UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
þ
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedJune 30, 2007
For the quarterly period ended March 31, 2007
     
Commission
 
Name of Registrants, State of Incorporation,
 
I.R.S. Employer
File Number
 
Address and Telephone Number
 
Identification No.
001-32462 PNM Resources, Inc. 85-0468296
  (A New Mexico Corporation)  
  Alvarado Square  
  Albuquerque, New Mexico 87158  
  (505) 241-2700  
     
001-06986 Public Service Company of New Mexico 85-0019030
  (A New Mexico Corporation)  
  Alvarado Square  
  Albuquerque, New Mexico 87158  
  (505) 241-2700  
     
002-97230 Texas-New Mexico Power Company 75-0204070
  (A Texas Corporation)  
  4100 International Plaza,  
  P.O. Box 2943  
  Fort Worth, Texas 76113  
  (817) 731-0099  
Indicate by check mark whether PNM Resources, Inc. (“PNMR”) and Public Service Company of New Mexico (“PNM”) (1) have 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) have been subject to such filing requirements for the past 90 days. YESþ NOüo NO

Indicate by check mark whether Texas-New Mexico Power Company (“TNMP”) (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.
YESYES o NOþNO 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 PNMR is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act).

Large accelerated filer Large accelerated filerþ                    Accelerated filero                    Non-accelerated fileroü
Accelerated filer
Non-accelerated filer

Indicate by check mark whether each of PNM and TNMP is a large accelerated filer, accelerated filer, or non-accelerated filer (as defined in Rule 12b-2 of the Act).

Large accelerated filero                    Accelerated filero                    Non-accelerated filerþ
Large accelerated filer
Accelerated filer
Non-accelerated filer ü

Indicate by check mark whether any of the registrants is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YESNO üo

NOþ
As of MayAugust 1, 2007, 76,687,48076,726,852 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 MayAugust 1, 2007 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 MayAugust 1, 2007 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 Form 10-Q represents separate filings by PNMR, PNM and TNMP. Information herein relating to an individual registrant is filed by that registrant on its own behalf. PNM makes no representations as to the information relating to PNMR and its subsidiaries other than PNM (and its subsidiary). TNMP makes no representations as to the information relating to PNMR and its subsidiaries other than TNMP (and its subsidiaries). When this Form 10-Q is incorporated by reference into any filing with the SEC made by PNM or TNMP, the portions of this Form 10-Q that relate to PNMR and its subsidiaries other than PNM (and its subsidiary) or TNMP (and its subsidiaries), respectively, are not incorporated by reference therein.
 

ii

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

INDEX

 
Page No.
  
GLOSSARY
 1
PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
 
PNM RESOURCES, INC. AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 4
Three Months Ended March 31, 2007 and 2006 
CONDENSED CONSOLIDATED BALANCE SHEETS
 5
March 31, 2007 and December 31, 2006 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 7
Three Months Ended March 31, 2007 and 2006 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 9
Three Months Ended March 31, 2007 and 2006 
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY 
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 10
Three Months Ended March 31, 2007 and 2006 
CONDENSED CONSOLIDATED BALANCE SHEETS
 11
March 31, 2007 and December 31, 2006 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 13
Three Months Ended March 31, 2007 and 2006 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 15
Three Months Ended March 31, 2007 and 2006 
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 16
Three Months Ended March 31, 2007 and 2006 
CONDENSED CONSOLIDATED BALANCE SHEETS
 17
March 31, 2007 and December 31, 2006 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 19
Three Months Ended March 31, 2007 and 2006 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 21
Three Months Ended March 31, 2007 and 2006 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
22
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
63 
AND RESULTS OF OPERATIONS 58
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURESDISCLOSURE ABOUT MARKET RISK
 8594
ITEM 4. CONTROLS AND PROCEDURES
 94100
PART II. OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 96102
ITEM 1A. RISK FACTORS
 96102
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
102
ITEM 6. EXHIBITS
 97103
SIGNATURE
 98104
Exhibit 2.1
Exhibit 4.23
Exhibit 12.1
Exhibit 12.2
Exhibit 31.1
Exhibit 31.2
Exhibit 31.3
Exhibit 31.4
Exhibit 31.5
Exhibit 31.6
Exhibit 32.1
Exhibit 32.2
Exhibit 32.3
Exhibit 32.4
Exhibit 32.5
Exhibit 32.6

i

iii
GLOSSARY

Definitions: 
AftonAfton Generating Station
ALJAdministrative Law Judge
AlturaAltura Power L.P.
APSArizona Public Service Company
AvistarAvistar, Inc.
BARTBest Available Retrofit Technology
BoardBoard of Directors of PNMR
BTUBritish Thermal Unit
Cal PXCalifornia Power Exchange
Cal ISOCalifornia Independent System Operator
CascadeCascade Investment, L.L.C.
CompanyPNM Resources, Inc. and Subsidiaries
ConstellationConstellation Energy Commodities Group, Inc.
CTCCompetition Transition Charge
DecathermMillion BTUs
EaREarnings at Risk
ECJVECJV Holdings, LLC
ECMTEnergyCo Marketing and Trading, LLC
EEIEdison Electric Institute
EIPEastern Interconnection Project
EITFEmerging Issues Task Force
EnergyCoEnergyCo, LLC, a joint venture between PNMR and ECJV
EPAUnited States Environmental Protection Agency
ERCOTElectric Reliability Council of Texas
ESIElectric Service Identifier
ESPPEmployee Stock Purchase Plan
FASBFinancial Accounting Standards Board
FCPSPFirst Choice Power Special Purpose, L.P.
FERCFederal Energy Regulatory Commission
FINFASB Interpretation Number
FIPFederal Implementation Plan
First ChoiceFirst Choice Power, L. P. and Subsidiaries
Four CornersFour Corners Power Plant
GAAPGenerally Accepted Accounting Principles in the United States of America
GWhGigawatt hours
ISOIndependent System Operator
LunaLuna Energy Facility
MD&AManagement’s Discussion and Analysis of Financial Condition and Results of Operations
MMBTUsMillion BTUs
Moody’sMoody’s Investor Services, Inc.
MWMegawatt
MWhMegawatt Hour
Navajo Acts
Navajo Nation Air Pollution Prevention and Control Act, the Navajo NationSafeNation Safe Drinking Water Act, and the
Navajo Nation Pesticide Act

1

1


Definitions:
NDTNuclear Decommissioning Trusts for PVNGS
Ninth CircuitUnited States Court of Appeals for the Ninth Circuit
NMEDNew Mexico Environment Department
NMPRCNew Mexico Public Regulation Commission
NOPRNotice of Proposed Rulemaking
NSPSNew Source Performance Standards
NSRNew Source Review
NYMEXNew York Mercantile Exchange
OATTOpen Access Transmission Tariff
O&MOperations and Maintenance
PCRBsPollution Control Revenue Bonds
PGACPurchased Gas Adjustment Clause
PG&EPacific Gas and Electric Co.
PNMPublic Service Company of New Mexico and Subsidiary
PNM FacilityPNM’s $400 Million Unsecured Revolving Credit Facility
PNMRPNM Resources, Inc. and Subsidiaries
PNMR FacilityPNMR’s $600 Million Unsecured Revolving Credit Facility
PPAPower Purchase Agreement
PSAPower Supply Agreement
PSDPrevention of Significant Deterioration
PUCTPublic Utility Commission of Texas
PVNGSPalo Verde Nuclear Generating Station
RECRenewable Energy Certificates
REPRetail Electricity Provider
RMCRisk Management Committee
RTORegional Transmission Organization
SDG&ESan Diego Gas and Electric Company
SECUnited States Securities and Exchange Commission
SFASFASB Statement of Financial Accounting Standards
SJCCSan Juan Coal Company
SJGSSan Juan Generating Station
SOAHState Office of Administrative Hearings
S&PStandard and Poors Ratings Services
TECATexas Electric Choice Act
TNMPTexas-New Mexico Power Company and Subsidiaries
TNPTNP Enterprises, Inc. and Subsidiaries
ThroughputVolumes of gas delivered, whether or not owned by the Company
Twin OaksAssets of Twin Oaks Power, L.P. and Twin Oaks Power III, L.P.
VaRValue at Risk

2


2


Accounting Pronouncements (as amended):
Accounting Pronouncements, (as amended):
EITF 03-11
EITF Issue No. 03-11 “Reporting Realized Gains and Losses on Derivative Instruments that are Subject to FASB Statement
No. 133 and Not Held for Trading Purposes”
EITF 03-13
EITF Issue No. 03-13 “Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to
Report Discontinued Operations“”
FIN 48
SAB 108
FIN No. 48 “Accounting for Uncertainty in Income Taxes”
SEC Staff Accounting Bulletin No. 108“Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”
SFAS 5
SFAS No. 5 “Accounting for Contingencies”
SFAS 57
SFAS No. 57 “Related Party Disclosures”
SFAS 71
SFAS No. 71 “Accounting for Effects of Certain Types of Regulation”
SFAS 128
SFAS No. 128 “Earnings per Share”
SFAS 133
SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities”
SFAS 141
SFAS No. 141 “Business Combinations”
SFAS 144
SFAS No.144 “Accounting for the Impairment or Disposal of Long-Lived Assets”
SFAS 149
SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”
SFAS 154
SFAS No. 154 “Accounting Changes and Error Corrections”

3

3
PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PNM RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)
                
 Three Months Ended June 30, Six Months Ended June 30, 
 2007 2006 2007 2006 
 
Three Months Ended March 31,
    (As Restated,   (As Restated, 
 
2007
 
2006
    See Note 16)   See Note 16) 
 (In thousands, except share information)  (In thousands, except share information) 
Operating Revenues:
      
Electric $436,807 $448,216  $505,376 $477,603 $942,183 $925,819 
Gas  216,484  207,476  75,136 68,869 291,620 276,345 
Other  210  109  169 197 379 306 
         
Total operating revenues  653,501  655,801  580,681 546,669 1,234,182 1,202,470 
         
        
Operating Expenses:
        
Cost of energy sold  378,520  425,972  356,533 306,500 735,053 732,472 
Administrative and general  71,206  65,305  64,341 66,311 135,547 131,616 
Energy production costs  47,500  37,587  52,256 44,038 100,080 81,949 
Depreciation and amortization  40,442  34,330  39,695 37,953 80,137 72,283 
Transmission and distribution costs  22,567  19,050  22,194 21,314 44,761 40,364 
Taxes other than income taxes  18,620  16,964  19,003 18,261 37,623 35,225 
Income taxes  13,969  10,247 
         
Total operating expenses  592,824  609,455  554,022 494,377 1,133,201 1,093,909 
         
Operating income  60,677  46,346  26,659 52,292 100,981 108,561 
         
        
Other Income and Deductions:
        
Interest income  10,788  10,151  7,041 8,916 17,829 19,067 
Gains on investment securities  70  966 
Gains on investments held by NDT 2,957 1,158 3,001 2,054 
Other income  2,012  2,201  1,890 764 3,929 3,035 
Equity in net loss of EnergyCo  (662) - 
Equity in net earnings of EnergyCo 2,272 — 1,610 — 
Carrying charges on regulatory assets  -  1,973  — 2,004 — 3,977 
Other deductions  (987) (1,516)  (5,530)  (2,497)  (6,518)  (4,013)
Other income taxes  (3,950) (5,101)
         
Net other income and deductions  7,271  8,674  8,630 10,345 19,851 24,120 
Earnings before interest charges  67,948  55,020 
                
Interest Charges :
       
 
Interest Charges:
 
Interest on long-term debt  24,009  22,531  18,734 24,267 42,743 46,798 
Other interest charges  13,838  6,032  11,158 12,231 24,996 18,263 
         
Total interest charges  37,847  28,563  29,892 36,498 67,739 65,061 
         
 
Earnings before Income Taxes
 5,397 26,139 53,093 67,620 
 
Income Taxes (Benefit) (See Note 15)
  (14,975) 10,024 2,923 25,372 
        
Preferred Stock Dividend Requirements of Subsidiary
  132  132  132 132 264 264 
                
 
Net Earnings
 $29,969 $26,325  $20,240 $15,983 $49,906 $41,984 
         
        
Net Earnings per Common Share (see Note 5):
        
Basic $0.39 $0.38  $0.26 $0.23 $0.65 $0.61 
         
Diluted $0.38 $0.38  $0.26 $0.23 $0.64 $0.61 
         
Dividends Declared per Common Share
 $0.23 $0.22  $0.23 $0.22 $0.46 $0.44 
         
The accompanying notes, as they relate to PNMR, are an integral part of these condensed consolidated financial statements.

4

4

PNM RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)
  
March 31,
 
December 31,
 
  
2007
 
2006
 
  (In thousands) 
      
ASSETS
     
Utility Plant:
     
Electric plant in service $4,278,802 $4,263,068 
Gas plant in service  732,152  721,168 
Common plant in service and plant held for future use  159,925  157,064 
   5,170,879  5,141,300 
Less accumulated depreciation and amortization  1,668,056  1,639,156 
   3,502,823  3,502,144 
Construction work in progress  262,850  230,871 
Nuclear fuel, net of accumulated amortization of $17,296 and $14,008  32,610  28,844 
        
Net utility plant  3,798,283  3,761,859 
        
Other Property and Investments:
       
Investment in PVNGS lessor notes  245,356  257,659 
Equity in net loss of EnergyCo  1,838  - 
Other investments  177,759  169,720 
Non-utility property, net of accumulated depreciation of $2,967 and $2,812  7,307  7,565 
        
Total other property and investments  432,260  434,944 
        
Current Assets:
       
Cash and cash equivalents  44,986  123,419 
Special deposits  818  5,146 
Accounts receivable, net of allowance for uncollectible accounts of $6,792 and $6,899  199,719  168,126 
Unbilled revenues  82,482  116,878 
Other receivables  73,396  73,744 
Inventories  69,712  63,329 
Regulatory assets  2,833  17,507 
Derivative instruments  54,290  59,312 
Income taxes receivable  61,526  65,210 
Other current assets  62,820  63,414 
        
Total current assets  652,582  756,085 
        
Deferred Charges:
       
Regulatory assets  547,084  553,564 
Pension asset  9,508  8,853 
Goodwill  494,513  495,738 
Other intangible assets, net of accumulated amortization of $2,380 and $2,052  101,874  102,202 
Derivative instruments  22,897  39,886 
Other deferred charges  73,401  77,703 
        
Total deferred charges  1,249,277  1,277,946 
        
  $6,132,402 $6,230,834 

The accompanying notes, as they relate to PNMR, are an integral part of these financial statements.
5

PNM RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
  
March 31,
 
December 31,
 
  
2007
 
2006
 
  (In thousands, except share information) 
      
CAPITALIZATION AND LIABILITIES
     
Capitalization:
     
Common stockholders' equity:     
Common stock outstanding (no par value, 120,000,000 shares authorized: issued     
and outstanding 76,683,386 and 76,648,472 shares) $1,039,908 $1,040,451 
Accumulated other comprehensive income, net of income tax  13,855  28,909 
Retained earnings  637,907  623,936 
Total common stockholders' equity  1,691,670  1,693,296 
Cumulative preferred stock of subsidiary without mandatory redemption       
requirements ($100 stated value, 10,000,000 shares authorized:       
115,293 issued and outstanding)  11,529  11,529 
Long-term debt  1,766,994  1,765,907 
        
Total capitalization  3,470,193  3,470,732 
        
Current Liabilities:
       
Short-term debt  739,345  764,345 
Accounts payable  190,070  214,229 
Accrued interest and taxes  55,269  98,789 
Regulatory liabilities  16,131  1,172 
Derivative instruments  49,698  71,019 
Other current liabilities  222,209  226,507 
        
Total current liabilities  1,272,722  1,376,061 
        
Long-Term Liabilities:
       
Accumulated deferred income taxes  582,501  577,443 
Accumulated deferred investment tax credits  29,383  30,236 
Regulatory liabilities  400,101  398,170 
Asset retirement obligations  62,602  61,338 
Accrued pension liability and postretirement benefit cost  132,461  134,799 
Derivative instruments  21,075  16,290 
Other deferred credits  161,364  165,765 
        
Total long-term liabilties  1,389,487  1,384,041 
        
Commitments and Contingencies (see Note 9)
       
        
  $6,132,402 $6,230,834 

The accompanying notes, as they relate to PNMR, are an integral part of these financial statements.
6

PNM RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
  
Three Months Ended
 
  
March 31,
 
  
2007
 
2006
 
  (In thousands) 
Cash Flows From Operating Activities:
     
Net earnings $29,969 $26,325 
Adjustments to reconcile net earnings to net cash flows from operating activities:       
Depreciation and amortization  47,432  40,011 
Allowance for equity funds used during construction  (454) (47)
Deferred income tax expense (benefit)  14,282  (10,279)
Equity in net loss of EnergyCo  662  - 
Net unrealized gains on derivatives  (3,795) (2,703)
Realized gains on investment securities  (811) (1,407)
Carrying charges on regulatory assets and liabilities  (1,018) (2,833)
Amortization of fair value of acquired Twin Oaks sales contract  (20,035) - 
Amortization of emissions allowances  701  - 
Amortization of fair value of acquired First Choice contracts  (361) (4,402)
Stock based compensation expense  4,381  4,373 
Excess tax benefit from stock-based payment arrangements  (6) (313)
Other, net  1,317  2,456 
Changes in certain assets and liabilities:       
Accounts receivable  (31,487) 22,461 
Other receivables  14,703  14,180 
Unbilled revenues  34,396  23,296 
Regulatory assets  4,624  22,144 
Other assets  2,799  11,043 
Accrued pension liability and postretirement benefit costs  (2,776) (2,841)
Accounts payable  (25,897) (102,149)
Accrued interest and taxes  (6,008) 24,751 
Deferred credits  (5,783) (5,436)
Other liabilities  (13,213) (26,184)
Net cash flows from operating activities  43,622  32,446 
        
Cash Flows From Investing Activities:
       
Utility plant additions  (89,484) (51,727)
Proceeds from sales of investment securities  31,803  30,449 
Purchases of investment securities  (36,365) (30,301)
Proceeds from sales of utility plant  4,572  - 
Return of principal on PVNGS lessor notes  11,612  10,956 
Investment in EnergyCo  (2,500) - 
Other, net  4,290  870 
Net cash flows from investing activities  (76,072) (39,753)

         
  June 30,  December 31, 
  2007  2006 
  (In thousands) 
ASSETS
        
Current Assets:
        
Cash and cash equivalents $58,050  $123,419 
Special deposits  1,094   5,146 
Accounts receivable, net of allowance for uncollectible accounts of $6,436 and $6,899  137,951   168,126 
Unbilled revenues  100,311   116,878 
Other receivables  99,091   73,744 
Inventories  58,963   63,329 
Regulatory assets  12,321   17,507 
Derivative instruments  91,600   59,312 
Income taxes receivable  50,960   65,210 
Other current assets  73,667   63,414 
       
         
Total current assets  684,008   756,085 
       
         
Other Property and Investments:
        
Investment in PVNGS lessor notes  203,862   257,659 
Equity investment in EnergyCo  198,144   — 
Investments held by NDT  136,424   123,143 
Other investments  54,996   46,577 
Non-utility assets, net of accumulated depreciation of $1,291 and $1,365  7,084   7,565 
       
         
Total other property and investments  600,510   434,944 
       
         
Utility Plant:
        
Electric plant in service  3,743,584   4,263,068 
Gas plant in service  751,736   721,168 
Common plant in service and plant held for future use  123,616   157,064 
       
   4,618,936   5,141,300 
Less accumulated depreciation and amortization  1,662,465   1,639,156 
       
   2,956,471   3,502,144 
Construction work in progress  312,161   230,871 
Nuclear fuel, net of accumulated amortization of $20,353 and $14,008  35,263   28,844 
       
         
Net utility plant  3,303,895   3,761,859 
       
         
Deferred Charges and Other Assets:
        
Regulatory assets  545,739   553,564 
Pension asset  10,163   8,853 
Goodwill  494,513   495,738 
Other intangible assets, net of accumulated amortization of $2,707 and $2,052  76,547   102,202 
Derivative instruments  27,548   39,886 
Other deferred charges  50,030   77,703 
       
         
Total deferred charges and other assets  1,204,540   1,277,946 
       
         
  $5,792,953  $6,230,834 
       
The accompanying notes, as they relate to PNMR, are an integral part of these condensed consolidated financial statements.

5

7

PNM RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
BALANCE SHEETS
(Unaudited)
  
Three Months Ended
 
  
March 31,
 
  
2007
 
2006
 
  (In thousands) 
Cash Flows From Financing Activities:
     
Short-term debt borrowings (repayments), net  (25,000) (1,213)
Issuance of common stock  1,070  671 
Proceeds from stock option exercise  6,509  1,765 
Purchases of common stock to satisfy stock awards  (11,587) (2,853)
Excess tax benefits from stock-based payment arrangements  6  313 
Dividends paid ��(16,863) (13,758)
Other, net  (118) (47)
Net cash flows from financing activities  (45,983) (15,122)
        
Change in Cash and Cash Equivalents
  (78,433) (22,429)
Cash and Cash Equivalents at Beginning of Period
  123,419  68,199 
Cash and Cash Equivalents at End of Period
 $44,986 $45,770 
        
Supplemental Cash Flow Disclosures:
       
Interest paid, net of capitalized interest $37,218 $25,750 
Income taxes paid (refunded), net $- $- 

         
  June 30,  December 31, 
  2007  2006 
  (In thousands, except share information) 
LIABILITIES AND STOCKHOLDERS’ EQUITY
        
Current Liabilities:
        
Short-term debt $559,670  $764,345 
Current installments of long-term debt  148,935   3,298 
Accounts payable  167,512   214,229 
Accrued interest and taxes  58,379   98,789 
Regulatory liabilities  17,577   1,172 
Derivative instruments  105,840   68,575 
Other current liabilities  114,052   225,653 
       
         
Total current liabilities  1,171,965   1,376,061 
       
         
Long-term Debt
  1,531,850   1,765,907 
       
         
Deferred Credits and Other Liabilities:
        
Accumulated deferred income taxes  579,586   586,283 
Accumulated deferred investment tax credits  28,531   30,236 
Regulatory liabilities  392,570   389,330 
Asset retirement obligations  63,789   61,338 
Accrued pension liability and postretirement benefit cost  131,126   134,799 
Derivative instruments  19,632   14,581 
Other deferred credits  135,797   155,860 
       
         
Total deferred credits and other liabilities  1,351,031   1,372,427 
       
         
Total liabilities  4,054,846   4,514,395 
       
         
Commitments and Contingencies (See Note 9)
        
         
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 
       
         
Common Stockholders’ Equity:
        
Common stock outstanding (no par value, 120,000,000 shares authorized; issued and outstanding 76,719,731 and 76,648,472 shares)  1,039,530   1,040,451 
Accumulated other comprehensive income, net of income tax  17,599   28,909 
Retained earnings  669,449   635,550 
       
         
Total common stockholders’ equity  1,726,578   1,704,910 
       
         
  $5,792,953  $6,230,834 
       
The accompanying notes, as they relate to PNMR, are an integral part of these condensed consolidated financial statements.

6

8

PNM RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
CASH FLOWS
(Unaudited)
         
  Six Months Ended June 30, 
  2007  2006 
     (As Restated, 
     See Note 16) 
  (In thousands) 
Cash Flows From Operating Activities:
        
Net earnings $49,906  $41,984 
Adjustments to reconcile net earnings to net cash flows from operating activities:        
Depreciation and amortization  97,093   79,651 
Allowance for equity funds used during construction  (876)  (73)
Deferred income tax expense (benefit)  13,062   (7,920)
Equity in net earnings of EnergyCo  (1,610)  — 
Net unrealized losses on derivatives  7,940   1,864 
Realized gains on investments held by NDT  (3,001)  (2,054)
Realized loss on Altura contribution  3,637   — 
Impairment loss on intangible assets  3,380   — 
Carrying charges on regulatory assets and liabilities  (513)  (4,922)
Amortization of fair value of acquired Twin Oaks sales contract  (35,073)  (16,878)
Stock based compensation expense  5,250   5,513 
Excess tax benefit from stock-based payment arrangements  (8)  (908)
Other, net  (561)  (9)
Changes in certain assets and liabilities:        
Accounts receivable  23,680   55,214 
Unbilled revenues  16,567   17,047 
Regulatory assets  (1,752)  20,878 
Other assets  (2,792)  (7,819)
Accrued pension liability and postretirement benefit costs  (4,549)  (5,409)
Accounts payable  (42,325)  (88,716)
Accrued interest and taxes  (14,709)  35,402 
Deferred credits  (17,567)  (9,168)
Other liabilities  (7,987)  (2,234)
       
Net cash flows from operating activities  87,192   111,443 
       
         
Cash Flows From Investing Activities:
        
Utility plant additions  (213,070)  (128,568)
Proceeds from sales of investments held by NDT  62,697   45,534 
Purchases of investments held by NDT  (66,903)  (45,738)
Proceeds from sales of utility plant  25,041   — 
Return of principal on PVNGS lessor notes  11,953   11,297 
Investments in EnergyCo  (2,540)  — 
Distributions from EnergyCo  362,275   — 
Twin Oaks acquisition  —   (481,015)
Other, net  (6,977)  2,309 
       
Net cash flows from investing activities  172,476   (596,181)
       
  
Three Months Ended March 31,
 
  
2007
 
2006
 
  (In thousands) 
      
Net Earnings
 $29,969 $26,325 
        
Other Comprehensive Income:
       
        
Unrealized gains (losses) on investment securities:
       
Unrealized holding gains arising during the period,       
net of income tax expense of $1,420 and $7,605  2,167  11,604 
Reclassification adjustment for (gains) included in net       
earnings, net of income tax expense of $435 and $319  (663) (486)
        
Fair value adjustment for certain derivative transactions:
       
Change in fair market value of designated cash flow hedges,       
net of income tax benefit of $11,886 and $9,064  (18,112) (14,646)
Reclassification adjustment for (gains) losses included in       
net earnings, net of income tax expense (benefit)       
of $(954) and $1,195  1,554  (1,484)
        
Total Other Comprehensive Income (Loss)
  (15,054) (5,012)
        
Total Comprehensive Income
 $14,915 $21,313 

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

7

PNM RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
         
  Six Months Ended June 30, 
  2007  2006 
     (As Restated, 
     See Note 16) 
  (In thousands) 
Cash Flows From Financing Activities:
        
Short-term borrowings (repayments), net  (204,675)  510,300 
Long-term borrowings  20,000   — 
Redemption of long-term debt  (100,500)  — 
Issuance of common stock  2,127   10,511 
Proceeds from stock option exercise  10,773   4,878 
Purchase of common stock to satisfy stock awards  (17,693)  (6,843)
Excess tax benefits from stock-based payment arrangements  8   908 
Dividends paid  (34,766)  (29,029)
Other, net  (311)  (296)
       
Net cash flows from financing activities  (325,037)  490,429 
       
         
Change in Cash and Cash Equivalents
  (65,369)  5,691 
Cash and Cash Equivalents Beginning of Period
  123,419   68,199 
       
Cash and Cash Equivalents End of Period
 $58,050  $73,890 
       
         
Supplemental Cash Flow Disclosures:
        
Interest paid, net of capitalized interest $58,323  $67,495 
       
Income taxes paid (refunded), net $—  $(11,586)
       
         
Supplemental schedule of noncash investing and financing activities:
        
As of June 1, 2007, PNMR contributed its ownership of Altura to EnergyCo at a fair value of $549.6 million after an adjustment for working capital changes. See Note 11. In conjunction with the contribution, PNMR removed Altura’s assets and liabilities from its balance sheet as follows:
         
Current assets $22,529     
Utility plant, net  575,906     
Deferred charges  46,018     
        
Total assets contributed  644,453     
        
         
Current liabilities  63,268     
Deferred credits and other liabilities  37,005     
        
Total liabilities contributed  100,273     
Other comprehensive income  (12,651)    
        
Total liabilities and OCI contributed  87,622     
        
         
Net contribution to EnergyCo $556,831     
        
         
Utility plant purchased through assumption of long-term debt that offsets a portion of investment in PVNGS lessor notes and is eliminated in consolidation. See Note 2. $41,152     
        
The accompanying notes, as they relate to PNMR, are an integral part of these condensed consolidated financial statements.

