(12)	Regulatory and Rate Matters

The Company is involved in various regulatory matters, some of which contain contingencies that are subject to the same uncertainties as those described in Note ~~10.~~11. Additional information concerning regulatory and rate matters is contained in Note 17 of the Notes to Consolidated Financial Statements in the ~~2012~~2013 Annual Reports on Form 10-K.

PNM

Renewable Portfolio Standard

The REA establishes a mandatory RPS requiring a utility to acquire a renewable energy portfolio equal to 10% of retail electric sales by 2011, 15% by 2015, and 20% by 2020. The NMPRC requires renewable energy portfolios to be ~~"fully~~“fully diversified.~~" Prior to December 2012, the~~” The current diversity requirements ~~were~~ ~~20%~~ ~~from wind energy,~~ ~~20%~~ ~~from solar energy,~~ ~~10%~~ ~~from other renewable technologies, and~~ ~~1.5%~~ ~~from distributed generation with the distributed generation component increasing to~~ 3% ~~in 2015. In December 2012, NMPRC issued an order that amended the diversity requirements to~~are 30% wind, 20% solar, 5% other, and 1.5% distributed generation, increasing to 3% in 2015, ~~and adopted other changes~~subject to ~~its renewable energy rule, including~~ the ~~increase in~~limitation of the ~~RCT discussed below.~~RCT. In ~~June~~December 2013, the NMPRC ~~initiated~~modified the RCT calculation to establish a ~~new rulemaking proceeding~~two to one REC weighting for renewable energy from the non-wind/non-solar category, such as geothermal resources. On motions for rehearing, the NMPRC reversed its weighting decision in which it proposed to consider amending or eliminating specific diversity targets and to reconsider the inclusion of avoided environmental and capacity costs in the application of the RCT. A public hearing was held on September 10, 2013.April 2014.

The REA provides for streamlined proceedings for approval of ~~utilities'~~utilities’ renewable energy procurement plans, assures utilities that they recover costs incurred consistent with approved procurement plans, and requires the NMPRC to establish a RCT for the procurement of renewable resources to prevent excessive costs being added to rates. The ~~NMPRC had established a RCT for 2011 of~~ 2% ~~of all customers' aggregated overall annual electric charges that increased by~~ ~~0.25%~~ ~~annually until reaching~~ 3% ~~in 2015. In December 2012, the~~currently NMPRC approved ~~an amended~~ RCT is set at 3% of ~~customers'~~customers’ annual electric ~~charges beginning in 2013 and continuing thereafter.~~charges.

In July 2011, PNM filed its renewable energy procurement plan for 2012. The plan requested a variance from the RPS due to RCT limitations. The plan was diversity-compliant based on the reduced RPS, except for non-wind/non-solar resources, which were not available. In December 2011, the NMPRC approved PNM's 2012 plan, but ordered PNM to spend an additional ~~$0.9 million~~ on renewable procurements in 2012. PNM is recovering the costs of the supplemental procurements through the renewable rider discussed below. The NMPRC also required PNM to file its 2013 renewable energy procurement plan by April 30, 2012. The 2013 plan proposed procurements for 2013 and 2014 of 20 ~~MW of PNM-owned solar PV facilities, at an estimated cost of~~ ~~$45.5 million, wind and solar REC purchases in 2013, and a PPA for the output of a new~~ 10 ~~MW geothermal facility. The plan also included an additional procurement of~~ 2 ~~MW of PNM-owned solar PV facilities at an estimated cost of~~ ~~$4.5 million~~ to supply the energy sold under PNM's voluntary renewable energy tariff. The plan will enable PNM to comply with the statutory RPS amount in 2013, but requires a variance from the NMPRC's diversity requirements in 2013 while the proposed geothermal facilities are being constructed. This plan had been expected to achieve full RPS quantity and diversity compliance by 2014 without exceeding the RCT. The NMPRC approved the plan in December 2012, but reduced the additional solar PV procurement from 2 ~~MW to~~ ~~1.5~~ ~~MW. Construction of the geothermal facility has been delayed due to a longer than expected permitting process. PNM~~

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still anticipates that the facility will begin energy production January 1, 2014, but full-scale production will be delayed. PNM does not believe this delay will affect its ability to comply with the diversity requirements as amended in December 2012.

PNM filed its 2014 renewable energy procurement plan on July 1, 2013. The plan meets ~~the~~ RPS ~~quantity~~ and diversity requirements within the RCT in 2014 and 2015. ~~PNM's proposed~~PNM’s procurements include 50,000 MWh of wind generated RECs in 2014, the construction by December 31, 2014 of 23 MW of PNM-owned solar PV facilities at a cost of $46.7 million, a 20-year PPA for the output of Red Mesa Wind, an existing wind facility having an aggregate capacity of ~~100~~102 MW, ~~wind energy center~~ beginning January 1, 2015 at a first year cost

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estimated to be $5.8 million, and the purchase of 120,000 MWh of wind RECs in 2015. ~~A public hearing was held in October 2013.~~ The NMPRC ~~is required to approve or modify~~approved the plan ~~within 180 days of the filing date. PNM cannot predict the outcome of this proceeding.~~on December 18, 2013.

PNM is recovering certain renewable procurement costs from customers through a rate rider. See Renewable Energy Rider below.

Renewable Energy Rider

~~On August 14, 2012, the~~The NMPRC has authorized PNM to recover certain renewable procurement costs through a rate rider billed on a per KWh basis. The ~~approved rates are~~ ~~$0.0022335~~ ~~per KWh in 2012 and~~ ~~$0.0028371~~ per KWh in 2013. The order disapproved the recovery of the cost of a supplemental REC procurement ordered by the NMPRC in the 2012 procurement plan case because the NMPRC had not yet acted on the specific ~~$0.9 million~~ procurement proposed by PNM, which is discussed under Renewable Portfolio Standard above. The NMPRC subsequently approved the supplemental REC procurement, but ordered that a hearing be held on its inclusion in the rider. Upon NMPRC approval, PNM implemented the rider on August 20, 2012. The rider will terminate upon a final order in ~~PNM's~~PNM’s next general rate case unless the NMPRC authorizes PNM to continue it. ~~Amounts collected under the rider are capped at~~ ~~$18.0 million~~ ~~in 2012 and~~ ~~$24.6 million~~ ~~in 2013. Any amounts above the caps are deferred for future recovery without carrying costs.~~ As a separate component of the rider, if ~~PNM's~~PNM’s earned return on jurisdictional equity in ~~2013,~~a calendar year, adjusted for weather and other items not representative of normal operations, exceeds 10.5%, PNM ~~must~~would be required to refund the amount over 10.5% to customers during May through December of the following year. On April 1, 2014, ~~the amount over~~ ~~10.5%~~.

~~In compliance~~PNM made a filing with the ~~NMPRC's rate rider order, PNM filed a notice to implement an increase in~~NMPRC demonstrating that it had not exceeded the ~~current~~10.5% return for 2013. The 2013 approved rider rate ~~effective with~~was $0.0028371 per KWh through May 28, 2013 ~~bills. The NMPRC suspended the effective date of the new rate for a period of nine months from April 1, 2013 and appointed a Hearing Examiner~~when it changed to ~~conduct a hearing on the proposed change. On May 15, 2013, the NMPRC approved the requested increase. PNM implemented the new rate of~~ $0.0030468 per ~~KWh on May 28, 2013.~~

~~In its 2014 renewable energy procurement plan described above, PNM proposed to increase the~~KWh. The rider rate increased to $0.0044391 effective January 1, 2014 and to $0.0045959 per KWh on April 25, 2014. At the currently approved rider rate, PNM ~~expects~~would collect an ~~order in this case in December 2013.~~estimated $34.6 million annually.

Energy Efficiency and Load Management

Program Costs

Public utilities are required by the Efficient Use of Energy Act to achieve specified levels of energy savings and to obtain NMPRC approval to implement energy efficiency and load management programs. Costs to implement approved programs are recovered through a rate rider. In 2013, this act was amended to set an annual program budget equal to 3% of ~~a utility's~~an electric utility’s annual revenue.

In October 2012, PNM filed an energy efficiency program application for programs proposed to be offered beginning in May 2013. The filing included proposed program costs of $22.5 million plus a proposed profit ~~incentive of~~ ~~$4.2 million~~ ~~and requested that~~incentive. The NMPRC approved PNM’s program application, including the ~~NMPRC issue an order by April 1, 2013. Portions of the program plan and proposed~~annual profit incentive ~~are opposed by other parties to the case. PNM subsequently revised its proposed profit incentive to~~ ~~$2.9 million. After a hearing held in February 2013, the Hearing Examiner recommended approval of the programs as proposed and recommended an annual incentive of $1.7 million. The NMPRC has not yet acted~~discussed below, on ~~the Hearing Examiner's recommendations. PNM is not able to predict the outcome of this matter.~~November 6, 2013.

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~~PNM RESOURCES, INC. AND SUBSIDIARIES~~Disincentives/Incentives

~~PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES~~

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~~Disincentives/Incentives Adder~~

The Efficient Use of Energy Act requires the NMPRC to remove utility disincentives to implementing energy efficiency and load management programs and to provide incentives for such programs. AIn 2010, PNM began implementing a NMPRC rule ~~approved by the NMPRC~~that authorized electric utilities to collect rate adders of ~~$0.01~~ ~~per KWh~~to remove disincentives and to provide incentives for ~~lifetime~~ energy ~~savings~~ and~~$10~~ ~~per KW for~~ demand savings related to energy efficiency and demand response programs beginning in 2010. The NMAG and NMIEC appealed the NMPRC order adopting this rule to the New Mexico Supreme Court. PNM began implementing a rate rider under the rule to collect adders related to its 2010 program savings in December 2010 while the appeal of the rule was pending.programs. In July 2011, the Supreme Court annulled and vacated the order adopting the rule and remanded the matter to the NMPRC. As a result of the Supreme Court decision, PNM filed revised tariffs and ceased collecting this adder for 2010 program savings on August 21, 2011. Of the ~~$4.2 million~~ ~~authorized for recovery,~~ ~~$2.6 million~~ ~~was collected through August 20, 2011.~~

~~In June 2011, prior to the Supreme Court decision, the NMPRC approved PNM-specific adders of~~ ~~$0.002~~ ~~per KWh and~~ $4 ~~per KW for savings due to programs implemented in 2011. PNM is presently collecting~~ ~~$1.3 million~~ in adder revenues consistent with this order. After the Supreme Court decision vacating the rule, the NMPRC initiated a proceeding to determine whether PNM should be required to cease collecting the adders and to refund all adder revenues collected since December 2010. In November 2011, the NMPRC issued orders that PNM is not required to refund any adder revenues and is authorized to continue collecting the adders. However, in an order on rehearing, which it subsequently rescinded, the NMPRC further reduced the amount of the authorized adders. Prior to the rescission, PNM appealed the rehearing order to the Supreme Court. In March 2012, the Supreme Court granted PNM's motion to vacate the rehearing order and dismiss PNM's appeal. In a separate appeal and writ proceeding in the Supreme Court, NMIEC and the NMAG sought to overturn the NMPRC order allowing PNM to continue to collect adders in light of the 2011 Supreme Court decision. On May 21, 2012, the Supreme Court dismissed the writ proceeding. On September 20, 2013, the Supreme Court issued a decision in the NMIEC and NMAG appeal. The Supreme Court affirmed the NMPRC's decision authorizing the incentive and remanded the case to the NMPRC. On October, 2, 2013, the NMPRC closed the docket.

On March 27, 2013, PNM filed its reconciliation for actual energy efficiency program costs, associated incentives, and actual collections for calendar year 2012. The reconciliation filing showed a net over-recovery of ~~$0.2 million, composed of an over-recovery of~~ ~~$1.0 million~~ ~~of program costs and an under-recovery of incentives of~~ ~~$0.8 million. PNM subsequently revised the estimated incentive under-recovery to~~ ~~$0.5 million. PNM and the NMPRC staff filed a motion seeking to substitute the new reconciliation filing with a proposed effective date of May 28, 2013. On April 24,~~ 2013, the NMPRC issued an order ~~granting the motion.~~authorizing PNM ~~implemented the new rate~~to recover an incentive equal to 7.6% of annual program costs beginning with program implementation in December 2013. Based on ~~May 28, 2013.~~PNM’s currently approved program costs, this equates to an estimated annual incentive of $1.7 million.

Energy Efficiency Rulemaking

On May 17, 2012, the NMPRC issued a NOPR that would have amended the ~~NMPRC's~~NMPRC’s energy efficiency rule to authorize use of a decoupling mechanism to recover certain fixed costs of providing retail electric service ~~from the rates charged on a per KWh of consumption,~~ as the mechanism for removal of disincentives associated with the implementation of energy efficiency programs. The proposed rule also addressed incentives associated with energy efficiency. On July 26, 2012, the NMPRC closed the proposed rulemaking and opened a new energy efficiency rulemaking docket that may address decoupling and incentives. Workshops to develop a proposed rule have been held, but no order proposing a rule has been issued. PNM is unable to predict the outcome of this matter.

On October 2, 2013, the NMPRC issued a NOPR and a proposed rule to implement amendments to the New Mexico Efficient Use of Energy Act. Included in the proposed rule is a provision that would limit incentive awards to an amount equal to the product (expressed in dollars) of the ~~utility's weighted cost of capital~~utility’s WACC (expressed as a percent) and its approved annual program costs. The ~~NOPR establishes a schedule for~~NMPRC received comments and ~~sets~~ a public hearing inwas held on November 20, 2013.

~~2010 Electric Rate Case and FPPAC~~

An order of the NMPRC approving an amended stipulation in PNM's 2010 Electric Rate Case limits the amount that can be recovered on an annual basis for fuel costs, renewable energy costs, and energy efficiency costs during certain years. Costs in excess of the limits are deferred, without carrying costs, for recovery in future periods. The fuel cost caps are ~~$38.8 million~~ ~~for the FPPAC year beginning July 1, 2012, which PNM began collecting at that time, and~~ ~~$36.2 million~~ ~~for the FPPAC year beginning July 1, 2013. PNM estimates that the caps will result in approximately~~ ~~$38.4 million~~ ~~of FPPAC costs being deferred for future~~

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~~collection at June 30, 2014. The portion of the costs and insurance recovery attributable to customers covered by the~~ FPPAC ~~resulting from the mine fire incident discussed in Note 10 are included in the FPPAC amounts.~~Continuation Application

Pursuant to the rules of the NMPRC, public utilities are required to file an application to continue using their FPPAC every four years. On May 28, 2013, PNM filed the required continuation application and requested that its current FPPAC be modified to increase the reset frequency of the fuel factor from annually to quarterly, to allow PNM to retain 10% of its off-system sales margin, and to apply the same carrying charge rate to ~~either~~both over ~~or under-collections~~and under collections in the balancing account. On December 20, 2013, a stipulated agreement was filed to resolve this case. A public hearing ~~has been scheduled~~on the stipulation was held on February 25, 2014. The Hearing Examiner recommended approval of the settlement in its entirety to ~~begin on~~the NMPRC. On April 23, 2014, the NMPRC approved the stipulation. The settlement allows PNM to retain 10% of off-system sales margin from July 1, 2013 through December ~~10,~~31, 2016, resolves all costs related to the San Juan Coal mine fire discussed in Note 11, resolves the ratemaking treatment for coal pre-treatment at SJGS until the next rate case, requires PNM to write-off $10.5 million of the under-collected balance in its FPPAC balancing account, and requires PNM to extend the recovery of the remaining under-collected balance over 18 months beginning July 1, 2014. PNM recorded the $10.5 million write-off as a regulatory disallowance in the fourth quarter of 2013. ~~PNM is unable to predict the outcome of this proceeding.~~

Integrated Resource Plan

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. In its most recent IRP, which was filed in July 2011, PNM indicated that it planned to meet its anticipated load growth through a combination of new natural gas-fired generating plants, renewable energy resources, load management, and energy efficiency programs. ~~As required by NMPRC rules, PNM utilized a public advisory group process during the development of the 2011 IRP.~~ ~~Two~~ protests were filed to the IRP requesting rejection of the plan. The NMPRC assigned the case to a Hearing Examiner and designated a mediator to facilitate negotiations. The NMPRC staff filed a motion in December 2011 to dismiss the protests and terminate the proceeding on the ground that PNM's IRP fully complies with NMPRC rules. On September 18, 2013, the NMPRC issued an order that closed this docket.

~~Consistent with the NMPRC's IRP rule,~~ PNM has initiated the process to prepare its 2014 IRP. ~~Initial public~~Public participation meetings have been held. The 2014 IRP is scheduled to be filed at the NMPRC by June 30, 2014.

~~Emergency FPPAC~~

In 2008, the NMPRC authorized PNM to implement an Emergency FPPAC from June 2, 2008 through June 30, 2009. The NMPRC order approving the Emergency FPPAC also provided that if PNM's base load generating units did not operate at or above a specified capacity factor and PNM was required to obtain replacement power to serve jurisdictional customers, PNM would be required to make a filing with the NMPRC seeking approval of the replacement power costs. In its required filing, PNM stated that the costs of the replacement power amounting to ~~$8.0 million~~ were prudently incurred and made a motion that they be approved. The NMPRC staff opposed PNM's motion and recommended that PNM be required to refund the amount collected. Auditors selected by the NMPRC found that PNM was prudent in operating its base load units and in securing replacement power but had not obtained prior NMPRC approval in the manner required by the NMPRC order. PNM continues to assert that its recovery of replacement power costs was proper and did not violate the NMPRC's order. The NMPRC has not ruled on this matter. Under the terms of the approved stipulation in the 2010 Electric Rate Case, the parties to the stipulation, including the NMPRC staff, jointly requested that the NMPRC take no further action in this matter and close the docket. No party opposed that request. Although the NMPRC has not acted on the joint request, the NMPRC electronic docket shows the docket closed.

Applications for Approvals to Purchase Delta

As discussed in Note 9 of the Notes to Consolidated Financial Statements in the ~~2012~~2013 Annual ~~Reports~~Report on Form 10-K, PNM has entered in to an agreement to purchase Delta, a 132 MW natural gas peaking unit from which PNM currently acquires energy and capacity under a PPA. The agreement to purchase Delta required approvals by the NMPRC and FERC. On ~~January 3, 2013, PNM filed an application with the NMPRC for a CCN to own and operate Delta and for a determination of related ratemaking principles and treatment. On~~ June 26, 2013, the NMPRC granted ~~PNM's~~PNM’s CCN application and approved ~~PNM's~~PNM’s proposed ratemaking treatment. ~~PNM filed an application for approval of the Delta acquisition at FERC on January 24, 2013.~~ FERC approved the purchase on February 26, 2013. ~~Closing~~PNM anticipates closing on the purchase ~~is anticipated~~ in ~~early~~the second quarter of 2014.

Application for Approval of La Luz Generating Station

On May 17, 2013, PNM filed an application with the NMPRC for a CCN to construct, own, and operate a 40 MW gas-fired generating facility near Belen, New Mexico. The application also ~~requests~~requested a determination of related ratemaking principles and treatment. The facility iswas initially expected to cost approximately $63.2 million and go into service in the first quarter of 2016. PNM has entered into a contract for purchase of the turbine to be used for this project and a separate contract for the construction of the facility on a turn-key basis. Both contracts allow PNM to cancel if NMPRC approval is not obtained. On February 20, 2014, a stipulated agreement was filed that would resolve the case. The parties to the stipulation are PNM, the NMPRC staff, and another intervenor. The parties to the stipulation agree that a CCN should be granted and establishes a value of up to $56 million to be included in rate base for the facility. A public hearing ~~on PNM's application is scheduled to begin~~was held on April 8,29, 2014. At the conclusion of the hearing, the Hearing Examiner requested that the parties to the stipulation draft a recommended decision approving the stipulation. PNM is unable to predict the outcome of this matter.

San Juan Generating Station Units 2 and 3 Retirement

As discussed in Note 11, on December 20, 2013, PNM filed an application at the NMPRC to retire SJGS Units 2 and 3 on December 31, 2017. In that application, PNM also seeks approval to recover the net book value of SJGS Units 2 and 3 at the date of retirement, for a CCN to include PNM’s share of PVNGS Unit 3 as a resource to serve New Mexico consumers, authority to install SNCRs on SJGS Units 1 and 4, and a CCN to exchange 78 MW in SJGS Unit 3 for the same amount of capacity in SJGS Unit 4. PNM requested the NMPRC issue its final ruling on the application no later than December 2014. A public hearing on the application has been scheduled to commence on August 19, 2014. Depending upon the terms and conditions agreed to as a result of the negotiations, including PNM’s share of the capacity of SJGS Unit 4, PNM may amend its December 20, 2013 filing with the NMPRC. PNM will also make an application at FERC to seek approval of the restructured SJGS participation agreements. PNM is unable to predict the outcome of these matters.

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~~San Juan Generating Station Units 2 and 3 Retirement~~

PNM anticipates filing an application at the NMPRC to retire SJGS Units 2 and 3, as discussed in Note 10, before the end of 2013. In the same application, PNM will also seek approval to recover its remaining costs in SJGS 2 and 3 and for a CCN for some of the resources to replace the retired units, which PNM anticipates will include PNM's share of PVNGS Unit 3 and additional capacity in SJGS Unit 4. PNM will also make an application at FERC to seek approval of the restructured SJGS participation agreements.

~~Transmission Rate Case~~

~~In October 2010, PNM filed a notice with FERC to increase its wholesale electric transmission revenues by~~ ~~$11.1 million~~ ~~annually, based on a return on equity of~~ ~~12.25%~~. The filing also sought to revise certain Open Access Transmission Tariff provisions and bi-lateral contractual terms. In December 2010, FERC issued an order accepting PNM's filing and suspending the proposed tariff revisions for five months. The proposed rates were implemented on June 1, 2011, subject to refund. The rate increase applied to all of PNM's wholesale electric transmission service customers, which include other utilities, electric cooperatives, and entities that use PNM's transmission system to transmit power at the wholesale level. The rate increase did not impact PNM's retail customers. On January 2, 2013, FERC approved an unopposed settlement agreement, which increases transmission service revenues by ~~$2.9 million~~ annually. In addition, the parties agreed that if PNM files for a formula based rate change within one year from FERC's approval of the settlement agreement, no party will oppose the general principle of a formula rate, although the parties may still object to particular aspects of the formula. PNM refunded amounts collected in excess of the settled rates in January 2013 concluding this matter.

Formula Transmission Rate Case

On December 31, 2012, PNM filed an application with FERC for authorization to move from charging stated rates for wholesale electric transmission service to a formula rate mechanism pursuant to which rates for wholesale transmission service are calculated annually in accordance with an approved formula. ~~The~~In a settlement of a prior transmission rate case, the parties agreed that no party would oppose the general principle of a formula rate, although the parties may still object to particular aspects of the formula. PNM’s proposed formula includes updating cost of service components, including investment in plant and operating expenses, based on information contained in ~~PNM's~~PNM’s annual financial report filed with FERC, as well as including projected large transmission capital projects to be placed into service in the following year. The projections included are subject to true-up in the following year formula rate. Certain items, including changes to return on equity and depreciation rates, require a separate filing to be made with FERC before being included in the formula rate. ~~The rates resulting from PNM's application are intended to replace the rates approved by the FERC on January 2, 2013 in the transmission rate case discussed above.~~ As filed, ~~PNM's~~PNM’s request would result in a $3.2 million wholesale electric transmission rate increase, based on ~~PNM's~~PNM’s 2011 data and a 10.81% return on equity (“ROE”), and authority to adjust transmission rates annually based on an approved formula. ~~The proposed~~ ~~$3.2 million~~ ~~rate increase would be in addition to the~~ ~~$2.9 million~~ ~~rate increase approved by the FERC on January 2, 2013.~~

On March 1, 2013, FERC issued an order (1) accepting ~~PNM's~~PNM’s revisions to its rates for filing and suspending the proposed revisions to become effective August 2, 2013, subject to refund; (2) directing PNM to submit a compliance filing to establish its ~~return-on-equity ("ROE")~~ROE using the median, rather than the mid-point, of the ROEs from a proxy group of companies; (3) directing PNM to submit a compliance filing to remove from its rate proposal the acquisition adjustment related to ~~PNM's~~PNM’s 60% ownership of the EIP transmission line, which was acquired in 2003 ; and (4) setting the proceeding for hearing and settlement judge procedures. PNM would be allowed to make a separate filing related to recovery of the EIP acquisition adjustment. On April 1, 2013, PNM made the required compliance filing. In addition, PNM filed for rehearing of ~~FERC's~~FERC’s order regarding the ROE. On June 3, 2013, PNM made additional filings incorporating final 2012 data into the formula rate request. The updated formula rate would result in a $1.3 million rate increase over the rates approved by FERC on January 2, 2013. The new rates will apply to all of ~~PNM's~~PNM’s wholesale electric transmission service customers. The new rates will not apply to ~~PNM's~~PNM’s retail customers. On June 10, 2013, FERC denied ~~PNM's~~PNM’s motion for rehearing regarding ~~FERC's~~FERC’s order requiring PNM to use the median, instead of the midpoint, to calculate its ROE for the formula rate case. On August 2, 2013, the new rates went into effect, subject to refund. On May 1, 2014, PNM updated its formula rate incorporating 2013 data resulting in a $0.5 million rate increase over the current rates. PNM anticipates filing the updated rate request with FERC on June 1, 2014, at which time the new rates will be effective, subject to refund. Settlement negotiations are ongoing concerning issues in this proceeding. PNM is unable to predict the outcome of this proceeding.

~~Table of Contents~~

~~PNM RESOURCES, INC. AND SUBSIDIARIES~~

~~PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES~~

~~TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~Tri-State Complaint~~

On March 13, 2013, Tri-State filed a complaint with FERC alleging that PNM's existing transmission rates approved by FERC on January 2, 2013 in the transmission rate case discussed above are unjust and unreasonable under the Federal Power Act. Tri-State's allegations were premised upon FERC's March 1, 2013 order and certain data provided by PNM in PNM's Formula Transmission Rate Case discussed above. Tri-State sought a reduction in PNM's annual transmission revenue requirement for the period between March 13, 2013 and the implementation of PNM's proposed rates under the Formula Transmission Rate Case. Tri-State also requested that FERC consolidate the complaint proceeding with the Formula Transmission Rate Case. On April 2, 2013, PNM answered Tri-State's complaint, asking FERC to dismiss the complaint and deny Tri-State's request to consolidate the complaint proceeding with the Formula Transmission Rate Case. On June 10, 2013, FERC dismissed Tri-State's complaint and denied Tri-State's request to consolidate the complaint proceeding with the PNM FERC Transmission Formula Rate Case. This matter is now concluded.

~~Firm-Requirements Wholesale Customers~~

~~Navopache Electric Cooperative, Inc. Rate Case~~

In September 2011, PNM filed an unexecuted amended sales agreement between PNM and NEC with FERC. The agreement proposed a cost of service based rate for the electric service and ancillary services PNM provides to NEC, which would result in an annual increase of ~~$8.7 million~~ ~~or a~~ ~~39.8%~~ increase over existing rates. PNM also requested a FPPAC and full recovery of certain third-party transmission charges PNM incurs to serve NEC. NEC filed a protest to PNM's filing with FERC. In November 2011, FERC issued an order accepting the filing, suspending the effective date to be effective April 14, 2012, subject to refund, and set the proceeding for settlement. The parties finalized a settlement agreement and PNM filed for the necessary FERC approval on December 6, 2012. The settlement agreement would result in an annual increase of ~~$5.3 million, an extension of the contract for~~ 10 years, and an agreement that PNM will be able to file an application for formula based rates to be effective in 2015. On April 5, 2013, FERC approved the settlement agreement. PNM has refunded the amounts collected in excess of the settled rates concluding this matter.

City of Gallup, New Mexico Contract ~~Approval Case~~

PNM provides both energy and power services to Gallup, ~~PNM's~~PNM’s second largest firm-requirements wholesale customer, under an electric service agreement that was to expire on June 30, 2013. On May 1, 2013, PNM and Gallup agreed to extend the term of the agreement to June 30, 2014 and to increase the demand and energy rates under the agreement. On May 1, 2013, PNM requested FERC approval of the amended agreement to be effective July 1, 2013. On June 21, 2013, FERC approved the amended agreement. Revenue from Gallup will ~~increase~~have increased by $3.1 million during the term of the amended agreement.

On September 26, 2013, Gallup issued a request for proposals for ~~long term~~long-term power supply. ~~Proposals are due November 26, 2013.~~ PNM ~~anticipates submitting~~submitted a proposal ~~but is unable~~in November 2013. On March 26, 2014, Gallup notified PNM that the contract for long-term power supply had been awarded to ~~predict if services provided to~~another utility. PNM’s contract with Gallup will ~~continue upon expiration of~~expire on June 29, 2014. PNM’s 2013 revenues for power sold under the ~~amended agreement.~~Gallup contract were $11.7 million.

TNMP

Advanced Meter System Deployment

In July 2011, the PUCT approved a settlement and authorized an AMS deployment plan that permits TNMP to collect $113.3 million in deployment costs through a surcharge over a 12-year period. TNMP began collecting the surcharge on August 11, 2011. Deployment of advanced meters began in September 2011 and is scheduled to be completed over a 5-year period.

In February 2012, the PUCT opened a proceeding to consider the feasibility of an ~~"opt-out"~~“opt-out” program for retail consumers that wish to decline receipt of an advanced meter. The PUCT has requested comments and convened a public meeting to hear various issues. However, various individuals filed a petition with the PUCT seeking a moratorium on any advanced meter deployment. The PUCT denied the petition and an appeal was filed with the Texas District Court on September 28, 2012.

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PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

On February 21, 2013, the PUCT filed a proposed rule to permit customers to opt-out of the AMS deployment. The PUCT adopted a rule on August 15, 2013 creating a non-standard metering service for retail customers choosing to decline standard metering service via an advanced meter. The cost of providing non-standard metering service will be borne by opt-out customers

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~~PNM RESOURCES, INC. AND SUBSIDIARIES~~

~~PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES~~

~~TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

through an initial fee and ongoing monthly charge. All transmission and distribution utilities in ERCOT are required to initiate proceedings to establish these charges.

On September 30, 2013, TNMP filed an application to set the initial fee and monthly charges to be assessed for non-standard metering service provided to those retail customers who choose to decline the advanced meter necessary for standard metering service. ~~TNMP's~~TNMP’s filing seeks recovery of $0.2 million through proposed initial fees ranging from $142.84 to $247.48. An additional $0.5 million in ongoing expenses would be recovered via a proposed monthly charge of $38.99. AsThe April 8, 2014 hearing on this matter has been suspended as the ~~proceeding has just been initiated,~~parties attempt to reach a settlement. TNMP cannot predict the outcome of this proceeding although TNMP does not expect it to have a material impact on its financial position, results of operations, or cash flows.

Energy Efficiency

TNMP recovers the costs of its energy efficiency programs through an energy efficiency cost recovery ~~factor.~~factor that includes projected program costs, under or over collected costs from prior years, case expenses, and performance bonuses (if the programs exceed expectations). On August 28, 2012, the PUCT approved a settlement that ~~permits~~permitted TNMP to collect ~~estimated 2013 program costs of~~ ~~$4.8 million, plus recovery of~~ an aggregate of $~~0.4~~5.2 million ~~in under-collected costs from prior years, case expenses, and a performance bonus for 2011. TNMP's new rates were~~ effective January 1, 2013. On ~~May 15,~~October 25, 2013, the PUCT approved a settlement that permits TNMP ~~filed~~to collect an aggregate of $5.6 million beginning March 1, 2014. By June 1, 2014, TNMP will file its ~~2014~~2015 energy efficiency cost recovery factor application with the PUCT. ~~The application seeks approval to collect~~ ~~$5.6 million, which includes~~ ~~$4.7 million~~ ~~in estimated program expenses for 2014, a~~ ~~$0.7 million~~ ~~performance bonus for 2012, a refund of~~ ~~$0.1 million~~ ~~over collection of energy savings expenses for the 2012 program year, and case expenses. In July 2013, the parties filed a settlement to permit TNMP to collect the substantially all of the requested~~ ~~$5.6 million. The settlement was approved by the PUCT on October 25, 2013.~~

Transmission Cost of Service Rates

TNMP can update its transmission rates twice per year to reflect changes in its invested capital. Updated rates reflect the addition and retirement of transmission facilities, including appropriate depreciation, federal income tax and other associated taxes, and the approved rate of return on such facilities.

On January 31, 2013, TNMP filed an application to update its transmission rates to reflect changes in its invested capital. The requested increase in total rate base ~~was~~is $21.9 million, which ~~would~~will increase revenues $2.9 million annually. ~~On March 19, 2013, the~~The PUCT ALJ approved ~~TNMP's~~TNMP’s interim transmission cost of service filing and rates went into effect with bills rendered on March 20, 2013.

On August 1, 2013, TNMP filed an application to further update its transmission rates to reflect changes in its invested capital. The requested increase in total rate base is $18.1 million, which would increase revenues by $2.8 million annually. The PUCT ALJ approved ~~TNMP's~~TNMP’s interim transmission cost of service filing and rates went into effect with bills rendered on September 17, 2013.

~~Consolidated Tax Savings Adjustment~~

On ~~June 14, 2013, the Governor~~January 21, 2014, TNMP filed an application to further update its transmission rates resulting from changes in its invested capital. The requested increase in total rate base is $18.2 million, which would increase revenues by $2.9 million annually. The PUCT ALJ approved TNMP’s interim transmission cost of ~~Texas signed~~service filing and rates went into law a bill eliminating the consolidated tax savings adjustment ("CTSA") from electric utility ratemaking in Texas. Previously, the CTSA required electric utilities to artificially reduce their respective tax expenses due to the losses incurred by their affiliates. The bill became effectiveeffect with bills rendered on ~~September 1, 2013.~~

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~~PNM RESOURCES, INC. AND SUBSIDIARIES~~

~~PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES~~

~~TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~


~~(12)~~	~~Related Party Transactions~~

PNMR, PNM, and TNMP are considered related parties as defined under GAAP. PNMR Services Company provides corporate services to PNMR and its subsidiaries in accordance with shared services agreements. The table below summarizes the nature and amount of related party transactions of PNMR, PNM, and TNMP:

Three Months Ended Nine Months Ended
September 30, September 30,
2013 2012 2013 2012
(In thousands)
Services billings:
PNMR to PNM $ 22,241
$ 22,143
65,729
68,030
PNMR to TNMP 6,731
6,439
20,948
20,206
PNM to TNMP 140
184
381
473
TNMP to PNMR 2
4
6
12
Interest billings:
PNMR to TNMP 139
22
354
72
PNMR to PNM —
—
1
1
PNM to PNMR 35
45
113
134
Income tax sharing payments:
PNMR to PNM —
—
45,000
63,114
PNMR to TNMP —
—
—
1,952
March 13, 2014.


(13)	Income Taxes

As required under GAAP, the Company makes an estimate of its anticipated effective tax rate for the year as of the end of each quarterly period within its fiscal year. Year-to-date income tax expense is then calculated by applying the anticipated annual effective tax rate to year-to-date earnings before taxes, which includes the earnings attributable to the Valencia non-controlling interest. GAAP also provides that certain unusual or infrequently occurring items, as well as adjustments due to enactment of new tax laws, be excluded from the estimated annual effective tax rate calculation.

On January 3, 2013, the American Taxpayer Relief Act of 2012, which extended fifty percent bonus depreciation, was signed into law. Due to provisions in the act, taxes payable to the State of New Mexico for 2013 were reduced, which resulted in an impairment of New Mexico wind energy production tax credits. In accordance with GAAP, PNMR was required to record this impairment, which after federal income tax benefit, amounted to $1.5 million as additional income tax expense during the three months ended March 31, 2013. This impairment is reflected in ~~PNMR's~~PNMR’s Corporate and Other segment.

On April 4, 2013, New Mexico House Bill 641 was signed into law. One of the provisions of the bill was to reduce the New Mexico corporate income tax rate from 7.6% to 5.9%. The rate reduction will be phased in from 2014 to 2018. In accordance with GAAP, PNMR and PNM adjusted accumulated deferred income taxes to reflect the tax rate at which the balances are expected to ~~reverse. The~~reverse during the period that includes the date of enactment, which was in three months ended June 30, 2013. At that time,

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PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

the portion of the adjustment related to ~~PNM's~~PNM’s regulated activities was recorded as a reduction in deferred tax liabilities, which was offset by an increase in a regulatory liability, on the assumption that PNM will be required to return the benefit to customers over time. The increase in the regulatory liability was $23.9 million. ~~The~~In addition, the portion of the adjustment that is not related to ~~PNM's~~PNM’s regulated activities was recorded as a reduction in deferred tax assets and an increase in income tax expense of $1.2 million ~~during~~. Changes in the estimated timing of reversals of deferred tax assets and liabilities will result in refinements of the impacts of this change in tax rates being recorded periodically until 2018, when the rate reduction is fully phased in. In the three months ended ~~June 30, 2013. This additional~~March 31, 2014, PNM’s regulatory liability was reduced by $4.6 million, which increased deferred tax liabilities. Additionally, deferred tax assets not related to PNM’s regulatory activities were reduced by $0.2 million, which increased income tax ~~expense is reflected in PNMR's Corporate and Other segment.~~expense.

~~The~~In 2013, the future reduction in taxes payable to the State of New Mexico resulting from the rate reduction in House Bill 641 and revisions in estimates of future taxable income resulted in a further impairment of New Mexico wind energy production tax credits. In accordance with GAAP, PNMR was required to record this impairment, which after federal income tax benefit, amounted to

~~Table of Contents~~

~~PNM RESOURCES, INC. AND SUBSIDIARIES~~

~~PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES~~

~~TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

$2.4 million as additional income tax expense during the three months ended June 30, 2013. ~~This impairment is reflected in PNMR's Corporate and Other segment.~~

~~On April 30,~~

In 2013, the ~~IRS~~FASB issued ~~Revenue Procedure 2013-24,~~Accounting Standards Update 2013-11, which ~~provides~~requires entities to present an unrecognized tax benefit as a ~~safe harbor method of accounting that taxpayers may use~~reduction to ~~determine repair costs~~a deferred tax asset for ~~electric generation property. Adoption of the safe harbor method is elective for years ending on or after December 31, 2012. On July 11, 2013, the IRS issued~~ a directive that suspends most current examination activity related to generation repairs methodology for any company that is eligible for the safe harbor. PNM is evaluating the possible effects of adopting the safe harbor method and the ultimate outcome cannot be determined at this time although the effects are not expected to be material.

In May 2013, PNMR received a refund of federal income taxes paid in prior years, which primarily was due to bonus tax depreciation and changes in the Company's method of accounting for repairs expense for income tax purposes. The total refund was ~~$96.2 million~~ ~~of which~~ ~~$77.4 million~~ ~~was attributable to PNM. As of September 30, 2013,~~ ~~$45.0 million~~ ~~had been transferred to PNM.~~

On September 13, 2013, the IRS issued final regulations addressing the recovery of amounts paid to acquire, produce, or improve tangible personal property and the accounting for and retirement of depreciable property. Also issued were proposed regulations addressing dispositions of property. Repairs of electric transmission and distribution property and repairs of electric generation property are specifically addressed in other Revenue Procedures issued by the IRS. The effects of the remainder of regulations are being evaluated by the Company and cannot be determined at this time. However, due to PNMR's net operating loss carryforward, ~~position for income~~a similar tax ~~purposes,~~loss, or a tax credit carryforward if such carryforward could be used to offset the ~~effects are not expected~~unrecognized tax benefit upon settlement. The update is required to be ~~material.~~

~~(14) Goodwill~~

applied prospectively for periods beginning after December 15, 2013, and early adoption was permitted. The ~~excess purchase price over~~Company elected not to adopt the ~~fair value~~change for 2013, but did adopt it for 2014 as required by the update. Had the Company applied the update at December 31, 2013, the effect would have been decreases in net operating deferred tax assets of $19.9 million for PNMR, $11.2 million for PNM, and $6.8 million for TNMP, along with the elimination of the assets acquired and the liabilities assumed by PNMR for its June 6, 2005 acquisition of TNP was recorded as goodwill and was pushed down to the businesses acquired. In 2007, the TNMP assets that were included in its New Mexico operations, including goodwill, were transferred to PNM.

GAAP requires the Company to evaluate its goodwill for impairment annually at the reporting unit level or more frequently if circumstances indicate that the goodwill may be impaired. PNMR's reporting units that have goodwill are PNM and TNMP. Application of the impairment test requires judgment, including the identification of reporting units, assignment ofcorresponding assets and liabilities associated with unrecognized tax benefits. There was no impact to ~~reporting units, and determination of~~earning from adopting the ~~fair value of each reporting unit.~~

GAAP provides that in certain circumstances an entity may perform a qualitative analysis to conclude that the goodwill of a reporting unit is not impaired. Under a qualitative assessment an entity would consider macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant entity-specific events affecting a reporting unit, as well as whether a sustained decrease (both absolute and relative to its peers) in share price had occurred. An entity would consider the extent to which each of the adverse events and circumstances identified could affect the comparison of a reporting unit's fair value with its carrying amount. An entity should place more weight on the events and circumstances that most affect a reporting unit's fair value or the carrying amount of its net assets. An entity also should consider positive and mitigating events and circumstances that may affect its determination of whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. An entity would evaluate, on the basis of the weight of evidence, the significance of all identified events and circumstances in the context of determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative analysis in not required.

In other circumstances, an entity may perform a quantitative analysis to reach the conclusion regarding impairment with respect to a reporting unit. The first step of the quantitative impairment test requires an entity to compare the fair value of the reporting unit with its carrying value, including goodwill. If as a result of this analysis, the entity concludes there is an indication of impairment in a reporting unit having goodwill, the entity is required to perform the second step of the impairment analysis, determining the amount of goodwill impairment to be recorded. The amount is calculated by comparing the implied fair value of the goodwill to its carrying amount. This exercise would require the entity to allocate the fair value determined in step one to the

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~~PNM RESOURCES, INC. AND SUBSIDIARIES~~

~~PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES~~

~~TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

individual assets and liabilities of the reporting unit. Any remaining fair value would be the implied fair value of goodwill on the testing date. To the extent the recorded amount of goodwill of a reporting unit exceeds the implied fair value determined in step two, an impairment loss would be reflected in results of operations.

An entity may choose to perform a quantitative analysis without performing a qualitative analysis and may perform a qualitative analysis for certain reporting units, but a quantitative analysis for others. For the annual evaluation performed as of April 1, 2013, PNMR utilized a qualitative analysis for the TNMP reporting unit and a quantitative analysis for the PNM reporting unit. For the PNM reporting unit, a discounted cash flow methodology was primarily used to estimate the fair value of the reporting unit. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of long-term growth rates for the business, and determination of appropriate weighted average cost of capital for each reporting unit. Changes in these estimates and assumptions could materially affect the determination of fair value and the conclusion of impairment.

The annual evaluations performed as of April 1, 2013 and 2012 did not indicate impairments of the goodwill of any of PNMR's reporting units. The April 1, 2013 and 2012 quantitative evaluations indicated the fair value of the PNM reporting unit, which has goodwill of ~~$51.6 million, exceeded its carrying value by more than~~ ~~10%. The April 1, 2012 quantitative evaluation indicated the fair value of the TNMP reporting unit, which has goodwill of~~ ~~$226.7 million, exceeded its carrying value by more than~~ ~~10%~~. Since the April 1, 2013 annual evaluation, there have been no indications that the fair values of the reporting units with recorded goodwill have decreased below the carrying values. Additional information concerning the Company's goodwill is contained in Note 22 of Notes to Consolidated Financial Statements in the 2012 Annual Reports on Form 10-K.update.