8

9PNM RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
                 
  Three Months Ended  Six Months Ended 
  June 30,  June 30, 
  2007  2006  2007  2006 
     (As Restated,     (As Restated, 
     See Note 16)     See Note 16) 
  (In thousands) 
                 
Net Earnings
 $20,240  $15,983  $49,906  $41,984 
             
                 
Other Comprehensive Income:
                
                 
Unrealized gain (loss) on investment securities:
                
Unrealized holding gains (losses) arising during the period, net of income tax (expense) benefit of $(2,230), $154, $(3,486) and $(6,953)  3,403   (236)  5,320   10,610 
Reclassification adjustment for (gains) included in net earnings, net of income tax expense of $787, $606, $1,058 and $427  (1,201)  (924)  (1,614)  (652)
                 
Fair value adjustment for designated cash flow hedges:
                
Change in fair market value, net of income tax expense (benefit) of $(1,387), $2,577, $10,795 and $8,177  1,996   (5,130)  (16,578)  (13,612)
Reclassification adjustment for (gains) losses included in net earnings, net of income tax (expense) benefit of $288, $(2,059), $(962) and $2,619  (454)  3,723   1,562   (3,925)
             
                 
Total Other Comprehensive Income (Loss)
  3,744   (2,567)  (11,310)  (7,579)
             
                 
Total Comprehensive Income
 $23,984  $13,416  $38,596  $34,405 
             
The accompanying notes, as they relate to PNMR, are an integral part of these condensed consolidated financial statements.

9


PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)
                
 Three Months Ended June 30, Six Months Ended June 30, 
 2007 2006 2007 2006 
 
Three Months Ended March 31,
    (As Restated,   (As Restated, 
 
2007
 
2006
    See Note 16)   See Note 16) 
 (In thousands)  (In thousands) 
Operating Revenues:
      
Electric $240,325 $311,467  $300,307 $259,298 $540,632 $570,765 
Gas  216,484  207,476  75,136 68,869 291,620 276,345 
         
Total operating revenues  456,809  518,943  375,443 328,167 832,252 847,110 
         
        
Operating Expenses:
        
Cost of energy sold  264,881  339,262  230,414 185,410 495,295 524,672 
Administrative and general  44,382  41,128  42,866 40,520 87,248 81,648 
Energy production costs  40,505  37,587  43,330 42,404 84,159 80,315 
Depreciation and amortization  26,356  24,855  26,202 24,289 52,558 49,144 
Transmission and distribution costs  17,641  14,307  17,244 15,916 34,885 30,223 
Taxes other than income taxes  8,686  9,313  10,021 8,414 18,707 17,727 
Income taxes  14,832  14,962 
         
Total operating expenses  417,283  481,414  370,077 316,953 772,852 783,729 
         
Operating income  39,526  37,529  5,366 11,214 59,400 63,381 
         
        
Other Income and Deductions:
        
Interest income  8,702  9,353  6,650 8,670 15,352 18,023 
Gains on investment securities  58  944 
Gains on investments held by NDT 2,957 1,158 3,001 2,054 
Other income  1,141  884  1,072 547 2,227 1,479 
Other deductions  (609) (851)  (1,907)  (1,504)  (2,516)  (2,355)
Other income taxes  (3,492) (4,011)
         
Net other income and deductions  5,800  6,319  8,772 8,871 18,064 19,201 
Earnings before interest charges  45,326  43,848 
                
Interest Charges:
       
 
Interest Charges:
 
Interest on long-term debt  12,437  11,859  11,956 13,167 24,393 25,026 
Other interest charges  3,655  1,561  3,683 1,732 7,338 3,293 
         
Total interest charges  16,092  13,420  15,639 14,899 31,731 28,319 
                
Net Earnings
  29,234  30,428 
 
Earnings (Loss) before Income Taxes
  (1,501) 5,186 45,733 54,263 
 
Income Taxes (Benefit)
  (690) 2,190 17,664 21,163 
 
         
Net Earnings (Loss)
  (811) 2,996 28,069 33,100 
        
Preferred Stock Dividend Requirements
  132  132  132 132 264 264 
                
Net Earnings Available for Common Stock
 $29,102 $30,296 
 
Net Earnings (Loss) Available for Common Stock
 $(943) $2,864 $27,805 $32,836 
         
The accompanying notes, as they relate to PNM, are an integral part of these condensed consolidated financial statements.

10

10

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)
  
March 31,
 
December 31,
 
  
2007
 
2006
 
  (In thousands) 
      
ASSETS
     
Utility Plant:
     
Electric plant in service $2,909,250 $2,742,795 
Gas plant in service  732,152  721,168 
Common plant in service and plant held for future use  57,082  72,806 
   3,698,484  3,536,769 
Less accumulated depreciation and amortization  1,361,127  1,279,349 
   2,337,357  2,257,420 
Construction work in progress  243,335  191,403 
Nuclear fuel, net of accumulated amortization of $17,296 and $14,008  32,610  28,844 
        
Net utility plant  2,613,302  2,477,667 
        
Other Property and Investments:
       
Investment in PVNGS lessor notes  245,356  257,659 
Other investments  146,210  138,777 
Non-utility property  979  966 
        
Total other property and investments  392,545  397,402 
        
Current Assets:
       
Cash and cash equivalents  6,433  11,886 
Special deposits  548  376 
Accounts receivable, net of allowance for uncollectible accounts of $1,703 and $1,788  155,013  122,648 
Unbilled revenues  56,575  81,166 
Other receivables  61,434  62,040 
Affiliate accounts receivable  -  7,879 
Inventories  58,101  51,801 
Regulatory assets  2,833  17,507 
Income taxes receivable  2,731  13,222 
Derivative instruments  26,755  27,750 
Other current assets  53,184  51,231 
        
Total current assets  423,607  447,506 
        
Deferred Charges:
       
Regulatory assets  406,492  410,979 
Derivative instruments  18,168  12,504 
Goodwill  102,562  - 
Other deferred charges  64,804  66,465 
        
Total deferred charges  592,026  489,948 
        
  $4,021,480 $3,812,523 

The accompanying notes, as they relate to PNM, are an integral part of these financial statements.
11

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
  
March 31,
 
December 31,
 
  
2007
 
2006
 
  (In thousands, except share information) 
      
CAPITALIZATION AND LIABILITIES
     
Capitalization:
     
Common stockholder's equity:     
Common stock outstanding (no par value, 40,000,000 shares authorized:     
39,117,799 shares issued and outstanding) $932,483 $765,500 
Accumulated other comprehensive income, net of income tax  12,741  8,761 
Retained earnings  434,004  404,261 
Total common stockholder's equity  1,379,228  1,178,522 
Cumulative preferred stock without mandatory redemption requirements       
($100 stated value, 10,000,000 shares authorized: 115,293 shares issued       
and outstanding)  11,529  11,529 
Long-term debt  988,400  987,205 
        
Total capitalization  2,379,157  2,177,256 
        
Current Liabilities:
       
Short-term debt  245,700  250,274 
Accounts payable  128,918  138,577 
Affiliate accounts payable  23,676  16,898 
Accrued interest and taxes  41,949  41,340 
Regulatory liabilities  16,131  1,172 
Derivative instruments  26,099  43,096 
Other current liabilities  58,744  82,262 
        
Total current liabilities  541,217  573,619 
        
Long-Term Liabilities:
       
Accumulated deferred income taxes  390,836  359,416 
Accumulated deferred investment tax credits  28,917  29,404 
Regulatory liabilities  358,829  344,036 
Asset retirement obligations  61,812  60,493 
Accrued pension liability and postretirement benefit cost  127,298  129,595 
Derivative instruments  10,894  14,100 
Other deferred credits  122,520  124,604 
        
Total long-term liabilities  1,101,106  1,061,648 
        
Commitments and Contingencies (see Note 9)
       
        
  $4,021,480 $3,812,523 
         
  June 30,  December 31, 
  2007  2006 
  (In thousands) 
ASSETS
        
Current Assets:
        
Cash and cash equivalents $1,430  $11,886 
Special deposits  774   376 
Accounts receivable, net of allowance for uncollectible accounts of $1,571 and $1,788  107,545   122,648 
Unbilled revenues  45,339   81,166 
Other receivables  79,619   62,040 
Affiliate accounts receivable  1,166   8,905 
Inventories  57,052   51,801 
Regulatory assets  12,321   17,507 
Income taxes receivable  —   13,222 
Derivative instruments  38,459   27,750 
Other current assets  54,515   51,231 
       
         
Total current assets  398,220   448,532 
       
         
Other Property and Investments:
        
Investment in PVNGS lessor notes  245,014   257,659 
Investments held by NDT  136,424   123,143 
Other investments  26,510   15,634 
Non-utility property  976   966 
       
         
Total other property and investments  408,924   397,402 
       
         
Utility Plant:
        
Electric plant in service  2,890,200   2,742,795 
Gas plant in service  751,736   721,168 
Common plant in service and plant held for future use  18,237   72,806 
       
   3,660,173   3,536,769 
Less accumulated depreciation and amortization  1,373,124   1,279,349 
       
   2,287,049   2,257,420 
Construction work in progress  294,565   191,403 
Nuclear fuel, net of accumulated amortization of $20,353 and $14,008  35,263   28,844 
       
         
Net utility plant  2,616,877   2,477,667 
       
         
Deferred Charges and Other Assets:
        
Regulatory assets  406,299   410,979 
Derivative instruments  19,837   12,504 
Goodwill  102,601   — 
Other deferred charges  65,304   66,465 
       
         
Total deferred charges and other assets  594,041   489,948 
       
         
  $4,018,062  $3,813,549 
       
The accompanying notes, as they relate to PNM, are an integral part of these condensed consolidated financial statements.

11

12

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
BALANCE SHEETS
(Unaudited)
  
Three Months Ended March 31,
 
  
2007
 
2006
 
  (In thousands) 
Cash Flows From Operating Activities:
     
Net earnings $29,234 $30,428 
Adjustments to reconcile net earnings to net cash flows from operating activities:       
Depreciation and amortization  32,854  29,780 
Allowance for equity funds used during construction  (380) 1 
Deferred income tax expense (benefit)  7,137  (11,889)
Net unrealized gains on derivatives  (3,892) (504)
Realized gains on investment securities  (811) (1,407)
Carrying charges on other regulatory assets and liabilities  (1,018) (1,297)
Other, net  (923) (105)
Changes in certain assets and liabilities, net of amounts acquired:       
Accounts receivable  (22,552) 19,292 
Unbilled revenues  28,122  18,131 
Regulatory assets  3,947  23,102 
Other assets  11,851  17,715 
Accrued pension liability and postretirement benefit costs  (1,457) (566)
Accounts payable  (12,482) (86,523)
Accrued interest and taxes  9,388  36,804 
Deferred credits  (4,570) (2,855)
Other liabilities  (6,935) (24,089)
Net cash flows from operating activities  67,513  46,018 
        
Cash Flows From Investing Activities:
       
Utility plant additions  (80,335) (38,806)
Proceeds from sales of investment securities  31,803  30,449 
Purchases of investment securities  (36,365) (30,301)
Proceeds from sales of utility plant assets  4,572  - 
Return of principal on PVNGS lessor notes  11,612  10,956 
Other, net  871  652 
Net cash flows from investing activities  (67,842) (27,050)
         
  June 30,  December 31, 
  2007  2006 
  (In thousands, except share information) 
LIABILITIES AND STOCKHOLDER’S EQUITY
        
Current Liabilities:
        
Short-term debt $242,070  $251,300 
Accounts payable  81,556   138,577 
Affiliate accounts payable  14,958   16,898 
Accrued interest and taxes  47,650   41,340 
Regulatory liabilities  17,577   1,172 
Derivative instruments  55,735   43,096 
Other current liabilities  69,166   82,262 
       
         
Total current liabilties  528,712   574,645 
       
         
Long-term Debt
  1,005,639   987,205 
       
         
Deferred Credits and Other Liabilities:
        
Accumulated deferred income taxes  394,973   368,256 
Accumulated deferred investment tax credits  28,207   29,404 
Regulatory liabilities  351,578   335,196 
Asset retirement obligations  63,076   60,493 
Accrued pension liability and postretirement benefit cost  126,187   129,595 
Derivative instruments  11,560   14,100 
Other deferred credits  104,073   112,990 
       
         
Total deferred credits and liabilities  1,079,654   1,050,034 
       
         
Total liabilities  2,614,005   2,611,884 
       
         
Commitments and Contingencies (See Note 9)
        
         
Cumulative Preferred Stock
without mandatory redemption requirements ($100 stated value, 10,000,000 authorized; issued and outstanding 115,293 shares)
  11,529   11,529 
       
         
Common Stockholder’s Equity:
        
Common stock outstanding (no par value, 40,000,000 shares authorized; issued and outstanding 39,117,799 shares)  932,522   765,500 
Accumulated other comprehensive income, net of income tax  15,685   8,761 
Retained earnings  444,321   415,875 
       
         
Total common stockholder’s equity  1,392,528   1,190,136 
       
         
  $4,018,062  $3,813,549 
       
The accompanying notes, as they relate to PNM, are an integral part of these condensed consolidated financial statements.

12

13

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
  
Three Months Ended March 31,
 
  
2007
 
2006
 
  (In thousands) 
Cash Flows From Financing Activities:
     
Short-term debt borrowings (repayments), net  (4,574) (24,913)
Dividends paid  (132) (132)
Other, net  (418) 23 
Net cash flows from financing activities  (5,124) (25,022)
        
Change in Cash and Cash Equivalents
  (5,453) (6,054)
Cash and Cash Equivalents at Beginning of Period
  11,886  12,690 
Cash and Cash Equivalents at End of Period
 $6,433 $6,636 
        
Supplemental Cash Flow Disclosures:
       
Interest paid, net of capitalized interest $21,883 $11,935 
Income taxes paid (refunded), net $- $- 
        
Supplemental schedule of noncash investing and financing activities:
       
        
As of January 1, 2007, TNMP transferred its New Mexico operational assets and liabilities to PNMR through       
a redemption of TNMP’s common stock. PNMR contemporaneously contributed the TNMP       
New Mexico operational assets and liabilities to PNM. See Note 14.       
        
Assets transferred $216,422    
Liabilities transferred  49,438    
Net assets transferred - increase in common stockholder's equity $166,984    

The accompanying notes, as they relate to PNM, are an integral part of these financial statements.
14

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
  
Three Months Ended March 31,
 
  
2007
 
2006
 
  (In thousands) 
      
Net Earnings Available for Common Stock
 $29,102 $30,296 
        
Other Comprehensive Income (Loss):
       
        
Unrealized gains (losses) on investment securities:
       
Unrealized holding gains arising during the period,       
net of income tax expense of $1,420 and $7,605  2,167  11,604 
Reclassification adjustment for (gains) included in net       
earnings, net of income tax expense of $435 and $319  (663) (486)
        
Fair value adjustment for certain derivative transactions:
       
Change in fair market value of designated cash flow hedges,       
net of income tax (expense) benefit of $(1,013) and $6,607  1,545  (10,081)
Reclassification adjustment for (gains) losses included in net       
earnings, net of income tax expense (benefits) of $(610) and $2,217  931  (3,382)
        
Total Other Comprehensive Income (Loss)
  3,980  (2,345)
        
Total Comprehensive Income
 $33,082 $27,951 

         
  Six Months Ended June 30, 
  2007  2006 
     (As Restated, 
     See Note 16) 
  (In thousands) 
Cash Flows From Operating Activities:
        
Net earnings $28,069  $33,100 
Adjustments to reconcile net earnings to net cash flows from operating activities:        
Depreciation and amortization  66,320   58,311 
Allowance for equity funds used during construction  (755)  1 
Deferred income tax (benefit)  (138)  (15,059)
Net unrealized losses on derivatives  10,896   1,967 
Realized gains on investments held by NDT  (3,001)  (2,054)
Carrying charges on regulatory assets and liabilities  (513)  (1,829)
Other, net  80   (4,075)
Changes in certain assets and liabilities, net of amounts acquired:        
Accounts receivable  25,047   69,659 
Unbilled revenues  39,358   35,646 
Regulatory assets  (1,253)  22,960 
Other assets  8,718   (16,075)
Accrued pension liability and postretirement benefit costs  (2,822)  (2,869)
Accounts payable  (59,844)  (100,340)
Accrued interest and taxes  16,975   33,560 
Deferred credits  (17,398)  (8,661)
Other liabilities  (5,077)  (3,713)
       
Net cash flows from operating activities  104,662   100,529 
       
         
Cash Flows From Investing Activities:
        
Utility plant additions  (149,648)  (100,008)
Proceeds from sales of investments held by NDT  62,697   45,534 
Purchases of investments held by NDT  (66,903)  (45,738)
Proceeds from sales of utility plant  25,041   — 
Return of principal on PVNGS lessor notes  11,953   11,297 
Other, net  (10,774)  6,601 
       
Net cash flows from investing activities  (127,634)  (82,314)
       
The accompanying notes, as they relate to PNM, are an integral part of these condensed consolidated financial statements.

13

15

TEXAS-NEWPUBLIC SERVICE COMPANY OF NEW MEXICO POWER COMPANY AND SUBSIDIARIES
SUBSIDIARY
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
         
  Six Months Ended June 30, 
  2007  2006 
     (As Restated, 
     See Note 16) 
  (In thousands) 
Cash Flows From Financing Activities:
        
Short-term borrowings (repayments), net  (7,179)  (28,000)
Long-term borrowings  20,000   — 
Dividends paid  (264)  (264)
Other, net  (41)  79 
       
Net cash flows from financing activities  12,516   (28,185)
       
         
Change in Cash and Cash Equivalents
  (10,456)  (9,970)
Cash and Cash Equivalents at Beginning of Period
  11,886   12,690 
       
Cash and Cash Equivalents at End of Period
 $1,430  $2,720 
       
         
Supplemental Cash Flow Disclosures:
        
Interest paid, net of capitalized interest $29,758  $30,193 
       
Income taxes paid, net $—  $457 
       
         
Supplemental schedule of noncash investing and financing activities:
        
As of January 1, 2007, TNMP transferred its New Mexico operational assets and liabilities to PNMR through a redemption of TNMP’s common stock. PNMR contemporaneously contributed the TNMP New Mexico operational assets and liabilities to PNM. (See Note 14).
Current assets $15,444     
Other property and investments  12     
Utility plant, net  96,610     
Goodwill  102,601     
Deferred charges  1,794     
        
Total assets transferred from TNMP  216,461     
        
         
Current liabilities  17,313     
Long-term debt  1,065     
Deferred credits and other liabilities  31,060     
        
Total liabilities transferred from TNMP  49,438     
        
         
Net assets transferred — increase in common stockholder’s equity $167,023     
        
The accompanying notes, as they relate to PNM, are an integral part of these condensed consolidated financial statements.

14

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
                 
  Three Months Ended  Six Months Ended 
  June 30,  June 30, 
  2007  2006  2007  2006 
     (As Restated,     (As Restated, 
     See Note 16)     See Note 16) 
  (In thousands) 
                 
Net Earnings (Loss) Available for Common Stock
 $(943) $2,864  $27,805  $32,836 
             
                 
Other Comprehensive Income (Loss):
                
                 
Unrealized gain (loss) on investment securities:
                
Unrealized holding gains (losses) arising during the period, net of income tax (expense) benefit of $(2,230), $154, $(3,486) and $(6,953)  3,403   (236)  5,320   10,610 
Reclassification adjustment for (gains) included in net earnings, net of income tax expense of $787, $606, $1,058 and $427  (1,201)  (924)  (1,614)  (652)
                 
Fair value adjustment for designated cash flow hedges:
                
Change in fair market value, net of income tax (benefit) of $(723), $606, $(1,511) and $6,563  1,103   (926)  2,305   (10,015)
Reclassification adjustment for (gains) losses included in net earnings, net of income tax (expense) benefit of $236, $3, $(599) and $2,869  (361)  (4)  913   (4,378)
             
                 
Total Other Comprehensive Income (Loss)
  2,944   (2,090)  6,924   (4,435)
             
                 
Total Comprehensive Income
 $2,001  $774  $34,729  $28,401 
             
The accompanying notes, as they relate to PNM, are an integral part of these condensed consolidated financial statements.

15

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)
                
 
Three Months Ended March 31,
  Three Months Ended June 30, Six Months Ended June 30, 
 
2007
 
2006
  2007 2006 2007 2006 
 (In thousands)  (In thousands) 
      
Electric Operating Revenues
 $40,928 $35,547  $43,536 $39,696 $84,464 $75,244 
         
        
Operating Expenses:
        
Cost of energy sold  7,171  6,448  7,221 7,145 14,392 13,594 
Administrative and general  8,902  9,215  7,361 7,848 16,263 17,061 
Depreciation and amortization  7,000  6,174  7,041 6,337 14,041 12,512 
Transmission and distribution costs  4,923  3,745  4,945 4,463 9,868 8,208 
Taxes other than income taxes  4,825  5,190  5,413 5,482 10,238 10,672 
Income taxes  352  (1,679)
         
Total operating expenses  33,173  29,093  31,981 31,275 64,802 62,047 
         
Operating income  7,755  6,454  11,555 8,421 19,662 13,197 
                
        
Other Income and Deductions:
        
Interest income  88  255  776 81 864 336 
Other income  276  168  770 85 1,046 253 
Carrying charges on regulatory assets  -  1,973  — 2,004 — 3,977 
Other deductions  (27) (24)  (46)  (20)  (73)  (43)
Other income taxes  (76) (907)
         
Net other income and deductions  261  1,465  1,500 2,150 1,837 4,523 
Earnings before interest charges  8,016  7,919 
                
Interest Charges:
       
 
Interest Charges:
 
Interest on long-term debt  6,432  6,432  6,153 6,432 12,585 12,864 
Other interest charges  646  802  718 829 1,364 1,632 
         
Total interest charges  7,078  7,234  6,871 7,261 13,949 14,496 
                
Net Earnings From Continuing Operations
  938  685 
        
Discontinued Operations, net of income tax
       
expense of $0 and $1,003
  -  471 
Earnings before Income Taxes
 6,184 3,310 7,550 3,224 
 
Income taxes
 1,950 2,101 2,378 1,330 
         
 
Net Earnings from Continuing Operations
 4,234 1,209 5,172 1,894 
 
Discontinued Operations, net of income tax expense (benefit) of $0, $(16), $0 and $987
 — 1,627 — 2,098 
         
        
Net Earnings
 $938 $1,156  $4,234 $2,836 $5,172 $3,992 
         
The accompanying notes, as they relate to TNMP, are an integral part of these condensed consolidated financial statements.

16

16

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)
 
March 31,
 
December 31,
         
 
2007
 
2006
  June 30, December 31, 
 (In thousands)  2007 2006 
      (In thousands) 
ASSETS
      
Current Assets:
 
Cash and cash equivalents $34 $2,542 
Special deposits 50 — 
Accounts receivable, net of allowance for uncollectible accounts of $0 and $31 8,757 10,317 
Unbilled revenues 3,018 6,000 
Affiliate accounts receivable 7,680 — 
Other receivables 5,483 1,515 
Inventories 1,670 1,509 
Federal income tax receivable 38,018 40,473 
Other current assets 803 944 
     
 
Total current assets 65,513 63,300 
     
 
Other Property and Investments:
 
Other investments 554 511 
Non-utility property, net of accumulated depreciation of $0 and $3 2,111 2,120 
     
Total other property and investments 2,665 2,631 
     
 
Utility Plant:
      
Electric plant in service $774,716 $925,538  770,630 925,538 
Common plant in service and plant held for future use  488  589  488 589 
  775,204  926,127      
 771,118 926,127 
Less accumulated depreciation and amortization  267,013  326,404  264,203 326,404 
  508,191  599,723      
 506,915 599,723 
Construction work in progress  10,318  13,799  10,242 13,799 
     
 
Net utility plant  518,509  613,522  517,157 613,522 
            
Other Property and Investments:
       
Other investments  555  511 
Non-utility property, net of accumulated depreciation of $0 and $3  2,110  2,120 
Total other property and investments  2,665  2,631 
        
Current Assets:
       
Cash and cash equivalents  92  2,542 
Accounts receivable, net of allowance for uncollectible accounts of $0 and $31  7,184  10,317 
Federal income tax receivable  40,068  40,473 
Unbilled revenues  2,170  6,000 
Affiliate accounts receivable  12,011  - 
Other receivables  4,850  1,515 
Inventories  1,549  1,509 
Other current assets  205  944 
Total current assets  68,129  63,300 
       
Deferred Charges:
       
Deferred Charges and Other Assets:
 
Stranded costs  88,956  89,949  87,962 89,949 
Carrying charges on stranded costs  41,112  41,584  40,652 41,584 
Other regulatory assets  10,525  11,052  10,826 11,052 
Goodwill  260,183  363,764  260,144 363,764 
Pension asset  9,508  8,853  10,163 8,853 
Other deferred charges  7,647  9,205  6,919 9,205 
Total deferred charges  417,931  524,407 
            
 $1,007,234 $1,203,860  
Total deferred charges and other assets 416,666 524,407 
     
 
 $1,002,001 $1,203,860 
     
The accompanying notes, as they relate to TNMP, are an integral part of these condensed consolidated financial statements.