~~(15)~~(14)	~~Sale of First Choice~~Related Party Transactions

~~On September 23, 2011,~~

PNMR, ~~entered into an agreement for the sale of First Choice~~PNM, and TNMP are considered related parties as defined under GAAP. PNMR Services Company provides corporate services to ~~Direct LP, Inc. for~~ ~~$270.0 million~~, subject to adjustment to reflect the amounts of certain components of working capital at closing. Closing occurred on November 1, 2011. For accounting purposes, the sale was effective as of the close of business on October 31, 2011. PNMR and ~~the purchaser disagreed about the calculation of working capital at October 31, 2011. In~~its subsidiaries in accordance with shared services agreements. The table below summarizes the ~~agreement for the sale, this matter was submitted to an independent~~nature and amount of related party ~~for a decision binding on the parties. A decision was received in August 2012. The decision resulted in~~transactions of PNMR, ~~being awarded~~ ~~$6.4 million~~ ~~of the~~ ~~$8.2 million~~ ~~in dispute. PNMR recorded an additional pre-tax gain of~~ ~~$1.0 million, which is included in other income in the three months ended September 30, 2012.~~PNM, and TNMP:



	Three Months Ended
	March 31,
	2014		2013
	(In thousands)
Services billings:
PNMR to PNM	$	21,066	$	22,652
PNMR to TNMP	7,261		7,361
PNM to TNMP	109		108
TNMP to PNMR	—		2
Interest billings:
PNMR to TNMP	96		96
PNMR to PNM	53		1
PNM to PNMR	26		41
Income tax sharing payments:
PNMR to PNM	—		—
PNMR to TNMP	—		—

7065

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ITEM 2. ~~MANAGEMENT'S~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following ~~Management's~~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"~~“Company” when discussing matters of common applicability to PNMR, PNM, and TNMP. A reference to a ~~"Note"~~“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~~748,000 residential, commercial, and industrial customers and end-users of electricity in New Mexico and Texas. PNMR’s electric utilities are PNM and TNMP.

Strategic Goals

PNMR is focused on achieving the following strategic goals:

Earning authorized returns on its regulated businesses

~~Continuing to improve~~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 ~~and customer satisfaction~~

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~~PNMR’s success in accomplishing its strategic goals is highly dependent on continued favorable regulatory treatment for its ~~utilities.~~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: ~~managing the Company's business~~safety, operational excellence, and ~~serving customers well,~~customer satisfaction, while engaging stakeholders to build productive relationships.

Both PNM and TNMP seek cost recovery for their investments through general rate cases and various rate riders. The PUCT has approved mechanisms that allow TNMP to recover capital invested in transmission and distribution projects without having to file a general rate case, which allows for more timely recovery. The PUCT approved TNMP’s most recent request for additional investments in transmission assets on March 13, 2014. The NMPRC has approved rate riders for renewable energy and energy efficiency that also allow for more timely recovery of ~~amounts invested in TNMP's systems. In 2011~~investments and ~~2012, PNM made significant progress toward~~improve the ~~goal of achieving~~ability to earn authorized returns ~~for its~~from PNM’s retail customers. ~~In 2012,~~Recently, PNM ~~saw additional progress toward achieving authorized~~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 ~~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.~~providing those services. In addition, PNM currently has a pending case before FERC in which it is requesting an increase in rates charged to transmission customers based on a formula rate mechanism. However, Gallup, PNM’s second largest customer for wholesale generation services, has informed PNM that it will obtain power from another utility at the end of the current contract on June 29, 2014. Additional information about rate filings is provided in Note 17 of the Notes to Consolidated Financial Statements in the ~~2012~~2013 Annual Reports on Form 10-K and in Note ~~11.~~12.

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.~~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 ~~credit~~the Company’s ratings, which could lower costs to utility customers.

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Also, earning allowed returns should result in increased earnings for PNMR, which ~~should~~would lead to increased total returns to investors.

~~PNM's~~PNM’s interest in PVNGS Unit 3 is currently excluded from NMPRC jurisdictional rates. While PVNGS Unit ~~3's~~3’s financial ~~contribution is~~results are not ~~calculated~~included in the authorized returns on its regulated business, it impacts ~~PNM's~~PNM’s earnings and has been demonstrated to be a valuable asset. Power generated from ~~PNM's~~PNM’s 134 MW interest in PVNGS Unit 3 is currently sold into the wholesale market

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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~~As part of compliance with the requirements for BART at SJGS discussed ~~below.~~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.

~~Continuing to Improve~~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 ~~2012~~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~~Moody’s changed the ratings outlook for PNMR, PNM, and TNMP to positive from stable. On January 30, 2014, Moody’s raised the credit ratings for PNMR, PNM and TNMP by one notch, while maintaining the positive outlook. All of the Company’s credit ratings issued by both Moody’s and S&P are now investment grade. On April 30, 2014, S&P changed the outlook for PNMR, PNM, and TNMP to positive from stable.

Providing Top-Quartile Total Returns to Investors

~~PNMR's~~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~~

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, and 12 percent in December 2013. PNMR expects to provide above-average dividend growth in the near-term and to manage the payout ratio to meet its long-term target. The ~~PNMR board~~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~~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~~that maintaining strong and modern electric infrastructure is critical to ~~ensure~~ensuring 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.~~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~~PNM’s and ~~TNMP's~~TNMP’s infrastructure is critical to ~~ensure~~ensuring reliability and ~~meet~~meeting future energy needs. Both utilities have long-established records of providing customers with top-tier electric reliability.

In September 2011, TNMP began its deployment of smart meters in homes and businesses across its Texas service area. Through ~~September 30, 2013~~March 31, 2014, TNMP had completed installation of more than ~~120,000~~142,000 smart ~~meters. TNMP's~~meters, which is approximately 62% of the anticipated total. TNMP’s deployment is expected to be completed in 2016.

As part of the State of ~~Texas'~~Texas’ long-term initiative to create a smart electric grid, ~~the~~installation of smart ~~meter rollout~~meters will ultimately give consumers more data about their 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~~TNMP’s responsiveness

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to outages.

During the ~~2010~~2011 to ~~2012~~2013 period, PNM and TNMP together invested ~~$803.7~~$937.5 million in utility plant, including substations, power plants, nuclear fuel, and transmission and distribution ~~systems in New Mexico and Texas.~~systems. In 2012, PNM announced ~~its planned~~plans for the 40 MW natural gas-fired La Luz peaking generating station to be located near Belen, New Mexico. PNM filed a request in May 2013 with the NMPRC for approval ~~for construction of~~to construct the La Luz ~~project,~~plant, which is expected to begin in 2014, with the facility going into service in 2016. PNM also announced an agreement to purchase Delta, a 132 MW gas-fired peaking facility, which has served PNM jurisdictional needs under a 20-year PPA since 2000. The purchase has been approved by the NMPRC and FERC. ~~Closing~~PNM anticipates closing on the Delta purchase ~~is anticipated~~ in ~~early~~the second quarter of 2014.

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Environmentally Responsible Power

PNMR has a long-standing record of environmental stewardship. ~~In 2012 and 2013, its~~PNMR’s 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~~cost-effectively as possible while providing broad environmental benefits

Preparing to meet New Mexico’s increasing renewable energy requirements as cost-effectively as possible

•Increasing energy efficiency participation

Another area of emphasis is the reduction of the amount of fresh water used during ~~the~~electricity generation ~~of power~~ at ~~PNM's~~PNM’s power plants. The fresh water used per MWh generated has dropped by ~~22.3%~~21.0% since 2002, primarily due to the growth of renewable energy sources, the expansion of Afton to a combined-cycle plant that has both air and water cooling systems, and the use of gray water for cooling at Luna. In addition to the above areas of focus, ~~in 2013,~~ the Company is 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.

Energy Efficiency

~~Renewable Energy~~TNMP recovers the costs of its energy efficiency programs through an energy efficiency cost recovery factor that includes projected program costs, under or over collected costs from prior years, case expenses, and performance bonuses (if the programs exceed expectations). On August 28, 2012, the PUCT approved a settlement that permitted TNMP to collect an aggregate of $5.2 million effective January 1, 2013. On October 25, 2013, the PUCT approved a settlement that permits TNMP to collect an aggregate of $5.6 million beginning March 1, 2014. By June 1, 2014, TNMP will file its 2015 energy efficiency cost recovery factor application with the PUCT.

~~In 2012, PNM filed~~

Transmission Cost of Service Rates

On January 31, 2013, ~~renewable procurement strategy.~~TNMP filed an application to update its transmission rates to reflect changes in its invested capital. The requested increase in total rate base is $21.9 million, which will increase revenues $2.9 million annually. The PUCT ALJ 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~~TNMP’s interim transmission cost of ~~almost $50 million. In addition~~service filing and rates went into effect with bills rendered on March 20, 2013.

On August 1, 2013, TNMP filed an application to further update its transmission rates to reflect changes in its invested capital. The requested increase in total rate base is $18.1 million, which would increase revenues by $2.8 million annually. The PUCT ALJ approved TNMP’s interim transmission cost of service filing and rates went into effect with bills rendered on September 17, 2013.

On January 21, 2014, TNMP filed an application to further update its transmission rates resulting from changes in its invested capital. The requested increase in total rate base is $18.2 million, which would increase revenues by $2.9 million annually. The PUCT ALJ approved TNMP’s interim transmission cost of service filing and rates went into effect with bills rendered on March 13, 2014.


(13)	Income Taxes

On January 3, 2013, the American Taxpayer Relief Act of 2012, which extended fifty percent bonus depreciation, was signed into law. Due to provisions in the act, taxes payable to the ~~solar expansion,~~State of New Mexico for 2013 were reduced, which resulted in an impairment of New Mexico wind energy production tax credits. In accordance with GAAP, PNMR was required to record this impairment, which after federal income tax benefit, amounted to $1.5 million as additional income tax expense during the three months ended March 31, 2013. This impairment is reflected in PNMR’s Corporate and Other segment.

On April 4, 2013, ~~proposal includes a 20-year agreement~~New Mexico House Bill 641 was signed into law. One of the provisions of the bill was to ~~purchase energy~~reduce the New Mexico corporate income tax rate from ~~a geothermal facility~~7.6% to ~~be built near Lordsburg, New Mexico.~~5.9%. The ~~10 MW facility~~rate reduction will be phased in from 2014 to 2018. In accordance with GAAP, PNMR and PNM adjusted accumulated deferred income taxes to reflect the ~~first geothermal project for~~tax rate at which the ~~PNM system. On July 1, 2013, PNM filed its 2014 renewable procurement strategy with~~balances are expected to reverse during 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~~period that includes the ~~purchase~~date 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, ifenactment, which was in three months ended June 30, 2013. At 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~~time,. 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-

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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~~RESOURCES, INC. AND SUBSIDIARIES

~~NMED submitting a revised SIP to EIB, which occurred in May 2013~~PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

~~Approval~~TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

the portion of the ~~revised SIP~~adjustment related to PNM’s regulated activities was recorded as a reduction in deferred tax liabilities, which was offset by ~~EIB, which occurred~~an increase in a regulatory liability, on ~~September 5, 2013~~

~~Submission~~the assumption that PNM will be required to return the benefit to customers over time. The increase in the regulatory liability was $23.9 million. In addition, the portion of the ~~revised SIP~~adjustment that is not related to ~~EPA, which occurred on October 18, 2013~~

~~EPA approval~~PNM’s regulated activities was recorded as a reduction in deferred tax assets and an increase in income tax expense of $1.2 million. Changes in the estimated timing of reversals of deferred tax assets and liabilities will result in refinements of the ~~revised SIP~~impacts of this change in tax rates being recorded periodically until 2018, when the rate reduction is fully phased in. In the three months ended March 31, 2014, PNM’s regulatory liability was reduced by $4.6 million, which increased deferred tax liabilities. Additionally, deferred tax assets not related to PNM’s regulatory activities were reduced by $0.2 million, which increased income tax expense.

~~NMPRC approval of~~

In 2013, the ~~retirement of Units 2 and 3, as well as recovery of the unrecovered investment and costs~~future reduction in taxes payable 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 resulting from the rate reduction in House Bill 641 and ~~PNM~~revisions in estimates of future taxable income resulted in a further impairment of New Mexico wind energy production tax credits. In accordance with GAAP, PNMR was required to ~~create a reasonable FIP compliance schedule~~record this impairment, which after federal income tax benefit, amounted to ~~reflect~~$2.4 million as additional income tax expense during the ~~time used to develop the new state plan.~~three months ended June 30, 2013.

In ~~connection~~2013, the FASB issued Accounting Standards Update 2013-11, which requires entities to present an unrecognized tax benefit as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such carryforward could be used to offset the unrecognized tax benefit upon settlement. The update is required to be applied prospectively for periods beginning after December 15, 2013, and early adoption was permitted. The Company elected not to adopt the change for 2013, but did adopt it for 2014 as required by the update. Had the Company applied the update at December 31, 2013, the effect would have been decreases in net operating deferred tax assets of $19.9 million for PNMR, $11.2 million for PNM, and $6.8 million for TNMP, along with the ~~implementation~~elimination of the ~~revised plan~~corresponding assets and liabilities associated with unrecognized tax benefits. There was no impact to earning from adopting the ~~retirement~~update.


(14)	Related Party Transactions



	Three Months Ended
	March 31,
	2014		2013
	(In thousands)
Services billings:
PNMR to PNM	$	21,066	$	22,652
PNMR to TNMP	7,261		7,361
PNM to TNMP	109		108
TNMP to PNMR	—		2
Interest billings:
PNMR to TNMP	96		96
PNMR to PNM	53		1
PNM to PNMR	26		41
Income tax sharing payments:
PNMR to PNM	—		—
PNMR to TNMP	—		—

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 ~~and 3, some~~refers to the accompanying Notes to Condensed Consolidated Financial Statements (Unaudited) included in Item 1, unless otherwise specified. Certain of the ~~SJGS participants~~tables below may not appear visually accurate due to rounding.

MD&A FOR PNMR

EXECUTIVE SUMMARY

Overview and Strategy

PNMR is a holding company with two regulated utilities serving approximately 748,000 residential, commercial, and industrial customers and end-users of electricity in New Mexico and Texas. PNMR’s electric utilities are PNM and TNMP.

Strategic Goals

PNMR is focused on achieving the following strategic goals:

Earning authorized returns on its regulated businesses

Maintaining investment grade credit ratings

Providing a top-quartile total return to investors

In conjunction with these goals, PNM and TNMP are dedicated to:

Achieving industry-leading safety performance

Maintaining strong plant performance and system reliability

Delivering a superior customer experience

Demonstrating environmental leadership in its business operations

Earning Authorized Returns on Regulated Businesses

PNMR’s success in accomplishing its strategic goals is highly dependent on continued favorable regulatory treatment for its utilities and their strong operating performance. The Company has multiple strategies to achieve favorable regulatory treatment, all of which have ~~expressed~~as their foundation a ~~desire~~focus on the basics: safety, operational excellence, and customer satisfaction, while engaging stakeholders to ~~exit~~build productive relationships.

Both PNM and TNMP seek cost recovery for their ~~ownership~~investments through general rate cases and various rate riders. The PUCT has approved mechanisms that allow TNMP to recover capital invested in transmission and distribution projects without having to file a general rate case, which allows for more timely recovery. The PUCT approved TNMP’s most recent request for additional investments in transmission assets on March 13, 2014. The NMPRC has approved rate riders for renewable energy and energy efficiency that also allow for more timely recovery of investments and improve the ~~plant. To implement~~ability to earn authorized returns from PNM’s retail customers. Recently, PNM completed rate proceedings for all of its FERC regulated transmission customers and for NEC, its largest wholesale generation services customer, which improved PNM’s returns for providing those services. In addition, PNM currently has a pending case before FERC in which it is requesting an increase in rates charged to transmission customers based on a formula rate mechanism. However, Gallup, PNM’s second largest customer for wholesale generation services, has informed PNM that it will obtain power from another utility at the ~~revised plan and accommodate the participants desiring to exit, the SJGS participants are negotiating a restructuring~~end 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 decisioncurrent contract 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, CO~~₂, 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.

June 29, 2014. Additional information about ~~BART at SJGS~~rate filings is ~~contained~~provided in Note 1617 of the Notes to Consolidated Financial Statements in the ~~2012~~2013 Annual Reports on Form 10-K and in Note ~~10.~~12.

Fair and timely rate treatment from regulators is crucial to PNM ~~anticipates filing~~and TNMP earning their allowed returns, which is critical for ~~NMPRC approvals regarding BART at SJGS in late 2013 as discussed in Note 11.~~

~~In addition~~PNMR’s ability to achieve its strategic goals. PNMR believes that if the ~~regional haze rule, SJGS is required~~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 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, SO~~₂ ~~by 69 percent, particulate matter by 63 percent, and mercury by 99 percent.~~utility customers.

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Also, earning allowed returns should result in increased earnings for PNMR, which would lead to increased total returns to investors.

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

Maintaining Investment Grade Credit Ratings

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

Providing Top-Quartile Total Returns to Investors

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

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

Business Focus

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

Reliable and Affordable Power

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

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

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

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

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to outages.

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

Environmentally Responsible Power

PNMR has a long-standing record of environmental stewardship. PNMR’s environmental focus has been in three key areas:

Developing strategies to meet regional haze rules at the coal-fired SJGS as cost-effectively as possible while providing broad environmental benefits

Preparing to meet New Mexico’s increasing renewable energy requirements as cost-effectively as possible

•Increasing energy efficiency participation

Another area of emphasis is the reduction of the amount of fresh water used during electricity generation at PNM’s power plants. The fresh water used per MWh generated has dropped by 21.0% since 2002, primarily due to the growth of renewable energy sources, the expansion of Afton to a combined-cycle plant that has both air and water cooling systems, and the use of gray water for cooling at Luna. In addition to the above areas of focus, the Company is also working to reduce the amount of solid waste going to landfills through increased recycling and reduction of waste. The Company has performed well in this area in the past and has set goals for even further reductions.

Energy Efficiency

TNMP recovers the costs of its energy efficiency programs through an energy efficiency cost recovery factor that includes projected program costs, under or over collected costs from prior years, case expenses, and performance bonuses (if the programs exceed expectations). On August 28, 2012, the PUCT approved a settlement that permitted TNMP to collect an aggregate of $5.2 million effective January 1, 2013. On October 25, 2013, the PUCT approved a settlement that permits TNMP to collect an aggregate of $5.6 million beginning March 1, 2014. By June 1, 2014, TNMP will file its 2015 energy efficiency cost recovery factor application with the PUCT.

Transmission Cost of Service Rates

On January 31, 2013, TNMP filed an application to update its transmission rates to reflect changes in its invested capital. The requested increase in total rate base is $21.9 million, which will increase revenues $2.9 million annually. The PUCT ALJ approved TNMP’s interim transmission cost of service filing and rates went into effect with bills rendered on March 20, 2013.

On August 1, 2013, TNMP filed an application to further update its transmission rates to reflect changes in its invested capital. The requested increase in total rate base is $18.1 million, which would increase revenues by $2.8 million annually. The PUCT ALJ approved TNMP’s interim transmission cost of service filing and rates went into effect with bills rendered on September 17, 2013.


(13)	Income Taxes

On April 4, 2013, New Mexico House Bill 641 was signed into law. One of the provisions of the bill was to reduce the New Mexico corporate income tax rate from 7.6% to 5.9%. The rate reduction will be phased in from 2014 to 2018. In accordance with GAAP, PNMR and PNM adjusted accumulated deferred income taxes to reflect the tax rate at which the balances are expected to reverse during the period that includes the date of enactment, which was in three months ended June 30, 2013. At that time,

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PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

the portion of the adjustment related to PNM’s regulated activities was recorded as a reduction in deferred tax liabilities, which was offset by an increase in a regulatory liability, on the assumption that PNM will be required to return the benefit to customers over time. The increase in the regulatory liability was $23.9 million. In addition, the portion of the adjustment that is not related to PNM’s regulated activities was recorded as a reduction in deferred tax assets and an increase in income tax expense of $1.2 million. Changes in the estimated timing of reversals of deferred tax assets and liabilities will result in refinements of the impacts of this change in tax rates being recorded periodically until 2018, when the rate reduction is fully phased in. In the three months ended March 31, 2014, PNM’s regulatory liability was reduced by $4.6 million, which increased deferred tax liabilities. Additionally, deferred tax assets not related to PNM’s regulatory activities were reduced by $0.2 million, which increased income tax expense.

In 2013, the future reduction in taxes payable to the State of New Mexico resulting from the rate reduction in House Bill 641 and revisions in estimates of future taxable income resulted in a further impairment of New Mexico wind energy production tax credits. In accordance with GAAP, PNMR was required to record this impairment, which after federal income tax benefit, amounted to $2.4 million as additional income tax expense during the three months ended June 30, 2013.

In 2013, the FASB issued Accounting Standards Update 2013-11, which requires entities to present an unrecognized tax benefit as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such carryforward could be used to offset the unrecognized tax benefit upon settlement. The update is required to be applied prospectively for periods beginning after December 15, 2013, and early adoption was permitted. The Company elected not to adopt the change for 2013, but did adopt it for 2014 as required by the update. Had the Company applied the update at December 31, 2013, the effect would have been decreases in net operating deferred tax assets of $19.9 million for PNMR, $11.2 million for PNM, and $6.8 million for TNMP, along with the elimination of the corresponding assets and liabilities associated with unrecognized tax benefits. There was no impact to earning from adopting the update.


(14)	Related Party Transactions



	Three Months Ended
	March 31,
	2014		2013
	(In thousands)
Services billings:
PNMR to PNM	$	21,066	$	22,652
PNMR to TNMP	7,261		7,361
PNM to TNMP	109		108
TNMP to PNMR	—		2
Interest billings:
PNMR to TNMP	96		96
PNMR to PNM	53		1
PNM to PNMR	26		41
Income tax sharing payments:
PNMR to PNM	—		—
PNMR to TNMP	—		—

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Strategic Goals

PNMR is focused on achieving the following strategic goals:

Earning authorized returns on its regulated businesses

Maintaining investment grade credit ratings

Providing a top-quartile total return to investors

In conjunction with these goals, PNM and TNMP are dedicated to:

Achieving industry-leading safety performance

Maintaining strong plant performance and system reliability

Delivering a superior customer experience

Demonstrating environmental leadership in its business operations

Earning Authorized Returns on Regulated Businesses

PNMR’s success in accomplishing its strategic goals is highly dependent on continued favorable regulatory treatment for its utilities and their strong operating performance. The Company has multiple strategies to achieve favorable regulatory treatment, all of which have as their foundation a focus on the basics: safety, operational excellence, and customer satisfaction, while engaging stakeholders to build productive relationships.

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

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

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Also, earning allowed returns should result in increased earnings for PNMR, which would lead to increased total returns to investors.

Maintaining Investment Grade Credit Ratings

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

Providing Top-Quartile Total Returns to Investors

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

Business Focus

Reliable and Affordable Power

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to outages.

Environmentally Responsible Power

PNMR has a long-standing record of environmental stewardship. PNMR’s environmental focus has been in three key areas:

Developing strategies to meet regional haze rules at the coal-fired SJGS as cost-effectively as possible while providing broad environmental benefits

Preparing to meet New Mexico’s increasing renewable energy requirements as cost-effectively as possible

•Increasing energy efficiency participation

Renewable Energy

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

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

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

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

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SJGS

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

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

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

On December 20, 2013, PNM made a filing with the NMPRC requesting certain approvals necessary to effectuate the revised SIP. In this filing, PNM requests authorization to:

Retire SJGS Units 2 and 3 at December 31, 2017 and to recover over 20 years their net book value at that date along with a regulated return on those costs

Include PNM’s ownership of PVNGS Unit 3 as a resource to serve New Mexico retail customers effective January 1, 2018

Allow cost recovery for the installation of SNCR equipment and the additional equipment to comply with NAAQS requirements on SJGS Units 1 and 4

Exchange ownership of 78 MW of PNM’s capacity in SJGS Unit 3 for 78 MW in SJGS Unit 4

PNM requested the NMPRC issue its final ruling on the application no later than December 2014. On February 11, 2014, PNM’s application was determined to be complete. The Hearing Examiner indicated the NMPRC should proceed with the review of PNM’s application and establish a schedule that would allow NMPRC action on the application by the end of 2014. A public hearing on the application is scheduled to begin on August 19, 2014.

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

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

PNM, as the SJGS operating agent, presented the SNCR project to the participants in Unit 1 and Unit 4 for approval in late October 2013. The project was approved for Unit 1, but the Unit 4 project did not obtain the required percentage of votes for approval. Other capital projects related to Unit 4 were also not approved by the participants. The SJPPA provides that PNM is authorized and obligated to take reasonable and prudent actions necessary for the successful and proper operation of SJGS pending resolution by the participants. PNM must evaluate its responsibilities and obligations as operating agent under the SJPPA regarding the SJGS Unit 4 capital projects that were not approved by the participants and take reasonable and prudent actions as it deems necessary. In March 2014, PNM requested that the owners of Unit 4 approve the expenditure of $1.9 million of costs critical to

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being able to comply with the time frame in the revised SIP with respect to Unit 4 project. The Unit 4 owners did not approve the expenditures. Thereupon, PNM issued a “Prudent Utility Practice” notice that, under the SJPPA, PNM was restarting certain critical activities to keep the Unit 4 project on schedule. PNM cannot predict the outcome of this matter.

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

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

Energy Efficiency

Energy efficiency also plays a significant role in helping to keep customers' electricity costs low while continuing to meet their energy needs. PNM's and TNMP's energy efficiency and load management portfolios continue to achieve robust results. In ~~2012,~~2013, annual energy saved as a result of ~~PNM's~~PNM’s portfolio of energy efficiency programs was approximately 7975 GWh. This is equivalent to the annual consumption of approximately ~~10,700~~10,200 homes in ~~PNM's~~PNM’s service territory. ~~PNM's~~PNM’s load management and energy efficiency programs also help lower peak demand requirements. ~~TNMP's~~TNMP’s energy efficiency programs in ~~2012~~2013 resulted in energy savings totaling an estimated ~~12.8~~17.0 GWh. This is equivalent to the annual consumption of approximately 1,650 homes in TNMP’s service territory.

Creating Value for Customers and Communities

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

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

Recognizing the importance of environmental stewardship to customers and other stakeholders, PNM expanded engagement with environmental stakeholders to promote ongoing dialogue and input. Similarly, PNM also proactively communicated with communities about its efforts and plans related to environmental stewardship. Customers took note of PNM’s efforts in this area. A nationally recognized customer satisfaction benchmark revealed gains in awareness of PNM’s efforts to improve environmental impact, as well as customer perceptions around the commitment to preserving the environment now and for future generations. Benchmark data also demonstrates positive movement in the communication component of the customer experience.

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

Building off work that began in 2008, PNM has continued outreach efforts to connect low-income customers with nonprofit community service providers offering support and help with such needs as utility bills, food, clothing, medical programs, services for seniors, and weatherization. In ~~2012,~~2013, PNM hosted 2322 community events throughout its service territory to assist low-income customers. Furthermore, the PNM Good Neighbor Fund provided ~~$1.0~~$0.3 million of assistance with utility bills to ~~10,216~~3,610 families in ~~2012.~~2013. In 2013, PNM committed funding of $0.9 million to the PNM Good Neighbor Fund.

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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 ~~2012,~~2013, the foundation awarded ~~$0.3~~$0.2 million to support 5556 projects in New Mexico to provide shade structure installations, window replacements, and efficient appliance purchases. Since the ~~program's~~program’s inception in 2008, Reduce Your Use grants have provided nonprofit agencies in New Mexico with a total of ~~$1.1~~$1.4 million of support. In ~~May~~ 2013, in connection with the PNM Resources ~~Foundation's~~Foundation’s 30^th anniversary, the foundation ~~announced that 30~~awarded thirty $10,000 environmental grants ~~would be awarded in 2013. The recipients were announced in August 2013.~~to nonprofit agencies.

PNM ~~also expanded~~continues to expand 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~~PNM’s renewable energy procurement plans that involved distributed solar energy developers early in the conversation and the siting of the planned gas-fired peaking generation facility near Belen, New Mexico, which featured in-depth community involvement and education early in the planning stages of the project. In both cases highly favorable outcomes were achieved, and controversial negative media coverage was virtually eliminated.

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

Economic Factors

In the three ~~and nine~~ months ended ~~September 30, 2013~~March 31, 2014, PNM experienced ~~decreases~~a decrease in weather ~~and leap-year~~ normalized retail load of ~~1.2% and 1.5%~~2.9% 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.~~same period in 2013. New ~~Mexico businesses are taking a longer time to recover from the economic downturn. In particular, the Albuquerque metropolitan area continues to lag~~Mexico’s economy still lags the nation in ~~economic~~post-recession 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~~March 31, 2014, ~~TNMP's~~TNMP’s weather normalized ~~and leap-year adjusted~~retail load increased ~~3.3% and 1.9%~~8.1% compared to ~~2012.~~the same period in 2013. In recent years, New Mexico and Texas have fared better than the national average in ~~unemployment.~~unemployment although the unemployment rate in New Mexico exceeded the national average in March 2013. However, ~~New Mexico's figures may be misleading due to people dropping out of the workforce. Employment~~employment growth is a ~~better indicator. Texas~~stronger predictor of load. Texas’ employment growth rates are well above the national rate, ~~and~~while New ~~Mexico's~~Mexico’s employment ~~growth rate is slightly positive.~~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,							Three Months Ended March 31,
	2013		2012		Change			2013		2012		Change			2014		2013		Change
	(In millions, except per share amounts)														(In millions, except per share amounts)
Net earnings attributable to PNMR	$	54.6	$	57.9	$	(3.3	)	$	92.9	$	96.5	$	(3.6	)	$	12.5	$	10.6	$	1.9
Average diluted common and common equivalent shares	80.3		80.4		(0.1		)	80.5		80.4		0.1			80.4		80.6		(0.2		)
Net earnings attributable to PNMR per diluted share	$	0.68	$	0.72	$	(0.04	)	$	1.15	$	1.20	$	(0.05	)	$	0.16	$	0.13	$	0.03

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The components of the change in earnings attributable to PNMR are:


	Three Months Ended			Nine Months Ended			Three Months Ended
	September 30, 2013			September 30, 2013			March 31, 2014
	(In millions)						(In millions)
PNM	$	(3.1	)	$	(0.1	)	$	(3.9	)
TNMP	1.0			2.1			3.1
Corporate and Other	(1.2		)	(5.5		)	2.6
Net change	$	(3.3	)	$	(3.6	)	$	1.9

~~PNMR's~~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~~additional information about these rate increases is provided in Note 17 of the Notes to Consolidated Financial Statements in the ~~2012~~2013 Annual Reports on Form 10-K and Note 1112

Milder weather in PNM’s service territory in 2014 than 2013

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Net unrealized gains and losses on mark-to-market economic hedges for sales and fuel costs not recoverable under ~~PNM's~~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 in 2013 due to impairments of state tax credits ~~and a change~~that did not recur in ~~state tax rate~~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 $~~755.9~~806.9 million at ~~October~~April 25, ~~2013~~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 ~~$2,054.0~~$2,564.5 million for ~~2013-2017,~~2014-2018, including amounts expended through ~~September 30, 2013~~March 31, 2014. The construction expenditures include estimated amounts related to environmental upgrades at SJGS to address regional haze and the identified sources of replacement capacity under the revised plan for compliance described in Note 11. The construction expenditures also include additional renewable resources anticipated to be required to meet the RPS, additional peaking resources needed to meet needs outlined in ~~PNM's~~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.~~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~~Company’s capital requirements.

RESULTS OF OPERATIONS

Segment Information

The following discussion is based on the segment methodology that ~~PNMR's~~PNMR’s management uses for making operating decisions and assessing performance of its various business activities. See Note 23 for more information on ~~PNMR's~~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.

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PNM

The following table summarizes the operating results for PNM:


	Three Months Ended September 30,									Nine Months Ended September 30,									Three Months Ended March 31,
	2013			2012			Change			2013			2012			Change			2014			2013			Change
	(In millions)																		(In millions)
Electric operating revenues	$	326.0		$	321.7		$	4.3		$	863.6		$	832.2		$	31.4		$	262.7		$	257.9		$	4.8
Cost of energy	100.2			99.2			1.0			283.7			263.0			20.7			96.6			91.7			4.9
Margin	225.8			222.5			3.3			579.9			569.2			10.7			166.1			166.2			(0.1		)
Operating expenses	104.7			101.1			3.6			311.4			311.5			(0.1		)	107.7			103.2			4.5
Depreciation and amortization	25.9			24.4			1.5			77.8			72.0			5.8			27.1			25.8			1.3
Operating income	95.2			97.0			(1.8		)	190.8			185.7			5.1			31.3			37.2			(5.9		)
Other income (deductions)	4.5			8.4			(3.9		)	14.8			19.1			(4.3		)	3.8			4.1			(0.3		)
Net interest charges	(20.1		)	(19.2		)	(0.9		)	(60.0		)	(56.7		)	(3.3		)	(19.8		)	(20.0		)	0.2
Segment earnings before income taxes	79.6			86.1			(6.5		)	145.6			148.2			(2.6		)	15.3			21.4			(6.1		)
Income (taxes)	(27.7		)	(31.2		)	3.5			(49.2		)	(51.9		)	2.7			(4.1		)	(6.6		)	2.5
Valencia non-controlling interest	(4.1		)	(4.0		)	(0.1		)	(10.9		)	(10.7		)	(0.2		)	(3.5		)	(3.2		)	(0.3		)
Preferred stock dividend requirements	(0.1		)	(0.1		)	—			(0.4		)	(0.4		)	—			(0.1		)	(0.1		)	—
Segment earnings	$	47.7		$	50.8		$	(3.1	)	$	85.1		$	85.2		$	(0.1	)	$	7.5		$	11.4		$	(3.9	)

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The following table summarizes the significant changes to electric operating revenues, cost of energy, and margin:


	2012/2013 Change																		2013/2014 Change
	Three Months Ended September 30,									Nine Months Ended September 30,									Three Months Ended March 31,
	Electric									Electric									Electric
	Operating			Cost of						Operating			Cost of						Operating			Cost of
	Revenues			Energy			Margin			Revenues			Energy			Margin			Revenues			Energy			Margin
	(In millions)																		(In millions)
Customer usage/load	$	(1.3	)	$	—		$	(1.3	)	$	(6.4	)	$	—		$	(6.4	)	$	(4.2	)	$	—		$	(4.2	)
Weather	(5.0		)	—			(5.0		)	(4.9		)	—			(4.9		)	(3.3		)	—			(3.3		)
Transmission and other	(2.5		)	(0.7		)	(1.8		)	14.9			17.0			(2.1		)
Economy service																			2.7			2.6			0.1
Wholesale rate increases	0.5			—			0.5			2.5			—			2.5			0.5			—			0.5
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			4.5			2.2			2.3
Unregulated margin	0.9			(0.4		)	1.3			3.1			(2.5		)	5.6			1.5			(2.1		)	3.6
Net unrealized economic hedges	9.3			0.5			8.8			8.9			(0.1		)	9.0			3.0			0.9			2.1
Other																			0.1			1.3			(1.2		)
Net change	$	4.3		$	1.0		$	3.3		$	31.4		$	20.7		$	10.7		$	4.8		$	4.9		$	(0.1	)

~~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,								Three Months Ended March 31,
	2013		2012			Change			2013		2012			Change			2014			2013			Change
	(In millions, except customers)																(In millions, except customers)
Residential	$	122.9	$	126.1		$	(3.2	)	$	319.8	$	318.9		$	0.9		$	97.6		$	104.3		$	(6.7	)
Commercial	119.1		120.4			(1.3		)	319.5		317.1			2.4			89.6			88.3			1.3
Industrial	21.2		22.6			(1.4		)	57.7		59.9			(2.2		)	15.8			17.3			(1.5		)
Public authority	8.2		8.1			0.1			20.0		19.3			0.7			5.2			5.3			(0.1		)
Economy service	7.8		6.8			1.0			23.9		17.7			6.2			10.6			7.9			2.7
Other retail	0.4		2.3			(1.9		)	6.2		9.5			(3.3		)	3.6			3.4			0.2
Transmission	10.5		10.8			(0.3		)	28.5		29.3			(0.8		)	9.1			8.7			0.4
Firm-requirements wholesale	10.1		10.5			(0.4		)	31.0		28.8			2.2			11.5			11.5			—
Other sales for resale	18.2		15.8			2.4			52.0		35.4			16.6			22.6			17.1			5.5
Mark-to-market activity	7.6		(1.7		)	9.3			5.0		(3.7		)	8.7			(2.9		)	(5.9		)	3.0
	$	326.0	$	321.7		$	4.3		$	863.6	$	832.2		$	31.4		$	262.7		$	257.9		$	4.8
Average retail customers (thousands)	508.3		505.6			2.7			507.8		505.3			2.5			510.4			507.4			3.0

The following table shows GWh sales by customer class:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2013	2012	Change		2013	2012	Change		2014	2013	Change
	(Gigawatt hours)								(Gigawatt hours)
Residential	955.8	975.7	(19.9	)	2,543.0	2,573.3	(30.3	)	775.0	851.3	(76.3	)
Commercial	1,049.8	1,103.5	(53.7	)	3,001.8	3,064.1	(62.3	)	868.0	878.5	(10.5	)
Industrial	272.2	300.3	(28.1	)	798.8	858.4	(59.6	)	240.0	252.6	(12.6	)
Public authority	78.4	84.0	(5.6	)	205.0	211.1	(6.1	)	51.6	55.0	(3.4	)
Economy service	174.9	171.3	3.6		528.6	454.6	74.0		191.4	176.7	14.7
Firm-requirements wholesale	157.6	162.0	(4.4	)	484.8	485.8	(1.0	)	160.9	177.2	(16.3	)
Other sales for resale	564.2	536.9	27.3		1,592.4	1,263.4	329.0		583.9	532.8	51.1
	3,252.9	3,333.7	(80.8	)	9,154.4	8,910.7	243.7		2,870.8	2,924.1	(53.3	)

Table of Contents

For the three ~~and nine~~ months ended ~~September 30, 2013,~~March 31, 2014, retail sales were lower compared to ~~2012~~2013 reflecting a continued sluggish economy in New Mexico. In particular, the Albuquerque metropolitan area continues to lag the nation in economic recovery. In spite of the economic pressures, PNM experienced year to date ~~growth in~~ average retail ~~customers~~customer growth of ~~0.5%~~0.6%. Weather negatively impacted revenues and margin $3.3 million during the three ~~and nine~~ months ended ~~September 30, 2013. Cooling~~March 31, 2014 as heating degree days were ~~10.1% and 9.8%~~13.8% lower for the three ~~and nine~~ months ended ~~September 30, 2013~~March 31, 2014 compared to the same period in ~~2012. PNM's~~2013. PNM’s weather normalized ~~and leap-year adjusted~~ retail KWh sales were 2.9% lower for the three months ended March 31, 2014 compared to 2013, which decreased revenues and margin $4.2 million. There is no clear indication regarding the future of New Mexico’s economy, as it still lags the nation in ~~2013 than~~post-recession recovery. Encouraging signs such as increased economic development activity and improved tax environment are contrasted by negative indicators such as a slip in ~~2012 by 1.9%~~employment growth and an increase in the unemployment rate in the first quarter ~~1.4%~~of 2014. PNM continues to see some customer growth, as well as increasing peak demand levels, while at the same time, usage per customer has decreased. The growth is not yet strong enough to offset the decreased usage, which appears to be the result of economic concerns, as well as energy efficiency measures.

PNM implemented new rates for Gallup, its second largest wholesale customer, in ~~the second quarter, 1.2% in the third quarter,~~July 2013 under a one-year agreement, which improved revenues and ~~1.5% for the nine months ended September 30. However, total KWh sales, excluding normalization, decreased 4.4% and 2.4%~~margins $0.5 million for the three ~~and nine~~ months ended ~~September 30, 2013~~March 31, 2014 compared to ~~2012. Based~~2013. PNM responded to Gallup’s request for proposals for long-term power supply. On March 26, 2014, Gallup notified PNM that the contract for long-term power supply had been awarded to another utility. PNM’s contract with Gallup will expire on June 29, 2014. PNM’s 2013 revenues for power sold under the ~~current trends, retail KWh sales could be down approximately 1%~~Gallup contract were $11.7 million. See Note 12.

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

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

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

PNM provides economy energy services to a major customer. In spite of the increase in KWh sales to this customer for the three ~~and nine~~ months ended ~~September 30, 2013~~March 31, 2014 compared to ~~2012,~~2013, there is only a minor impact in margin resulting from providing ancillary services. Other changes in revenues and cost of energy for this customer are a pass through with no impact to margin. Other 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.

~~Table~~drivers 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 andrevenue, cost of energy, ~~reflecting the purchase of RECs,~~and margin include lower consumption by ~~$1.6 million~~firm-requirements wholesale customers and ~~$6.3 million. These revenues include a return on investment of $0.9 million~~off-system sales 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.purchases not included in PNM’s FPPAC.

For the three months ~~and nine months~~ ended ~~September 30, 2013, higher unregulated revenues of $0.9~~March 31, 2014, operating expenses increased $4.5 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.~~2013. 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~~March 31, 2014, higher maintenance expenses for outages at San Juan, Four Corners, and ~~losses are based on economic hedges in place for sales~~PNM’s natural gas-fired plants of $1.0 million, $0.7 million, and ~~fuel costs not covered under the FPPAC, primarily associated with PVNGS Unit 3. Unrealized gains~~$1.0 million were partially offset by lower maintenance expenses of ~~$7.7~~$0.5 million at PVNGS. Higher Arizona property taxes increased operating expenses of $0.9 million for the three months ended ~~September 30, 2013~~March 31, 2014 compared to ~~unrealized losses~~2013. Bad debt expense increased $0.6 million in the three months ended March 31, 2014 compared to 2013. Higher renewable rider expenses of ~~$1.1~~$0.4 million, which is offset in revenue, increased operating expenses 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~~March 31, 2014 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.~~2013. In ~~the three months ended September 30, 2013,~~addition, 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~~expense of $0.2 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~~increased operating expenses for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2014 compared to 2013. ~~Lower allocation of corporate expenses of $0.9~~

Depreciation and amortization expense increased $1.3 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 expensesMarch 31, 2014 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~~additions to ~~the 22~~utility plant in service, including 21.5 MW of PNM-owned solar PV facilities. Depreciation on the PNM-owned solar PV facilities ~~which are being~~is recovered through ~~a rate~~the renewable energy rider ~~beginning in August 2012, as well as higher depreciation due to an increase in utility plant in service.~~discussed above.

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Other income (deductions) decreased ~~$3.9 million and $4.3~~$0.3 million for the three ~~and nine~~ months ~~September 30, 2013~~ended March 31, 2014 compared to ~~2012. Lower~~2013. Higher income from investments held by the NDT ~~decreased other income~~of $0.8 million were offset by ~~$3.7~~retirements of PVNGS Unit 3 plant in service of $0.7 million and ~~$1.9 million in the three and nine months ended September 30, 2013 compared to 2012. Lower~~lower interest income on PVNGS lessor notes of ~~$0.6~~$0.5 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,~~March 31, 2014, interest expense ~~increased $0.9 million and $3.3~~decreased $0.2 million compared to ~~2012,~~2013, primarily due to lower short-term borrowings expense partially offset by interest expense on new long-term borrowings under 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.~~$175.0 million PNM 2014 Term Loan Agreement. See Note 9.