17

17

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)
  
March 31,
 
December 31,
 
  
2007
 
2006
 
  (In thousands, except share information) 
      
CAPITALIZATION AND LIABILITIES
     
Capitalization:
     
Common stockholder’s equity:     
Common stock outstanding ($10 par value, 12,000,000 shares authorized:     
6,358 and 9,615 shares issued and outstanding) $64 $96 
Paid-in-capital  326,111  492,812 
Accumulated other comprehensive income, net of income tax  562  562 
Retained earnings  24,049  21,149 
Total common stockholder’s equity  350,786  514,619 
Long-term debt  419,127  420,546 
        
Total capitalization  769,913  935,165 
        
Current Liabilities:
       
Short term debt - affiliate  29,200  - 
Accounts payable  3,639  11,332 
Affiliate accounts payable  6,460  15,673 
Accrued interest and taxes  15,892  23,110 
Other current liabilities  5,058  10,102 
        
Total current liabilities  60,249  60,217 
        
Long-Term Liabilities:
       
Accumulated deferred income taxes  126,979  145,641 
Accumulated deferred investment tax credits  467  832 
Regulatory liabilities  41,272  54,134 
Accrued pension liability and postretirement benefit cost  5,163  5,203 
Other deferred credits  3,191  2,668 
        
Total long-term liabilities  177,072  208,478 
        
Commitments and Contingencies (see Note 9)
       
        
  $1,007,234 $1,203,860 

The accompanying notes, as they relate to TNMP, are an integral part of these financial statements.
18

TEXAS-NEW MEXICO POWER COMPANY
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
  
Three Months Ended March 31,
 
  
2007
 
2006
 
  (In thousands) 
Cash Flows From Operating Activities:
     
Net earnings $938 $1,156 
Adjustments to reconcile net earnings to       
net cash flows from operating activities:       
Depreciation and amortization  6,905  7,805 
Rate case amortization  938  - 
Allowance for equity funds used during construction  (74) (47)
Deferred income tax expense (benefit)  (1,247) 430 
Carrying charges on deferred stranded costs  -  (1,973)
Interest on retail competition transition obligation  -  437 
Other, net  (350) 340 
Changes in certain assets and liabilities:       
Accounts receivable  (6,532) 2,173 
Unbilled revenues  299  (316)
Other assets  548  1,838 
Accrued pension liability and postretirement benefit costs  (185) (507)
Accounts payable  (4,870) 725 
Accrued interest and taxes  (4,481) (6,477)
Change in affiliate accounts  (13,610) 4,528 
Other liabilities  (2,123) (2,072)
Net cash flows from operating activities  (23,844) 8,040 
        
Cash Flows From Investing Activities:
       
Utility plant additions  (7,804) (7,216)
Other, net  (3) 31 
Net cash flows from investing activities  (7,807) (7,185)

         
  June 30,  December 31, 
  2007  2006 
  (In thousands, except share information) 
LIABILITIES AND STOCKHOLDER’S EQUITY
        
Current Liabilities:
        
Short-term debt — affiliate $27,200  $— 
Current installments of long-term debt  148,935   2,523 
Accounts payable  3,001   11,332 
Affiliate accounts payable  4,303   15,673 
Accrued interest and taxes  15,900   23,110 
Other current liabilities  3,646   7,579 
       
         
Total current liabilties  202,985   60,217 
       
         
Long-term Debt
  167,451   420,546 
       
         
Deferred Credits and Other Liabilities:
        
Accumulated deferred income taxes  126,164   145,641 
Accumulated deferred investment tax credits  324   832 
Regulatory liabilities  40,992   54,134 
Accrued pension liability and postretirement benefit cost  4,939   5,203 
Other deferred credits  2,916   2,668 
       
         
Total deferred credit and other liabilities  175,335   208,478 
       
         
Total liabilities  545,771   689,241 
       
         
Commitments and Contingencies (See Note 9)
        
         
Common Stockholder’s Equity:
        
Common stock outstanding ($10 par value, 12,000,000 shares authorized; issued and outstanding 6,358 and 9,615 shares)  64   96 
Paid-in-capital  427,320   492,812 
Accumulated other comprehensive income, net of income tax  562   562 
Retained earnings  28,284   21,149 
       
         
Total common stockholder’s equity  456,230   514,619 
       
         
  $1,002,001  $1,203,860 
       
The accompanying notes, as they relate to TNMP, are an integral part of these condensed consolidated financial statements.

18

19

TEXAS-NEW MEXICO POWER COMPANY

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
  
Three Months Ended March 31,
 
  
2007
 
2006
 
  (In thousands) 
      
Cash Flow From Financing Activities:
     
Short-term debt - affiliate  29,200  - 
Other, net  1  34 
        
Net cash flows from financing activities  29,201  34 
        
Change in Cash and Cash Equivalents
  (2,450) 889 
Cash and Cash Equivalents at Beginning of Period
  2,542  16,228 
Cash and Cash Equivalents at End of Period
 $92 $17,117 
        
Supplemental Cash Flow Disclosures:
       
Interest paid, net of capitalized interest $5,912 $5,482 
Income taxes paid (refunded), net $- $- 
        
Supplemental schedule of noncash investing and financing activities:
       
        
As of January 1, 2007, TNMP transferred its New Mexico operational assets and liabilities to PNMR through       
a redemption of TNMP’s common stock. PNMR contemporaneously contributed the TNMP       
New Mexico operational assets and liabilities to PNM. See Note 14.       
        
Assets transferred $216,422    
Liabilities transferred  49,438    
Net assets transferred - common stock redeemed $166,984    

The accompanying notes, as they relate to TNMP, are an integral part of these financial statements.
20

TEXAS-NEW MEXICO POWER COMPANY
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
  
Three Months Ended March 31,
 
  
2007
 
2006
 
  (In thousands) 
      
Net Earnings and Total Comprehensive Income (Loss)
 $938 $1,156 

         
  Six Months Ended June 30, 
  2007  2006 
  (In thousands) 
Cash Flows From Operating Activities:
        
Net earnings $5,172  $3,992 
Adjustments to reconcile net earnings to net cash flows from operating activities:        
Depreciation and amortization  13,873   16,386 
Rate case amortization  1,851   — 
Allowance for equity funds used during construction  (121)  (74)
Deferred income tax expense (benefit)  (2,205)  (438)
Carrying charges on deferred stranded costs  —   (3,978)
Interest on retail competition transition obligation  —   885 
Other, net  (572)  (1,035)
Changes in certain assets and liabilities:        
Accounts receivable  (8,137)  2,154 
Unbilled revenues  (549)  (2,497)
Other assets  (1,156)  1,792 
Accrued pension liability and postretirement benefit costs  (554)  — 
Accounts payable  (5,508)  (307)
Accrued interest and taxes  (2,422)  (2,838)
Change in affiliate accounts  (11,435)  9,046 
Other liabilities  (1,445)  (1,805)
       
Net cash flows from operating activities  (13,208)  21,283 
       
         
Cash Flows From Investing Activities:
        
Utility plant additions  (17,249)  (18,930)
Other, net  —   69 
       
Net cash flows from investing activities  (17,249)  (18,861)
       
The accompanying notes, as they relate to TNMP, are an integral part of these condensed consolidated financial statements.

19

TEXAS-NEW MEXICO POWER COMPANY
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
         
  Six Months Ended June 30, 
  2007  2006 
  (In thousands) 
Cash Flow From Financing Activities:
        
Short-term debt — affiliate  27,200   — 
Redemption of long-term debt  (100,500)  — 
Equity contribution by parent  101,249   — 
Other, net  —   82 
       
Net cash flows from financing activites  27,949   82 
       
         
Change in Cash and Cash Equivalents
  (2,508)  2,504 
Cash and Cash Equivalents Beginning of Period
  2,542   16,228 
       
Cash and Cash Equivalents End of Period
 $34  $18,732 
       
         
Supplemental Cash Flow Disclosures:
        
Interest paid, net of capitalized interest $14,127  $12,749 
       
Income taxes paid, net $—  $— 
       
         
Supplemental schedule of noncash investing and financing activities:
        
As of January 1, 2007, TNMP transferred its New Mexico operational assets and liabilities to PNMR through a redemption of TNMP’s common stock. PNMR contemporaneously contributed the TNMP New Mexico operational assets and liabilities to PNM. (See Note 14).
         
Current assets $15,444     
Other property and investments  12     
Utility plant, net  96,610     
Goodwill  102,601     
Deferred charges  1,794     
        
Total assets transferred to PNM  216,461     
        
         
Current liabilities  17,313     
Long-term debt  1,065     
Deferred credits and other liabilities  31,060     
        
Total liabilities transferred to PNM  49,438     
        
         
Net assets transferred — common stock redeemed $167,023     
        
The accompanying notes, as they relate to TNMP, are an integral part of these condensed consolidated financial statements.

20

21TEXAS-NEW MEXICO POWER COMPANY
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
                 
  Three Months Ended  Six Months Ended 
  June 30,  June 30, 
  2007  2006  2007  2006 
  (In thousands) 
                 
Net Earnings and Total Comprehensive Income
 $4,234  $2,836  $5,172  $3,992 
             
The accompanying notes, as they relate to TNMP, are an integral part of these condensed consolidated financial statements.

21

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Significant Accounting Policies and Responsibility for Financial Statements

(1)
Significant Accounting Policies and Responsibility for Financial Statements
Financial Statement Preparation

In the opinion of the management, of PNMR, the accompanying unaudited interim Condensed Consolidated Financial Statements reflect all normal and recurring accruals and adjustments which are necessary to present fairly the Company’s financial position at March 31,June 30, 2007 and December 31, 2006, the consolidated results of its operations and comprehensive income for the three months and six months ended March 31,June 30, 2007 and 2006 and the consolidated statements of cash flows for the threesix months ended March 31,June 30, 2007 and 2006. The preparation of financial statements in conformity with generally accepted accounting principles in the United States 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.

The results of operations presented in the accompanying Condensed Consolidated Financial Statements are not necessarily representative of operations for an entire year.
These Condensed Consolidated Financial Statements are unaudited, and certain information and note disclosures normally included in the Company’s 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 and TNMP’s audited Consolidated Financial Statements and Notes thereto for the year ended December 31, 2006 that are included in their respective 2006 Annual Reports on Form 10-K for the year ended December 31, 2006. The results10-K/A (Amendment No. 1).
Principles of operations presented in the accompanyingConsolidation
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. PNMR’s primary subsidiaries are not necessarily representative of operations for an entire year.PNM, TNMP, First Choice and, through May 31, 2007, Altura. PNM consolidates the PVNGS Capital Trust. PNMR shared services administrative and general expenses, which represent costs that are primarily driven by corporate level activities, are allocated to the business segments. Other significant intercompany transactions between PNMR, PNM, and TNMP include energy purchases and sales, transmission and distribution services, dividends paid on common stock, and interest paid by PVNGS Capital Trust to PNM. All intercompany transactions and balances have been eliminated. See Note 12.

Presentation

The Notes to Condensed Consolidated Financial Statements include disclosures for PNMR, PNM, and TNMP. For discussion purposes, this report will use the term “Company” when discussing matters of common applicability to PNMR, PNM and TNMP. Discussions regarding only PNMR, PNM or TNMP will be indicated as such. Certain amounts in the 2006 Condensed Consolidated Financial Statements and Notes thereto for PNMR, PNM and TNMP have been reclassified to conform to the 2007 financial statement presentation.

Income taxes, which previously had been separated between operating expense and other income and deductions in the Condensed Consolidated Statements of Earnings, is being presented on a combined basis. In addition, certain sections on the Condensed Consolidated Balance Sheets have been rearranged in the current presentation.
At December 31, 2006, certain income tax receivables and payables were shown on a net basis. At March 31,In 2007, these income tax receivables and payables are shown gross on the Condensed Consolidated Balance Sheet. For comparability, the December 31, 2006 balances have been reclassified resulting in income tax receivables and payables each being increased by $65.2 million for PNMR, $13.2 million for PNM, and $4.1 million for TNMP.

22

Principles of Consolidation

The Condensed Consolidated Financial Statements include the accounts of the Company and subsidiaries in which it owns a majority voting interest and the PVNGS Capital Trust. PNMR’s primary subsidiaries are PNM, TNMP, First Choice and Altura. Corporate administrative and general expenses, which represent costs that are driven primarily by corporate level activities, are allocated to the business segments. Other significant intercompany transactions between PNMR, PNM and TNMP in 2007 or 2006 include energy purchases and sales, dividends paid on common stock and consolidation of the PVNGS Capital Trust. All significant intercompany transactions and balances have been eliminated. (See Note 12.)

22
PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)

(2)
Acquisition of Twin Oaks

(2) Acquisitions and Disposition
On April 18, 2006, PNMR’s wholly owned subsidiary, Altura, purchased the Twin Oaks business, which included the 305 MW coal-fired Twin Oaks power plant located 150 miles south of Dallas, Texas. Effective June 1, 2007, PNMR contributed Altura, including the Twin Oaks business, to EnergyCo. See Note 11. The results of Twin Oaks operations have been included in the Consolidated Financial Statements of PNMR from that date.

April 18, 2006 through May 31, 2007. Beginning June 1, 2007, the Twin Oaks operations are included in EnergyCo, which is accounted for by PNMR using the equity method.
As part of the acquisition of Twin Oaks, PNMR determined the fair value of two contractual obligations to sell power. The first contract obligates PNMRAltura to sell power through September 2007 at which time the second contract begins and extends for three years. In comparing the pricing terms of the contractual obligations against the forward price of electricity in the relevant market, PNMR concluded that the contracts were below market. In accordance with SFAS 141, as amended, the contracts were recorded at fair value and willto be amortized as an increase in operating revenue over the contract lives.periods. The amortization matches the difference between the forward price curve and the contractual obligations for each month in accordance with the contract as of the acquisition date. For the first contract, which runs through September 30, 2007, $94.9 million was recorded in other current liabilities and $52.4 million was recorded in other deferred credits for a contract total of $147.3 million. As of MarchMay 31, 2007, the Company had amortized $90.9$105.9 million, including $20.0 million during the three months ended March 31, 2007 leaving a balance onand $15.0 million during the first contract of $56.4 million.period from April 1, 2007 through May 31, 2007. For the second contract, which begins October 1, 2007, $29.6 million was recorded in other deferred credits. See Note 4 for information on the accounting treatment of these contracts.

credits and no amortization has been recorded.
The following unaudited pro forma financial information presentsTwin Oaks purchase agreement also includes the development rights for a summarypossible 600-megawatt expansion of the plant, which PNMR classified as an intangible asset with a value of $25 million at the date of acquisition. PNMR reassessed this valuation during the quarter ended June 30, 2007 and determined that the asset was impaired, resulting in a pre-tax loss of $3.4 million, which was recorded in energy production costs.
On June 29, 2007, a wholly-owned subsidiary of PNMR purchased 100% of a trust, which owns a 2.27% undivided interest, representing 29.8 MW, in PVNGS Unit 2 and a 0.76% undivided interest in certain PVNGS common facilities, as well as a lease under which such facilities are leased to PNM. The beneficial interest in the trust was purchased for $44.0 million in cash and the assumption of $41.2 million in long-term debt payable to PVNGS Capital Trust. This long-term debt offsets a portion of the investment in PVNGS lessor notes and is eliminated in PNMR’s consolidated results of operationsfinancial statements. The funds for the three months ended March 31, 2006 assuming the acquisition of Twin Oaks had been completed as of January 1, 2006, including adjustments to reflect the allocation of the purchase price to the acquired net assets.were provided by PNMR. The pro formalease remains in effect and this transaction has no impact on PNM’s consolidated financial information does not include synergy savings that may result from the business combination and is not necessarily indicative of the results of operations if the acquisition had been effective as of this date.statements.

  
For the Three Months
 
  
Ended March 31, 2006
 
  (In thousands, except per share amounts) 
    
Operating revenues $694,948 
Operating expenses $637,004 
Net earnings $31,137 
Net earnings per common share:    
Basic $0.45 
Diluted $0.45 


(3)
Segment Information

(3) Segment Information
The following segment presentation is based on the methodology that the Company’s management uses for making operating decisions and assessing performance of its various business activities. The following presentation reportsfor operating results without regard tosegments reflects normal operations. Unusual and non-recurring items are included in the effect of accounting or regulatory changesCorporate and similar other items not related to normal operations.Other segment. As discussed below and effective January 1, 2007, TNMP’s New Mexico operations were transferred to PNM Electric. See Note 14. The 2006 segment information is presented as previously reported and does not reflect this transfer.

23

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
REGULATED OPERATIONS

PNM Electric

PNM Electric is a regulated utility that provides integrated electricity services that include the generation, transmission and distribution of electricity for retail electric customers in New Mexico and the sale of transmission to third parties as well as to the PNM Wholesale segment.

TNMP Electric

TNMP Electric is a regulated utility operating in Texas and, through December 31, 2006, in New Mexico. TNMP’s operations are subject to traditional costrate of servicereturn regulation. TNMP provides regulated transmission and distribution services in Texas under the TECA.

Through December 31, 2006, TNMP provided integrated electric services that included the transmission, distribution, and sale of electricity to its New Mexico customers as well as transmission to third parties and to PNM. Effective January 1, 2007, TNMP’s New Mexico operations were transferred to PNM. PNM Wholesale wasremains the sole electricity supplier for the transferred operations both before and after the transfer of assets.operations.

PNM Gas

PNM Gas is a regulated utility that distributes natural gas to most of the major communities in New Mexico. The customer base of PNM Gas includes both sales-service customers and transportation-service customers. PNM Gas purchases natural gas in the open market and resells it at cost to its sales-service customers. As a result, increases or decreases in gas revenues resulting from gas price fluctuations do not impact PNMR’s or PNM’s consolidated gross margin or earnings.

24

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
UNREGULATED OPERATIONS

Wholesale
Wholesale

for PNMR Wholesale includes PNM Wholesale and Altura and consists of the generation and sale of electricity into the wholesale market. PNM Wholesale sells the unused capacity of PNM’s jurisdictional assets as well as the capacity of PNM’s wholesale plants excluded from retail rates. Although the FERC has jurisdiction over the rates of PNM Wholesale, the Company includes PNM Wholesaleit is included in the unregulated portion of its businessoperations because PNM Wholesale is not subject to traditional rate of return regulation. AlturaTwin Oaks is included in the consolidated results of operations for PNMR from the date of its acquisition of Twin Oaks on April 18, 2006 (See Note 2).through May 31, 2007, at which time Altura was contributed to EnergyCo. See Notes 2 and 11. Power from Twin Oaks is sold at wholesale in markets served bythrough ERCOT.

24
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

First Choice

First Choice is a certified retail electric provider operating in Texas, which allows it to provide electricity to residential, small and large commercial, industrial and institutional customers. Although First Choice is regulated in certain respects by the PUCT, PNMR includes First Choiceit is included in the unregulated portion of its businessoperations because First Choice is not subject to traditional rate of return regulation.

EnergyCo
Upon the contribution of Altura to EnergyCo, EnergyCo became a separate segment for PNMR effective June 1, 2007. PNMR’s investment in EnergyCo is held in the Corporate and Other segment and is accounted for using the equity method of accounting and EnergyCo’s revenues and expenses are not included in PNMR’s consolidated results of operations or the following tables. See Notes 2 and 11.

25

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
CORPORATE AND OTHER

PNMR provides energy and technology related services through its wholly owned subsidiary, Avistar, and those results are included in the Corporate and Other segment. PNMR Services Company, which provides corporate services to the Company, and its subsidiaries, and EnergyCo, is also included in the Corporate and Other segment.

Adjustments related to EITF 03-11 are included in Corporate and Other. ThisEITF 03-11 requires a net presentation of all realized gains and losses on non-normal derivative transactions that do not physically deliver and that are offset by similar transactions during settlement. Management evaluates Wholesale operations on a gross presentation basis due to its primarily net asset-backed marketing strategy and the importance it places on the Company’s ability to repurchase and remarket previously sold capacity.

The following tables present summarized financial information for PNMR and PNM, as restated, by business segment. Explanations for footnotes (a) through (e) follow the tables.

26

 
PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)

PNMR SEGMENT INFORMATION
                             
  Regulated  Unregulated       
  PNM  TNMP          First  Corporate    
2007 Electric (d)  Electric (d)  PNM Gas  Wholesale  Choice  and Other  Consolidated 
  (In thousands) 
Three Months Ended June 30, 2007:
                            
Operating revenues $169,744  $26,480  $75,136  $185,697  $150,002  $(26,378)(a) $580,681 
Intersegment revenues  1,396   17,056   49   8,363   31   (26,895)  — 
                      
Total revenues
  171,140   43,536   75,185   194,060   150,033   (53,273)  580,681 
Cost of energy  65,881   7,221   45,095   165,639   125,863   (53,166)(a)  356,533 
Intersegment energy transfer  3,628   —   —   (3,628)  —   —   — 
                      
Gross margin
  101,631   36,315   30,090   32,049   24,170   (107)  224,148 
                      
Operating expenses  73,577   17,719   25,921   19,225   12,961   8,391(b)  157,794 
Depreciation and amortization  16,387   7,041   6,064   6,187   470   3,546   39,695 
                      
Operating income
  11,667   11,555   (1,895)  6,637   10,739   (12,044)  26,659 
                      
                             
Interest income  5,654   776   (543)  1,298   534   (678)  7,041 
Equity in earnings of EnergyCo  —   —   —   —   —   2,272   2,272 
Other income (deductions)  1,045   724   50   998   8   (3,640)  (815)
Net interest charges  (9,367)  (6,871)  (2,938)  (6,576)  (1,061)  (3,079)  (29,892)
                      
                             
Segment earnings before taxes
  8,999   6,184   (5,326)  2,357   10,220   (17,169)  5,265 
                             
Income taxes (benefit)  3,563   1,950   (2,109)  933   3,854   (23,166)(b,c)  (14,975)
                      
                             
Segment net earnings (loss)
 $5,436  $4,234  $(3,217) $1,424  $6,366  $5,997  $20,240 
                      
                             
Six Months Ended June 30, 2007:
                            
Operating revenues $337,619  $50,641  $291,620  $311,564  $285,520  $(42,782)(a) $1,234,182 
Intersegment revenues  3,634   33,823   97   17,047   78   (54,679)  — 
                      
Total revenues
  341,253   84,464   291,717   328,611   285,598   (97,461)  1,234,182 
Cost of energy  132,383   14,392   206,808   241,986   236,679   (97,195)(a)  735,053 
Intersegment energy transfer  (2,030)  —   —   2,030   —   —   — 
                      
Gross margin
  210,900   70,072   84,909   84,595   48,919   (266)  499,129 
                      
Operating expenses  146,213   36,369   51,533   44,926   28,118   10,852(b)  318,011 
Depreciation and amortization  32,772   14,041   12,245   13,946   941   6,192   80,137 
                      
Operating income
  31,915   19,662   21,131   25,723   19,860   (17,310)  100,981 
                      
                             
Interest income  11,771   864   453   2,736   1,017   988   17,829 
Equity in earnings of EnergyCo  —   —   —   —   —   1,610   1,610 
Other income (deductions)  1,182   973   172   1,296   (34)  (3,441)  148 
Net interest charges  (19,186)  (13,949)  (5,954)  (15,717)  (1,176)  (11,757)  (67,739)
                      
                             
Segment earnings before taxes
  25,682   7,550   15,802   14,038   19,667   (29,910)  52,829 
                             
Income taxes (benefit)  10,168   2,378   6,256   5,557   7,419   (28,855)(b,c)  2,923 
                      
                             
Segment net earnings (loss)
 $15,514  $5,172  $9,546  $8,481  $12,248  $(1,055) $49,906 
                      
                             
At June 30, 2007:
                            
Total Assets
 $2,431,469  $989,641  $663,498  $360,509  $408,702  $939,134  $5,792,953 
Goodwill
 $102,601  $260,144  $—  $—  $131,768  $—  $494,513 

27

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
Summarized financial information for NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
PNMR by businessSEGMENT INFORMATION
                             
  Regulated  Unregulated       
  PNM  TNMP          First  Corporate    
2006 Electric (d)  Electric (d)  PNM Gas  Wholesale  Choice  and Other  Consolidated 
  (In thousands) 
Three Months Ended June 30, 2006:
                            
Operating revenues $144,080  $43,437  $68,869  $141,820  $154,908  $(6,445)(a) $546,669 
Intersegment revenues  2,256   18,019   92   12,674   —   (33,041)  — 
                      
Total revenues
  146,336   61,456   68,961   154,494   154,908   (39,486)  546,669 
Cost of energy  43,308   22,652   42,168   119,869   118,073   (39,570)(a)  306,500 
Intersegment energy transfer  8,524   —   —   (8,524)  —   —   — 
                      
Gross margin
  94,504   38,804   26,793   43,149   36,835   84   240,169 
Operating expenses  66,887   20,957   25,881   18,380   15,367   2,452(e)  149,924 
Depreciation and amortization  14,316   7,831   5,994   7,155   510   2,147   37,953 
                      