TNMP

The following table summarizes the operating results for TNMP:


	Three Months Ended September 30,									Nine Months Ended September 30,									Three Months Ended March 31,
	2013			2012			Change			2013			2012			Change			2014			2013			Change
	(In millions)																		(In millions)
Electric operating revenues	$	73.7		$	68.7		$	5.0		$	201.4		$	187.4		$	14.0		$	66.2		$	59.8		$	6.4
Cost of energy	14.5			11.6			2.9			41.3			34.3			7.0			16.0			13.0			3.0
Margin	59.2			57.1			2.1			160.1			153.1			7.0			50.2			46.7			3.4
Operating expenses	23.1			22.3			0.8			67.3			64.2			3.1			21.1			22.0			(0.9		)
Depreciation and amortization	13.9			13.8			0.1			37.8			37.2			0.6			11.8			11.7			0.1
Operating income	22.3			21.0			1.3			55.0			51.7			3.3			17.3			13.1			4.2
Other income (deductions)	0.7			0.4			0.3			1.4			1.2			0.2			0.2			0.2			—
Net interest charges	(6.7		)	(7.0		)	0.3			(20.7		)	(21.2		)	0.5			(6.6		)	(7.2		)	0.6
Segment earnings before income taxes	16.3			14.3			2.0			35.7			31.7			4.0			10.9			6.0			4.9
Income (taxes)	(6.2		)	(5.2		)	(1.0		)	(13.6		)	(11.6		)	(2.0		)	(4.1		)	(2.3		)	(1.8		)
Segment earnings	$	10.1		$	9.1		$	1.0		$	22.2		$	20.1		$	2.1		$	6.8		$	3.7		$	3.1

The following table summarizes the significant changes to total electric operating revenues, cost of energy, and margin:


	2012/2013 Change																2013/2014 Change
	Three Months Ended September 30,								Nine Months Ended September 30,								Three Months Ended March 31,
	Electric								Electric								Electric
	Operating			Cost of					Operating			Cost of					Operating			Cost of
	Revenues			Energy		Margin			Revenues			Energy		Margin			Revenues			Energy		Margin
	(In millions)																(In millions)
Rate increases	$	1.4		$	—	$	1.4		$	3.4		$	—	$	3.4		$	1.5		$	—	$	1.5
Demand based customers																	0.7			—		0.7
Customer usage/load	0.5			—		0.5			1.2			—		1.2			0.5			—		0.5
Customer growth	0.4			—		0.4			1.2			—		1.2			0.3			—		0.3
Demand based customers	1.0			—		1.0			2.6			—		2.6
Weather	(0.1		)	—		(0.1		)	(1.4		)	—		(1.4		)	0.5			—		0.5
Recovery of third-party transmission costs	2.9			2.9		—			7.4			7.0		0.4			3.0			3.0		—
AMS surcharge	(0.1		)	—		(0.1		)	2.0			—		2.0			0.9			—		0.9
CTC surcharge	(1.0		)	—		(1.0		)	(2.8		)	—		(2.8		)	0.4			—		0.4
Other	—			—		—			0.4			—		0.4			(1.4		)	—		(1.4		)
Net change	$	5.0		$	2.9	$	2.1		$	14.0		$	7.0	$	7.0		$	6.4		$	3.0	$	3.4

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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,							Three Months Ended March 31,
	2013		2012		Change		2013		2012		Change			2014		2013		Change
	(In millions, except consumers)													(In millions, except consumers)
Residential	$	36.4	$	33.2	$	3.2	$	84.1	$	79.9	$	4.2		$	26.8	$	22.9	$	3.9
Commercial	24.0		22.7		1.3		69.8		65.1		4.7			23.2		20.9		2.3
Industrial	3.2		3.2		—		9.6		10.1		(0.5		)	3.5		3.0		0.5
Other	10.1		9.6		0.5		37.9		32.3		5.6			12.7		13.0		(0.3		)
	$	73.7	$	68.7	$	5.0	$	201.4	$	187.4	$	14.0		$	66.2	$	59.8	$	6.4
Average consumers (thousands) ⁽¹⁾	235.3		233.6		1.7		234.7		232.7		2.0			236.7		234.1		2.6


⁽¹⁾	TNMP provides transmission and distribution services to REPs that provide electric service to consumers in ~~TNMP's~~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,				Three Months Ended March 31,
	2013	2012	Change		2013	2012	Change		2014	2013	Change
	(Gigawatt hours)								(Gigawatt hours)
Residential	963.6	930.4	33.2		2,176.2	2,173.4	2.8		642.1	561.4	80.7
Commercial	714.7	692.5	22.2		1,854.2	1,796.7	57.5		540.1	478.3	61.8
Industrial	686.1	695.4	(9.3	)	1,920.3	2,025.6	(105.3	)	648.1	552.5	95.6
Other	27.6	26.5	1.1		77.3	78.0	(0.7	)	23.5	21.5	2.0
	2,392.0	2,344.8	47.2		6,028.0	6,073.7	(45.7	)	1,853.8	1,613.7	240.1

For the three ~~and nine~~ months ended ~~September 30, 2013,~~March 31, 2014, revenues and margin increased by ~~$1.4 million and $3.4~~$1.5 million compared to ~~2012~~2013 due to transmission ~~cost of service~~ rate increases in ~~September 2012,~~ March 2013, September 2013, and ~~September 2013.~~March 2014. See Note ~~10.~~12. TNMP experienced ~~positive year to date average~~ customer growth of ~~0.9%. Weather had only minor impacts on results~~1.1%, increasing revenues and margin by $0.3 million for the ~~third quarter of 2013, but milder~~three months ended March 31, 2014 compared to 2013. Higher weather normalized usage per customer increased revenues and margin by $0.5 million for the three months ended March 31, 2014 compared to 2013. TNMP’s weather normalized retail KWh sales increased 8.1% for the three months ended March 31, 2014 compared to 2013. Colder temperatures in the ~~second quarter of 2013~~three months ended March 31, 2014 compared to ~~2012~~2013, resulted in ~~decreased~~increased revenues and margin of ~~$1.4 million for the nine months ended September 30, 2013.~~$0.5 million. 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, 2013March 31, 2014 compared to ~~2012.~~2013, heating degree days were 30.1% higher, which was partially offset by cooling degree days being 36.8% lower.

Demand based revenues and margin for the three ~~and nine~~ months ended ~~September 30, 2013~~March 31, 2014 increased by ~~$1.0 million and $2.6~~$0.7 million compared to ~~2012.~~2013. 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~~Differences between revenues and ~~margin~~costs charged by ~~$0.1~~third party transmission providers are deferred and recovered through a transmission cost recovery factor resulting in no impact on margin. Higher transmission cost of energy resulting from rate increases from other transmission service providers within ERCOT increased cost of energy $3.0 million for the three months ~~and~~ended March 31, 2014 compared to 2013. These increases in cost of energy resulted in TNMP rate increases for the recovery of third party transmission costs increasing revenue $3.0 million for the three months ended March 31, 2014 compared to 2013.

The AMS surcharge increased revenues and ~~margins~~margin by ~~$2.0~~$0.9 million for the ~~nine~~three months ~~2013~~ended March 31, 2014 compared to ~~2012,~~2013, which amounts are offset by ~~changes~~increases in operating expenses and depreciation. ~~A decrease in the~~The CTC surcharge ~~rate decreased~~increased revenues and margin by ~~$1.0 million and $2.8~~$0.4 million for the three ~~and nine~~ months ended ~~September 30, 2013~~March 31, 2014 compared to ~~2012,~~2013, which amounts are also offset by increases depreciation and amortization expense. Other revenues, which include recovery of the Hurricane Ike, rate case expenses, and energy efficiency programs, were lower for the three months ended March 31, 2014 compared to 2013. These lower revenues were offset by decreases in operating expenses and depreciation and ~~amortization expense.~~amortization. The Hurricane Ike surcharge was terminated in November of 2013 due to full recovery of costs associated with this hurricane.

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~~Customer related~~Operating expenses decreased $0.9 million for the three months ended March 31, 2014 compared to 2013. Lower employee healthcare claims of $0.5 million and lower property and casualty claims of $0.1 million decreased operating expense for the three months ended March 31, 2014 compared to 2013. Lower vegetation management of $0.2 million and ~~administrative and general~~lower labor costs of $0.2 million decreased operating expenses in the three months ended March 31, 2014 compared to 2013. In addition, lower energy efficiency program costs of $0.2 million decreased operating expense in the three months ended 2014, which is offset in revenue under TNMP’s energy efficiency cost recovery factor. These decreases were offset by an increase of $0.3 million for operating expenses associated with the installation of additional meters under the AMS deployment, ~~decreased operating expenses $0.7~~which is recovered through the AMS surcharge.

Depreciation and amortization increased $0.1 million for the three months ~~and increased operating expense $0.5 million for the nine months~~ ended ~~September 30, 2013~~March 31, 2014 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~~

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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~~$0.5 million for the three ~~and nine~~ months ended ~~September 30, 2013~~March 31, 2014 compared to ~~2012.~~2013. Depreciation expense associated with the CTC, which is recovered through the CTC surcharge, increased $0.4 million for the three months ended March 31, 2014 compared to 2013. In addition, an increase in utility plant in service increased depreciation by ~~$0.3 million and $1.0~~$0.4 million for the three ~~and nine~~ months ended ~~September 30, 2013~~March 31, 2014 compared to ~~2012.~~2013. These increases are offset by lower amortization of the ~~CTC regulatory asset~~Hurricane Ike costs of ~~$0.8 million and $2.0~~$1.1 million for the three ~~and nine~~ months ended ~~September 30, 2013~~March 31, 2014 compared to ~~2012.~~2013.

InInterest expense decreased $0.6 million for the three months ended March 31, 2014 compared to 2013. The decrease primarily results from the April 2013 ~~TNMP exchanged~~exchange of $93.2 million of ~~its~~TNMP’s 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,									Three Months Ended March 31,
	2013			2012			Change			2013			2012			Change			2014			2013			Change
	(In millions)																		(In millions)
Total revenues	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—
Cost of energy	—			—			—			—			—			—			—			—			—
Margin	—			—			—			—			—			—			—			—			—
Operating expenses	(3.3		)	(4.8		)	1.5			(10.2		)	(12.7		)	2.5			(3.2		)	(3.7		)	0.5
Depreciation and amortization	3.0			4.6			(1.6		)	9.6			13.1			(3.5		)	3.0			3.3			(0.3		)
Operating income (loss)	0.3			0.2			0.1			0.6			(0.4		)	1.0
Operating income																			0.2			0.4			(0.2		)
Other income (deductions)	(3.5		)	(0.9		)	(2.6		)	(7.5		)	(4.9		)	(2.6		)	(0.7		)	(1.8		)	1.1
Net interest charges	(3.6		)	(4.2		)	0.6			(11.6		)	(12.4		)	0.8			(3.1		)	(4.1		)	1.0
Segment earnings (loss) before income taxes	(6.8		)	(4.9		)	(1.9		)	(18.6		)	(17.8		)	(0.8		)	(3.6		)	(5.4		)	1.8
Income (taxes) benefit	3.6			2.9			0.7			4.1			8.9			(4.8		)	1.7			0.9			0.8
Segment earnings (loss)	$	(3.2	)	$	(2.0	)	$	(1.2	)	$	(14.4	)	$	(8.9	)	$	(5.5	)	$	(1.9	)	$	(4.5	)	$	2.6

Operating expenses for Corporate and Other are net of amounts allocated to PNM and TNMP under shared service agreements. Changes in depreciation and amortization are offset in operating expenses as a result of allocation of these costs to other business segments.

~~For~~ The change in operating expense is the ~~three and nine months ended September 30, 2013,~~result of lower depreciation and amortization ~~decreased~~for the three months ended March 31, 2014 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 20122013 related to ~~the Company's union negotiations and the restructuring~~certain items of ~~outsourcing arrangements for information technology, both of which did not recur~~computer software that were fully depreciated in 2013 ~~as well as~~and changes in the allocation of ~~additional costs~~certain items to PNM and ~~TNMP in 2013, which were included in Corporate and Other in 2012.~~TNMP.

The ~~change~~decrease in other income (deductions) during the three months ~~and nine months~~ ended ~~September 30,~~March 31, 2014 compared to 2013 is ~~primarily~~ due to losses related to ~~premiums of $1.8 million and $3.0 million paid~~corporate investments in 2013 ~~for~~that did not recur in 2014. Net interest charges decreased primarily due to lower interest charges resulting from the 2013 repurchase of ~~$14.7 million and $23.0~~$23.8 million principal ~~amounts~~amount of ~~PNMR's~~PNMR’s 9.25% Senior Unsecured Notes, Series A, due 2015. ~~These repurchases were also primarily responsible for the~~The remaining decrease in net interest charges ~~for~~is the ~~three~~result of lower borrowings 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 gainlower interest rates 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.~~short-term borrowings.

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During the ~~first six~~three months ofended March 31, 2013, income (taxes) benefit for Corporate and Other included the impairment of New Mexico wind energy production tax credits of ~~$3.9~~$1.5 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.~~benefits. No such ~~impairments or changes occurred~~impairment was incurred in ~~the three months ended September 30, 2013 or the nine months ended September 30, 2012.~~2014. See Note 13.

LIQUIDITY AND CAPITAL RESOURCES

Statements of Cash Flows

The changes in ~~PNMR's~~PNMR’s cash flows for the ~~nine~~three months ended ~~September 30, 2013~~March 31, 2014 compared to ~~September 30, 2012~~March 31, 2013 are summarized as follows:


	Nine Months Ended September 30,									Three Months Ended March 31,
	2013			2012			Change			2014			2013			Change
	(In millions)									(In millions)
Net cash flows from:
Operating activities	$	311.0		$	205.0		$	106.0		$	76.4		$	(1.4	)	$	77.8
Investing activities	(211.4		)	(188.0		)	(23.4		)	(74.4		)	(62.2		)	(12.2		)
Financing activities	(75.1		)	(26.8		)	(48.3		)	22.6			59.7			(37.1		)
Net change in cash and cash equivalents	$	24.5		$	(9.7	)	$	34.2		$	24.6		$	(3.9	)	$	28.5

The increase in ~~PNMR's~~PNMR’s cash ~~flows~~flow from operating activities relate to ~~income tax refunds received of $95.5 million in 2013 compared to income taxes paid of $5.3 million in 2012 and $22.0~~$60.7 million lower contributions to the PNM and TNMP pension and other postretirement benefit plans in ~~2013~~2014 than in ~~2012.~~2013. In addition, refunds of $15.2 million made to customers related to the settlement of PNM’s transmission rate ~~increases~~in 2013 did not recur in 2014. Higher retail load at TNMP and ~~for two of PNM's firm-requirements wholesale customers, along with~~ other changes in assets and liabilities resulting from normal operations increased operating cash flows. These increases were partially offset by refunds of $15.2 million made to customers related to the settlement of PNM's transmission rate case in 2013, $21.6 million of governmental grants received by PNM in 2012 that did not recur in 2013, and lower retail load at PNM.

The changes in ~~PNMR's~~PNMR’s cash flows from investing activities relate primarily to an increase of ~~$19.2~~$10.3 million in utility plant additions in the ~~nine~~three months ended ~~September 30, 2013~~March 31, 2014 compared to ~~2012.~~2013. Utility plant additions at PNM were ~~$20.1~~$7.2 million higher in the ~~nine~~three months ended ~~September 30,~~March 31, 2014 compared to 2013, ~~than 2012,~~ including increases in transmission and distribution additions of ~~$33.9~~$19.9 million, ~~and~~ renewable energy additions of ~~$4.5~~$0.4 million, and higher nuclear fuel purchases of $1.5 million. These increases were offset by ~~$8.2 million lower nuclear fuel purchases, due to the acceleration of fuel deliveries in 2012 related to the financial difficulties of a supplier, and~~ lower generation additions of ~~$10.1~~$14.6 million. TNMP utility plant additions increased ~~$7.6~~$2.8 million in the ~~nine~~three months ended ~~September 30, 2013~~March 31, 2014 compared to ~~2012,~~2013, including increases in ~~AMS additions of $4.4 million and other~~ transmission and distribution additions of ~~$3.2~~$2.4 million and AMS additions of $0.2 million. Corporate plant additions ~~decreased $8.5~~increased $0.3 million in ~~the nine months ended September 30, 2013,~~2014, primarily related to improvements made to the Company's corporate headquarters building in 2012. Proceeds from the sale of First Choice of $4.0 million received in 2012 included in investing activities also contributed to the change in cash flows.computer hardware and software.

The changes in PNMR’s cash flows from financing activities ~~include a $77.4~~are primarily due to $33.8 million ~~reduction in net short-term~~lower cash inflows from borrowings induring the ~~nine~~three months ended ~~September 30, 2013~~March 31, 2014 compared to ~~2012. The decrease in short-term borrowings reflects~~ the ~~utilization of the tax refunds received~~same period in 2013. ~~Cash flows~~Proceeds from ~~financing activities in 2013 also includes~~ long-term borrowings of $175.0 million under the PNM 2014 Term Loan Agreement were used to repay the existing $75.0 million ~~made at~~ PNM ~~In addition, $13.0 million was paid in connection with TNMP's debt exchange~~Term Loan Agreement and ~~$26.0 million was paid by PNMR to repurchase $23.0 million of its outstanding 9.25% Senior Unsecured Notes, Series A, due 2015, in 2013.~~reduce short-term debt.

Financing Activities

See Note 6 of the Notes to Consolidated Financial Statements in the ~~2012~~2013 Annual Reports on Form 10-K and Note 9 for additional information concerning the ~~Company's~~Company’s financing activities. PNM must obtain NMPRC approval for any financing transaction having a maturity of more than 18 months. In addition, PNM files its annual short-term financing plan with the NMPRC. The Company’s ability to access the credit and capital markets at a reasonable cost is largely dependent upon its:

Ability to earn a fair return on equity

Results of operations

Ability to obtain required regulatory approvals

Conditions in the financial markets

Credit ratings

In December 2012, PNMR entered into the PNMR Term Loan Agreement, which must be repaid on or before December 27, 2013, borrowed $100.0 million under that agreement, and used the funds to repay $100.0 million in borrowings made under

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the PNMR Revolving Credit Facility. PNMR anticipates that funds to repay the PNMR Term Loan Agreement at maturity will come from entering into a new arrangement similar to the PNMR Term Loan Agreement, borrowing under the PNMR Revolving Credit Agreement, or a combination of these sources. On ~~April 22, 2013,~~March 5, 2014, PNM entered into the $175.0 million PNM 2014 Term Loan Agreement and used a portion of the funds borrowed there under to repay all amounts outstanding under the existing $75.0 millionPNM Term Loan Agreement. The funds were also used to repay other short-term amounts outstanding. There were no prepayment penalties paid in connection with the termination of the PNM Term Loan Agreement. The PNM 2014 Term Loan Agreement includes customary covenants and conditions. The PNM 2014 Term Loan Agreement bears interest at a variable rate, which was 1.11% at March 31, 2014, and must be repaid on or before ~~October 21,~~September 4, 2015. At March 31, 2014 ~~borrowed $75.0 million under that agreement, and used~~, the ~~funds to repay $75.0 million in~~weighted average interest rate was 1.01% for borrowings ~~made~~outstanding under the twelve-month PNMR Term Loan Agreement, which matures in December 2014.

The PNM ~~Revolving Credit Facility. At~~ ~~September 30, 2013, average interest rates were 1.31% for~~2014 Term Loan Agreement, as well as the PNMR Term Loan Agreement, ~~and 1.44% for the PNM Term Loan Agreement.~~

The TNMP Revolving Credit Facility is a $75.0 million facility secured by $75.0 million aggregate principal amount of TNMP first mortgage bonds. On September 18, 2013, the TNMP Revolving Credit Facility was amended and restated extending its maturity date from December 16, 2015 to September 18, 2018.

~~Each of the term loans, as well as the PNMR Revolving Credit Facility, the PNM Revolving Credit Facility, and the TNMP Revolving Credit Facility,~~each contain one financial covenant, which requires the maintenance of debt-to-capital ratios of less than or equal to 65%. These ratios for PNMR and PNM include the present value of payments under the PVNGS and EIP leases as debt.

On March 6, 2013, TNMP commenced an offer to exchange any and all of TNMP's $265.5 million aggregate principal amount outstanding 9.50% First Mortgage Bonds, due 2019, Series 2009A, for a new series of 6.95% First Mortgage Bonds due 2043, Series 2013A, and up to $140 in cash for each $1,000 of bonds exchanged. Settlement of the exchange offer occurred on April 3, 2013. Upon settlement, TNMP issued $93.2 million of 6.95% First Mortgage Bonds and paid an aggregate of $13.0 million in cash in exchange for $93.2 million of 9.50% First Mortgage Bonds, in addition to payment of accrued and unpaid interest on the exchanged bonds. The exchange resulted in the recording of a ~~$23.2 million~~ ~~premium on the~~ ~~6.95%~~ First Mortgage Bonds reflecting the contractual interest rate being in excess of the market rate of interest on the date of the exchange. A regulatory asset was recorded offsetting the premium and the cash consideration paid in the exchange.

~~In the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2013, PNMR purchased $23.0 million aggregate principal amount of its outstanding 9.25% Senior Unsecured Notes, Series A, due 2015, for $26.0 million plus accrued and unpaid interest.~~

On October 2, 2013, the NMPRC approved PNM's application to enter into a new revolving credit facility of up to $50.0 million with banks operating in New Mexico. PNM anticipates entering into a facility in late 2013.

In October 2013, the second of the two one-year extension options for the PNMR Revolving Credit Facility and the PNM Revolving Credit Facility were exercised extending the expiration of both facilities to October 31, 2018.

Capital Requirements

Total capital requirements consist of construction expenditures and cash dividend requirements for PNMR common stock and PNM preferred stock. Key activities in ~~PNMR's~~PNMR’s current construction program include:

Upgrading generation resources, including expenditures for compliance with environmental requirements and ~~additional~~for renewable energy ~~projects~~resources

Expanding the electric transmission and distribution systems

Purchasing nuclear fuel

Projected capital requirements, including amounts expended through ~~September 30, 2013~~March 31, 2014, are:


	2013		2014-2017		Total		2014		2015-2018		Total
	(In millions)						(In millions)
Construction expenditures	$	351.9	$	1,438.2	$	1,790.1	$	509.0	$	1,758.2	$	2,267.2
Dividends on PNMR common stock	51.0		210.3		261.3		58.9		235.8		294.7
Dividends on PNM preferred stock	0.5		2.1		2.6		0.5		2.1		2.6
Total capital requirements	$	403.4	$	1,650.6	$	2,054.0	$	568.4	$	1,996.1	$	2,564.5

The construction expenditure estimates are under continuing review and subject to ongoing adjustment, as well as to Board review and approval. The construction expenditures above include estimated amounts of $80.0 million related to environmental upgrades at SJGS to address regional haze and $276.3 million related to the identified sources of replacement capacity under the revised plan for compliance described in Note 11. The above construction expenditures also include additional renewable resources anticipated to be required to meet the RPS, additional peaking resources ~~needed~~ to meet needs outlined in ~~PNM's~~PNM’s current IRP, ~~and~~ environmental upgrades at Four Corners of ~~$71.9~~$80.3 million, the purchase of the leased portion of the EIP and the assets underlying three of the PVNGS Unit 2 leases at the expiration of those leases, and the anticipated purchase of Delta. Expenditures for the SJGS and Four Corners environmental upgrades are estimated to be expended through 2017. The construction expenditures above do not include any amounts related to environmental upgrades at SJGS that ultimately may be required by EPA to address regional haze or expenditures

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~~that could be required to replace capacity should environmental control at SJGS involve shutdown of one or more SJGS units.~~$10.0 million in 2014. See Note 1011 and Commitments and Contractual Obligations below. The ability of PNMR to pay dividends on its common stock is dependent upon the ability of PNM and TNMP to be able to pay dividends to PNMR. Note 5 of the Notes to Consolidated Financial Statements in the ~~2012~~2013 Annual Reports on Form 10-K describes regulatory and contractual restrictions on the payment of dividends by PNM and TNMP.