Operating income
  13,301   10,016   (5,082)  17,614   20,958   (4,515)  52,292 
                      
                             
Interest income  6,626   81   468   1,323   116   302   8,916 
Other income (deductions)  216   2,097   (11)  330   (225)  (1,110)  1,297 
Net interest charges  (8,946)  (7,271)  (3,091)  (9,512)  (248)  (7,430)  (36,498)
                      
                             
Segment earnings before income taxes
  11,197   4,923   (7,716)  9,755   20,601   (12,753)  26,007 
                             
Income taxes (benefit)  4,433   2,086   (3,055)  3,873   7,321   (4,634)(e)  10,024 
                      
                             
Segment net earnings (loss)
 $6,764  $2,837  $(4,661) $5,882  $13,280  $(8,119) $15,983 
                      
                             
Six Months Ended June 30, 2006:
                            
Operating revenues $280,676  $90,406  $276,345  $306,131  $259,990  $(11,078)(a) $1,202,470 
Intersegment revenues  4,438   33,735   141   27,851   —   (66,165)  — 
                      
Total revenues
  285,114   124,141   276,486   333,982   259,990   (77,243)  1,202,470 
Cost of energy  88,782   49,823   199,859   262,746   208,408   (77,146)(a)  732,472 
Intersegment energy transfer  3,346   —   —   (3,346)  —   —   — 
                      
Gross margin
  192,986   74,318   76,627   74,582   51,582   (97)(e)  469,998 
Operating expenses  134,366   42,489   50,971   30,165   28,545   2,618   289,154 
Depreciation and amortization  29,288   15,563   11,914   10,316   1,008   4,194   72,283 
                      
Operating income
  29,332   16,266   13,742   34,101   22,029   (6,909)  108,561 
                      
                             
Interest income  13,137   336   1,733   2,602   508   751   19,067 
Other income (deductions)  414   4,226   90   1,036   (235)  (742)  4,789 
Net interest charges  (17,543)  (14,498)  (6,088)  (13,333)  (472)  (13,127)  (65,061)
                      
                             
Segment earnings before income taxes
  25,340   6,330   9,477   24,406   21,830   (20,027)  67,356 
                             
Income taxes (benefit)  10,032   2,325   3,752   9,673   7,760   (8,170)(e)  25,372 
                      
                             
Segment net earnings (loss)
 $15,308  $4,005  $5,725  $14,733  $14,070  $(11,857) $41,984 
                      
                             
At June 30, 2006:
                            
Total Assets
 $1,935,934  $1,131,593  $616,678  $1,082,632  $374,640  $596,066  $5,737,543 
Goodwill
 $—  $363,764  $—  $—  $131,677  $—  $495,441 

28

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
PNM SEGMENT INFORMATION
                     
  PNM  PNM  PNM       
2007 Electric (d)  Gas  Wholesale  Other  Consolidated 
  (In thousands) 
Three Months Ended June 30, 2007:
                    
Operating revenues $169,744  $75,136  $157,104  $(26,541)(a) $375,443 
Intersegment revenues  1,396   49   8,364   (9,809)  — 
                
Total revenues
  171,140   75,185   165,468   (36,350)(a)  375,443 
Cost of energy  65,881   45,095   155,742   (36,304)  230,414 
Intersegment energy transfer  3,628   —   (3,628)  —   — 
                
Gross margin
  101,631   30,090   13,354   (46)  145,029 
                
Operating expenses  73,577   25,921   14,159   (196)  113,461 
Depreciation and amortization  16,387   6,064   3,113   638   26,202 
                
Operating income
  11,667   (1,895)  (3,918)  (488)  5,366 
                
                     
Interest income  5,654   (543)  1,270   269   6,650 
Other income (deductions)  1,045   50   997   (102)  1,990 
Net interest charges  (9,367)  (2,938)  (3,552)  218   (15,639)
                
                     
Segment earnings before income taxes
  8,999   (5,326)  (5,203)  (103)  (1,633)
                     
Income taxes (benefit)  3,563   (2,109)  (2,060)  (84)  (690)
                
                     
Segment net earnings (loss)
 $5,436  $(3,217) $(3,143) $(19) $(943)
                
                     
Six Months Ended June 30, 2007:
                    
Operating revenues $337,619  $291,620  $246,168  $(43,155)(a) $832,252 
Intersegment revenues  3,634   97   17,048   (20,779)  — 
                
Total revenues
  341,253   291,717   263,216   (63,934)  832,252 
Cost of energy  132,383   206,808   219,923   (63,819)(a)  495,295 
Intersegment energy transfer  (2,030)  —   2,030   —   — 
                
Gross margin
  210,900   84,909   41,263   (115)  336,957 
                
Operating expenses  146,213   51,533   27,600   (347)  224,999 
Depreciation and amortization  32,772   12,245   6,263   1,278   52,558 
                
Operating income
  31,915   21,131   7,400   (1,046)  59,400 
                
                     
Interest income  11,771   453   2,591   537   15,352 
Other income (deductions)  1,182   172   1,295   (201)  2,448 
Net interest charges  (19,186)  (5,954)  (7,194)  603   (31,731)
                
                     
Segment earnings before income taxes
  25,682   15,802   4,092   (107)  45,469 
                     
Income taxes (benefit)  10,168   6,256   1,620   (380)  17,664 
                
                     
Segment net earnings
 $15,514  $9,546  $2,472  $273  $27,805 
                
                     
At June 30, 2007:
                    
Total assets
 $2,451,206  $671,002  $362,912  $532,942  $4,018,062 
Goodwill
 $102,601  $—  $—  $—  $102,601 

29

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
PNM SEGMENT INFORMATION
                     
  PNM  PNM  PNM       
2006 Electric (d)  Gas  Wholesale  Other  Consolidated 
  (In thousands) 
Three Months Ended June 30, 2006:
                    
Operating revenues $144,080  $68,869  $109,063  $(6,642)(a) $315,370 
Intersegment revenues  2,133   92   —   (2,225)  — 
Affiliated sales  123   —   12,674   —   12,797 
                
Total revenues
  146,336   68,961   121,737   (8,867)  328,167 
Cost of energy  43,308   42,168   108,756   (8,822)(a)  185,410 
Intersegment energy transfer  8,524   —   (8,524)  —   — 
                
Gross margin
  94,504   26,793   21,505   (45)  142,757 
                
Operating expenses  66,887   25,881   14,928   (442)  107,254 
Depreciation and amortization  14,316   5,994   3,191   788   24,289 
                
Operating income
  13,301   (5,082)  3,386   (391)  11,214 
                
                     
Interest income  6,626   468   1,276   300   8,670 
Other income (deductions)  216   (11)  315   (451)  69 
Net interest charges  (8,946)  (3,091)  (3,842)  980   (14,899)
                
                     
Segment earnings before income taxes
  11,197   (7,716)  1,135   438   5,054 
                     
Income taxes (benefit)  4,433   (3,055)  450   362   2,190 
                
                     
Segment net earnings (loss)
 $6,764  $(4,661) $685  $76  $2,864 
                
                     
Six Months Ended June 30, 2006:
                    
Operating revenues $280,676  $276,345  $273,374  $(11,383)(a) $819,012 
Intersegment revenues  4,191   141   —   (4,332)  — 
Affiliated sales  247   —   27,851   —   28,098 
                
Total revenues
  285,114   276,486   301,225   (15,715)  847,110 
Cost of energy  88,782   199,859   251,633   (15,602)(a)  524,672 
Intersegment energy transfer  3,346   —   (3,346)  —   — 
                
Gross margin
  192,986   76,627   52,938   (113)  322,438 
                
Operating expenses  134,366   50,971   26,713   (2,137)  209,913 
Depreciation and amortization  29,288   11,914   6,352   1,590   49,144 
                
Operating income
  29,332   13,742   19,873   434   63,381 
                
                     
Interest income  13,137   1,733   2,555   598   18,023 
Other income (deductions)  414   90   1,021   (611)  914 
Net interest charges  (17,543)  (6,088)  (7,663)  2,975   (28,319)
                
                     
Segment earnings before income taxes
  25,340   9,477   15,786   3,396   53,999 
                     
Income taxes  10,032   3,752   6,250   1,129   21,163 
                
                     
Segment net earnings
 $15,308  $5,725  $9,536  $2,267  $32,836 
                
                     
At June 30, 2006:
                    
Total assets
 $1,943,340  $616,678  $410,579  $485,720  $3,456,317 

30

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
TNMP SEGMENT INFORMATION
TNMP operates in only one reportable segment; therefore tabular presentation of segment data is not presented.
Footnote explanations for the three months ended March 31, 2007 isabove tables are as follows (in thousands):follows:
    
Regulated
   Unregulated      
Segments of Business 
PNM
 
TNMP
 
PNM
   
First
 
Corporate
    
  
Electric (c)
 
Electric (c)
 
Gas
 
Wholesale
 
Choice
 
and Other
  
Consolidated
 
                 
2007:
                
Operating revenues $167,875 $24,161 $216,484 $125,867 $135,518 $(16,404) (a) $653,501 
Intersegment revenues  2,238  16,767  48  8,684  47  (27,784)   - 
Total Revenues
  170,113  40,928  216,532  134,551  135,565  (44,188)   653,501 
Cost of energy  66,502  7,171  161,713  76,347  110,816  (44,029) (a)  378,520 
Intersegment energy transfer  (5,658) -  -  5,658  -  -    - 
Gross Margin
  109,269  33,757  54,819  52,546  24,749  (159)   274,981 
Operating expenses  72,312  18,650  25,612  25,701  15,157  2,461  (b)  159,893 
Depreciation and amortization  16,385  7,000  6,181  7,759  471  2,646    40,442 
Income taxes  4,257  352  7,922  3,937  3,407  (5,906) (b)  13,969 
Operating Income
  16,315  7,755  15,104  15,149  5,714  640    60,677 
                         
Interest income  6,117  88  996  1,438  483  1,666    10,788 
Other income (deductions)  137  249  122  298  (42) (463)   301 
Other income taxes  (2,476) (76) (443) (687) (157) (111)   (3,950)
Net interest charges  (9,819) (7,078) (3,015) (9,141) (115) (8,679)   (37,847)
                         
Segment Net Earnings (Loss)
 $10,274 $938 $12,764 $7,057 $5,883 $(6,947)  $29,969 
                         
Gross Property Additions
 $61,921 $7,804 $7,150 $10,589 $(114)$2,134   $89,484 
                         
At March 31, 2007: $ 2,357,886 $ 986,568 $684,430 $1,044,787 $342,472 $716,259   $6,132,402 
Total Assets                        
Goodwill $ 102,562 $ 260,183   $- $- $ 131,768 $ -   $494,513  

(a) Reflects EITF 03-11 impact under which wholesale revenuesof $26.5 million and $6.6 million for the associated cost of energy of $16.6three months ended June 30, 2007 and 2006 and $43.2 million are reclassified to a net margin basis in accordance with GAAP.and $11.4 million for the six months ended June 30, 2007 and 2006.
(b)
 Includes(b)For the three months and six months ended June 30, 2007, includes EnergyCo formation costs of $1.2$3.0 million and $4.2 million, impairment loss on Twin Oaks intangible assets of $3.4 million and $3.4 million, and a loss related to the contribution of Altura to EnergyCo of $3.6 million and $3.6 million (all included in operating expensesexpenses) and an income tax benefit of $0.5$4.0 million includedand $4.4 million (included in income taxes.taxes).
(c)Includes an income tax benefit of $16.0 million for the settlement with the IRS on previously unrecognized income tax benefits. See Note 15.
(d) Operations and assets, including goodwill, transferred from TNMP Electric to PNM Electric on January 1, 2007 are included in PNM Electric and excluded from TNMP Electric.



Summarized financial information for PNMR by business segment for the three months ended March 31, 2006 is as follows (in thousands):
    
Regulated
   
Unregulated
      
Segments of Business 
PNM
 
TNMP
 
PNM
   
First
 
Corporate
    
  
Electric (c)
 
Electric (c)
 
Gas
 
Wholesale
 
Choice
 
and Other
  
Consolidated
 
2006:
                
Operating revenues $136,596 $46,969 $207,476 $164,311 $105,082 $(4,633)(a) $655,801 
Intersegment revenues  2,182  15,716  49  15,177  -  (33,124)   - 
Total Revenues
  138,778  62,685  207,525  179,488  105,082  (37,757)   655,801 
Cost of energy  45,474  27,172  157,691  142,877  90,335  (37,577)(a) 425,972 
Intersegment energy transfer  (5,178) -  -  5,178  -  -    - 
Gross Margin
  98,482  35,513  49,834  31,433  14,747  (180)   229,829 
Operating expenses  67,154  21,532  25,090  11,785  13,178  167 (b) 138,906 
Depreciation and amortization  14,972  7,731  5,920  3,161  498  2,048    34,330 
Income taxes  3,072  (673) 6,266  5,014  300  (3,732)(b) 10,247 
Operating Income
  13,284  6,923  12,558  11,473  771  1,337    46,346 
                         
Interest income  6,511  255  1,265  1,279  392  449    10,151 
Other income (deductions)  198  2,129  101  706  (10) 368    3,492 
Other income taxes  (2,656) (912) (541) (786) (139) (67)   (5,101)
Net interest charges  (8,597) (7,227) (2,997) (3,821) (224) (5,697)   (28,563)
                         
Segment Net Earnings (Loss)
 $8,740 $1,168 $10,386 $8,851 $790 $(3,610)  $26,325 
                         
Gross Property Additions
 $30,316 $7,216 $4,365 $3,751 $297 $5,782   $51,727 
                         
At March 31, 2006:
                        
Total Assets
 $1,913,142 $1,168,674 $650,588 $406,267 $327,431 $536,861   $5,002,963 
Goodwill
 $- $367,245 $- $- $131,910 $-   $499,155 

(a)  Reflects EITF 03-11 impact, under which wholesale revenuesElectric in 2007, and the associated cost of energy of $4.7 million are reclassified to a net margin basis in accordance with GAAP.
(b)  Includes TNP acquisition integration costs of $0.9 million included in operating expenses and an income tax benefit of $0.4 million included in income taxes.
(c)  Operations and assets, including goodwill, transferred from TNMP Electric to PNM Electric on January 1, 2007 are excluded from PNM Electric and included in TNMP Electric.Electric in 2006.
(e)For the three months and six months ended June 30, 2006, includes TNP and Twin Oaks acquisition integration costs of $1.8 million and $2.8 million and an income tax benefit of $0.7 million and $1.1 million in income taxes.

(4) Energy Related Derivative Contracts

OVERVIEW
The Company may enter into agreements for the sale or purchase of derivative instruments, including options and swaps, to manage risks related to changes in natural gas prices and electric prices and to take advantage of existing market opportunities. At the inception of any such transaction meeting the definition of a hedge, the Company documents the relationships between the hedging instruments and the items being hedged. This documentation includes the strategy that supports executing the specific transaction. SFAS 133 requires that certain derivative instruments, which the Company classifies as mark-to-market instruments and hedge instruments, be carried at fair value in the Condensed Consolidated Balance Sheets. Note 8 of Notes to Consolidated Financial Statements in the 2006 Annual Reports on Form 10-K/A (Amendment No. 1) contains information regarding energy related derivative contracts. See Note 7 for additional information regarding interest rate swaps.
Changes in the fair value of mark-to-market instruments are reflected in results of operations, with changes related to sales contracts included in operating revenues and changes related to purchase contracts included in cost of energy sold. Changes in the fair value of hedge instruments are included in accumulated other comprehensive income, except for amounts related to the PGAC that are recoverable from or refundable to customers, which are included in regulatory assets and liabilities on the Condensed Consolidated Balance Sheets. Amounts due to or from counterparties for energy related derivative contracts are shown as derivative contracts on the Condensed Consolidated Balance Sheets.
Gains or losses related to hedge instruments are reclassified from accumulated other comprehensive income when the hedged transaction settles and impacts earnings. The amounts shown as current assets and current liabilities relate to contracts that will be settled in the next twelve months.

31

27
PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

PNM SEGMENT INFORMATION

Summarized financial information for PNM by business segment for the three months ended March 31, 2007 is as follows (in thousands):
Segments of Business 
PNM
 
PNM
 
PNM
 
Corporate
    
  
Electric (b)
 
Gas
 
Wholesale
 
and Other
  
Consolidated
 
             
2007:
            
Operating revenues $167,875 $216,484 $89,064 $(16,614)(a) $456,809 
Intersegment revenues  2,238  48  8,684  (10,970)   - 
Total Revenues
  170,113  216,532  97,748  (27,584)   456,809 
Cost of energy  66,502  161,713  64,181  (27,515)(a)  264,881 
Intersegment energy transfer  (5,658) -  5,658  -    - 
Gross Margin
  109,269  54,819  27,909  (69)   191,928 
Operating expenses  72,312  25,612  13,441  (151)   111,214 
Depreciation and amortization  16,385  6,181  3,150  640    26,356 
Income taxes  4,257  7,922  3,039  (386)   14,832 
Operating Income
  16,315  15,104  8,279  (172)   39,526 
                   
Interest income  6,117  996  1,321  268    8,702 
Other income (deductions)  137  122  298  (99)   458 
Other income taxes  (2,476) (443) (641) 68    (3,492)
Net interest charges  (9,819) (3,015) (3,642) 384    (16,092)
                   
Segment Net Earnings
 $10,274 $12,764 $5,615 $449   $29,102 
                   
Gross Property Additions
 $61,921 $7,150 $11,264 $-   $80,335 
                   
At March 31, 2007:
                  
Total Assets
 $2,392,709 $693,168 $395,056 $540,547   $4,021,480 
Goodwill
 $102,562 $- $- $-   $102,562 

(a)  Reflects EITF 03-11 impact, under which wholesale revenues and the associated cost of energy of $16.6 million are reclassified to a net margin basis in accordance with GAAP.
(b)  Includes operations and assets, including goodwill, transferred from TNMP Electric to PNM Electric on January 1, 2007.


28
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Summarized financial information for PNM by business segment for the three months ended March 31, 2006 is as follows (in thousands):
Segments of Business 
PNM
 
PNM
 
PNM
 
Corporate
    
  
Electric (b)
 
Gas
 
Wholesale
 
and Other
  
Consolidated
 
2006:
            
Operating revenues $136,596 $207,476 $164,311 $(4,741)(a) $503,642 
Intersegment revenues  2,058  49  -  (2,107)   - 
Affiliated Sales  124  -  15,177  -    15,301 
Total Revenues
  138,778  207,525  179,488  (6,848)   518,943 
Cost of energy  45,474  157,691  142,877  (6,780)(a)  339,262 
Intersegment energy transfer  (5,178) -  5,178  -    - 
Gross Margin
  98,482  49,834  31,433  (68)   179,681 
Operating expenses  67,154  25,090  11,785  (1,694)   102,335 
Depreciation and amortization  14,972  5,920  3,161  802    24,855 
Income taxes  3,072  6,266  5,014  610    14,962 
Operating Income
  13,284  12,558  11,473  214    37,529 
                   
Interest income  6,511  1,265  1,279  298    9,353 
Other income/(deductions)  198  101  706  (160)   845 
Other income taxes  (2,656) (541) (786) (28)   (4,011)
Net interest charges  (8,597) (2,997) (3,821) 1,995    (13,420)
                   
Segment Net Earnings
 $8,740 $10,386 $8,851 $2,319   $30,296 
                   
Gross Property Additions
 $30,316 $4,365 $3,751 $374   $38,806 
                   
At March 31, 2006:
                  
Total Assets
 $1,913,142 $650,588 $406,267 $480,548   $3,450,545 

(a)  Reflects EITF 03-11 impact, under which wholesale revenues and the associated cost of energy of $4.7 million are reclassified to a net margin basis in accordance with GAAP.
(b)  Excludes operations and assets, including goodwill, transferred from TNMP Electric to PNM Electric on January 1, 2007.

TNMP SEGMENT INFORMATION

TNMP operates in only one reportable segment; therefore tabular presentation of segment data is not presented.


29
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(4)
Energy Related Derivative Contracts

OVERVIEW

GAAP defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. Although management uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique. Fair value is based on current market quotes.quotes to the extent they are available and applicable to the Company’s financial instruments, supplemented by modeling techniques and assumptions made by the Company. The market prices used to fair value the Company’s energy portfolio are based on closing exchange prices and over-the-counter quotations.

The Company may enter into agreements for the sale or purchaseValuation of certain derivative instruments including optionsrequires the use of models and swaps, to manage risks related to changesassumptions. At June 30, 2007, PNM implemented new market price curve models and assumptions. This change in natural gasvaluation is a change in accounting estimate under SFAS 154. The effect of the change in estimate was a decrease in net earnings for PNMR and PNM of $1.2 million, which is $0.015 per share for PNMR. Fluctuating commodity prices and electric prices. At the inception of any such transaction,on open positions prevent the Company documentsfrom predicting with certainty the relationships between the hedging instruments and the items being hedged. This documentation includes the strategy that supports executing the specific transaction. See Note 7 for additional information regarding interest rate swaps.

The Company utilizes the following derivative instruments by commodity type:

Energy Contracts - forward derivative physical and financial purchases and sales of electricity and gas with the intent of optimizing the Company’s net generation position and to take advantage of existing market opportunities.

Gas Fixed-for-Float Swaps - forward financial and physical contracts and sales of fixed-for-float price swaps to manage the price risk associated with electricity and gas and to hedge the variable component of certain heat-rate based power products.

Options - forward physical and financial purchases and sales of electric and gas option-type derivative instruments with the intent of optimizing the Company’s net generation position and to take advantage of existing market opportunities.

PGAC portion of options, swaps and hedges - forward financial and physical transactions to hedge a portion of PNM’s winter gas purchase portfolio.

PNMR

In addition to the commodity transactions that PNM enters into as described above, two other subsidiaries of PNMR enter into commodity transactions.

Normal Sales and Purchases Transactions

PNMR’s subsidiary, First Choice, enters into physical energy contracts to meet the needs of its competitive customer load. These contracts qualify for the “normal sales and purchases” accounting exception pursuant to SFAS 133, as the energy purchased is physically delivered and sold to First Choice customers within ERCOT. Expenses related to these purchases are recorded in cost of energy at the time of delivery.

PNMR’s subsidiary, Altura, at the time of acquisition of Twin Oaks (see Note 2), assumed an existing contract for the energy outputfuture impact of the Twin Oaks facility. This contract qualifieschange in estimate.
PNM recognized an ineffectiveness loss on its fair value hedge of $0.9 million in the six months ended June 30, 2007, which is included in operating revenues. Ineffectiveness for certain cash flow hedges was immaterial during the “normal sales and purchases” accounting exception pursuant to SFAS 133, as the energy sold is physically delivered within ERCOT to meet the needs of the purchaser's load requirements. Revenue related to this sale is recorded in electric revenues at the time of delivery.six months ended June 30, 2007.

32

30
PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)PNMR

Hedge Accounting Transactions

First Choice also enters into natural gas swaps and options to hedge the variable component of certain heat-rate power contracts used to serve retail customer load. The heat-rate contracts are priced based on a gas-to-power conversion factor using the NYMEX last day natural gas rates. Both the natural gas swaps and options qualify for cash flow hedge accounting treatment under SFAS 133. The natural gas swaps and the underlying power contract both contain like terms as both are indexed to NYMEX last day rates. Therefore the transactions are effective and no hedge ineffectiveness is recorded. The settlement day for the natural gas option contracts is one day prior to NYMEX last day. PNMR has tested the effectiveness and determined that the transactions are highly effective in offsetting changes associated with the underlying power contract. The ineffectiveness reported through the income statement as of March 2007 was immaterial. The maximum length of time over which First Choice is hedging its exposure to the variability in future cash flows is through October 2007.

Altura, at the time of the acquisition of Twin Oaks (see Note 2), assumed an existing forward contract for the energy output of the Twin Oaks facility. This forward physical contract is designated as a hedge of the cash flow risk associated with Twin Oaks’ forecasted excess generation. This hedge is effective in offsetting future cash flow volatility caused by changes in the forward price of electricity and qualifies for hedge accounting under SFAS 133. There is no hedge ineffectiveness on this transaction because the hedged transaction and the hedged item are based on the same forward curve. Any market changes in valuation are recorded in other comprehensive income. The length of time over which Twin Oaks is hedging its exposure to the variability in future cash flows is through December 2010.

Mark-to-Market Transactions

Electricity Contracts

First Choice enters into various forward physical and financial contracts for the purchase and sale of electricity with the intent of optimizing market opportunities. These contracts, which are derivatives, do not qualify for “normal” or “hedge” designation pursuant to SFAS 133, and are marked to market. The change in market valuation is recognized in earnings each period.

Gas Contracts

First Choice enters into various gas contracts on a trading basis to optimize market opportunities. These contracts are marked to market in accordance with SFAS 133. The change in market valuation is recognized in earnings each period.