During the ~~nine~~three months ended ~~September 30, 2013~~March 31, 2014, PNMR met its capital requirements and construction expenditures through cash generated from operations, as well as its liquidity ~~arrangements.~~arrangements and the PNM 2014 Term Loan Agreement.

In addition to the capital requirements for construction expenditures and dividends, the Company has long-term debt that must be paid or refinanced at maturity. Note 6 of the Notes to Consolidated Financial Statements in the ~~2012~~2013 Annual Reports on Form 10-K contains information about the maturities of long-term debt. The Company has from time to time refinanced or repurchased portions of its outstanding debt before scheduled maturity. Depending on market conditions, the Company may refinance other debt issuances, or make additional debt repurchases, or enter into other liquidity arrangements in the future.

Liquidity

~~PNMR's~~PNMR’s liquidity arrangements include the PNMR Revolving Credit Facility and the PNM Revolving Credit Facility that both expire in October 2018 and the TNMP Revolving Credit Facility that expires in September 2018. The PNMR Revolving

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Credit Facility has a financing capacity of $300.0 million, the PNM Revolving Credit Facility has a financing capacity of $400.0 million, and the TNMP Revolving Credit Facility has a financing capacity of $75.0 million. On January 8, 2014, PNM entered into the $50.0 million PNM New Mexico Credit Facility, which expires on January 8, 2018. The Company believes the terms and conditions of its facilities are consistent with those of other investment grade revolving credit facilities in the utility industry. Each of the credit facilities contains one financial covenant that requires the maintenance of debt-to-capital ratios of less than or equal to 65%. For PNMR and PNM, these ratios reflect the present value of payments under the PVNGS and EIP leases as debt.

The revolving credit facilities and the PNM New Mexico Credit Facility provide short-term borrowing ~~capacity and~~capacity. The revolving credit facilities also allow letters of credit to be issued. Letters of credit reduce the available capacity under the facilities. The Company utilizes these credit facilities and cash flows from operations to provide funds for both construction and operational expenditures. The ~~Company's~~Company’s business is seasonal with more revenues and cash flows from operations being generated in the summer months. In general, the Company relies on the credit facilities to be the initial funding source for construction expenditures. Accordingly, borrowings under the facilities may increase over time. Depending on market and other conditions, the Company will periodically sell long-term debt and use the proceeds to reduce the borrowings under the credit facilities. Borrowings under the PNMR Revolving Credit Facility ranged from zero to ~~$71.8~~$21.1 million during the three months ended ~~September 30, 2013~~March 31, 2014 and from ~~zero~~$21.5 million to ~~$84.0~~$54.2 million during the ~~nine~~three months ended March 31, 2013. Borrowings under the PNM Revolving Credit Facility ranged from zero to $82.0 million during the three months ended ~~September 30, 2013~~March 31, 2014. and from $9.8 million to $130.8 million during the three months ended March 31, 2013. Borrowings under the PNM New Mexico Credit Facility during the three months ended March 31, 2014 ranged from zero to $25.0 million. TNMP had no borrowings under the ~~PNM~~TNMP Revolving Credit Facility during the three months ended ~~September 30, 2013~~March 31, 2014 and borrowings ranged from zero to ~~$130.8~~$25.0 million during the ~~nine~~three months ended ~~September 30, 2013. Borrowings under the TNMP Revolving Credit Facility ranged from zero to $34.0 million during the three months ended~~ ~~September 30, 2013~~ ~~and from zero to $40.0 million during the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2013. At~~ ~~September 30, 2013, the average interest rate was 1.30% for the TNMP Revolving Credit Facility.~~March 31, 2013.

The Company currently believes that its capital requirements can be met through internal cash generation, existing or new credit arrangements, and access to public and private capital markets. To cover the difference in the amounts and timing of internal cash generation and cash requirements, the Company intends to use short-term borrowings under its current and future liquidity arrangements. However, if difficult market conditions experienced during ~~2008 and 2009~~the recent recession return, ~~or worsen,~~ the Company may not be able to access the capital markets or renew credit facilities when they expire. Should that occur, the Company would seek to improve cash flows by reducing capital expenditures and exploring other available alternatives. Also, PNM may consider seeking authorization for the issuance of first mortgage bonds to improve access to the capital markets.

In addition to its internal cash generation, the Company anticipates that it will be necessary to obtain additional long-term financing to fund its capital requirements ~~through 2017.~~during the 2014-2018 period. This could include debt refinancing, new debt issuances, and/or new equity.

~~The Company's ability to access the credit and capital markets at a reasonable cost is largely dependent upon its:~~

•~~Ability to earn a fair return on its investments~~

•~~Results of operations~~

•~~Ability to obtain required regulatory approvals~~

•~~Conditions in the financial markets~~

•~~Credit ratings~~

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The credit ratings for PNMR, PNM, and TNMP were set forth under the heading Liquidity in the MD&A contained in the ~~2012~~2013 Annual Reports on Form 10-K. On ~~April 5, 2013, S&P~~January 30, 2014, Moody’s raised the ~~corporate credit~~senior unsecured rating for PNMR, the senior unsecured and issuer ratings for PNM, and the senior ~~debt~~secured and issuer ratings for TNMP. Moody’s continued to maintain the ratings outlook for PNMR, PNM, and TNMP as ~~well as the preferred stock rating for PNM.~~positive. On April 30, 2014, 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. As of ~~October~~April 25, ~~2013~~2014, ratings on the ~~Company's~~Company’s securities were as follows:



	PNMR	PNM	TNMP
S&P
Senior secured debt	*	*	A-
Senior unsecured debt	BBB-	BBB	*
Preferred stock	*	BB+	*
~~Moody's~~Moody’s
Senior secured debt	*	*	A3A2
Senior unsecured debt	~~Ba1~~Baa3	~~Baa3~~Baa2	*
Preferred stock	*	Ba2	*

* Not applicable

Investors are cautioned that a security rating is not a recommendation to buy, sell, or hold securities, that it is subject to revision or withdrawal at any time by the assigning rating organization, and that each rating should be evaluated independently of any other rating.

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A summary of liquidity arrangements, which do not include the PNMR Term Loan Agreement or the PNM 2014 Term Loan Agreement, as of ~~October~~April 25, ~~2013~~2014 is as follows:

PNMR
Separate

PNM
Separate

TNMP
Separate

PNMR
Consolidated
(In millions)
Financing capacity - revolving credit facility $ 300.0
$ 400.0
$ 75.0
$ 775.0

Amounts outstanding as of October 25, 2013:
Revolving credit facility —
—
7.0
7.0
Letters of credit 8.6
3.2
0.3
12.1

Total short–term debt and letters of credit 8.6
3.2
7.3
19.1

Remaining availability as of October 25, 2013 $ 291.4
$ 396.8
$ 67.7
$ 755.9
Invested cash as of October 25, 2013 $ 6.5
$ 15.7
$ —
$ 22.2



	PNMR Separate		PNM Separate		TNMP Separate		PNMR Consolidated
	(In millions)
Financing capacity:
Revolving credit facility	$	300.0	$	400.0	$	75.0	$	775.0
PNM New Mexico Credit Facility	—		50.0		—		50.0
Total financing capacity	$	300.0	$	450.0	$	75.0	$	825.0


Amounts outstanding as of April 25, 2014:
Revolving credit facility	$	—	$	—	$	6.0	$	6.0
PNM New Mexico Credit Facility	—		—		—		—
Letters of credit	8.6		3.2		0.3		12.1

Total short–term debt and letters of credit	8.6		3.2		6.3		18.1

Remaining availability as of April 25, 2014	$	291.4	$	446.8	$	68.7	$	806.9
Invested cash as of April 25, 2014	$	2.0	$	9.3	$	—	$	11.3

The above table excludes intercompany debt. As of April 25, 2014, TNMP had $41.2 million in borrowings from PNMR under their intercompany loan agreement. The remaining availability under the revolving credit facilities at any point in time varies based on a number of factors, including the timing of collections of accounts receivables and payments for construction and operating expenditures.

For offerings of securities registered with the SEC, PNMR has a shelf registration statement expiring in March 2014. This shelf registration statement has unlimited availability and can be amended to include additional securities, subject to certain restrictions and limitations. PNMR can ~~also~~ offer new shares of common stock through the PNM Resources Direct Plan under a ~~separate~~ SEC shelf registration statement that expires in August 2015. PNM has a shelf registration statement for up to $440.0 million of senior unsecured notes that will expire in May 2014.

Off-Balance Sheet Arrangements

~~PNMR's~~PNMR’s off-balance sheet arrangements include ~~PNM's~~PNM’s operating lease obligations for PVNGS Units 1 and 2, the EIP transmission line, and Delta. These arrangements help ensure PNM the availability of lower-cost generation needed to serve customers. See MD&A - Off-Balance Sheet Arrangements and Notes 7 9, and 169 of the Notes to Consolidated Financial Statements in the ~~2012~~2013 Annual Reports on Form 10-K. See Note 45 and Note 6 for additional information concerning the PVNGS Leases and Delta. ~~See Note 10 for additional information concerning the EIP transmission line.~~

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Commitments and Contractual Obligations

PNMR, PNM, and TNMP have contractual obligations for long-term debt, operating leases, construction expenditures, purchase obligations, and certain other long-term obligations. See MD&A - Commitments and Contractual Obligations in the ~~2012~~2013 Annual Reports on Form 10-K.

Contingent Provisions of Certain Obligations

As discussed in the ~~2012~~2013 Annual Reports on Form 10-K, PNMR, PNM, and TNMP have a number of debt obligations and other contractual commitments that contain contingent provisions. Some of these, if triggered, could affect the liquidity of the Company. In the unlikely event that the contingent requirements were to be triggered, PNMR, PNM, or TNMP could be required to provide security, immediately pay outstanding obligations, or be prevented from drawing on unused capacity under certain credit agreements. The contingent provisions also include contractual increases in the interest rate charged on certain of the ~~Company's~~Company’s short-term debt obligations in the event of a downgrade in credit ratings. The Company believes its financing arrangements are sufficient to meet the requirements of the contingent provisions. No conditions have occurred that would result in any of the above contingent provisions being implemented.

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Capital Structure

The capitalization tables below include the current maturities of long-term debt, but do not include short-term debt and do not include operating lease obligations as debt.


	September 30, 2013		December 31, 2012		March 31, 2014		December 31, 2013
PNMR
PNMR common equity	48.6	%	48.9	%	47.3	%	48.8	%
Preferred stock of subsidiary	0.3	%	0.3	%	0.3	%	0.3	%
Long-term debt	51.1	%	50.8	%	52.4	%	50.9	%
Total capitalization	100.0	%	100.0	%	100.0	%	100.0	%

PNM
PNM common equity	49.6	%	50.5	%	46.5	%	48.2	%
Preferred stock	0.4	%	0.5	%	0.4	%	0.4	%
Long-term debt	50.0	%	49.0	%	53.1	%	51.4	%
Total capitalization	100.0	%	100.0	%	100.0	%	100.0	%

TNMP
Common equity	58.9	%	59.8	%	60.3	%	59.9	%
Long-term debt	41.1	%	40.2	%	39.7	%	40.1	%
Total capitalization	100.0	%	100.0	%	100.0	%	100.0	%

OTHER ISSUES FACING THE COMPANY

Climate Change Issues

Background

According to EPA, gases that trap heat in the atmosphere are called greenhouse gases. The four primary greenhouse gases are CO₂, methane, nitrous oxide, and fluorinated gases, including chlorofluorocarbons such as ~~freon.~~Freon. In ~~2012,~~2013, GHG associated with ~~PNM's~~PNM’s interests in its generating plants were approximately ~~6.7~~7.0 million metric tons of CO₂, which comprises the vast majority of ~~PNM's~~PNM’s GHG. By comparison, the total GHG in the United States in ~~2011,~~2012, the latest year for which EPA has published this data, were approximately ~~6.7~~6.5 billion metric tons, of which approximately ~~5.6~~5.4 billion metric tons were CO₂.

PNM has several programs underway to reduce or offset ~~its~~ GHG from its resource portfolio, thereby reducing its exposure to climate change regulation. See Note ~~11.~~12. In 2011, PNM completed construction of 22 MW of utility-scale solar generation

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located at five sites on ~~PNM's~~PNM’s system throughout New Mexico. In 2013, PNM ~~is expanding~~expanded its renewable energy portfolio by constructing 21.5 MW of utility-scale solar ~~generation that will be online by~~generation. On December 18, 2013, the ~~end of the year. On July 1, 2013, PNM filed its~~NMPRC approved PNM’s 2014 renewable energy procurement plan ~~with the NMPRC~~ that ~~requests approval for~~includes construction of an additional 23 MW of utility-scale solar generation. ~~If the plan~~This additional generation is ~~approved, the proposed generation will~~anticipated to be online by the end of 2014. Since 2003 PNM has purchased the entire output of ~~the 204 MW~~ New Mexico Wind, ~~Energy Center~~which has an aggregate capacity of 204 MW, and ~~also included in the 2014 plan is a request for approval of the~~will purchase of the full output of ~~the 102 MW~~ Red Mesa Wind, ~~Center~~which has an aggregate capacity of 102 MW, beginning in January 2015. PNM has signed a 20-year PPA for the output of aLightning Dock Geothermal, which began providing power to PNM in January 2014. The current output of the facility is 4 MW and future expansion may result in up to 10 MW ~~geothermal facility to be in service in 2014.~~of generation capacity. Additionally, PNM has a customer distributed solar generation program that represented ~~almost 20~~31 MW at the end of ~~2012.~~2013 and is expected to grow to over 36 MW by the end of 2014. Once fully subscribed, the distributed solar programs will reduce PNM’s production from fossil-fueled electricity generation by 117 GWh per year. PNM offers its customers a comprehensive portfolio of energy efficiency and load management programs, with a ~~2012~~2013 budget of over $17 million, that PNM estimates saved approximately 7976 GWh of electricity in ~~2012.~~2013. Over the next 1820 years, PNM projects the expanded energy efficiency and load management programs will provide the equivalent of approximately ~~12,185~~13,565 GWh of electricity, which will avoid at least ~~6.1~~6.8 million metric tons of CO₂ based upon projected emissions from ~~PNM's~~PNM’s system-wide resources. These estimates are subject to change ~~based upon the difficulty in accurately estimating avoidance~~ because of the high uncertainty of many of the underlying variables, including changes in demand for electricity, and complex interrelationships between those ~~variables, including changes in demand for electricity.~~variables.

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Management periodically updates the Board on implementation of the corporate environmental policy and the ~~Company's~~Company’s environmental management systems, promotion of energy efficiency, and use of renewable resources. The Board is also advised of the ~~Company's~~Company’s practices and procedures to assess the sustainability impacts of operations on the environment. The Board considers associated issues around climate change, the ~~Company's~~Company’s GHG exposures, and ~~potential~~ financial consequences that might result from potential federal and/or state regulation of GHG.

As of December 31, ~~2012,~~2013, approximately ~~81.8%~~74.7% of ~~PNM's~~PNM’s generating capacity, including resources owned, leased, and ~~leased generating capacity,~~under PPAs, all of which is located within the United States, consisted of coal or gas-fired generation that produces GHG. Based on current forecasts, the Company does not expect its output of GHG from existing sources to increase significantly in the near-term. Many factors affect the amount of GHG emitted. For example, if new natural gas-fired generation resources are added to meet increased load as anticipated in ~~PNM's~~PNM’s current IRP, GHG would be incrementally increased. In addition, plant performance could impact the amount of GHG emitted. If PVNGS experienced prolonged outages, PNM might be required to utilize other power supply resources such as gas-fired generation, which could increase GHG. As described in Note ~~10,~~11, on February 15, 2013, PNM, NMED, and EPA agreed to pursue a strategy to address the regional haze requirements of the CAA at the coal-fired SJGS, which would include the shutdown of SJGS Units 2 and 3. The shutdown of Units 2 and 3 ~~will~~would result in a reduction of GHG of approximately 50 percent at SJGS. That agreement also contemplates that gas-fired generation would be built to partially replace the retired capacity. Although replacement power strategies have not been finalized, the reduction in GHG from the retirement of the coal-fired generation would be far greater than the increase in GHG from replacement with gas-fired generation. On September 5, 2013, the EIB unanimously approved a revised SIP submitted by NMED that encompassed the February 15, 2013 agreement and the revised SIP was submitted to EPA for approval on October 18, 2013. On April 30, 2014, EPA issued an advance copy of the proposed approval of the revised SIP. Final EPA action on the revised SIP is ~~projected for late~~expected by about the end of September 2014.

Because of ~~PNM's~~PNM’s dependence on fossil-fueled generation, any legislation or regulation that imposes a limit or cost on GHG could impact the cost at which electricity is produced. While PNM expects to recover that cost through rates, the timing and outcome of proceedings for cost recovery are uncertain. In addition, to the extent that any additional costs are recovered through rates, customers may reduce their ~~demand,~~usage, relocate facilities to other areas with lower energy costs, or take other actions that ultimately will adversely impact PNM.

Given the geographic location of its facilities and customers, PNM generally has not been exposed to the extreme weather events and other physical impacts commonly attributed to climate change, with the exception of periodic drought conditions. PNM’s service areas also experience high winds, forest fires, and severe thunderstorms periodically. Climate changes are generally not expected to have material consequences in the near-term. Drought conditions in northwestern New Mexico could impact the availability of water for cooling coal-fired generating plants. Water shortage sharing agreements have been in place since 2004, although no shortage has been declared due to sufficient precipitation in the San Juan River basin. PNM also has a supplemental water contract in place with the Jicarilla Apache Nation to help address any water shortages from primary sources. The contract expires on December 31, 2016. TNMP has operations in the Gulf Coast area of Texas, which experiences periodic hurricanes and drought conditions. In addition to potentially causing physical damage to TNMP-owned facilities, which disrupt the ability to transmit and/or distribute energy, hurricanes can temporarily reduce ~~customers'~~customers’ usage and demand for energy.

EPA Regulation

In April 2007, the United States Supreme Court held that EPA has the authority to regulate GHG under the CAA. This decision heightened the importance of this issue for the energy industry. In December 2009, EPA released its endangerment finding

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stating that the atmospheric concentrations of six key greenhouse gases (CO₂, methane, nitrous oxides, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride) endanger the public health and welfare of current and future generations. In May 2010, EPA released the final PSD and Title V Greenhouse Gas Tailoring Rule (the ~~"Tailoring Rule"~~“Tailoring Rule”) to address GHG from stationary sources under the CAA permitting programs. The purpose of the rule is to ~~"tailor"~~“tailor” the applicability of two programs, PSD and Title V operating permit programs, to avoid impacting millions of small GHG emitters. The rule focuses on the largest sources of GHG, including fossil-fueled electric generating units. This program currently covers new construction projects that emit GHG of at least 100,000 tons per year (even if PSD is not triggered for other pollutants). In addition, modifications at existing facilities that increase GHG by at least 75,000 tons per year will be subject to PSD permitting requirements, even if they do not significantly increase emissions of any other pollutant. ~~All of PNM's~~PNM’s fossil-fueled generating plants are potentially subject to the Tailoring Rule because of the magnitude of ~~non-GHG, but the~~GHG and other emissions. PNM’s existing plants other than Four Corners do not have any currently planned projects that would trigger PSD permitting for GHG. Four Corners may be subject to PSD review as a result of the SCR

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installation planned for Regional Haze compliance. Any newly constructed fossil-fired power plant would likely be subject to the Tailoring Rule.

On June 26, 2012, the D.C. Circuit rejected challenges to ~~EPA's~~EPA’s 2009 GHG endangerment finding, GHG standards for light-duty vehicles, PSD Interpretive Memorandum ~~(EPA's~~(EPA’s so-called GHG ~~"Timing Rule"~~“Timing Rule”), and the Tailoring Rule. The Court found that ~~EPA's~~EPA’s endangerment finding and its light-duty vehicle rule ~~"are~~“are neither arbitrary nor capricious,"” that ~~"EPA's~~“EPA’s interpretation of the governing CAA provisions is unambiguously correct,"” and that ~~"no~~“no petitioner has standing to challenge the Timing and Tailoring Rules."

” On October 15, 2013, the United States Supreme Court granted a petition for a Writ of Certiorari regarding the permitting of stationary sources that emit GHG. The Supreme Court limited the question that it will be reviewing to: ~~"Whether~~“Whether EPA permissibly determined that its regulation of greenhouse gas emissions from new motor vehicles triggered permitting requirements under the Clean Air Act for stationary sources that emit greenhouse gases."” Specifically, the case deals with whether ~~EPA's~~EPA’s determination that regulation of GHG from motor vehicles required EPA to regulate stationary sources under the PSD and Title V permitting programs. The petitioners argued that ~~EPA's~~EPA’s determination that it was required to regulate GHG under the PSD and Title V Programs was unlawful as it violates Congressional intent.

On March 27, 2012, EPA issued its proposed carbon pollution standards, under Section 111(b) of the CAA, for GHG from new fossil-fueled ~~electric generating units ("EGUs").~~EGU. The proposed NSPS set a limit of 1,000 lb of CO₂/MWh and would cover newly constructed fossil-fueled EGUs larger than 25 MW. The proposed limit was based on the performance of natural gas combined cycle technology. Therefore, coal-fired power plants would only be able to comply with the standard by using carbon capture and sequestration technology. The proposed rule included an exemption for new simple cycle EGUs. EPA accepted comment on the proposed rule through June 25, 2012, during which EPA received over 2.5 million comments. As a result of the comments, onEPA reproposed the ~~proposed rule.~~EGU NSPS as discussed below.

On June 25, 2013, President Obama announced the ~~President's~~President’s Climate Action Plan which outlines how his administration plans to cut GHG in the United States, prepare the country for the impacts of climate change, and lead international efforts to combat and prepare for global warming. The plan proposes actions that would lead to the reduction of GHG by 17% below 2005 levels by 2020. The President also issued a Presidential Memorandum to EPA to continue development of the GHG NSPS regulations for electric generators. The Presidential Memorandum establishes a timeline for the reproposal and issuance of ana GHG NSPS for new sources and a timeline for the proposal and final rule for developing carbon pollution standards, regulations, or guidelines for GHG reductions from existing ~~sources.~~sources under Section 111(d) of the CAA. EPA met the ~~President's~~President’s timeline for the reproposal of the GHG NSPS for new sources (under Section 111(b) of the CAA) by releasing the draft rule on September 20, 2013. In accordance with the Presidential Memorandum, EPA will issue a final rule in "a“a timely fashion thereafter."” EPA is also directed to issue the proposed GHG NSPS for modified and existing EGUs by June 1, 2014 and issue the final rule by June 1, 2015. Each state then must submit a SIP that addresses how the state will comply with the new regulation no later than June 30, 2016.