31
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

PNMR’s commodity derivative instruments are summarized as follows:

                 
  June 30,  December 31,  June 30,  December 31, 
  2007  2006  2007  2006 
Type of Derivative Mark-to-Market Instruments  Hedge Instruments 
  (In thousands) 
Current Assets
                
Energy contracts $26,686  $17,773  $1,489  $7,208 
Gas fixed-for-float swaps and futures  56,341   21,875   2,778   4,655 
Options  4,294   4,032   12   — 
PGAC portion of options, swaps and hedges  —   —   6,831   16,748 
             
Total current assets  87,321   43,680   11,110   28,611 
             
                 
Deferred Charges
                
Energy contracts  4,335   2,666   —   26,991 
Gas fixed-for-float swaps  17,521   7,288   2,943   1,872 
Options  2,749   1,028   —   — 
PGAC portion of options, swaps and hedges  —   —   —   3,337 
             
Total deferred charges  24,605   10,982   2,943   32,200 
             
                 
Total Assets
  111,926   54,662   14,053   60,811 
             
                 
Current Liabilities
                
Energy contracts  (37,286)  (16,499)  —   — 
Gas fixed-for-float swaps  (51,499)  (21,518)  (1,339)  (6,845)
Options  (10,035)  (4,003)  (91)  (109)
PGAC portion of options, swaps and hedges  —   —   (6,831)  (16,748)
             
Total current liabilities  (98,820)  (42,020)  (8,261)  (23,702)
             
                 
Long-term Liabilities
                
Energy contracts  (9,499)  (7,472)  (1,666)  (154)
Gas fixed-for-float swaps  (4,183)  (862)  (387)  (1,915)
Options  (3,898)  (842)  —   — 
PGAC portion of options, swaps and hedges  —   —   —   (3,337)
             
Total long-term liabilities  (17,580)  (9,176)  (2,053)  (5,406)
             
                 
Total Liabilities
  (116,400)  (51,196)  (10,314)  (29,108)
             
                 
Net Total Assets and Liabilities
 $(4,474) $3,466  $3,739  $31,703 
             
  
March 31,
 
December 31,
 
March 31,
 
December 31,
 
  
2007
 
2006
 
2007
 
2006
 
Type of Derivative
 
Mark-to-Market Instruments
 
Hedge Instruments
 
    (In thousands)   
Current Assets
         
Energy contracts $14,924 $17,773 $5,494 $7,208 
Gas fixed-for-float swaps and futures  19,828  21,875  3,901  4,655 
Options  4,682  4,032  -  - 
Derivative assets for gas off-system sales             
forward physical trades  479  -  -  - 
PGAC portion of options, swaps and hedges  -  -  3,302  16,748 
Total Current Assets  39,913  43,680  12,697  28,611 
              
Deferred Charges
             
Energy contracts  2,581  2,666  -  26,991 
Gas fixed-for-float swaps  14,041  7,288  3,200  1,872 
Options  3,075  1,028  -  - 
PGAC portion of options, swaps and hedges  -  -  749  3,337 
Total Deferred Charges  19,697  10,982  3,949  32,200 
              
Total Assets
  59,610  54,662  16,646  60,811 
              
Current Liabilities
             
Energy contracts  (18,782) (16,499) (808) - 
Gas fixed-for-float swaps  (17,139) (21,518) (384) (6,845)
Options  (4,008) (4,003) -  (109)
PGAC portion of options, swaps and hedges  -  -  (3,302) (16,748)
Total Current Liabilities  (39,929) (42,020) (4,494) (23,702)
              
Long-Term Liabilities
             
Energy contracts  (6,583) (7,472) (6,356) (154)
Gas fixed-for-float swaps  (2,144) (862) (835) (1,915)
Options  (3,693) (842) -  - 
PGAC portion of options, swaps and hedges  -  -  (749) (3,337)
Total Long-Term Liabilities  (12,420) (9,176) (7,940) (5,406)
              
Total Liabilities
  (52,349) (51,196) (12,434) (29,108)
              
Net Total Assets and Liabilities
 $7,261 $3,466 $4,212 $31,703 

33


Gains or losses related to hedged instruments are reclassified from accumulated other comprehensive income when the hedged transaction settles and impacts earnings. The amounts, other than PGAC, shown as current assets and current liabilities, relate to contracts that will be settled in the next twelve months.


32
PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)PNM

PNM

Normal Sales and Purchases Transactions

PNM enters into physical gas contracts to meet the needs of its gas retail sales-service customers. These contracts qualify for “the normal sales and purchases” accounting exceptions pursuant to SFAS 133.

PNM also enters into forward physical contracts for the sale of PNM’s electric capacity in excess of its retail and wholesale firm requirement needs, including reserves. In addition, PNM enters into forward physical contracts for the purchase of retail needs, including reserves, when resource shortfalls are forecast to exist. PNM generally accounts for these as normal sales and purchases as defined by SFAS 133. From time to time PNM makes forward purchases to serve its retail needs when the cost of purchased power is less than the incremental cost of its generation.

The operations of PNM, including both firm commitments and other wholesale sale activities, are managed primarily through a net asset-backed strategy, whereby PNM’s aggregate net open position is covered by its own excess generation capabilities. PNM is exposed to market risk if its generation capabilities were disrupted or if its retail load requirements were greater than anticipated. If PNM were required to cover all or a portion of its net open contract position, it would have to meet its commitments through market purchases.

Hedge Accounting Transactions

PGAC

The NMPRC has authorized PNM to use financial instruments to hedge certain portions of natural gas supply contracts during the winter months to protect PNM’s sales-service gas customers from the risk of adverse price fluctuations in the natural gas market. PNM has elected to use call options and financial swaps to hedge certain portions of the physical gas purchase contracts used exclusively for resale to PNM’s sales-service gas customers. The contracts qualify for hedge accounting treatment under SFAS 133. Option premium expenses are deferred on PNM’s balance sheet as a regulatory asset as incurred and amortized into the PGAC for recovery as a component of gas costs during the winter heating season. Option premium expense and hedge gains and losses from both types of instruments are passed through PNM’s PGAC with no income statement effect if deemed prudently incurred by the NMPRC.

PNM also enters into financial swaps to hedge the variable portion of its winter gas portfolio. PNM has hedged 6.1 million MMBtus utilizing the fixed-for-float strategy for 2006-2007 and the 2007-2008 winter heating season. Any settled fixed-for-float financial transactions are passed through PNM’s PGAC.

Wholesale Electricity

PNM enters into various forward physical contracts to hedge the cash flow risk associated with PNM’s forecasted excess generation. These hedges are effective in offsetting future cash flow volatility caused by changes in the forward price of electricity and qualify for hedge accounting under SFAS 133. There is no hedge ineffectiveness on these transactions because the hedged transactions and the hedged item are based on the same forward curve. Any market changes in valuation are recorded in other comprehensive income. The maximum length of time over which PNM is hedging its exposure to the variability in future cash flows is through September 2008.

33
Wholesale Gas

PNM also enters into various fixed-for-float price swaps to manage the costs associated with running PNM’s gas generation units. The hedges are effective in offsetting future cash flow volatility caused by changes in natural gas prices. There is no hedge ineffectiveness on these transactions because the hedged transactions and the hedged item are based on the same forward curve. Any market changes in valuation from inception until March 30, 2007 are recorded in other comprehensive income; market valuation changes from March 30, 2007 until settlement are marked to market. The maximum length of time over which PNM is hedging its exposure to the variability in future cash flows is through June 2016.

SO2 Allowances

PNM has entered into a fair value hedge to protect against fair-value changes to the Company’s SO2 emission allowances inventory. PNM assessed the effectiveness of the fair value hedge based on the changes in the intrinsic value of the hedging instrument and the hedged item. At March 31, 2007, PNM recognized an ineffectiveness gain on the hedging transaction of $1.1 million.

Mark-to-Market Transactions

Wholesale Electricity

PNM enters into various commodity derivative instruments, including but not limited to, forward physical contracts and options for the purchase and sale of electricity with the intent of optimizing market opportunities. These derivative contracts do not qualify for “the normal sales and purchases” exceptions or “hedge” designation pursuant to SFAS 133, and are marked to market. The change in market valuation is recognized in earnings each period.
Wholesale Gas

PNM enters into various fixed for float price swaps and physical gas purchases to manage the price risk of certain forward sales of power and the costs associated with running PNM's gas generation units. These contracts are marked to market in accordance with GAAP. The change in market valuation is recognized in earnings each period.

Liquidity Reserves

The market prices used to value PNM mark-to-market energy transactions and cash flow contracts are based on index prices and broker quotations. PNM enters into long-term physical option contracts and long-term financial gas swap contracts that are classified as derivatives and consequently marked to market through earnings. Generally, market data to value these types of transactions at PNM is available for up to 5 years for gas swaps and up to 18 months for options. The remaining time period, referred to as the illiquid period, is valued using internally developed pricing data. As a result, PNM records liquidity reserves on these contracts for market gains and losses in the illiquid period. PNM regularly assesses the validity and availability of pricing data for the illiquid period of its derivative transactions and adjusts its liquidity reserves, accordingly.

PNM also records liquidity reserves for the illiquid period for electricity contracts. This period is greater than five years which requires internal model assumptions and calculations to establish a forward market curve.


34
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

PNM’s commodity derivative instruments are summarized as follows:

                 
  June 30,  December 31,  June 30,  December 31, 
  2007  2006  2007  2006 
Type of Derivative Mark-to-Market Instruments  Hedge Instruments 
  (In thousands) 
Current Assets
                
Energy contracts $13,803  $16,374  $1,489  $1,057 
Gas fixed-for-float swaps  17,908   1,950   2,755   1,615 
Options  2,505   2,986   —   — 
PGAC portion of options, swaps and hedges  —   —   6,831   16,748 
             
Total current assets  34,216   21,310   11,075   19,420 
             
                 
Deferred Charges
                
Energy contracts  372   2,666   —   — 
Gas fixed-for-float swaps  14,108   7,101   2,943   1,872 
Options  2,414   825   —   — 
PGAC portion of options, swaps and hedges  —   —   —   3,337 
             
Total deferred charges  16,894   10,592   2,943   5,209 
             
                 
Total Assets
  51,110   31,902   14,018   24,629 
             
                 
Current Liabilities
                
Energy contracts  (15,552)  (10,928)  —   — 
Gas fixed-for-float swaps  (28,653)  (6,440)  (231)  (2,872)
Options  (5,709)  (3,255)  —   — 
PGAC portion of options, swaps and hedges  —   —   (6,831)  (16,748)
             
Total current liabilities  (49,914)  (20,623)  (7,062)  (19,620)
             
                 
Long-term Liabilities
                
Energy contracts  (4,865)  (7,472)  (1,666)  (154)
Gas fixed-for-float swaps  (877)  (421)  (387)  (1,915)
Options  (3,765)  (801)  —   — 
PGAC portion of options, swaps and hedges  —   —   —   (3,337)
             
Total long-term liabilities  (9,507)  (8,694)  (2,053)  (5,406)
             
                 
Total Liabilities
  (59,421)  (29,317)  (9,115)  (25,026)
             
                 
Net Total Assets and Total Liabilities
 $(8,311) $2,585  $4,903  $(397)
             
  
March 31,
 
December 31,
 
March 31,
 
December 31,
 
  
2007
 
2006
 
2007
 
2006
 
Type of Derivative
 
Mark-to-Market Instruments
 
Hedge Instruments
 
    (In thousands)   
Current Assets
         
Energy contracts $8,253 $16,374 $- $1,057 
Gas fixed-for-float swaps  6,544  1,950  3,656  1,615 
Options  2,841  2,986  -  - 
Derivative assets for gas off-system sales             
forward physical trades  479  -  -  - 
PGAC portion of options, swaps and hedges  -  -  3,302  16,748 
Total Current Assets  18,117  21,310  6,958  19,420 
              
Deferred Charges
             
Energy contracts  -  2,666  -  - 
Gas fixed-for-float swaps  12,172  7,101  3,200  1,872 
Options  2,797  825  -  - 
PGAC portion of options, swaps and hedges  -  -  749  3,337 
Total Deferred Charges  14,969  10,592  3,949  5,209 
              
Total Assets
  33,086  31,902  10,907  24,629 
              
Current Liabilities
             
Energy contracts  (11,069) (10,928) (808) - 
Gas fixed-for-float swaps  (4,492) (6,440) (330) (2,872)
Options  (2,933) (3,255) -  - 
PGAC portion of options, swaps and hedges  -  -  (3,302) (16,748)
Total Current Liabilities  (18,494) (20,623) (4,440) (19,620)
              
Long-Term Liabilities
             
Energy contracts  (4,214) (7,472) (1,194) (154)
Gas fixed-for-float swaps  (291) (421) (835) (1,915)
Options  (3,610) (801) -  - 
PGAC portion of options, swaps and hedges  -  -  (749) (3,337)
Total Long-Term Liabilities  (8,115) (8,694) (2,778) (5,406)
              
Total Liabilities
  (26,609) (29,317) (7,218) (25,026)
              
Net Total Assets and Total Liabilities
 $6,477 $2,585 $3,689 $(397)

34


Gains or losses related to hedged instruments are reclassified from accumulated other comprehensive income when the hedged transaction settles and impacts earnings. The amounts, other than PGAC, shown as current assets and current liabilities, relate to contracts that will be settled in the next twelve months.

35
PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)

(5)
Earnings Per Share

(5) Earnings Per Share
In accordance with SFAS 128, dual presentation of basic and diluted earnings per share has been presented in the Condensed Consolidated Statements of Earnings of PNMR. The following reconciliation illustratesInformation regarding the impact on the share amountscomputation of potential common shares and the earnings per share amounts:is as follows:
                
 Three Months Ended Six Months Ended 
 June 30, June 30, 
 2007 2006 2007 2006 
 
Three Months Ended
    (As   (As 
 
March 31,
    Restated,   Restated, 
 
2007
 
2006
    See note 16)   See note 16) 
 (In thousands, except per share amounts)  (In thousands, except per share amounts) 
      
Net Earnings
 $29,969 $26,325  $20,240 $15,983 $49,906 $41,984 
                
 
Average Number of Common Shares Outstanding
  76,659  68,787  76,695 68,852 76,677 68,819 
Dilutive effect of common stock equivalents:       
Dilutive effect of common stock equivalents (a):
 
Stock options and restricted stock  701  497  659 520 680 492 
Equity-linked units  739  91  1,439 61 1,089 38 
Average Common and Common Equivalent Shares Outstanding
  78,099  69,375 
         
Average Common and Common Equivalent Shares
 78,793 69,433 78,446 69,349 
         
        
Net Earnings per Share of Common Stock:
        
Basic $0.26 $0.23 $0.65 $0.61 
                
Basic $0.39 $0.38 
Diluted $0.38 $0.38  $0.26 $0.23 $0.64 $0.61 
         
(a)Excludes the effect of average anti-dilutive common stock equivalents related to out-of-the-money stock options of zero and 722,306661,855 for the three months and zero and 736,869 for the six months ended March 31,June 30, 2007 and 2006, respectively.

35

36
PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)

(6)
Stock-Based Compensation

(6) Stock-Based Compensation
Information concerning the Company’s stock-based compensation plans is contained in Note 13 of the Notes to Consolidated Financial Statements in the 2006 Annual Reports on Form 10-K.10-K/A (Amendment No. 1).

Stock Options

The following table represents stock option activity for the threesix months ended March 31,June 30, 2007:

                 
              Weighted- 
      Weighted-  Aggregate  Average 
      Average  Intrinsic  Remaining 
      Exercise  Value  Contract Life 
Options for PNMR Common Stock Shares  Price  (In thousands)  (Years) 
                 
Outstanding at beginning of period  2,999,606  $21.02         
Granted  762,400  $30.50         
Exercised  (431,065) $20.45         
Forfeited  (19,837) $27.18         
                
                 
Outstanding at end of period  3,311,104  $23.24  $15,063   7.35 
                
                 
Options exercisable at end of period  1,898,008  $19.73  $15,292   6.08 
                
                 
Options available for future grant  2,477,194             
                
        
Weighted-
 
    
Weighted-
 
Aggregate
 
Average
 
    
Average
 
Intrinsic
 
Remaining
 
    
Exercise
 
Value
 
Contract Life
 
Stock Options
 
Shares
 
Price
 (In thousands) (Years) 
          
Outstanding at beginning of period  2,999,606 $21.02       
Granted  754,000 $30.50       
Exercised  (278,859)$20.11       
Forfeited  (11,636)$27.26       
              
Outstanding at end of period  3,463,111 $23.11 $31,737  7.57 
              
Options exercisable at end of period  1,848,561 $19.03 $24,525  6.17 
              
Options available for future grant  2,485,793          


37
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table provides additional information concerning stock option activity for the threesix months ended March 31:June 30:
         
Options for PNMR Common Stock 2007  2006 
  (In thousands, 
  except per share amounts) 
         
Weighted-average grant date fair value per share of options granted $4.70  $3.87 
Total intrinsic value of options exercised during the period $4,847  $2,556 

36

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
Stock Options
 
2007
 
2006
 
  
(In thousands,
except per share amounts)
 
      
Weighted-average grant date fair value per share of options granted $4.70 $3.87 
Total intrinsic value of options exercised during the period $3,103 $851 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Restricted Stock

The following table summarizes nonvested restricted stock activity for the threesix months ended March 31,June 30, 2007:

   
Weighted-
        
   
Average
 Weighted- 
   
Grant-Date
 Average 
Nonvested Restricted Stock
 
Shares
 
Fair Value
Nonvested Restricted Grant-Date 
PNMR Common Stock Shares Fair Value 
     
Nonvested at beginning of period 161,769 $24.55 161,769 $24.55 
Granted  94,000 $28.76 102,400 $28.78 
Vested  (64,301) $23.24  (69,551) $23.35 
   
 
Nonvested at end of period 191,468 $25.93 194,618 $26.09 
   
The total fair value of shares of restricted stock that vested during the threesix months ended March 31,June 30, 2007 was $2.0$1.6 million.

37

38
PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)

(7)
Capitalization

(7) Capitalization
Information concerning the Company’s financing activities is contained in Note 6 of the Notes to Consolidated Financial Statements in the 2006 Annual Reports on Form 10-K. 10-K/A (Amendment No. 1).
Short-term Debt
PNMR and PNM have revolving credit facilities for borrowings up to $600 million and $400 million, respectively, that primarily expire in 20112012 and local lines of credit amounting to $15 million and $13.5 million, respectively. PNMR and PNM also have commercial paper programs under which they may issue up to $400 million and $300 million of commercial paper, respectively. PNMR entered into a short-term bridge loan agreement for temporary financing of Twin Oaks (See Note 2). The revolving credit facilities serve as support for the commercial paper programs. Operationally, this means the aggregate borrowings under the commercial paper program and the revolving credit facility for each of PNMR and PNM cannot exceed the maximum amount of the revolving credit facility for that entity.

Short-term debt outstanding consists of:

  
March 31,
 
December 31,
 
Short-term Debt
 
2007
 
2006
 
  (In thousands) 
      
Commercial paper programs:     
PNMR $244,150 $263,550 
PNM  245,700  251,300 
PNMR bridge loan  249,495  249,495 
        
  $739,345 $764,345 

PNMR entered into a short-term bridge loan agreement for temporary financing of Twin Oaks. See Note 2. On April 17, 2007, PNMR repaid the balance due on the bridge loan. To facilitate the repayment, PNMR borrowed $250.5 million under its revolving credit facility. Reflecting this borrowing, at Mayfacility, which amount has been repaid as of June 30, 2007.
Short-term debt outstanding consists of:
         
  June 30,  December 31, 
Short-term Debt 2007  2006 
  (In thousands) 
         
PNM        
Commercial paper $188,370  $251,300 
Revolving credit facility  47,300   — 
Local lines of credit  6,400   — 
       
   242,070   251,300 
         
PNMR        
Commercial paper  317,600   263,550 
Bridge loan  —   249,495 
       
         
  $559,670  $764,345 
       
At August 1, 2007, PNMR and PNM had $48.8$221.7 million and $188.8$141.8 million of availability under their respective revolving credit facilities and local lines of credit, including reductions of availability due to outstanding letters of credit and amounts outstanding under the commercial paper programs.

As of March 31,June 30, 2007, TNMP had outstanding borrowings of $29.2$27.2 million from PNMR under theirits intercompany loan agreement.
Long-term Debt
On June 26, 2007, the City of Farmington, New Mexico issued $20.0 million of its PCRBs to finance or reimburse PNM for expenditures incurred in connection with pollution control equipment at SJGS. PNMR is obligated to pay amounts equal to the principal and interest on the PCRBs. In addition, PNM issued $20.0 million of senior unsecured notes to secure and guarantee the PCRBs. Both the PCRBs and the senior unsecured notes mature in 2037 and bear interest at 5.15%. The proceeds from the PCRBs were placed directly in trust with an independent trustee. As PNM incurs qualified expenditures, it receives reimbursement from the trustee. In the event PNM does not incur qualified expenditures at least equal to the proceeds of the PCRBs, the amount remaining in the trust must be used by the trustee to redeem a portion of the PCRBs. As of June 30, 2007, PNM had received $7.6 million from the trust. The senior unsecured notes are included in long-term debt in the Condensed Consolidated Balance Sheets of PNM and PNMR and the amount remaining in the trust is included in other investments since it is restricted for the acquisition of items that will be included in utility plant.

38

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Effective June 15, 2007, TNMP redeemed $100.0 million of its 6.125% Senior Notes Due 2008 at a redemption price of 100.50% of the principal amount redeemed, plus accrued interest. To facilitate the redemption, PNMR made a cash contribution, recorded as equity, of $101.2 million to TNP, which then made an equity contribution to TNMP in the same amount.
PNMR has entered into three fixed-to-floating interest rate swaps with an aggregate notional principal amount of $150.0 million. The swaps are accounted for as fair-value hedges with a liability position of approximately $2.8$3.5 million at March 31,June 30, 2007, with a corresponding reduction of long-term debt.

Stockholders’ Equity
PNMR offers new shares of PNMR common stock through the PNM Direct Plan and an equity distribution agreement. For the threesix months ended March 31,June 30, 2007, PNMR had sold a combined total of 22,70447,049 shares of its common stock through the PNMR Direct Plan and the equity distribution agreement for net proceeds of $0.7$1.4 million. PNMR also issued 12,21024,210 shares of its common stocksstock for $0.4$0.7 million through its ESPP during the threesix months ended March 31,June 30, 2007.



(8)
Pension and Other Postretirement Benefit Plans

(8) Pension and Other Postretirement Benefit Plans
PNMR and its subsidiaries maintain(other than TNP, TNMP and First Choice) have a qualified defined benefit pension plan, a plan providing medical and dental benefits to eligible retirees, and an executive retirement program (“PNM Plans”). PNMR maintains the legal obligationis legally obligated for the benefits owed to participants under these plans.the PNM Plans. TNP, TNMP also maintainsand First Choice have a qualified defined benefit pension plan, covering substantially all of its employees, a plan providing medical and death benefits to eligible retirees and an executive retirement program (“TNMP Plans”). Benefits were frozen in 1997 for the PNM pension plan and 2005 for the TNMP pension plan. Readers should refer to Note 12 of Notes to the Consolidated Financial Statements in the Company’s2006 Annual ReportReports on Form 10-K for the year ended December 31, 200610-K/A (Amendment No. 1) for additional information on these plans.

39

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
PNM Plans

The following table presentstables present the components of the PNM Plans’ net periodic benefit cost (income):

                         
  Three Months Ended June 30, 
          Other Postretirement  Executive Retirement 
  Pension Plan  Benefits  Program 
  2007  2006  2007  2006  2007  2006 
  (In thousands) 
                         
Components of Net Periodic
                        
Benefit Cost (Income)
                        
Service cost $36  $126  $632  $678  $14  $14 
Interest cost  7,953   7,710   1,928   1,842   272   264 
Expected long-term return on assets  (10,195)  (10,139)  (1,464)  (1,355)  —   — 
Amortization of net loss  972   1,210   1,461   1,670   24   25 
Amortization of prior service cost  79   79   (1,422)  (1,422)  3   3 
                   
Net periodic benefit cost (income)
 $(1,155) $(1,014) $1,135  $1,413  $313  $306 
                   
                        
 Six Months Ended June 30, 
 Other Postretirement Executive Retirement 
 
Three Months Ended March 31,
  Pension Plan Benefits Program 
 
Pension Plan
 
Other Postretirement Benefits
 
Executive Retirement Program
  2007 2006 2007 2006 2007 2006 
 
2007
 
2006
 
2007
 
2006
 
2007
 
2006
  (In thousands) 
     (In thousands)      
Components of Net Periodic
              
Benefit Cost (Income)
              
Service cost $36 $126 $632 $678 $14 $14  $72 $252 $1,264 $1,356 $28 $28 
Interest cost  7,953 7,710 1,928 1,842 272 264  15,906 15,420 3,856 3,684 544 527 
Expected long-term return on assets  (10,194) (10,138) (1,463) (1,354) - -   (20,389)  (20,277)  (2,927)  (2,709) — — 
Amortization of net (gain) loss  971 1,210 1,460 1,670 24 25 
Amortization of net loss 1,944 2,420 2,922 3,340 46 50 
Amortization of prior service cost  79  79  (1,422) (1,422) 3  3  158 158  (2,844)  (2,844) 6 6 
Net Periodic Benefit Cost (Income)
 $(1,155)$(1,013)$1,135 $1,414 $313 $306 
             
Net periodic benefit cost (income)
 $(2,309) $(2,027) $2,271 $2,827 $624 $611 
             
For the three months ended March 31,June 30, 2007 and 2006, PNM made contributions totalingcontributed $1.5 million and zero$3.1 million, respectively, to trusts for other postretirement benefits. For the six months ended June 30, 2007 and 2006, PNM contributed $3.1 million and $3.1 million, respectively, to trusts for other postretirement benefits. PNM expects to make contributions totaling $6.7$6.0 million during 2007 to trusts for other postretirement benefits. PNM does not anticipate making any contributions to the pension planor executive retirement plans during 2007.

40

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)

TNMP Plans

The following table presentstables present the components of the TNMP Plans’ net periodic benefit cost (income):

                         
  Three Months Ended June 30, 
          Other Postretirement  Executive Retirement 
  Pension Plan  Benefits  Program 
  2007  2006  2007  2006  2007  2006 
  (In thousands) 
                         
Components of Net Periodic
                        
Benefit Cost (Income)
                        
Service cost $—  $—  $98  $106  $—  $— 
Interest cost  1,057   1,085   165   178   19   19 
Expected long-term return on assets  (1,710)  (1,754)  (114)  (114)  —   — 
Amortization of net gain  (2)  —   (39)  —   —   — 
Amortization of prior service cost  —   —   15   15   —   — 
                   
Net Periodic Benefit Cost (Income)
 $(655) $(669) $125  $185  $19  $19 
                   
                        
 Six Months Ended June 30, 
 Other Postretirement Executive Retirement 
 
Three Months Ended March 31,
  Pension Plan Benefits Program 
 
Pension Plan
 
Other Postretirement Benefits
 
Executive Retirement Program
  2007 2006 2007 2006 2007 2006 
 
2007
 
2006
 
2007
 
2006
 
2007
 
2006
  (In thousands) 
     (In thousands)      
Components of Net Periodic
              
Benefit Cost (Income)
              
Service cost $- $- $98 $106 $- $-  $— $— $196 $212 $— $— 
Interest cost  1,057 1,085 165 178 19 19  2,114 2,170 330 355 38 38 
Expected long-term return on assets  (1,710) (1,754) (114) (114) - -   (3,420)  (3,508)  (228)  (228) — — 
Amortization of net (gain) loss  (2) - (39) - - - 
Amortization of net gain  (4) —  (78) — — — 
Amortization of prior service cost  -  -  15  15  -  -  — — 30 30 — — 
             
Net Periodic Benefit Cost (Income)
 $(655)$(669)$125 $185 $19 $19  $(1,310) $(1,338) $250 $369 $38 $38 
             
For the three and six months ended March 31,June 30, 2007, TNMP contributed $0.3 million for the other postretirement benefits. For the three and six months ended June 30, 2006, TNMP did not make anymade no contributions to trusts for other postretirement benefits. TNMP expects to make contributions totaling $0.7$0.5 million during 2007 to trusts for other postretirement benefits. TNMP does not anticipate making any contributions to the pension planor executive retirement plans during 2007.

41

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(9)
Commitments and Contingencies
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(9) 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 is currently participating in the investigation and remediation of numerous sites. In addition, the Company periodically enters into financial commitments in connection with its business operations. It is not possible at this time for the Company to determine fully the effect of all litigation and other legal proceedings on its results of operations or financial position. It is the Company’s policy to accrue for expected costs in accordance with SFAS 5, when it is probable that a SFAS 5 liability has been incurred and the amount of expected costs of these items to be incurred is reasonably estimable. These estimates include costs for external counsel and other professional fees. The Company is also involved in various legal proceedings in the normal course of its business. The associated legal costs for these routine matters are accrued when the legal expenses are incurred. The Company does not expect that any known lawsuits, environmental costs and commitments will have a material adverse effect on its financial condition or results of operations, although the outcome of litigation, investigations and other legal proceedings is inherently uncertain.

41
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

COMMITMENTS AND CONTINGENCIES RELATED TO THE ENVIRONMENT

PNM
PNM

Renewable Portfolio Standard

The Renewable Energy Act of 2004 was enacted to encourage the development of renewable energy in New Mexico. As amended effective July 1, 2007, the act establishes a mandatory renewable energy portfolio standard requiring a utility to acquire a renewable energy portfolio equal to 5% of retail electric sales by January 1, 2006 and increasing to 10% by 2011, 15% by 2015 and 20% by 2020. The act provides for streamlined proceedings for approval of utilities’ renewable energy procurement plans, assures utilities recovery of costs incurred consistent with approved procurement plans and requires the NMPRC to establish a reasonable cost threshold for the procurement of renewable resources to prevent excessive costs being added to rates.

In August 2006, PNM filed its annual renewable energy portfolio report and 2007 renewable energy procurement plan. In its procurement plan, PNM stated that it would continue to procure renewable energy and RECs from wind and solar photovoltaic facilities and to capitalize the costs for recovery in its next rate case in accordance with a stipulation approved by the NMPRC in 2003. The procurement plan requested the NMPRC to amend PNM’s solar photovoltaic program to eliminate the annual ceiling on new customer subscriptions, to approve the procurement of renewable energy and RECs from a biomass facility under a 20-year PPA beginning in 2009 and to authorize recovery of the costs of procurement under the PPA, including costs related to imputed debt. The NMPRC issued a final order on December 14, 2006 which approved the amendment to the photovoltaic program, approved the procurement under the biomass PPA, and recognized a “disputable presumption” of the reasonableness of the costs of energy and capacity under the PPA. The NMPRC denied PNM’s request to recover imputed debt costs, but gave PNM leave to present the issue again in a rate case. On February 6, 2007, the NMPRC entered an order reopening the case with the limited purpose of reconsidering its determination that the act creates only a “disputable presumption” of the reasonableness of costs incurred under an approved procurement plan and invited briefs on that issue. PNM, the NMPRC staff, and the New Mexico Attorney General filed briefs. A decision is pending.

42

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Clean Air Act

Regional Haze

In 2005, the EPA issued the final rule addressing regional haze and guidelines for BART determinations. The purpose of the regional haze regulations is to address regional haze visibility impairment in the United States’ national parks and wilderness areas. The rule calls for all states to establish goals and emission reduction strategies for improving visibility in these areas. In October 2006, the EPA issued the final BART alternatives rule which made revisions to the 2005 regional haze rules. In particular, the alternatives rule defines how an SO2 emissions trading program developed by the Western Regional Air Partnership, a voluntary organization of western states, tribes and federal agencies, can be used by western states. New Mexico will be participating in the SO2 program, which is a trading program that will be implemented if SO2 reduction milestones, which are still being developed, are not met. The NMED hashad requested a BART analysis for nitrogen oxides and particulate be done for each of the four units at SJGS. The Company is working to complete this analysis in early June 2007, and upon completion will submitsubmitted the analysis to the NMED.NMED in early June 2007. The NMED is presently reviewing the analysis. Potentially, additional nitrogen oxide emission reductions could be required. The nature and cost of compliance with these potential requirements cannot be determined at this time.

New Source Review Rules

In 2003, the EPA issued a rule clarifying what constitutes routine maintenance, repair, and replacement of damaged or worn equipment, subject to safeguards to assure consistency with the Clean Air Act. In March 2006, a panel of the Court of Appeals for the District of Columbia Circuit vacated this rule. The action by the court did not eliminate the NSR exclusion for routine maintenance, repair, and replacement work nor did the decision rule on what activities are physical changes. The EPA’s authority to write a rule based on the current NSPS hourly emission increase test remains in place, although the U.S. Supreme Court agreed to hear an appeal of the 4thFourth U.S. Circuit Court of Appeals ruling in favor of Duke Energy Corp with respect to the hourly emission increase test being the appropriate method for calculating an emissions increase for PSD purposes. On April 2, 2007, the U.S. Supreme Court issued its decision. In a unanimous decision, the U.S. Supreme Court vacated the decision of the Fourth U.S. Circuit Court of Appeals and remanded for further proceedings consistent with the U.S. Supreme Court’s opinion. The decision precludes the use of an increase in the maximum hourly emission rate for determining an emissions increase for PSD purposes. The decision did not eliminate the NSR exclusion for routine maintenance, repair, or replacement, nor did it preclude the EPA from promulgating a regulation allowing an emission increase test for PSD purposes to be based on an increase in the maximum hourly emission rate. The EPA has announced that it will proceed with revision of the NSR rules to specify that only activities that increase an emitting unit’s hourly rate of emissions triggerstrigger a major modification. The Company is unable to determine the impact of this matter on its results of operations and financial position.

Citizen Suit Under the Clean Air Act

PNM reached an impasse with the Grand Canyon Trust and Sierra Club (“Plaintiffs”) and with the NMED with respect to certain matters under the Consent Decree of May 10, 2005. As a result, PNM filed petitions with the United States District Court for the District of New Mexico on October 6 and 12, 2006, seeking a determination that PNM had complied with the Consent Decree with respect to the matters at issue. The controversies related to PNM’s reports on NOX controls and demisters at SJGS. PNM reached an agreement with the Plaintiffs and the NMED concerning these issues which was set forth in a Stipulated Order. The Court entered the Stipulated Order approving the settlement on December 27, 2006. The settlement does not require any additional material expenditures with respect to the implementation of the Consent Decree. Counsel for Plaintiffs has submitted statements to PNM for payment of attorneys fees and costs incurred with respect to post-decree administration and disputes. PNM is presently reviewing these statements. If no agreement is reached onThe parties have settled the fee and cost request Plaintiffs have until May 29, 2007 to file an application for an award of fees and costs.a nominal amount.

43

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Consent Decree includes a provision whereby stipulated penalties are assessed for non-compliance with specified emissions limits. Stipulated penalty amounts are placed in escrow on a quarterly basis pending review of SJGS’s emissions performance for each quarter. For the years 2005 and 2006, PNM has placed $1.2 million into escrow as potential stipulated penalties. By letter dated March 20, 2007, the NMED and Plaintiffs requested information concerning PNM’s calculation of potential stipulated penalty amounts and the amounts held in escrow. PNM is presently formulatingsubmitted its response to the March 20, 2007 letter.NMED on May 23, 2007.

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. APS is the Four Corners operating agent and PNM owns a 13.0% ownership interest in Units 4 and 5 of Four Corners.

The Navajo Acts, enacted in 1995, purport to give the Navajo Nation EPA 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, Window Rock District, challenging the applicability of the Navajo Acts as to Four Corners. The District Court stayed these proceedings pursuant to a request by the parties and the parties are seeking to negotiate a settlement.

In 2000, the Navajo Tribal Council approved operating permit regulations under the Navajo Nation Air Pollution Prevention and Control Act. The Four Corners participants believe that the regulations fail to recognize that the Navajo Nation did not intend to assert jurisdiction over Four Corners. Each of the Four Corners participants filed a petition with the Navajo Supreme Court for review of the operating permit regulations. Those proceedings have been stayed, pending the outcome of the settlement negotiations mentioned above.

In May 2005, APS and the Navajo Nation signed a Voluntary Compliance Agreement which would resolve the dispute regarding the Air Pollution Prevention and Control Act portion of the lawsuit for the term of the Voluntary Compliance Agreement. On March 21, 2006, the EPA determined that the Navajo Nation was eligible for “treatment as a state” for the purpose of entering into a supplemental delegation agreement with the EPA to administer the Clean Air Act Title V, Part 71 federal permit program over Four Corners. The EPA entered into the supplemental delegation agreement with the Navajo Nation on the same day. Because the EPA’s approval was consistent with the requirements of the Voluntary Compliance Act,Agreement, SRP and APS sought and obtained dismissal of the pending litigation in the Navajo Nation Supreme Court, as well as the pending litigation in the Navajo Nation District Court to the extent the claims relate to the Clean Air Act. The agreement does not address or resolve any dispute relating to other Navajo Acts.

The Company cannot currently predict the outcome of these matters.

Four Corners Federal Implementation Plan Litigation

In September 1999, the EPA proposed a FIP to set air quality standards at certain power plants, including Four Corners. On July 26, 2006, the Sierra Club sued the EPA in an attempt to force the EPA to issue a final FIP to limit emissions at the Four Corners. On September 12, 2006, the EPA proposed a revised FIP to establish air quality standards at Four Corners.

APS, the Four Corners operator, intervened in the proceeding as a defendant in order to protect the interests of the participants. The Sierra Club and the EPA reached a settlement over the timing of the issuance of the FIP and a Consent Decree was lodged with the Court on December 13, 2006 and notice of the lodging of the Consent Decree was published in the March 15, 2007 Federal Register. Under the terms of the proposed Consent Decree, the EPA, on April 30, 2007, issued the final FIP for Four Corners. The FIP essentially federalizes the requirements contained in the New Mexico State Implementation Plan, which Four Corners has historically followed. In the case of sulfur dioxide, the FIP includes an emission limit that Four Corners has achieved following a successful program to determine if additional reductions could be made with the existing controls. The FIP also includes a requirement to control fugitive dust within 18 months after the FIP becomes effective. APS filed a Petition for Review on July 2, 2007 in the United States Circuit Court of Appeals for the Tenth Circuit seeking revisions to the FIP in order to clarify certain requirements and allow operational flexibility. The Sierra Club also filed a Petition for Review with the Tenth Circuit Court on July 6, 2007, challenging whether the FIP complies with the requirements of the Clean Air Act. The Company is unable to determine the impact of these matters on its results of operations and financial position.

44

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In addition, on August 21, 2006, the EPA proposed a FIP to implement “minor New Source Review” on Tribal reservations. The FIP, if finalized, would apply to Four Corners and would require preconstruction review and permitting of plant projects that meet specified criteria. PNM does not currently expect this FIP to have a material adverse effect on its financial position, results of operations, cash flows or liquidity.

Santa Fe Generating Station

PNM and the NMED conducted investigations of gasoline and chlorinated solvent groundwater contamination detected beneath PNM’s former Santa Fe Generating Station site to determine the source of the contamination pursuant to a 1992 settlement agreement between PNM and the NMED.

PNM believes that the data compiled indicates observed groundwater contamination originated from off-site sources. However, in 2003, PNM elected to enter into a fifth amendment to the 1992 Settlement Agreement with the NMED to avoid a prolonged legal dispute, whereby PNM agreed to supplement remediation facilities by installing an additional extraction well and two new monitoring wells to address remaining gasoline contamination in the groundwater at and in the vicinity of the site. These wells were completed in 2004. PNM will continue to operate the remediation facilities until the groundwater is cleaned up to applicable federal standards or until such time as the NMED determines that additional remediation is not required, whichever is earlier. The City of Santa Fe, the NMED and PNM entered into an amended Memorandum of Understanding relating to the continued operation of the well and the remediation facilities called for under the latest amended Settlement Agreement. The well continues to operate and meets federal drinking water standards. PNM is not able to assess the duration of this project.

PNM has been verbally informed that the Superfund Oversight Section of the NMED is conducting an investigation into the chlorinated solvent contamination in the vicinity of the former Santa Fe Generating Station site. The investigation will study possible sources for the chlorinated solvents in the groundwater. The NMED investigation is ongoing.

Coal Combustion Waste Disposal

SJCC currently disposes of coal combustion products consisting of fly ash, bottom ash, and gypsum from SJGS in the surface mine pits adjacent to the plant. PNM and SJCC have been participating in various sessions sponsored by EPA to consider rulemaking for the disposal of coal combustion products. The rulemaking would be pursuant to the Bevill Amendment of the Resource Conservation and Recovery Act. PNM cannot predict the outcome of this matter but does not believe currently that it will have a material adverse impact on its results of operations or financial position.

NRC Matters
In October 2006, the NRC conducted an inspection of the PVNGS emergency diesel generators after a Palo Verde Unit 3 generator started but did not provide electrical output during routine inspections on July 25 and September 22, 2006. On February 22, 2007, the NRC issued a “white” finding (low to moderate safety significance) for this matter. Under the NRC’s Action Matrix, this finding, coupled with a previous NRC “yellow” finding relating to a 2004 matter involving PVNGS’s safety injection systems, resulted in PVNGS Unit 3 being placed in the “multiple/repetitive degraded cornerstone” column of the NRC’s Action Matrix, which has resulted in an enhanced NRC inspection regimen. On June 21, 2007, the NRC issued a confirmatory action letter confirming APS’ commitments, as operator, regarding specific actions APS will take to improve Palo Verde’s performance. APS continues to implement its plan to improve PVNGS’s performance.

45

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On November 9, 2006, APS notified the NRC that a senior reactor operator at PVNGS had attempted to cover up a mistaken entry the operator had made in a PVNGS operations verification log. The senior reactor operator resigned shortly thereafter. By letter dated July 12, 2007, the NRC notified APS that, based upon the results of its investigation of the matter, the NRC is considering an escalated enforcement action against PVNGS due to the willfulness of the senior reactor operator’s actions. The NRC noted in its letter that the safety significance of the matter was very low. In accordance with NRC procedures, APS has requested alternative dispute resolution with the NRC in an attempt to resolve this issue. PNM cannot predict the outcome of this matter.

46

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
OTHER COMMITMENTS AND CONTINGENCIES

PNM
PNM

PVNGS Liability and Insurance Matters

The PVNGS participants have financial protection for public liability resulting from nuclear energy hazards to the full limit of liability under federal law. This potential liability is covered by primary liability insurance provided by commercial insurance carriers in the amount of $300.0 million and the balance by an industry-wide retrospective assessment program. If losses at any nuclear power plant covered by the programs exceed the primary liability insurance limit, PNM could be assessed retrospective adjustments. The maximum assessment per reactor under the program for each nuclear incident is approximately $101.0 million. The retrospective assessment is subject to an annual limit of $15.0 million per reactor per incident. Based upon PNM’s 10.2% interest in the three PVNGS units, PNM’s maximum potential assessment per incident for all three units is approximately $31.0 million, with an annual payment limitation of approximately $4.5$4.6 million. If the funds provided by this retrospective assessment program prove to be insufficient, Congress could impose revenue-raising measures on the nuclear industry to pay claims.

San Juan River Adjudication

In 1975, the State of New Mexico filed an action entitled “State of New Mexico v. United States, et al.”, in the District Court of San Juan County, New Mexico, to adjudicate all water rights in the San Juan River Stream System. The Company was made a defendant in the litigation in 1976. The action is expected to adjudicate water rights used at Four Corners and at SJGS (see “Water Supply” above).SJGS. The Navajo Nation and various parties announced a settlement of the Nation’s reserved surface water rights. Congressional legislation as well as other approvals will be required to implement the settlement. The Company cannot at this time anticipatedetermine the effect, if any, of any water rights adjudication on the present arrangements for water at SJGS and Four Corners. It is PNM’s understanding that final resolution of the case cannot be expected for several years. PNM is unable to predict the ultimate outcome of this matter.

Conflicts at San Juan Mine Involving Oil and Gas Leaseholders

SJCC, through leases with the federal government and the State of New Mexico, owns coal interests with respect to the San Juan underground mine. Certain gas producers have leases in the area of the underground coal mine and have asserted claims against SJCC that its coal mining activities are interfering with gas production. The Company understands that SJCC has reached a settlement with Western Gas for certain wells in the mine area. The Western Gas settlement however, does not resolve all of Western Gas’ potential claims in the larger San Juan underground mine area. Discussions are ongoing with Western Gas’ successor, Anadarko Petroleum Corporation, for settlement of additional claims. SJCC has also reached a settlement with another gas leaseholder, Burlington Resources, for certain wells in the mine area. PNM cannot predict the outcome of any future disputes between SJCC and Western Gas or other gas leaseholders.

Western United States Wholesale Power Market

Various circumstances, including electric power supply shortages, weather conditions, gas supply costs, transmission constraints and alleged market manipulation by certain sellers, resulted in the well-publicized California energy crisis and in the bankruptcy filings of the Cal PX and of PG&E. As a result of the conditions in the western market, the FERC and other federal and state governmental authorities initiated investigations, litigation and other proceedings relevant to the Company and other sellers. The more significant of these in relationproceedings relating to the Company are summarized below.

47

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
California Refund Proceeding

SDG&E filed a complaint with the FERC in 2000 against sellers into the California wholesale electric market. In 2002, the FERC ALJ issued the Proposed Findings on California Refund Liability, in which it determined that the Cal ISO and Cal PX had, for the most part, correctly calculated the amounts of the potential refunds owed by most sellers and identified approximations for the amount of refunds due. In 2003, the FERC issued an order substantially adopting the findings from the ALJ’s 2002 decision, but requiring a change to the formula used to calculate refunds, which had the effect of increasing the refund amounts owed by most sellers. In August 2005, the FERC issued an order setting out the process by which sellers into the Cal ISO and Cal PX markets could make cost recovery filings pursuant to the FERC’s prior orders that indicated sellers would get the opportunity to submit evidence demonstrating that the refund methodology creates a revenue shortfall for their transactions during the refund period (October 2, 2000 through June 20, 2001). Included in PNM’s submittal were objections to the limited amount of time the FERC allowed for sellers to complete their respective submittals, and the FERC’s arbitrary decision to allow only marketers, and not load serving entities such as PNM, to include a return component in their cost filings. PNM participated with certain other sellers to request rehearing of these issues before the FERC. In September 2005, PNM made its cost recovery filing identifying its costs associated with sales into the Cal ISO and Cal PX markets during the refund period. In January 2006, the FERC issued its order on the cost recovery filings, acting on 23 filings that were made by multiple sellers. The FERC accepted that portion of PNM’s filing submitted as prescribed by the FERC’s August 2005 order, but rejected the alternative filings that included a return component for PNM as a load serving entity. The effect of the FERC’s order is that PNM’s allowed cost offset against its refund liability is zero. In February 2006, PNM filed a petition for rehearing requesting FERC to reconsider its order and allow PNM to include a return on equity. While PNM believes it has meritorious legal arguments, the Company cannot predict the outcome of this cost recovery proceeding at this time.

As previously reported, there have been a number of additional appeals pending before the United States Court of Appeals for the Ninth Circuit with regard to FERC’s orders issued in the various California market refund dockets and PNM has participated in various appeals as one of the members of the Competitive Sellers Group. The Ninth Circuit has held a number of mediation conferences in these, and the multiple other appeals pending before it, to assess the opportunities for settlement, in which PNM has participated. The Ninth Circuit issued an order declaring a 45-day time out period to allow parties the opportunity to assess the recent court decisions and the potential for settlement of cases. In October 2006, the Ninth Circuit extended the time out period in several of the cases. In September 2006, a mediation conference was convened at the California Public Utilities Commission to assess the potential settlement of the refund proceedings. The conference was attended by, among others, PNM, the other buyers and sellers, FERC personnel, a settlement judge and mediator from the Ninth Circuit, and a former FERC ALJ (whose help was enlisted by the Ninth Circuit) to aid in the mediation process. Representatives of PNM continue to attend and participate in the mediation sessions being hosted by the Ninth Circuit. By notice issued in January 2007, the parties to the appeals were advised that the former FERC ALJ will no longer participate in the mediation efforts. In June 2007, the Ninth Circuit further extended the time-out period for settlement discussions to continue until August 13, 2007. The Company cannot predict the ultimate outcome of FERC proceedings that may result from the decisions in these appeals, or whether PNM will be ultimately directed to make any additional future refunds as the result of these court decisions, or whether settlement will be reached in the case.

Pacific Northwest Refund Proceeding

Puget Sound Energy, Inc. filed a complaint at the FERC alleging that spot market prices in the Pacific Northwest wholesale electric market were unjust and unreasonable. In 2003, the FERC issued an order recommending that no refunds should be ordered. Several parties in the proceeding filed requests for rehearing and the FERC denied rehearing and reaffirmed its prior ruling that refunds were not appropriate for spot market sales in the Pacific Northwest during the first half of 2001. The Port of Seattle then filed an appeal of the FERC’s order denying rehearing in the Ninth Circuit, which is still pending. As a participant in the proceedings before the FERC, PNM is also participating in the appeal proceedings. Oral argument in the case was held on January 8, 2007. The Company is unable to predict the ultimate outcome of this appeal, or whether PNM will ultimately be directed to make any refunds for these transactions.

48

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FERC Gaming Partnerships Order

In 2003, in the Gaming Partnerships Order, the FERC asserted that certain entities, including PNM, acted in concert with Enron Corporation and other market participants to engage in activities that constitute gaming and/or anomalous market behavior in violation of the Cal ISO and Cal PX tariffs during 2000 and 2001. In 2003, PNM filed its responses to the Gaming Partnerships Order indicating that it did not engage in the alleged partnerships, alliances or other arrangements.

In 2004, the FERC issued an order granting the FERC staff’s motion to dismiss seven of the thirteen PNM customers on grounds that there was no evidence to conclude that these companies used their commercial relationship with PNM to game the Cal ISO and Cal PX markets. The FERC approved the settlements entered into by two of the 13thirteen PNM customers and dismissed another of PNM’s customers from the proceeding. Of the three remaining PNM customers in the docket, the FERC staff entered into settlement agreements with two of them. In 2004, the FERC staff filed a motion to dismiss PNM from the docket and to enter into a settlement of certain parking and lending transactions. The staff’s motion stated that after investigation and review there was no evidence that PNM either engaged in a gaming practice that violated either the Cal ISO or Cal PX tariffs. Additionally, PNM entered into a settlement of certain matters outside the scope of the docket related to historic parking and lending transactions, under which PNM agreed not to provide parking and lending services prospectively without first meeting certain requirements agreed to with the FERC staff. Additionally, PNM agreed to pay $1.0 million in settlement to the FERC to obtain satisfaction of all issues related to any potential liability stemming from the provision of parking and lending services historically. In July 2005, the FERC issued its order granting the staff’s motion to dismiss PNM from the Gaming Partnerships docket. In its order, the FERC found that PNM did not engage in prohibited gaming practices as defined in the FERC’s Gaming Partnership Order and also approved the settlement on the parking and lending services. The FERC also denied the California parties’ request to keep the docket open as to PNM and terminated the PNM docket. Subsequently, the California parties filed their petition for rehearing at the FERC objecting to the FERC’s dismissal of PNM from the Gaming Partnership investigation and objecting to the settlement reached with the FERC staff. The petition for rehearing is pending before FERC and PNM cannot predict the ultimate outcome of the rehearing petition. In August 2005, Enron, the final of the original 13 PNM customers, entered into a settlement agreement with the FERC staff, the California parties and others that was contested by several parties. In November 2005, the FERC issued an order approving the joint offer of settlement. Various parties have either objected to the settlement or otherwise sought efforts to stay or overturn FERC’s order. In January 2007, the Enron matter went to hearing on certain contested matters. In June 2007, the FERC administrative law judge issued its initial decision, which has no impact on PNM. The Enron settlement proceedings continueparties will now have the opportunity to be ongoing atfile exceptions before the matter goes to FERC. PNM cannot predict the final outcome of this proceeding.

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

California Power Exchange and Pacific Gas and Electric Bankruptcies

In 2001, Southern California Edison Company and the major purchasers of power from the Cal ISO and Cal PX defaulted on payments due to the Cal ISO for power purchased from the Cal PX in 2000. These defaults caused the Cal PX to seek bankruptcy protection. PG&E subsequently also sought bankruptcy protection. PNM has filed its proofs of claims in the Cal PX and PG&E bankruptcy proceedings. Amounts due to PNM from the Cal ISO or Cal PX for power sold to them in 2000 and 2001 total approximately $7.9 million. Both the PG&E and Cal PX bankruptcy cases have confirmed plans of reorganization in which the claims of various creditors have been specially classified and are waiting a final determination by the FERC before the claims are actually paid. The PG&E bankruptcy case has an escrow account and the Cal PX bankruptcy has established a settlement account, both of which are awaiting final determination by the FERC setting the level of claims and allocating the funds.