The Presidential Memorandum further directs EPA to allow the use of ~~"market-based instruments"~~“market-based instruments” and ~~"other~~“other regulatory ~~flexibilities"~~flexibilities” to ensure standards will allow for continued reliance on a range of energy sources and technologies and that they are developed and implemented in a manner that provides for reliable and affordable energy and to undertake the rulemaking through direct engagement with ~~States, "as~~states, “as they will play a central role in establishing and implementing standards for existing power plants,"” and with utility leaders, labor leaders, non-governmental organizations, tribal officials and other stakeholders.

~~EPA's~~EPA’s reproposed GHG NSPS for new sources published on September 20, 2013 apply only to new fossil-fired EGUs. The reproposed standard would revise requirements for new fossil-fired utility boilers, integrated gasification combined cycle units, combined and simple cycle turbines, and new sources meeting certain other criteria. New fossil fuel-fired utility boilers including coal-fired and integrated gasification combined cycle units would be required to meet an emissions limit of 1,100 pounds of CO₂ per MWh on a 12-operating month rolling average basis or an alternative limit of 1,000 to 1,050 pounds of CO₂ per MWh based on an 84-operating month average. New coal-fired facilities would only be able to meet the standard by using partial carbon capture and sequestration

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technology. New combined or simple cycle gas turbines would be subject to an emission limit of either 1,000 or 1,100 pounds of CO₂ per MWh based on whether the rated capacity of the unit is above or below 850 million BTUs per hour. The reproposed GHG NSPS removed the blanket exemption for simple-cycle turbines and instead provided an exemption for units that sell to the transmission grid less than one-third of their potential electric output over a ~~3-year~~three-year rolling average.

EPA regulation of GHG from large stationary sources will impact ~~PNM's~~PNM’s fossil-fueled EGUs. Impacts could involve investments in efficiency improvements and/or control technologies at the fossil-fueled EGUs. In setting existing source standards, EPA has historically used technology-based performance standards on emission rates. The only end-of-pipe emission control technology for coal and gas fired power plants available for GHG reduction is carbon capture and sequestration, which is not yet

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a commercially demonstrated technology. There are limited efficiency enhancement measures that may be available to a subset of the existing EGUs; however, such measures would provide only marginal GHG improvements. It is also possible EPA may allow states to consider a broader range of emission reduction measures, such as fuel switching, end use energy efficiency, or renewable energy deployment. Additional GHG control technologies for existing EGUs may become viable in the future. The costs of such improvements or technologies could impact the economic viability of some plants.

The ultimate impact of ~~EPA's~~EPA’s regulation of GHG to PNM is unknown because the regulatory requirements, including BACT implications and NSPS requirements, are in draft form or are still developing. PNM estimates that implementation of the revised SIP for BART at SJGS, which requires the installation of SNCRs on Units 1 and 4 by the later of January 2016 or 15 months after EPA approval of a revised SIP and the retirement of SJGS Units 2 and 3 by the end of 2017, will allow PNM on a system-wide basis to meet or exceed the ~~President's~~President’s GHG reduction goal of 17% below 2005 levels by ~~2020 if the goal is is to be applied on a utility-by-utility basis.~~2020. The reduction in CO₂ emissions that will result from implementation of the revised SIP may allow PNM to meet future GHG regulations; however, until such regulations are finalized, PNM is uncertain of the requirements for compliance.

Federal Legislation

Prospects for enactment of legislation imposing a new or enhanced regulatory program to address climate change in Congress are unlikely in ~~2013,~~2014, although there is growing interest among some policymakers in addressing climate change and there may be legislation in the future. Instead, EPA is the primary venue for GHG regulation in the near future, especially for coal-fired units. PNM has assessed, and continues to assess, the impacts of potential climate change legislation or regulation on its business. This assessment is preliminary and future changes arising out of the legislative or regulatory process could impact the assessment significantly. ~~PNM's~~PNM’s assessment includes assumptions regarding the specific GHG limits, the timing of implementation of these limits, the possibility of a cap and trade program including the associated costs and the availability of offsets, the development of technologies for renewable energy and to reduce emissions, and provisions for cost containment. Moreover, the assessment assumes various market reactions such as the price of coal and gas and regional plant economics. These assumptions, at best, are preliminary and speculative. However, based upon these assumptions, the enactment of climate change legislation could, among other things, result in significant compliance costs, including large capital expenditures by PNM, and could jeopardize the economic viability of certain generating facilities. See Note ~~10.~~11. In turn, these consequences could lead to increased costs to customers and affect results of operations, cash flows, and financial condition if the incurred costs are not fully recovered through regulated rates. Higher rates could also contribute to reduced ~~demand for~~usage of electricity. ~~PNM's~~PNM’s assessment process is ongoing, but too preliminary and speculative at this time for the meaningful prediction of financial impact.

State and Regional Activity

Pursuant to New Mexico law, each utility must submit an IRP to the NMPRC every three years to evaluate renewable energy, energy efficiency, load management, distributed generation, and conventional supply-side resources on a consistent and comparable basis. The IRP is required to take into consideration risk and uncertainty of fuel supply, price volatility, and costs of anticipated environmental regulations when evaluating resource options to meet supply needs of the ~~utility's~~utility’s customers. The NMPRC ~~issued an order in June 2007, requiring~~requires that New Mexico utilities factor a standardized cost of carbon emissions into their IRPs using prices ranging between $8 and $40 per metric ton of CO₂ emitted and escalating these costs by 2.5% per year. Under the NMPRC order, each utility must analyze these standardized prices as projected operating costs. Reflecting the developing nature of this issue, the NMPRC order states that these prices may be changed in the future to account for additional information or changed circumstances. However, PNM is required to use these prices for purposes of its IRP, and the prices may not reflect the costs that it ultimately will incur. ~~PNM's~~PNM’s IRP filed with the NMPRC on July 18, 2011 ~~(Note 11)~~ showed that while consideration of the NMPRC required carbon emissions costs did not significantly change the resource decisions regarding future facilities over the next 20 years, it did slightly impact the projected in-service dates of some of the identified resources. ~~Much~~Largely because future resource options are low-GHG emitting resources much higher GHG costs than assumed in the NMPRC analysis are necessary to impact future resource decisions. The primary consequence of the standardized cost of carbon emissions was an increase to generation portfolio costs.

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In recent years, New Mexico adopted regulations, which have since been repealed, that would directly limit GHG from larger sources, including EGUs, through a regional GHG cap and trade program and that would cap GHG from larger sources such as ~~electric generation units.~~EGUs. Although these rules have been repealed, PNM cannot rule out future state legislative or regulatory initiatives to regulate GHG.

On August 2, 2012, 33thirty-three New Mexico organizations representing public health, business, environmental, consumers, Native American, and other interested parties filed a petition for rulemaking with the NMPRC. The petition asked the NMPRC to issue a NOPR regarding the implementation of an Optional Clean Energy Standard for electric utilities located in New Mexico.

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The proposed standard would have utilities that elect to participate reduce their CO₂ emissions by 3% per year. Utilities that opt into the program would be assured recovery of their reasonable compliance costs. On October 4, 2012, the NMPRC held a workshop to discuss the proposed standard and whether it has authority to proceed with the NOPR. On August 23, 2013, the petitioners amended the August 2, 2012 petition and requested that the NMPRC issue a NOPR to implement a ~~"Carbon~~“Carbon Risk Reduction ~~Rule"~~Rule” for electric utilities in New Mexico. The proposed rule would require affected utilities to demonstrate a 3% per year CO₂ emission reduction from a ~~base year~~three-year average baseline period between 2005 and 2012. The proposed rule would use a credit system that provides credits for electricity production based on how much less than ~~1.0~~one metric ton of CO₂per MWh the utility emits. Credits would be retired such that 3% per year reductions are achieved from the baseline year until 2035 unless a participating utility elects to terminate the program ~~early.~~at the end of 2023. Credits would not expire and could be banked. An advisory committee of interested stakeholders would monitor the program. In addition, utilities would be allowed to satisfy their obligations by funding NMPRC approved energy efficiency programs. There has been no further action on this matter at the NMPRC.

International Accords

The Company monitors international treaties and accords such as the Kyoto Protocol and the EU Emissions Trading System to determine potential impacts to their business activities. The Company does not anticipate any direct impact near-term from international accords.

Transmission Issues

At any given time, FERC has various notices of inquiry and rulemaking dockets related to transmission issues pending. Such actions may lead to changes in FERC administrative rules or ratemaking policy, but have no time frame in which action must be taken or a docket closed with no further action. Further, such notices and rulemaking dockets do not apply strictly to PNM, but will have industry-wide effects in that they will apply to all FERC-regulated entities. PNM monitors and often submits comments taking a position in such notices and rulemaking dockets or may join in larger group responses. PNM often cannot determine the full impact of a proposed rule and policy change until the final determination is made by FERC and PNM is unable to predict the outcome of these matters.

On November 24, 2009, FERC issued Order 729 approving two Modeling, Data, and Analysis Reliability Standards ("(“Reliability ~~Standards"~~Standards”) submitted by NERC –- MOD-001-1 (Available Transmission System Capability) and MOD-029-1 (Rated System Path Methodology). Both MOD-001-1 and MOD-029-1 require a consistent approach, provided for in the Reliability Standards, to measuring the total transmission capability ~~("TTC"~~(“TTC”) of a transmission path. The TTC level established using the two Reliability Standards could result in a reduction in the available transmission capacity currently used by PNM to deliver generation resources necessary for its jurisdictional load and for fulfilling its obligations to third-party users of the PNM transmission system.

During the first quarter of 2011, at the request of PNM and other southwestern utilities, NERC advised all transmission owners and transmission service providers that the implementation of portions of the MOD-029 methodology for ~~"Flow Limited"~~“Flow Limited” paths has been delayed until such time as a modification to the standard can be developed that will mitigate the technical concerns identified by the transmission owners and transmission service providers. PNM and other western utilities filed a Standards Action Request with NERC in the second quarter of ~~2012~~2012.

NERC initiated an informal development process to address directives in Order No. 729 to modify certain aspects of the MOD standards, including MOD-001 and ~~are waiting~~MOD-029. The modifications to this standard would retire MOD-029 and require each transmission operator to determine and develop methodology for TTC values for MOD-001.

A final ballot for MOD-001-2 concluded on December 20, 2013 and received sufficient affirmative votes for approval. On February 10, 2014, NERC filed with FERC a petition for approval of MOD-001-2 and retirement of reliability standards MOD-001-1a, MOD-004-1, MOD-008-1, MOD-028-2, MOD-029-1a, and MOD-030-2. The MOD-001-2 standard will become effective on the ~~request~~first day of the calendar quarter that is 18 months after the date the standard is approved by FERC. The retirement and changes to ~~be processed through NERC's~~these MOD standards ~~development.~~will remove the risk of reduced TTC for PNM and other southwestern utilities.

In July 2011, FERC issued Order 1000 adopting new requirements for transmission planning, cost allocation, and development. Order 1000 calls for significant changes to the transmission process of WestConnect, an organization of utility companies providing transmission of electricity in the western region that includes PNM. On October 11, 2012, PNM and other WestConnect participants filed modified versions of Attachment K to their transmission tariffs to meet Order 1000 regional compliance requirements. Thirteen intervention motions were filed, with several objecting to and/or protesting various provisions

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of the filings submitted by the WestConnect participants. On December 17, 2012, the WestConnect participants filed responses

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to the issues raised by the intervenors. On March 22, 2013, FERC issued its order regarding ~~PNM's~~PNM’s and six other WestConnect FERC jurisdictional utilities compliance filings. FERC partially accepted many aspects of the filings including the governance structure that gives the transmission owners a veto authority over the regional plan and cost allocations. A major change directed by FERC is the requirement that the cost allocations be binding on identified beneficiaries and that a process be created that will result in a qualified developer being selected. WestConnect members are evaluating the order and will be required to submit revised filings. The WestConnect participants requested an extension of time to file updated compliance filings reflecting the March 22, 2013 FERC order regarding the original October 11, 2012 Attachment K submittals. On July 3, FERC issued an order granting the requests and extending the filing date to September 20, 2013. PNM and the other WestConnect FERC jurisdictional entities submitted compliance filings on September 20, ~~2013.~~2013 to address and comply with the March 22, 2013 FERC order. On July 11, 2013, the WestConnect participants submitted an additional compliance filing to address the planning and cost allocation between WestConnect and other regions.

Financial Reform Legislation

The Dodd-Frank Wall Street Reform and Consumer Protection Act ("(“Dodd-Frank Reform ~~Act"~~Act”), enacted in July 2010, includes provisions that will require certain over-the-counter derivatives, or swaps, to be centrally cleared and executed through an exchange or other approved trading facility. It also includes provisions related to swap transaction reporting and recordkeeping and may impose margin requirements on swaps that are not centrally cleared. The United States Commodity Futures Trading Commission ~~("CFTC"~~(“CFTC”) has published final rules defining several key terms related to the act and has set compliance dates for various types of market participants. The Dodd-Frank Reform Act provides exemptions from certain requirements, including an exception to the mandatory clearing and swap facility execution requirements for commercial end-users that use swaps to hedge or mitigate commercial risk. PNM expects to qualify for this exception. PNM also expects to be able to comply with its requirements under the Dodd-Frank Reform Act and related rules within the time frames required by the CFTC. However, as a result of the Dodd-Frank Reform Act and related rules, ~~PNM's~~PNM’s swap activities could be subject to increased costs, including from higher margin requirements. In addition, implementation of, and compliance with, the swaps provisions of the Dodd-Frank Reform Act and related rules by ~~PNM's~~PNM’s swap counterparties could result in increased costs. At this time, PNM cannot predict the ultimate impact the Dodd-Frank Reform Act may have on ~~PNM's~~PNM’s financial condition, results of operations, cash flows, or liquidity.

Other Matters

On March 25, 2013, a petition was filed by IBEW Local 66 with the National Labor Relations Board seeking to certify a union at TNMP for utility workers. On April 12, 2013, a second petition was filed by IBEW Local 66 with the National Labor Relations Board seeking to certify a union at TNMP for meter technicians, who were not included in the original petition. Approximately 200 employees ~~are~~were covered by the petitions. Elections to determine whether the IBEW would represent the employees were held in May 2013. The employees voted to unionize through both petitions and contract negotiations have begun. Subsequently, on June 25, 2013, a third petition was filed by IBEW Local 66 with the National Labor Relations Board seeking to include a group of three relay technicians, who were not included in the original petition. In August 2013, the relay technicians voted to unionize and contract negotiations have begun. As of December 31, 2013, TNMP had 192 employees represented by IBEW Local 66. The parties are still in negotiations on a collective bargaining agreement.

See Notes 1011 and 1112 herein and Notes 16 and 17 of the Notes to Consolidated Financial Statements in the ~~2012~~2013 Annual Reports on Form 10-K for a discussion of commitments and contingencies and rate and regulatory matters.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with GAAP requires Company management to select and apply accounting policies that best provide the framework to report the results of operations and financial position for PNMR, PNM, and TNMP. The selection and application of those policies requires management to make difficult, subjective, and/or complex judgments concerning reported amounts of revenue and expenses during the reporting period and the reported amounts of assets and liabilities at the date of the financial statements. As a result, there exists the likelihood that materially different amounts would be reported under different conditions or using different assumptions.

As of ~~September 30, 2013~~March 31, 2014, there have been no significant changes with regard to the critical accounting policies disclosed in ~~PNMR's, PNM's,~~PNMR’s, PNM’s, and ~~TNMP's~~TNMP’s ~~2012~~2013 Annual Reports on Forms 10-K. The policies disclosed included unbilled revenues, regulatory accounting, impairments, decommissioning and reclamation costs, derivatives, pension and other postretirement benefits, accounting for contingencies, income taxes, and market risk.

9287

MD&A FOR PNM

RESULTS OF OPERATIONS

PNM operates in only one reportable segment, as presented above in Results of Operations for PNMR.

MD&A FOR TNMP

RESULTS OF OPERATIONS

TNMP operates in only one reportable segment, as presented above in Results of Operations for PNMR.

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

Statements made in this filing that relate to future events or ~~PNMR's, PNM's,~~PNMR’s, PNM’s, or ~~TNMP's~~TNMP’s expectations, projections, estimates, intentions, goals, targets, and strategies are made pursuant to the Private Securities Litigation Reform Act of 1995. Readers are cautioned that all forward-looking statements are based upon current expectations and estimates. PNMR, PNM, and TNMP assume no obligation to update this information.

Because actual results may differ materially from those expressed or implied by these forward-looking statements, PNMR, PNM, and TNMP caution readers not to place undue reliance on these statements. ~~PNMR's, PNM's,~~PNMR’s, PNM’s, and ~~TNMP's~~TNMP’s business, financial condition, cash flows, and operating results are influenced by many factors, which are often beyond their control, that can cause actual results to differ from those expressed or implied by the forward-looking statements. These factors include:

The ability of PNM and TNMP to recover costs and earn allowed returns in regulated jurisdictions, including recovery of the net book value of SJGS Units 2 and 3 at the date of their proposed early retirement as contemplated in the revised SIP to comply with the regional haze provisions of the CAA

The ability of the Company to successfully forecast and manage its operating and capital expenditures

State and federal ~~regulatory, legislative, and judicial decisions and actions on ratemaking, tax, and other matters~~

~~State and federal~~ regulation or legislation relating to environmental matters, including the approval of the revised SIP for SJGS’s compliance with the CAA, the resultant costs of compliance, and other impacts on the operations and economic viability of ~~PNM's~~PNM’s generating plants

The impacts on the electricity usage of the ~~Company's~~Company’s customers due to performance of state, regional, and national economies and mandatory energy efficiency measures, weather, seasonality, and other changes in supply and demand

~~The risk that reliability standards regarding available transmission capacity~~State and federal regulatory, legislative, and judicial decisions and actions on ratemaking, tax, and other ~~FERC rulemakings may negatively impact~~matters

Uncertainty surrounding the ~~operation~~status of ~~PNM's transmission system~~PNM’s participation in jointly-owned generation projects resulting from the scheduled expiration of the operational agreements for SJGS and Four Corners, as well as the fuel supply agreement for SJGS, including potential restructuring and approval issues at SJGS and Four Corners necessary for operational and environmental compliance matters

Uncertainty regarding the requirements and related costs of decommissioning power plants and coal mines supplying certain power plants, as well as the ability to recover decommissioning costs from customers

The performance of generating units, transmission systems, and distribution systems, which could be negatively affected by operational issues, extreme weather conditions, terrorism, and cybersecurity breaches

Variability of prices and volatility and liquidity in the wholesale power and natural gas markets

Changes in price and availability of fuel and water supplies, including the ability of the mines supplying coal to ~~PNM's~~PNM’s coal-fired generating units and the companies involved in supplying nuclear fuel to provide adequate quantities of fuel

Uncertainty surrounding the status of PNM's participation in jointly-owned generation projects resulting from the scheduled expiration of the operational and fuel supply agreements for the projects, including potential restructuring and approval issues at SJGS and Four Corners necessary for operational and environmental compliance matters

The risks associated with completion of generation, transmission, distribution, and other projects

Regulatory, financial, and operational risks inherent in the operation of nuclear facilities, including spent fuel disposal uncertainties

~~Uncertainty~~The risk that reliability standards regarding available transmission capacity and other FERC rulemakings may negatively impact the ~~requirements and related costs~~operation of ~~decommissioning power plants and coal mines supplying certain power plants, as well as the ability to recover decommissioning costs from customers~~PNM’s transmission system

The ~~Company's~~Company’s ability to access the financial markets, including disruptions in the credit markets, actions by ratings agencies, and fluctuations in interest rates

The potential unavailability of cash from ~~PNMR's~~PNMR’s subsidiaries due to regulatory, statutory, or contractual restrictions

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The impacts of decreases in the values of marketable equity securities maintained to provide for decommissioning, reclamation, pension benefits, and other ~~postretirement~~post employment benefits

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Commodity and counterparty credit risk transactions and the effectiveness of risk management

The outcome of legal proceedings, including the extent of insurance coverage

Changes in applicable accounting principles

Any material changes to risk factors occurring after the filing of ~~PNMR's, PNM's,~~PNMR’s, PNM’s, and ~~TNMP's~~TNMP’s ~~2012~~2013 Annual Reports on Form 10-K are disclosed in Item 1A, Risk Factors, in Part II of this Form 10-Q.

For information about the risks associated with the use of derivative financial instruments, see Item 3. ~~"Quantitative~~“Quantitative and Qualitative Disclosures About Market Risk."”

SECURITIES ACT DISCLAIMER

Certain securities described or cross-referenced in this report have not been registered under the Securities Act of 1933, as amended, or any state securities laws and may not be reoffered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act of 1933 and applicable state securities laws. This Form 10-Q does not constitute an offer to sell or the solicitation of an offer to buy any securities.

WEBSITES

The PNMR website, www.pnmresources.com, is an important source of Company information. New or updated information for public access is routinely posted. PNMR encourages analysts, investors, and other interested parties to register on the website to automatically receive Company information by e-mail. This information includes news releases, notices of webcasts, and filings with the SEC. Participants can unsubscribe at any time and will not receive information that was not requested.

Our Internet addresses are:

PNMR: www.pnmresources.com

PNM: www.pnm.com

TNMP: www.tnmp.com

The contents of these websites are not a part of this Form 10-Q. The SEC filings of PNMR, PNM, and TNMP, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, are accessible free of charge on the PNMR website as soon as reasonably practicable after they are filed with, or furnished to, the SEC. These reports are also available in print upon request from PNMR free of charge.

Also available on the ~~Company's~~Company’s website at www.pnmresources.com/investors/governance.cfm and in print upon request from any shareholder are our:

Corporate Governance Principles

Code of Ethics (Do the Right Thing-Principles of Business Conduct)

Charters of the Audit and Ethics Committee, Nominating and Governance Committee, Compensation and Human Resources Committee, and Finance Committee

The Company will post amendments to or waivers from its code of ethics (to the extent applicable to the ~~Company's~~Company’s executive officers and directors) on its website.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company manages the scope of its various forms of risk through a comprehensive set of policies and procedures with oversight by senior level management through the RMC. The ~~Board's~~Board’s Finance Committee sets the risk limit parameters. The RMC has oversight over the risk control organization. The RMC is assigned responsibility for establishing and enforcing the policies, procedures and limits and evaluating the risks inherent in proposed transactions on an enterprise-wide basis. The ~~RMC's~~RMC’s responsibilities include:

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• ~~Establishment of~~Establishing policies regarding risk exposure levels and activities in each of the business segments

• ~~Approval of~~Approving the types of derivatives entered into for hedging

• ~~Review~~Reviewing and ~~approval of~~approving hedging risk activities

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• ~~Establishment of~~Establishing policies regarding counterparty exposure and limits

• ~~Authorization~~Authorizing and ~~delegation of~~delegating transaction limits

• ~~Review~~Reviewing and ~~approval of~~approving controls and procedures for derivative activities

• ~~Review~~Reviewing and ~~approval of~~approving models and assumptions used to calculate mark-to-market and market risk exposure

• Proposing risk limits to the ~~Board's~~Board’s Finance Committee for its approval

• Quarterly reporting to the ~~Board's~~Board’s Audit and Finance Committees on these ~~activities.~~activities

To the extent an open position exists, fluctuating commodity prices, interest rates, equity prices, and economic conditions can impact financial results and financial position, either favorably or unfavorably. As a result, the Company cannot predict with

certainty the impact that its risk management decisions may have on its businesses, operating results, or financial position.

Commodity Risk

Information concerning accounting for derivatives and the risks associated with commodity contracts is set forth in Note 5,7, including a summary of the fair values of mark-to-market energy related derivative contracts included in the Condensed Consolidated Balance Sheets. During the ~~nine~~three months ended ~~September 30, 2013~~March 31, 2014 and the year ended December 31, ~~2012,~~2013, PNMR and PNM had no commodity derivative instruments designated as cash flow hedging instruments.

Commodity contracts, other than those that do not meet the definition of a derivative under GAAP, ~~other than~~and those derivatives designated as normal purchases and normal sales, are recorded at fair value on the Condensed Consolidated Balance Sheets. The following table details the changes in ~~PNMR's~~PNMR’s net asset or liability balance sheet position for mark-to-market energy ~~transactions:~~transactions.


	Nine Months Ended						Three Months Ended
	September 30,						March 31,
	2013			2012			2014			2013
Economic Hedges	(In thousands)						(In thousands)
Sources of fair value gain (loss):
Net fair value at beginning of period	$	1,204		$	(356	)	$	3,273		$	1,204
Amount realized on contracts delivered during period	(306		)	(3,695		)	1,201			(1,055		)
Changes in fair value	6,164			619			(3,962		)	(3,847		)
Net mark-to-market change recorded in earnings	5,858			(3,076		)	(2,761		)	(4,902		)
Net change recorded as regulatory assets and liabilities	601			(42		)	(388		)	(105		)
Net fair value at end of period	$	7,663		$	(3,474	)	$	124		$	(3,803	)

The following table provides the maturity of PNMR's net assets (liabilities) ~~other than cash flow hedges,~~, giving an indication of ~~the calendar year in which~~when these mark-to-market amounts will settle and generate (use) cash.

Fair Value of Mark-to-Market Instruments at ~~September 30, 2013~~March 31, 2014


	Settlement Dates									Settlement Dates
	2013		2014		2015		2016			2014			2015		2016
	(In thousands)									(In thousands)
Economic hedges
Prices actively quoted	$	—	$	—	$	—	$	—		$	—		$	—	$	—
Prices provided by other external sources	1,298		4,464		2,269		(368		)	(1,853		)	2,337		(360		)
Prices based on models and other valuations	—		—		—		—			—			—		—
Total	$	1,298	$	4,464	$	2,269	$	(368	)	$	(1,853	)	$	2,337	$	(360	)

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PNM measures the market risk of its long-term contracts and wholesale activities using a Monte Carlo VaR simulation model to report the possible loss in value from price ~~movements and~~movements. VaR is not a measure of the potential accounting mark-to-market loss. The quantitative risk information is limited by the parameters established in creating the model. The Monte Carlo VaR methodology employs the following critical parameters: historical volatility estimates, market values of all contractual commitments, a three-day holding period, seasonally adjusted and cross-commodity correlation estimates, and a 95% confidence

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level. The instruments being evaluated may trigger a potential loss in excess of calculated amounts if changes in commodity prices exceed the confidence level of the model used.

PNM measures VaR for the positions in its wholesale portfolio ~~that are not~~(not covered by ~~a FPPAC.~~the FPPAC). For the ~~nine~~three months ended ~~September 30,~~March 31, 2014, the high, low, and average VaR amounts were $0.9 million, $0.6 million, and $0.7 million. For the year ended December 31, 2013, the high, low, and average VaR amounts were $1.4 million, $0.6 million, and ~~$1.0 million. For the year ended~~ ~~December 31, 2012, the high, low, and average VaR amounts were $1.4 million, $0.3 million, and $0.6~~$0.9 million. At ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012~~2013, the VaR amounts for the PNM wholesale portfolio were $0.7 million and ~~$0.5~~$0.6 million.

The VaR limits, which were not exceeded during the ~~nine~~three months ended ~~September 30, 2013~~March 31, 2014 or the year ended December 31, ~~2012~~2013, represent an estimate of the potential gains or losses that could be recognized on the ~~Company's~~Company’s portfolios, subject to market risk, given current volatility in the market, and are not necessarily indicative of actual results that may occur, since actual future gains and losses will differ from those estimated. Actual gains and losses may differ due to actual fluctuations in market prices, operating exposures, and the timing thereof, as well as changes to the underlying portfolios during the year.

Credit Risk

The Company is exposed to credit risk from its retail and wholesale customers, as well as the counterparties to derivative instruments. The Company conducts counterparty risk analysis across business segments and uses a credit management process to assess the financial conditions of counterparties.

The following table provides information related to ~~PNMR's~~PNMR’s credit exposure by the credit worthiness (credit rating) and concentration of credit risk for counterparties to derivative transactions. All credit exposures at ~~September 30, 2013~~March 31, 2014 will mature in less than two ~~years, except for $0.8 million that matures in the fourth quarter of 2015.~~years.

Schedule of Credit Risk Exposure

~~September 30, 2013~~
March 31, 2014


Rating ⁽¹⁾	Credit Risk Exposure⁽²⁾		Number of Counter-parties >10%	Credit Risk Exposure of Counter-parties >10%		Credit Risk Exposure⁽²⁾		Number of Counter-parties >10%	Net Exposure of Counter-parties >10%
	(Dollars in thousands)					(Dollars in thousands)
External ratings:
Investment grade	$	12,644	2	$	11,281	$	9,815	1	$	8,426
Non-investment grade	—		—	—		—		—	—
Split ratings	—
Internal ratings:
Investment grade	548		—	—		905		—	—
Non-investment grade	88		—	—		345		—	—
Total	$	13,280		$	11,281	$	11,065		$	8,426

⁽¹⁾

The rating ~~"Investment Grade"~~“Investment Grade” is for counterparties, or a guarantor, with a minimum S&P rating of BBB- or ~~Moody's~~Moody’s rating of Baa3. The category ~~"Internal~~“Internal Ratings - Investment ~~Grade"~~Grade” includes those counterparties that are internally rated as investment grade in accordance with the guidelines established in the ~~Company's~~Company’s credit policy.

⁽²⁾

The Credit Risk Exposure is the gross credit exposure, including long-term contracts (other than firm-requirements wholesale customers), forward sales, and short-term sales. The exposure captures the amounts from receivables/payables for realized transactions, delivered and unbilled revenues, and mark-to-market gains/losses. Gross exposures can be offset according to legally enforceable netting arrangements but are not reduced by posted credit collateral. At ~~September 30, 2013~~March 31, 2014, PNMR held ~~no credit~~$0.1 million of cash collateral to offset its credit exposure.

~~The Company provides for losses due to market and credit risk.~~ Net credit risk for the ~~Company's~~Company’s largest counterparty as of ~~September 30, 2013~~March 31, 2014 was ~~$7.5~~$8.4 million.

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The PVNGS lessor notes are not exposed to credit risk, since the notes are repaid as PNM makes payments on the underlying leases. Other investments have no significant counterparty credit risk.

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Interest Rate Risk

The majority of the ~~Company's~~Company’s long-term debt is fixed-rate debt and does not expose earnings to a major risk of loss due to adverse changes in market interest rates. However, the fair value of ~~PNMR's~~PNMR’s consolidated long-term debt instruments would increase by ~~3.6%~~2.1%, or ~~$69.3~~$43.1 million, if interest rates were to decline by 50 basis points from their levels at ~~September 30, 2013~~March 31, 2014. In general, an increase in fair value would impact earnings and cash flows to the extent not recoverable in rates if all or a portion of debt instruments were acquired in the open market prior to their maturity. As described in Note 6 of the Notes to Consolidated Financial Statements in the 2013 Annual Reports on Form 10-K, TNMP has long-term debt of $50.0 million that bears interest at a variable rate. However, TNMP has also entered into a hedging arrangement that effectively results in this debt bearing interest at a fixed rate, thereby eliminating interest rate risk. At ~~October~~April 25, ~~2013~~2014, PNMR, PNM, and TNMP had zero, zero, and ~~$7.0~~$6.0 million of short term debt outstanding under their revolving credit facilities, which allow for a maximum aggregate borrowing capacity of $300.0 million for PNMR, $400.0 million for PNM, and $75.0 million for TNMP. ~~These~~PNM had no borrowings under its $50.0 million PNM New Mexico Credit Facility at April 25, 2014. The revolving credit facilities, the PNM New Mexico Credit Facility, the $175.0 million PNM 2014 Term Loan Agreement, and the $100.0 million PNMR Term Loan Agreement bear interest at variable rates, which averaged ~~1.30%~~1.15% for the TNMP on ~~October 25, 2013~~ ~~borrowings. At~~ ~~October 25, 2013, PNMR had outstanding borrowings of $100.0 million under~~Revolving Credit Facility, 1.01% for the PNMR Term Loan Agreement, and ~~PNM had outstanding borrowings of $75.0 million under~~1.10% for the PNM 2014 Term Loan ~~Agreement. The term loans bear interest at variable rates, which were 1.31% for PNMR~~Agreement on April 25, 2014, and ~~1.44% for PNM at~~ ~~October 25, 2013. The~~the Company is exposed to interest rate risk to the extent of future increases in variable interest rates.

The investments held by PNM in ~~the NDT~~trusts for decommissioning and ~~trust for post-term~~ reclamation ~~of the coal mines serving SJGS~~ had an estimated fair value of ~~$211.4~~$230.3 million at ~~September 30, 2013~~March 31, 2014, of which ~~32.3%~~40.5% were fixed-rate debt securities that subject PNM to risk of loss of fair value with movements in market interest rates. If interest rates were to increase by 50 basis points from their levels at ~~September 30, 2013~~March 31, 2014, the decrease in the fair value of the fixed-rate securities would be ~~3.4%~~3.3%, or ~~$2.3~~$3.1 million.

PNM does not directly recover or return through rates any losses or gains on the securities, including equity investments discussed below, in the trusts for ~~nuclear~~ decommissioning and reclamation. However, the overall performance of these trusts does enter into the periodic determinations of expense and funding levels, which are factored into the ~~ratemaking~~rate making process to the extent applicable to regulated operations. PNM is at risk for shortfalls in funding of obligations due to investment losses, including those from the equity market risks discussed below to the extent not ultimately recovered through rates charged to customers.

Equity Market Risk

The ~~NDT~~investments held by PNM in trusts for decommissioning and ~~the trust for post-term~~ reclamation ~~of the coal mines serving SJGS hold~~include certain equity securities at ~~September 30, 2013~~March 31, 2014. These equity securities expose PNM to losses in fair value should the market values of the underlying securities decline. At ~~September 30, 2013, these equity~~Equity securities ~~were valued at $118.7 million.~~comprised 57.7% of the securities held by various trusts as of March 31, 2014. A hypothetical 10% decrease in equity prices would reduce the fair values of these funds by ~~$11.9~~$13.3 million.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

As of the end of the period covered by this quarterly report, each of PNMR, PNM, and TNMP conducted an evaluation under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer of each of PNMR, PNM, and TNMP concluded that the disclosure controls and procedures are effective.

Changes in internal controls

There have been no changes in each of ~~PNMR's, PNM's,~~PNMR’s, PNM’s, and ~~TNMP's~~TNMP’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the quarter ended ~~September 30, 2013~~March 31, 2014 that have materially affected, or are reasonably likely to materially affect, each of ~~PNMR's, PNM's,~~PNMR’s, PNM’s, and ~~TNMP's~~TNMP’s internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Notes 1011 and 1112 for information related to the following matters, for PNMR, PNM, and TNMP, incorporated in this item by reference.

Note 1011

The Clean Air Act - Regional Haze - SJGS

The Clean Air Act - Regional Haze - Four Corners

The Clean Air Act - Four Corners BART FIP Challenge

The Clean Air Act - Regional Haze Challenges

The Clean Air Act - ~~SJGS Operating Permit Challenge~~

~~The Clean Air Act -~~ Citizen Suit Under the Clean Air Act

The Clean Air Act - Four Corners Clean Air Act Lawsuit

WEG v. OSM NEPA Lawsuit

Navajo Nation Environmental Issues

~~Endangered Species Act~~

Santa Fe Generating Station

Continuous Highwall Mining Royalty Rate

SJCC Arbitration

Four Corners Severance Tax Assessment

PVNGS Water Supply Litigation

San Juan River Adjudication

Rights-of-Way Matter

Complaint Against Southwestern Public Service Company

Navajo Nation Allottee Matters

~~TGP Complaint~~

Note 1112

PNM - ~~Renewable Portfolio Standard~~

~~PNM - Renewable Energy Rider~~

~~PNM - Energy Efficiency and Load Management~~

~~PNM - 2010 Electric Rate Case and~~ FPPAC

~~PNM - Integrated Resource Plan~~

~~PNM - Emergency FFPAC~~ Continuation Application

PNM - Applications for Approvals to Purchase Delta

PNM - Application for Approval of La Luz Generating Station

PNM - San Juan Generating Station Units 2 and 3 Retirement

PNM - ~~Transmission Rate Case~~

~~PNM -~~ Formula Transmission Rate Case

~~PNM - Tri-State Complaint~~

~~PNM - Firm-Requirements Wholesale Customers~~

TNMP - Advanced Meter System Deployment ~~and Surcharge Request~~

~~TNMP - Energy Efficiency~~

TNMP - Transmission Cost of Service Rates

See also Climate Change Issues under Other Issues Facing the Company in MD&A. The third ~~paragraphs~~paragraph under State and Regional Activity is incorporated in this item by reference.

ITEM 1A. RISK FACTORS

As of the date of this report, there have been no material changes with regard to the Risk Factors disclosed in ~~PNMR's, PNM's,~~PNMR’s, PNM’s, and ~~TNMP's~~TNMP’s Annual Reports on Form 10-K for the year ended December 31, ~~2012~~2013.

ITEM 5. OTHER INFORMATION

Amendment to PVNGS Participation Agreement

PNM, along with APS, SCE, Salt River Project Agricultural Improvement and Power District, El Paso Electric Company, Southern California Public Power Authority, and Department of Water and Power of the City of Los Angeles, are parties to a certain agreement entitled Arizona Nuclear Power Project Participation Agreement, dated as of August 23, 1973, as amended by fifteen amendments (as so amended, the “Participation Agreement”). The Arizona Nuclear Power Project is also known as PVNGS.

The Participation Agreement was further amended by Amendment Number 16, which was signed by the last of the parties on April 28, 2014. The purpose of Amendment Number 16 is to extend the expiration date of the Participation Agreement to align with the license extensions granted by the NRC on April 21, 2011 for each of the three units at PVNGS. The latest expiration date

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of the original operating licenses had been November 25, 2027, which was extended by the NRC to November 25, 2047. Also, in accordance with Amendment Number 16, the term of the Participation Agreement would be automatically extended in the event of future extensions of the NRC operating licenses.

Leases of Interests in PVNGS Unit 2

See Note 6 for a discussion of PNM’s PVNGS Unit 2 leases. On May 1, 2014, PNM and PNMR Development, a wholly owned subsidiary of PNMR, entered into a letter agreement (the “Cypress Letter Agreement”) with Cypress Verde LLC and Cypress Second PV Partnership (together, the “Cypress Entities”). The Cypress Entities are the respective lessors under two (the “Cypress Leases”) of the three Unit 2 leases for which notices were given on January 13, 2014 that PNM would exercise its fair market value purchase option. Consistent with the Cypress Leases and such notices, the Cypress Letter Agreement specifies the fair market value of the 32.76 MW of generating capacity subject to both of the Cypress Leases as of the end of the original lease term, January 15, 2016. The agreed fair market value in total for both of the Cypress Leases as of January 15, 2016 is $85.2 million. The agreement with respect to such fair market value is binding on PNM and the Cypress Entities.

The Cypress Letter Agreement also constitutes a letter of intent containing non-binding terms relating to the possible purchase of the entities that own the leased assets by PNMR Development prior to the expiration of the leases on January 15, 2016. The prices for the early purchase of the interests would depend on the actual date of the purchase and range from $79.9 million if the purchase were to take place on June 1, 2014 up to $85.2 million if the purchase were to take place on January 14, 2016. In addition, an amount equal to the lessors’ equity return portion of the future lease payments discounted to the early purchase date would be due upon an early purchase. Such amount would be $5.8 million on June 1, 2014 and would decline to $1.2 million on January 14, 2016. Any obligation of PNMR Development to purchase such interests is subject to appropriate approvals by the Board and the board of PNMR Development and the negotiation of acceptable definitive agreements. PNMR and PNM are unable to predict whether or not the early purchase of the Cypress Leases by PNMR Development will take place prior to the expiration of the leases, at which time PNM is otherwise obligated to purchase the leased assets in accordance with its January 13, 2014 notices.

ITEM 6. EXHIBITS



3.1	PNMR	Articles of Incorporation of PNMR, as amended to date (incorporated by reference to Exhibit 3.1 to ~~PNMR's~~PNMR’s Current Report on Form 8-K filed November 21, 2008)

3.2	PNM	Restated Articles of Incorporation of PNM, as amended through May 31, 2002 (incorporated by reference to Exhibit 3.1.1 to ~~PNM's~~PNM’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002)

3.3	TNMP	Articles of Incorporation of TNMP, as amended through July 7, 2005 (incorporated by reference to Exhibit 3.1.2 to ~~TNMP's~~TNMP’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005)

3.4	PNMR	Bylaws of PNMR, with all amendments to and including December 8, 2009 (incorporated by reference to Exhibit 3.1 to ~~PNMR's~~PNMR’s Current Report on Form 8-K filed December 11, 2009)

3.5	PNM	Bylaws of PNM, with all amendments to and including May 31, 2002 (incorporated by reference to Exhibit 3.1.2 to ~~PNM's~~PNM’s Report on Form 10-Q for the fiscal quarter ended June 30, 2002)

3.6	TNMP	Bylaws of TNMP, with all amendments to and including June 18, 2013 (incorporated by reference to Exhibit 3.6 to ~~TNMP's~~TNMP’s Current Report on Form 8-K filed June 20, 2013)

10.1	PNMR	PNM Resources, Inc. 2014 Officer Annual Incentive Plan dated March 20, 2014

10.2	PNMR	PNM Resources, Inc. 2014 Long-Term Incentive Plan dated March 20, 2014

10.3	PNM	Amendment Number 16, effective as of April 28, 2014, to the Arizona Nuclear Power Project Participation Agreement, dated August 23, 1973, among Arizona Public Service Company, Salt River Project Agricultural Improvement and Power District, Southern California Edison Company, Public Service Company of New Mexico, El Paso Electric Company, Southern California Public Power Authority, and Department of Water and Power of the City of Los Angeles.

10.4	PNM	Letter Agreement dated May 1, 2014, among PNM, PNMR Development and Management Corporation, Cypress Verde LLC, and Cypress Second PV Partnership.

12.1	PNMR	Ratio of Earnings to Fixed Charges

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12.2	PNM	Ratio of Earnings to Fixed Charges

12.3	TNMP	Ratio of Earnings to Fixed Charges

31.1	PNMR	Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	PNMR	Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.3	PNM	Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.4	PNM	Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.5	TNMP	Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.6	TNMP	Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002



32.1	PNMR	Chief Executive Officer and Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2	PNM	Chief Executive Officer and Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.3	TNMP	Chief Executive Officer and Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS	PNMR, PNM, and TNMP	XBRL Instance Document

101.SCH	PNMR, PNM, and TNMP	XBRL Taxonomy Extension Schema Document

101.CAL	PNMR, PNM, and TNMP	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	PNMR, PNM, and TNMP	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	PNMR, PNM, and TNMP	XBRL Taxonomy Extension Label Linkbase Document

101.PRE	PNMR, PNM, and TNMP	XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.



		PNM RESOURCES, INC. PUBLIC SERVICE COMPANY OF NEW MEXICO TEXAS-NEW MEXICO POWER COMPANY
		(Registrants)


Date:	~~November 1, 2013~~May 2, 2014	/s/ Thomas G. Sategna
		Thomas G. Sategna
		Vice President and Corporate Controller
		(Officer duly authorized to sign this report)

~~100~~96



	Attributable to PNM
									Total PNM Common Stockholder's Equity			Non- controlling Interest in Valencia

	Common Stock		AOCI			Retained Earnings									Total Equity
	Common Stock		AOCI			Retained Earnings									Total Equity
	(In thousands)
Balance at December 31, 2012	$	1,061,776	$	(81,414	)	$	273,701		$	1,254,063		$	80,843		$	1,334,906
Valencia's transactions with its owner	—		—			—			—			(13,477		)	(13,477		)
Net earnings	—		—			85,516			85,516			10,904			96,420
Total other comprehensive income	—		8,841			—			8,841			—			8,841
Dividends declared on preferred stock	—		—			(396		)	(396		)	—			(396		)
Dividends declared on common stock	—		—			(68,028		)	(68,028		)	—			(68,028		)
Balance at September 30, 2013	$	1,061,776	$	(72,573	)	$	290,793		$	1,279,996		$	78,270		$	1,358,266