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PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
California Attorney General Complaint

In 2002, the California Attorney General filed a complaint with the FERC against numerous sellers, including PNM, regarding prices for wholesale electric sales into the Cal ISO and Cal PX markets and to the California Department of Water Resources. In 2002, the FERC entered an order denying the California Attorney General’s request to initiate a refund proceeding, but directed sellers, including PNM, to comply with additional reporting requirements with regard to certain wholesale power transactions. The California Attorney General filed a petition for review in the Ninth Circuit. The Ninth Circuit issued a decision upholding the FERC’s authority to establish the market-based rate framework under the Federal Power Act, but held that the FERC violated its administrative discretion by declining to investigate whether it should order refunds from sellers who failed to provide transaction-specific reports to the FERC as required by its rules. The Ninth Circuit determined that the FERC has the authority to order refunds for these transactions if it elects to do so and remanded the case back to the FERC for further proceedings, including a determination as to whether additional refunds are appropriate. In December 2006, PNM joined a group of sellers in filing a petition for writ of certiorari in the United States Supreme Court challenging the decision by the Ninth Circuit. On June 18, 2007, the U.S. Supreme Court denied the Petition for Certiorari filed by various competitive sellers, including PNM. The Company cannot predict the ultimate outcome of the FERC proceeding on remand, or whether PNM will be ultimately directed to make any additional refunds as the result of the decision.

California Antitrust Litigation

In May 2005, the California Attorney General filed a lawsuit in California state court against PNM, PowerEx, and the Colorado River Commission alleging that PNM and PowerEx conspired to engage in unfair trade practices involving overcharges for electricity in violation of California state antitrust laws. In April 2006, the Federal District Court issued its decision denying the California Attorney General’s motion to remand the case back to the state court, and granted PNM’s and PowerEx’s motions to dismiss the case. The California Attorney General has appealed the case to the Ninth Circuit. Briefs have been filed in the case by the parties, but oral argument has not yet been scheduled. The Company cannot predict the final outcome of this litigation nor whether PNM will be required to make refunds or pay damages under these claims.

Wholesale Power Marketing Antitrust Suit

In 2004, PNM received notice that it was included in a list of 56 defendants that were sued by the City of Tacoma Department of Public Utilities in Federal District Court in the State of Washington. PNM was listed in a class of defendants referred to as the Trading Defendants, who allegedly engaged in buying, selling and marketing power in California and other locations in the western United States. The complaint alleged the Trading Defendants acted in concert among themselves and with Non-Defendant Trading Co-Conspirators and engaged in conduct that amounted to market manipulation. The complaint identified specific conduct that allegedly amounted to market manipulation, including the submission of false information and misrepresentation regarding load schedules, bids, power supply, transmission congestion, source and destination of energy, the supply and provision of energy and ancillary services. The complaint alleged the activities of the Trading Defendants, along with Generator Defendants and the Co-Conspirators, resulted in substantially increased prices for energy in the Pacific Northwest spot market in
excess of what otherwise would have been the price and asserted damages in excess of $175.0 million from the multiple defendants. There have been three Ninth Circuit decisions that, collectively, appear to make the plaintiff’s case more difficult to prevail. As such, PNM joined a motion to dismiss the City of Tacoma Department of Public Utilities complaint given Ninth Circuit precedent. In February 2005, the district court judge in the case granted defendants’ motion to dismiss. As a result, the antitrust lawsuit against PNM filed by the City of Tacoma Department of Public Utilities was dismissed. In March 2005, the City of Tacoma Department of Public Utilities filed an appeal in the Ninth Circuit contesting the district court’s decision to dismiss the complaint. PNM participated in the appeal in support of the dismissal and joined in defendants’ brief filed in the Ninth Circuit, as well as a motion for summary affirmance. The defendants’ motion for summary affirmance of the district court was denied and the case was assigned to a merits panel for argument. Subsequently, the defendants were notified that plaintiffs were willing to enter a stipulation dismissing the appeal if defendants were willing to bear their own costs. PNM joined the numerous other defendants and agreed to the stipulation. In March 2007, the Ninth Circuit dismissed the appeal with prejudice pursuant to the stipulation of the parties. The case has been terminated with no liability to PNM.

Regional Transmission Issues

Transmission Services

In July 2005, the FERC issued an order terminating its proceeding on standard market design, stating that since issuance of the standard market design notice of proposed rulemaking, the electric industry has made significant progress in the development of voluntary RTOs and ISOs. In September 2005, the FERC issued a Notice of Inquiry on Preventing Undue Discrimination and Preference in Transmission Services seeking information from the industry regarding the provisions of the OATT for possible revision in a future rulemaking. On May 18, 2006, FERC issued a NOPR to reform its pro forma OATT. FERC emphasized that its purpose for the NOPR was not to create new market structures, redesign approved RTO or ISO markets, require transmission owners to divest control over transmission, impinge on state jurisdiction, or weaken the protection of native load customers. Core OATT elements were retained, including comparability requirements, protection of native load, state’s jurisdiction over bundled retail load, functional unbundling to address undue discrimination, and reciprocity. PNM and TNMP have filed Comments and Supplemental Comments in this proceeding. In February 2007, FERC issued Order 890 setting out the new OATT rule, which will becomebecame effective in May 2007. Order 890 addressed several elements of transmission service, including: (1) requiring greater consistency and transparency in calculating available transfer capacity for transmission; (2) requiring transparent transmission planning and customer access to transmission plans; (3) reform of rollover rights; and (4) clarification of various ambiguities in transmission rights under the new OATT. Order 890 also required numerous compliance filings to be made by transmission providers. Order 890 also attempted to clarify certain elements of transmission service utilized for network generation resources, but still left uncertain the transmission used for such resources that pre-dated transmission open access. PNM filed a petition for

50

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
rehearing seeking clarification of this issue in regards to one such generation resource that PNM has under contract. Numerous other entities also filed petitions for rehearing and/or clarification. Additionally, a number of entities, including EEI, have requested extensions of time for making several of the compliance filings due under the order issued in the NOPR. Order 890 is still pending before the FERC. The Company is awaiting FERC action on rehearing requests. The Company’s transmission group has been working to prepare the numerous FERC compliance filings required by Order 890. On May 30, 2007, the Company posted its compliance filing and its transmission planning proposal on its website. In June 2007, FERC held a technical conference regarding transmission planning proposals, including the WestConnect proposal, in which PNM participated. PNM will continue making compliance filings. PNM will participate in FERC’s technical conference on Order 890 reliability standards. The Company cannot predict what impact the final rule will have on its operations.

49
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Transmission Pricing

FERC Office of Market Oversight and Investigations
In November 2005, the FERC issued a NOPR titled Promoting Transmission Investment through Pricing Reform. In the proposed rulemaking, the FERC noted declining investment in the national transmission grid and proposed certain incentive actions it is considering to increase transmission investment to improve the reliability of the national transmission grid. In addition to the incentive proposals, the FERC would implement additional reporting requirements for public utilities that operate transmission systems. In July 2006, FERC issued its Final Rule 679 to promote transmission investment through pricing reform. With its rule, FERC provided various incentives intended to promote transmission investment within the context of existing procedural requirements, with some flexibility. The FERC did not grant outright incentives to any public utility, but rather, identified incentives that it would allow when justified in the context of individual utility petitions for declaratory orders or rate filings made pursuant to existing rate change requirements. Under the FERC’s rule, each applicant must demonstrate a nexus between the incentive sought and the transmission investment being made. In August 2006, various entities, including EEI, filed requests for rehearing requesting the FERC to modify its rule. PNM supported EEI’s position in the filing. On December 22, 2006, FERC issued its order on rehearing and retained its proposed rate treatments for transmission incentives, but modified the way in which theses incentives are applied in three principal respects to address the comments received on the rule. Initially, the order on rehearing will require each applicant to explain whether any siting process being relied upon for a rebuttable presumption that the project is necessary to ensure reliability or reduce congestion does contain such review. The rehearing order also clarified that this rebuttable presumption applies only to whether the project reduces congestion or encourages reliability, not the additional requirements of the Final Rule. Additionally, the rehearing order requires applicants to demonstrate that the total package of incentives being proposed is tailored to address the demonstrable risks or challenges faced by the transmission provider in undertaking the project. As such, if some of the incentives in the package reduce the risks of the project, that fact will be taken into account in any request for an enhanced return on equity. The rehearing order also clarifiednotice that the FERC does not intend to grant incentive returns “routinely” or that, when granted, they will always be at the “top”Division of Operational Audits of the zoneOffice of reasonableness. Rather, eachEnforcement formerly known as the Office of Market Oversight and Investigations would perform a compliance audit of the Company. The audit covers the period from January 2004 to the present and will examine the Company’s compliance with the FERC standards of conduct and OASIS requirements, compliance of the Company’s transmission providerpractices with the FERC regulations and applicable OATT, and compliance of PNM’s wholesale electricity marketing operation with its market-based rate tariff. This audit is part of a series of routine, mandatory audits of all of the utilities under FERC oversight, focused on compliance with the FERC’s rules and regulations. Similar audits have been conducted of other regional utilities.
On May 29, 2007, PNM received the FERC’s draft final report. PNM reviewed the draft report and requested several corrections, which FERC agreed to make. The draft report identified three areas of non-compliance related to Standards of Conduct and OATT requirements: (1) Marketing’s access to non-public transmission information citing three examples; (2) off-OASIS communications and exercise of discretion regarding scheduling transmission; and (3) failing to make postings when shared services employees shared facilities with marketing. PNM sent a written response to staff’s draft report indicating it did not identify matters within the draft audit report that required PNM to formally contest the audit findings. PNM also indicated its plan to implement the FERC staff’s recommendations. In June 2007, PNM received the final audit letter from the FERC’s audit staff mirroring the draft audit report as revised. PNM made its compliance filing in July 2007, and will first, be required to justify a higher ROE undermake periodic reports every quarter thereafter per the required nexus test and, second, to justify wherestaff’s recommendation. There were no significant findings in the zone of reasonableness that return should lie. The rehearing order indicated the FERC will entertain requests for a specific return on equity determinationfinal audit report and PNM has no further action required in a petition for declaratory order. PNM intends to continue to monitor and participate in additional developments in these FERC notices and rulemakings.this matter.

Natural Gas Royalties Qui Tam Litigation

In 1999, a private relator served a complaint alleging violations of the False Claims Act by PNM and its wholly owned subsidiaries, Sunterra Gas Gathering Company and Sunterra Gas Processing Company (collectively, the “Company” for purposes of this discussion), by purportedly failing to properly measure natural gas from federal and tribal properties in New Mexico, and consequently, underpaying royalties owed to the federal government. The complaint seeks actual damages, treble damages, costs and attorneys fees, among other relief.

The Company joined with other defendants in a motion to dismiss on the ground that the relator does not meet certain jurisdictional requirements for bringing suit under the False Claims Act. On October 20, 2006, the United States District Court for the District of Wyoming issued an order granting the motion and dismissing some of the defendants, including the Company. The relator has appealed to the U.S. Court of Appeals for the Tenth Circuit.

The Company has reached anexecuted a settlement agreement in principle with the private relator pursuant to which the relator will moveagreed to dismiss his appeal, the Company willagreed to forego any efforts to seek attorney fees, costs and expenses, and the parties will provideprovided mutual releases. When fully implemented,Upon the motion of the relator, on April 23, 2007 the U.S. Court of Appeals for the Tenth Circuit issued an order dismissing the appeal against the Company. Upon the motion of the Company will haveand some of the other defendants, on July 19, 2007, the United States District Court for the District of Wyoming issued an order dismissing their claims for attorney fees, costs and expenses. The settlement agreement has now been fully implemented. As a result, the Company has no further potential liability from this litigation.

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PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)

Biomass Project

PNM has entered into a 20-year contract for the purchase of 35 MW of capacity from a renewable biomass power generation facility in central New Mexico to commence in 2009. The purchase power agreement is contingent upon the satisfaction of certain conditions precedent as outlined in the purchase power agreement. The contract contains several conditions that must be met, including obtaining permits, completion of financial closing by April 2, 2007 and the start of construction by July 2, 2007. The biomass project owner was unable to complete the financial closing on April 2, 2007. As a result, PNM delivered a Remediable Event of Default letter to the biomass project owner andowner. The operator has declared a force majeure over failure to obtain an air permit. On June 18, 2007, PNM sent a letter to the operator conditionally accepting the notice of force majeure. The operator is currently evaluatingrequired to remedy the response to that letter.condition within 180 days of the notice dated May 25, 2007. A hearing is scheduled for August 20, 2007 on the owner’s appeal of the denial of the air permit.

Valencia Energy Facility

On April 18, 2007, PNM entered into a power purchase agreement to purchase all of the electric capacity and energy from the Valencia Energy Facility, a proposed natural gas-fired power plant to be constructed near Albuquerque, New Mexico. A third-party will build, own and operate the facility while PNM will be the sole purchaser of the electricity generated. The total projected construction cost for the facility is from $100 million to $105 million. The term of the proposed power purchase agreement would beis for 20 years beginning June 1, 2008, with the full output of the plant estimated up to an average of 150148 MW. PNM will have the option to purchase and own up to 50% of the plant after it reaches commercial operation. PNM estimates that the plant will typically operate during peak periods of energy demand in summer (less than 18% of the time on an annual basis). The Company is evaluating the accounting treatment of this PPA.
On May 31, 2007, the office of the New Mexico Attorney General and the Utility Staff of the NMPRC filed a Petition For Formal Review requesting the NMPRC to investigate the power purchase agreement and related transactions relating to the Valencia Energy Facility to determine, among other things, whether the transactions are prudent, appropriate and consistent with NMPRC rules, and to establish the ratemaking treatment of the power purchase agreement. On June 21, 2007, the NMPRC ordered PNM to respond to the Petition so that the NMPRC could ascertain PNM’s position on the matters raised before proceeding further with processing the Petition. In its Response, filed July 11, 2007, PNM described the terms of the agreement and process used to select this resource, stated that an investigation was not warranted and joined in the Staff and Attorney General’s request for determination of the ratemaking treatment for the purchase power agreement. To date, the NMPRC has taken no further action on the petition.

(10) Regulatory and Rate Matters
(10)
Regulatory and Rate Matters
PNMR

PNMR

Price-to-Beat Base Rate Reset

Based on the terms of the Texas stipulation related to the acquisition of TNP, First Choice made a filing to reset its price-to-beat base rates in December 2005. First Choice’s price-to-beat base rate case was consolidated with TNMP’s 60-day rate review (see “60-Day Rate Review” below). First Choice requested that the PUCT recognize in its new price-to-beat base rates the TNMP rate reduction and the synergy savings credit provided for in the TNP acquisition stipulation. In May 2006, TNMP, First Choice, the PUCT staff and other parties filed a non-unanimous settlement agreement (“NUS”). On July 20, 2006, the ALJ reopened the record to accept argument concerning the provisions for accumulated deferred federal income taxes and the carrying charges on stranded costs. Subsequently, on August 24, 2006, the ALJ issued a Proposal For Decision urging the PUCT to reject the NUS. After the parties filed exceptions to the Proposal For Decision, the PUCT unanimously rejected the ALJ’s proposal and approved the NUS on November 2, 2006. The PUCT made First Choice’s new price-to-beat base rates effective on December 1, 2006, as First Choice had requested. As price-to-beat rates expired on December 31, 2006, the approved rates are no longer applicable. In January 2007, TNMP’s 60-Day Rate Review proceeding, and the underlying NUS, waswere appealed by various Texas cities to the district court, in Austin, Texas. TNMP and FCP have intervened and will defend the PUCT’s Final Order approving the NUS.

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PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Energy Agreement

In 2003, First Choice and Constellation executed a power supply agreement that resulted in Constellation being the primary supplier of power for First Choice’s customers through the end of 2006. Additionally, Constellation has agreed to supply power in certain transactions under the agreement beyond the date when that commitment expired.

In 2004, FCPSP, a bankruptcy remote entity, was created pursuant to the agreement with Constellation to hold all customer contracts previously held by First Choice. Constellation received a lien against the assets of FCPSP to cover the settlement exposure and the mark-to-market exposure rather than requiring FCPSP to post alternate collateral for the purchase of power supply. In addition, FCPSP is restricted by covenants that limit the size of FCPSP’s unhedged market positions and require that sales by FCPSP retain a positive retail margin. The agreement does not, however, permit Constellation to demand additional collateral irrespective of its credit exposure under the agreement. If, however, a change in electricity or gas forward prices increases Constellation’s credit exposure to FCPSP beyond a limit based on Constellation’s liens in cash and accounts receivable, Constellation will have no obligation to supply additional power to customers of FCPSP unless FCPSP provides letters of credit or other collateral acceptable to Constellation, and FCPSP will be constrained in its ability to sign up additional customers until that credit shortfall is corrected. The existing pricing mechanism under the Constellation power supply agreement expired on December 31, 2006. In addition, Constellation has agreed to supply power in certain transactions under the PSA beyond the date when that commitment expired. The obligations of Constellation to act as a qualified scheduling entity continue until the expiration of the agreement on December 31, 2007.

FCPSP may terminate the agreement upon 30 days prior written notice to Constellation for any reason, but the agreement and all liens securing the agreement remain in effect with respect to transactions entered into prior to the termination until both parties have fulfilled all of their obligations with respect to such transactions or such transactions have been terminated for default or reasons related to regulatory changes.

PNM
PNM

Gas Rate Case

On May 30, 2006, PNM filed a general gas rate case that asked the NMPRC to approve an increase in the service fees charged to its 481,000 natural gas customers. The proposal would increase the set monthly fee, the charge tied to monthly usage, and miscellaneous on-demand service fees. Those fees are separate from the cost of gas charged to customers. The monthly cost of gas charge would not be affected by the fee increase. The petition requestsrequested an increase in base gas service rates of $20.5$22.6 million and an increase in miscellaneous on-demand service rates of approximately $0.2 million. The request iswas designed to provide PNM’s gas utility an opportunity to earn an 11% return on equity, which is consistent with the average return allowed ten comparable natural gas utilities. The petition also requestsrequested approval of a line item that provides a true-up mechanism for operational costs when system-wide gas consumption is lower or higher than what is designed in the rates. A hearing on the case was conducted before a hearing examiner in December 2006. On January 25,June 29, 2007 the Commission voted to extend the suspension periodNMPRC unanimously approved an increase in annual revenues of approximately $9 million for PNM. The NMPRC based the new rates from March 25on a revenue requirement needed to earn a 9.53% return on equity. The NMPRC did not approve PNM’s request for upthe true-up mechanism for operational costs based on system-wide gas consumption. PNM filed a Notice of Appeal with the New Mexico Supreme Court on July 27, 2007 and has until August 27, 2007 to ninety days. A final order is expected from the NMPRC in the second quarter of 2007.file which components will be appealed.

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PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Electric Rate Case

On February 21, 2007, PNM filed a general electric rate case that askedrequesting the NMPRC to approve an increase in service fees to all of PNM’s retail customers except those formerly served by TNMP. The application requests an annual increase in electric service revenues of $68.9 million effective January 1, 2008, an increase of approximately 12.3% over test period revenues. The request is designed to provide PNM’s electric utility an opportunity to earn a 10.75% return on equity. The application also requests authorization to implement a Fuel and Purchased Power Adjustment Clause through which changes in the cost of fuel and purchased power, above or below the costs included in base rates, will be passed through to customers on a monthly basis. The NMPRC hasinitially suspended the operation of the proposed new rates through December 23, 2007, and hasbut subsequently extended the suspension through February 21, 2008. A hearing is scheduled a hearing to begin September 5,October 1, 2007. A motionrecommended decision of the New Mexico Attorney General requestinghearing examiner is due by December 31, 2007.
Complaint Against Southwestern Public Service Company
In September 2005, PNM filed a complaint under the Federal Power Act against SPS. PNM believes that through its fuel cost adjustment clause, SPS has been overcharging PNM for deliveries of energy under three contracts, and continues to do so under the remaining contracts. PNM requested that the FERC investigate these charges for the period 2001 through 2004, and going forward. PNM had previously intervened in the Golden Spread Electric Coop complaint case against SPS for the same matter. The hearing was held in that case and in May 2006, the ALJ issued an extensioninitial decision in that proceeding recommending that SPS make refunds to customers, including PNM, for misapplication of charges in its fuel cost adjustment clause. The parties in that proceeding filed their exceptions to the initial decision, which has gone to the FERC for review. Fuel cost charges for 2005 and 2006 are being addressed as part of the suspension period for an additional three months isfinding in the Golden Spread Electric Coop fuel charge adjustment clause case pending before the NMPRC.FERC, in which PNM is an intervenor. PNM’s complaint also alleges that SPS’ demand charge rates for interruptible power sales are excessive and requested that the FERC set a refund effective date of September 13, 2005 for these rates. Settlement conferences were held before a FERC settlement judge throughout the first quarter of 2006. Upon the failure of the parties to reach a settlement, the judge recommended the case proceed to hearing. Additionally, in November 2005, SPS filed an electric rate case proposing to unbundled and raise rates charged to customers effective July 2006. PNM intervened in the case and objected to the proposed rate increase. In September 2006, PNM and SPS filed a settlement agreement at FERC in which PNM settled its issues in the complaint proceeding, as well as its concerns with SPS’ proposed rate increases in the SPS rate case. On October 10, 2006, interested parties and FERC Trial Staff filed comments on the proposed settlement. Only one party opposed the settlement, which was supported or not opposed by the remaining active parties and the FERC Trial Staff. On October 19, 2006, PNM, SPS and FERC Trial Staff each filed reply comments contending that opposition was without merit. The Settlement Judge and the Administrative Law Judge have certified the contested partial settlement and sent it to the FERC for final approval. The settlement must be approved by the FERC before it may be effective. The settlement has no impact on the initial decision of the ALJ in the fuel cost adjustment clause case or the pending petitions for rehearing in that docket. In July 2007, the FERC open meeting agenda indicated the Golden Spread Electric Coop complaint case initial decision was on the docket for consideration by the FERC. SPS and Golden Spread Electric Coop filed a motion to delay the FERC action on the initial decision to provide additional opportunity for the parties to reach settlement. PNM filed its opposition to the motion requesting the FERC to proceed to issue an order on the initial decision. Then the FERC removed the Golden Spread item from its agenda. PNM cannot predict if the settlement will be approved by the FERC or what the outcome of the fuel cost adjustment clause proceeding at the FERC will be.

54

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)

TNMP

TNMP Competitive Transition Charge True-Up Proceeding

The purpose of the true-up proceeding was to quantify and reconcile the amount of stranded costs that TNMP may recover from its transmission and distribution customers. A 2004 PUCT decision established $87.3 million as TNMP’s stranded costs.

In July 2005, the PUCT issued a final order confirming the calculation of carrying costs and the amount of stranded costs allowed for recovery. TNMP and other parties appealed the July PUCT order. On July 24, 2006, the district court in Austin, Texas affirmed the PUCT order. TNMP has appealed that decision to the Texas Third Court of Appeals in Austin, Texas and has filed its briefs. Oral argument is scheduled foroccurred May 9, 2007.2007 and the Court took the matter under advisement.

Interest Rate for Calculating Carrying Charges on TNMP’s Stranded Cost

The PUCT approved an amendment to the true-up rule at its June 29, 2006 open meeting. The amendment will result in a lower interest rate that TNMP is allowed to collect on the unsecuritized true-up balance through a stranded cost. The PUCT concluded that the correct rate at which a utility should accrue carrying costs through a stranded cost is the weighted average of an adjusted form of its marginal cost of debt and its unadjusted historical cost of debt, with the weighting based on the utility’s most recently authorized capital structure. The new rate is yet to be determined, but this change will affect TNMP by lowering the currentpreviously approved carrying cost rate of 10.93%. This change in carrying charges will affect the rates set in TNMP’s stranded cost filing. The rule went into effect on July 20, 2006, and TNMP has made its compliance filing. Because the PUCT staff disagreesdisagreed with TNMP’s calculation of the interest rate, the matter was referred to SOAH for a hearing on the merits. The parties have filed and submitted testimony. Initial briefs were filed on April 6, 2007 with reply briefs filed on April 16, 2007. On June 18, 2007, the ALJ issued a proposed order approving an interest rate of 8.06%. As this calculation differs from TNMP’s methodology and result, TNMP filed exceptions on July 2, 2007. At this time, the Company cannot predictJuly 20th open meeting, the outcomePUCT unanimously rejected the proposed order regarding the calculation of this matter.TNMP’s on-going interest rate for the CTC. The PUCT approved the 8.31% interest rate proposed by TNMP and the PUCT Staff. The PUCT will issue a signed final order, and then TNMP will be required to make a compliance filing to implement new rates.

60-Day Rate Review

In November 2005, TNMP made its required 60-day rate review filing. TNMP’s case establishes a competition transition charge for recovery of the true-up balance. As noted above, TNMP’s 60-day rate review, along with First Choice’s price-to-beat rate reset filing, were consolidated. See “Price-To-Beat Base Rate Reset” above for further updates. On November 2, 2006, the PUCT issued a signed order which would allow TNMP to begin collecting its true-up balance, which includes carrying charges, over a 14 year period. The order also allows TNMP to collect expenses associated with several cases over a three yearthree-year period. The PUCT allowed TNMP to begin collecting its competition transition charge and its rate case expenses on December 1, 2006. In January 2007, this proceeding was appealed by various Texas cities to the district court, in Austin, Texas. TNMP and First Choice have intervened and will defend the PUCT’s Final Order in this proceeding.

(11)
EnergyCo Joint Venture

(11) EnergyCo Joint Venture
In January 2007, PNMR and ECJV, a wholly owned subsidiary of Cascade, created EnergyCo, a new unregulated energy company, temporarily named EnergyCo, which willjoint venture, to serve expanding U.S. markets throughout the Southwest, Texas and the West. Under the terms of the agreement, PNMR and ECJV each have a 50 percent ownership interest in EnergyCo, a limited liability company. In February 2007, EnergyCo formed ECMT as a subsidiary that is expected to perform future marketing and trading activity for the joint venture. To fund startup expenses of EnergyCo, both members contributed $2.5 million to EnergyCo in the three months ended March 31, 2007. In February 2007, the EnergyCo Board of Directors formed ECMT. ECMT is the subsidiary of EnergyCo that is expected to perform future marketing and trading activity for the joint venture.

55

53
PNMR, ECJV and EnergyCo have signed a non-binding letter of intent which provides for PNMR to contribute to EnergyCo its ownership of the subsidiaries that hold Twin Oaks at fair market value of approximately $554 million, for ECJV to make a related cash contribution to EnergyCo equal to 50% of the Twin Oaks contribution amount and for EnergyCo to make a related cash distribution to PNMR equal to 50% of the Twin Oaks contribution amount. PNMR expects to contribute Twin Oaks to EnergyCo on or about June 1, 2007.

PNMR accounts for its investment in EnergyCo using the equity method of accounting.accounting because PNMR’s ownership interest results in significant influence, but not control, over EnergyCo and its operations. PNMR records as income its percentage share of earnings or loss and distributions of EnergyCo and carries its investment at cost, adjusted for its share of undistributed earnings or losses. The difference between PNMR’s book value of its investment in EnergyCo and its proportionate share of EnergyCo’s equity is being amortized into results of operations over the useful lives of the underlying assets and contractual periods of the liabilities that resulted in the difference.

On June 1, 2007, PNMR contributed its ownership of Altura to EnergyCo at fair value of $549.6 million (after the working capital adjustment described below), ECJV made a cash contribution to EnergyCo equal to 50% of the fair value amount, and EnergyCo distributed that cash to PNMR. PNMR accounted for this transaction by (1) removing the assets and liabilities transferred to EnergyCo from its consolidated financial statements; (2) recording an additional investment in EnergyCo for an amount equal to 50% of the net carrying value of the Altura assets and liabilities transferred, reflecting that 50% of the items transferred are in effect still owned by PNMR; and (3) reflecting in results of operations the difference between the cash received and 50% of the net carrying value of the items transferred that in effect were sold to ECJV, which resulted in a pre-tax loss of $3.6 million being reflected in energy production costs. As provided under the contribution agreement, subsequent to June 1, 2007, an adjustment to the contribution amounts was made for changes in components of working capital between the date for which fair value was determined and closing. The result of this adjustment is a payment by PNMR of $2.1 million.
(12)
Related Party Transactions
EnergyCo has entered into a bank financing arrangement with a term of five years which includes a revolving line of credit. This facility also provides for bank letters of credit to be issued as credit support for certain contractual arrangements entered into by EnergyCo. Cascade has guaranteed EnergyCo’s obligations on this facility and, to secure EnergyCo’s obligation to reimburse Cascade for any payments made under the guaranty, has a first lien on all assets of EnergyCo and its subsidiaries. In June 2007, EnergyCo borrowed $181 million of long-term debt under this facility. From this borrowing, $87.5 million was distributed to each of PNMR and ECJV.
Effective August 1, 2007, EnergyCo completed the acquisition of the CoGen Lyondell Power Generation Facility (now known as Altura Cogen, LLC), a 614 MW natural gas-fired cogeneration plant, located near Houston, Texas. The purchase price of approximately $467.5 million was funded through cash contributions of $42.5 million from each of PNMR and ECJV and the remaining amount was financed through borrowings under EnergyCo’s credit facility.
On August 2, 2007, PNMR announced that EnergyCo has agreed with NRG Energy, Inc. to jointly develop a 550 MW combined-cycle natural gas unit at the existing NRG Cedar Bayou Generating Station near Houston. EnergyCo anticipates the construction of the project will be completed in the summer of 2009, at which time 275 MW of electricity will be available for sale by EnergyCo. EnergyCo expects to fund its portion of the Cedar Bayou construction with borrowings under its existing credit facility. Once the project is complete, EnergyCo expects to arrange permanent financing of an appropriate mix of debt and equity. PNMR does not anticipate making significant capital contributions to EnergyCo in connection with this project.
Other than as described above, PNMR has no commitments or guarantees with respect to EnergyCo.

56

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Summarized financial information for EnergyCo is as follows:
         
  Three Months  Six Months 
  Ended  Ended 
  June 30, 2007 
  (In thousands) 
         
Operating revenues $14,366  $14,366 
Operating expenses  10,990   12,314 
       
Net earnings $3,376  $2,052 
       
         
50 percent of net earnings $1,688  $1,026 
Amortization of basis difference in EnergyCo  584   584 
       
PNMR equity in net earnings of EnergyCo $2,272  $1,610 
       
     
  As of June 30, 
  2007 
  (In thousands) 
     
Current assets $38,074 
Deferred assets  52,537 
Net utility plant  573,508 
    
Total assets  664,119 
    
     
Current liabilities  55,877 
Long-term liabilities  210,440 
    
Total liabilities  266,317 
    
     
Owners’ equity $397,802 
    
     
50 percent of owners’ equity $198,901 
Less unamortized PNMR basis difference in EnergyCo  757 
    
PNMR equity investment in EnergyCo $198,144 
    

57

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(12) Related Party Transactions
PNMR, PNM, TNMP, and TNMPEnergyCo are considered related parties as defined in SFAS 57. PNMR Services Company provides corporate services to PNMR, its subsidiaries, and its subsidiaries.EnergyCo. Additional information concerning the Company’s related party transactions is contained in Note 20 of the Notes to Consolidated Financial Statements in the 2006 Annual Reports on Form 10-K.

10-K/A (Amendment No. 1).
See Note 11 for information concerning EnergyCo and Note 14 for information concerning the transfer of operations from TNMP to PNM. The table below summarizes the nature and amount of other related party transactions amongof PNMR, PNM and TNMP:

                 
  Three Months Ended  Six Months Ended 
  June 30,  June 30, 
  2007  2006  2007  2006 
  (In thousands) 
Electricity, transmission and related services billings:                
PNM to TNMP $—  $12,677  $126  $27,909 
TNMP to PNMR  16,873   17,880   33,386   33,167 
                 
Shared services billings from PNMR to:                
PNM  23,697   30,759   49,595   62,376 
TNMP  4,587   8,948   10,117   18,288 
                 
Services billings from PNMR to EnergyCo  2,344   —   3,414   — 
                 
Income tax sharing payments from:                
PNM to PNMR $—  $—  $—  $— 
TNMP to PNMR  —   —   —   — 
  
Three Months Ended
 
  
March 31,
 
  
2007
 
2006
 
  (In thousands) 
Electricity, transmission and related services billings:     
PNM to TNMP $126 $15,232 
TNMP to PNMR  16,513  15,287 
        
Shared services billings from PNMR to:       
PNM $25,800 $31,617 
TNMP  5,512  9,340 
        
Capital expenditures fee billings from PNMR to:       
PNM $99 $- 
TNMP  18  - 
        
Income tax sharing payments from:       
PNM to PNMR $- $- 
TNMP to PNMR  -  - 

58



54
PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
(13) New Accounting Pronouncements

(13)
New Accounting Pronouncements

Please refer to Note 21 of theNotes to Consolidated Financial Statements in the Company's2006 Annual Reports on Form 10-K for the year ended December 31, 2006 for10-K/A (Amendment No. 1) contains information regarding recently issued accounting pronouncements that could have a material impact on the Company. No accounting pronouncements issued since that report are expected to have a material impact on the Company'sCompany’s Consolidated Financial Statements. See Note 15 for discussion concerning the adoption of FIN 48 as of January 1, 2007.

(14)
Discontinued Operations

(14) Discontinued Operations
In connection with the acquisition of TNP and its principal subsidiaries, TNMP and First Choice, the NMPRC stipulated that all TNMP’s New Mexico operations would transfer to the ownership of PNM. This transfer took place on January 1, 2007 when TNMP transferred its New Mexico operational assets and liabilities to PNMR through a redemption of TNMP’s common stock. PNMR contemporaneously contributed the TNMP New Mexico operational assets and liabilities to PNM.

In accordance with SFAS 144 and EITF 03-13, the Company determined that the New Mexico operations component of TNMP is required to be reported as discontinued operations in the TNMP Condensed Consolidated Statements of Operations for the period January 1, 2006 through March 31,June 30, 2006. Due to the fact the net assets were distributed to TNMP’s parent, PNMR, the assets and liabilities were considered “held and used” up until the date of transfer and, according to SFAS 144, are not classified as “held for sale” within TNMP’s Consolidated Balance Sheet at December 31, 2006. No gain or loss or impairments were recognized on the disposition due to the fact the transfer was among entities under common control. Furthermore, the TNMP New Mexico operations are subject to traditional rate of return regulation. Subsequent to the transfer, the NMPRC regulates these operations in the same manner as prior to the transfer. Under SFAS 71, the assets and liabilities were recorded by PNM at TNMP’s carrying amounts, which represent their fair value within the regulatory environment.

Under SFAS 154, the asset transfer did not meet the definition of a “change in reporting entity” since PNM’s financial statement composition remained unchanged after the transfer. The assets and operations transferred from TNMP are in the same line of business as PNM and are immaterial to both PNM’s assets and net earnings.

The following table summarizes the results classified as discontinued operations in TNMP’s Condensed Consolidated Statements of Earnings:

         
  Three Months  Six Months 
  Ended  Ended 
  June 30, 2006 
  (In thousands) 
         
Operating revenues $21,760  $48,897 
Operating expenses and other income  20,149   45,812 
       
Earnings from discontinued operations before income tax  1,611   3,085 
Income tax expense  (16)  987 
       
Earnings from discontinued operations $1,627  $2,098 
       
  
Three Months
 
  
Ended
 
  
March 31, 2006
 
  (In thousands) 
    
Operating revenue $27,137 
Operating expenses and other income  25,663 
Earnings from operations of discontinued operations, before income tax  1,474 
Income tax expense  1,003 
Earnings from discontinued operations $471 

59



55
PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes the TNMP New Mexico assets and liabilities transferred to PNM:

     
  January 1, 
  2007 
  (In thousands) 
Current assets $15,444 
Other property and investments  12 
Utility plant, net  96,610 
Goodwill  102,601 
Deferred charges  1,794 
    
Total assets transferred to PNM  216,461 
    
     
Current liabilities  17,313 
Long-term debt  1,065 
Deferred credits and other liabilities  31,060 
    
Total liabilities transferred to PNM  49,438 
    
     
Net assets transferred between entities $167,023 
    
  
January 1,
 
  
2007
 
  (In thousands) 
Utility plant, net $96,610 
Other property and investments  12 
Current assets  15,444 
Goodwill  102,562 
Deferred charges  1,794 
Total assets transferred to PNM  216,422 
     
Long-term debt  1,065 
Current liabilities  17,313 
Deferred credits and other liabilities  31,060 
Total liabilities transferred to PNM  49,438 
     
Net assets transferred between entities $166,984 
(15)Income Taxes

In July 2006, the FASB issued FIN 48, which requires that the Company recognize only the impact of tax positions that, based on their technical merits, are more likely than not to be sustained upon an audit by the taxing authority. FIN 48 also specifies standards for recognizing interest income and expense.

The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, PNMR established a liability under FIN 48 of $33.9 million, reduced its previously recorded tax liabilities by $39.9 million, increased the January 1, 2007 balance of retained earnings by $1.6 million, increased interest payable by $3.2 million, and decreased goodwill by $1.2 million. PNM established an asset under FIN 48 of $3.6 million, reduced its previously recorded tax liabilities by $3.6 million, increased the January 1, 2007 balance of retained earnings by $0.6 million, and increased interest receivable by $0.6 million. TNMP established no liability under FIN 48, recorded interest receivable of $3.3 million, increased the January 1, 2007 balance of retained earnings by $2.0 million, and decreased goodwill by $1.3 million.
As of January 1, 2007 under FIN 48, PNMR had $33.9 million of unrecognized tax benefits, all of which would affect the effective tax rate if recognized; PNM had $3.6 million of unrecognized tax expense, none of which would affect the effective tax rate if recognized; and TNMP had no unrecognized tax benefits. There have been no significant changes to these amounts during the quarter ended March 31, 2007. The CompanyPNMR has agreed to a tentativereceived notice that its agreement with the IRS regarding substantially all of the unrecognized tax benefits. This agreement must be approved bybenefits has been returned from the Joint Committee on Taxation. TheTaxation with no changes and the issue will beis considered settled oncesettled. As a result, PNMR has recognized approximately $16.0 million of income tax benefit in June 2007. Including this benefit, PNMR’s effective tax rates were (277.5)% and 5.5% for the Joint Committee review process is complete.three and six months ended June 30, 2007. Without this non-recurring benefit, PNMR’s effective tax rates would have been 19.7% and 35.7% for the three and six months ended June 30, 2007.
During the three months ended June 30, 2007, PNMR established a liability of $13.9 million for additional unrecognized tax benefits, which was offset by deferred income taxes and had no effect on earnings. At June 30, 2007, PNMR had $16.0 million of unrecognized tax benefits, PNM had $3.5 million of unrecognized tax expense, and TNMP had no unrecognized tax benefits. While it cannot be assured, it is anticipated that approximately $31.3$.5 million of unrecognized tax benefitsexpense of PNMR and $3.3 million of unrecognized tax expense of PNM will reversebe reversed by March 31,June 30, 2008. The Company is unable to make reasonably reliable estimates of the period of cash settlement of the remaining unrecognized tax benefits and expenses.

60

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Estimated interest income related to refunds expected to be received is included in Other Income and estimated interest expense and penalties are included in Interest Expense in the Condensed Consolidated StatementStatements of Operations. Interest income under FIN 48 for the six months ended June 30, 2007 was $0.1 million for PNMR. Due to the settlement discussed above, during for the three months ended March 31,June 30, 2007, was $1.0PNMR reversed interest expense of $4.8 million for PNMR.previously recorded. At March 31,June 30, 2007, PNMR had accumulated accrued interest expensereceivable of $4.3 million and penaltiesaccumulated accrued interest payable of $2.2$2.1 million; PNM had accumulated interest receivable of $0.3 million and accumulated interest payable of $0.1 million; and TNMP had accumulated interest receivable of $4.0 million.

The Company files a Federalfederal consolidated and several consolidated and separate state income tax returns. The tax years prior to 2001 are closed to examination by either Federalfederal or state taxing authorities. The years 2001-2004 are currently under Federalfederal income tax examination. Additionally, the reporting years 2003-2006 are currently under Texas franchise tax examination. Based on the status and the process involved in finalizing these examinations, it is not possible to estimate the impact, if any, upon the Company’s previously recorded uncertain tax positions.
(16) Restatement
Subsequent to the issuance of the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006, the management of PNMR and PNM determined that the deferred gains related to certain sale-leaseback transactions had not been amortized over the correct period.
In 1985 and 1986, PNM entered into 11 separate transactions through which it sold all of its interest in Units 1 and 2 of the PVNGS and related common facilities to institutional investors. At the same time, PNM entered into agreements to lease back the facilities that were sold. These transactions resulted in gains, which in accordance with GAAP were deferred and amortized over the lives of the leases, approximately 30 years.
In 1990, the New Mexico Public Service Commission (“NMPSC”), the predecessor to the NMPRC, ordered that the portion of the gain on the sale-leasebacks attributable to PNM’s New Mexico customers was to reduce electric rates over 15 years. Accordingly, under GAAP, the amortization period for the portion of the gain on the sale-leasebacks remaining at that time and attributable to New Mexico customers should have been changed to match the rate-making treatment, which would have resulted in that portion of the gain being completely amortized by 2001. However, PNM continued to amortize the gain over the lives of the leases for financial reporting purposes, which was longer than the 15 years determined by the NMPSC. The portion of the gain not attributable to PNM’s New Mexico customers was not affected by the NMPSC order and has continued to be amortized over the lives of the leases in accordance with GAAP.
In connection with the above, PNMR and PNM have restated the Condensed Consolidated Statements of Earnings, Condensed Consolidated Statements of Cash Flows and Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months and six months ended June 30, 2006 included herein and the Notes to the Condensed Consolidated Financial Statements for such periods, as appropriate. This restatement does not impact the Condensed Consolidated Financial Statements of TNMP.

61

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
57NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following is a summary of the corrections described above:
PNMR
                 
  Three Months Ended June 30, 2006  Six Months Ended June 30, 2006 
  As Previously      As Previously    
  Reported  As Restated  Reported  As Restated 
  (In thousands, except per share amounts)  (In thousands, except per share amounts) 
                 
Consolidated Statements of Earnings
                
Energy production costs $43,714  $44,038  $81,301  $81,949 
Net earnings*  16,307   15,983   42,632   41,984 
Net earnings per share                
Basic  0.24   0.23   0.62   0.61 
Diluted  0.23   0.23   0.61   0.61 
                 
Consolidated Statements of Cash Flows
                
Deferred credits**          (9,816)  (9,168)
                 
Consolidated Statements of Comprehensive Income (Loss)
                
Total comprehensive income  13,740   13,416   35,053   34,405 
*Net earnings also appears in the Consolidated Statements of Cash Flows and Consolidated Statements of Comprehensive Income (Loss)
**Deferred credits was combined into other liabilities in the June 30, 2006 Form 10-Q, as originally filed
PNM
                 
  Three Months Ended June 30, 2006  Six Months Ended June 30, 2006 
  As Previously      As Previously    
  Reported  As Restated  Reported  As Restated 
  (In thousands)  (In thousands) 
                 
Consolidated Statements of Earnings
                
Energy production costs $42,080  $42,404  $79,667  $80,315 
Net earnings*  3,320   2,996   33,748   33,100 
Net earnings available for common stock**  3,188   2,864   33,484   32,836 
                 
Consolidated Statements of Cash Flows
                
Deferred credits***          (9,309)  (8,661)
                 
Consolidated Statements of Comprehensive Income (Loss)
                
Total comprehensive income  1,098   774   29,049   28,401 
*Net earnings also appears in the Consolidated Statements of Cash Flows
**Net earnings available for common stock also appears in the Consolidated Statements of Comprehensive Income (Loss)
***Deferred credits was combined into other liabilities in the June 30, 2006 Form 10-Q, as originally filed

62

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 PNM and TNMP is presented both on a combined basis, including information applicable to PNM and TNMP. The MD&A for PNM and TNMP only includes a narrative analysis of results of operations as applicable, and on a separate basis.permitted by Form 10-Q General Instruction H (2). For discussion purposes, this report will use the term “Company” when discussing matters of common applicability to PNMR, PNM and TNMP. Discussions regarding specific contractual obligations generally reference the entity that is legally obligated. In the case of contractual obligations of PNM and TNMP, these obligations are combined with PNMR and its subsidiaries. A reference to a “Note” in this Item 2 refers to the accompanying Notes to Condensed Consolidated Financial Statements (Unaudited) included in Item 1.1, unless otherwise specified. MD&A gives effect to the restatement discussed in Note 16.

MD&A FOR PNMR
RESULTS OF OPERATIONS - EXECUTIVE SUMMARYBUSINESS AND STRATEGY

During the first quarter of 2007, PNMR experienced higher earnings over the prior year primarily due to increased price margins on First Choice Power customer sales, the Twin Oaks acquisition, the effects of colder weather and increased performance at PVNGS. However, the first quarter results were negatively impacted by the absence of the PNM Wholesale forward sale of first-quarter excess resources used in 2006, lower levels of plant performance at SJGS and Four Corners, increased coal costs, higher interest expense due to higher short-term borrowings, and the remarketing of Pollution Control Revenue Bonds. The Company cannot predict what impact the changes in market prices for power and natural gas will have on its future results of operations.

Business and Strategy

Overview

The Company is positioned as a merchant utility, principally operating as a regulated energy service provider and a competitive wholesale and retail electricity service provider. The Company is engaged in the sale and marketing of electricity in the regulated electric and competitive wholesale energy marketplace.marketplaces. In addition, through First Choice, PNMR is a retail electric provider in Texas under legislation that established retail competition. PNM also provides natural gas services on both a sales and transportation basis. PNM and TNMP are under the jurisdiction of the FERC. PNM is under the jurisdiction of the NMPRC while TNMP operates under the jurisdiction of the PUCT in Texas.

PNMR, primarily through EnergyCo, intends to enhance and diversify its presence in the southwest region through the acquisition or development of quality generation assets, including renewable or clean technology resources, to serve the Company’s retail and wholesale load while maintaining diversity of fuel mix. PNMR also plans to increase long-term sales contracts in tandem with increases in its generation capacity. As in the past, PNMR intends towill continue a disciplined approach to any acquisition, to match acquisitions to demand and to hedge capacity with long-term contracts.

EnergyCo Joint Venture

The EnergyCo joint venture with ECJV is a newan unregulated energy company that will serve expanding U.S. markets throughout the Southwest, Texas and the West. ECJV is a wholly owned subsidiary of Cascade, which is PNMR’s second-largesta large PNMR shareholder.

PNMR’s strategy for unregulated operations is focused on some of the nation’s growing power markets. PNMR intends to capitalize on the growth opportunities in these markets through its participation and ownership in EnergyCo. In particular, it is anticipated that ECJV will commit capital for the acquisition of assets and that Cascade will make significant guarantees of certain EnergyCo debt obligations to increase EnergyCo’s scale in its anticipated business lines:lines will consist of:

·• Competitive retail electricityenergy sales;
·
• Development, operation and ownership of diverse generation assets; and
·
• Wholesale marketing and trading to optimize its assets.

To fund startup expenses, both membersOn June 1, 2007, PNMR contributed $2.5 million to EnergyCo in the three months ended March 31, 2007.
58
In February 2007, the EnergyCo Board of Directors formed ECMT. ECMT is the subsidiary of EnergyCo that is expected to perform future marketing and trading activity for the joint venture.

PNMR , ECJV and EnergyCo have signed a non-binding letter of intent which provides for PNMR to contribute to EnergyCo its ownership of the subsidiaries that hold Twin OaksAltura to EnergyCo at fair market value of approximately $554$549.6 million, foras adjusted to reflect changes in working capital. ECJV to makemade a related cash contribution to EnergyCo equal to 50% of the Twin Oaks contributionfair value amount and forEnergyCo distributed that cash to PNMR. EnergyCo has entered into a bank financing arrangement under which it borrowed $181 million on a long-term basis from which it distributed $87.5 million to each of PNMR and ECJV. PNMR utilized amounts distributed from EnergyCo to make a related cash distributionreduce debt. Subsequent to PNMR equalJune 30, 2007, EnergyCo completed the acquisition of one electric generating plant and announced plans to 50% of the Twin Oaks contribution amount. PNMR expects to contribute Twin Oaks on or about June 1, 2007 and its impact is expected to reduce PNMR’s 2007 earnings per diluted share by approximately $0.05.co-develop another generating unit.

TNMP Asset Transfer to PNM

In connection with the acquisition of TNP, the NMPRC approved a stipulation that called for the integration of TNMP’s New Mexico assets into PNM. The asset transfer occurred as of January 1, 2007 at which time the transferred New Mexico assets and operations became reportable under the PNM Electric segment rather than TNMP Electric.

63


RESULTS OF OPERATIONS
Executive Summary
A summary of PNMR’s net earnings is as follows:
                 
  Three Months Ended June 30,  Six Months Ended June 30, 
  2007  2006  2007  2006 
  (In thousands, except per share amounts) 
                 
Net earnings $20,240  $15,983  $49,906  $41,984 
Average common and common equivalent shares  78,793   69,433   78,446   69,349 
Net earnings per diluted share $0.26  $0.23  $0.64  $0.61 
The major causes of changes in net earnings were the recognition of income tax benefit for a settlement with the IRS regarding previously unrecognized tax benefits; increased plant performance at SJGS and PVNGS, offset by decreased performance at Four Corners; increases due to regulated load growth and weather impacts; changes in First Choice earnings, excluding mark-to-market impacts; changes in Wholesale marketing activity; mark-to-market losses; higher coal costs; non-recurring costs related to Twin Oaks and EnergyCo for the costs of forming EnergyCo, the loss due to the impairment of intangible assets, and the loss on the contribution of Altura to EnergyCo; and higher financing costs. The after-tax impacts of these items on net earnings in 2007 compared to 2006 are as follows:
         
  Three Months Ended  Six Months Ended 
  June 30, 2007  June 30, 2007 
  (In millions) 
After-tax impacts
        
IRS settlement $16.0  $16.0 
Plant performance  7.2   10.9 
Regulated load growth and weather  1.0   7.3 
First Choice (excluding mark-to-market)  (5.7)  2.4 
Wholesale marketing activity  0.2   (6.3)
Mark-to-market  (8.6)  (9.3)
Coal costs  (2.6)  (4.8)
Twin Oaks and EnergyCo  (6.0)  (6.8)
Financing  (0.8)  (3.5)
Other  3.6   2.0 
       
Net change in net earnings $4.3  $7.9 
       

64

The increase in the number of common and common equivalent shares is primarily due to new issuances of PNMR common stock in 2006 and an increase in the dilutive effect of the equity-linked units.
Segment Information

The following discussion is based on the segment methodology that the Company’sPNMR’s management uses for making operating decisions and assessing performance of its various business activities; therefore, operating results for each segmentactivities. Unusual and non-recurring items are presented without regard toincluded in the effect of accounting or regulatory changesCorporate and similar other items not related to normal operations. Except for the section “Results of Operation - TNMP,” referencesOther segment. References to 2006 amounts in the following discussion are to 2006 information as previously reported and have not been adjusted to reflect the transfer of TNMP’s New Mexico operations that are discussed above. See Note 3 for more information on the Company’sPNMR’s operating segments.

Income taxes, interest charges, and non-operating items are discussed for PNMR in total.
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” in this Item 2 and to Part II, Item 1A. “Risk Factors.”


59

RESULTS OF OPERATIONS - PNMR

THREE MONTHS ENDED MARCH 31, 2007
COMPARED TO THREE MONTHS ENDED MARCH 31, 2006

PNMR’s net earnings for the three months ended March 31, 2007 were $30.0 million, or $0.38 per diluted share of common stock, compared to $26.3 million, or $0.38 per diluted share of common stock for the three months ended March 31, 2006. The increase in earnings was driven primarily by increased price margins on First Choice Power customer sales, the acquisition of Twin Oaks, the effects of colder weather, and improved performance at PVNGS. These increases were partially offset by the absence of the PNM Wholesale forward sale of first-quarter excess resources used in 2006, lower levels of plant performance at SJGS and Four Corners, increased coal costs, higher interest expense due to higher short-term borrowings, and the remarketing of Pollution Control Revenue Bonds. Net earnings per diluted share of common stock remained flat due to an increase in the average number of shares of common stock outstanding during the first three months of 2007 compared to the same period in 2006, due primarily to the public offering of 5,750,000 shares in December 2006.

The following discussion is based on the methodology that management uses for making operating decisions and assessing performance of its various business activities. See Note 3 for additional information regarding these results and the Consolidated Financial Statements.

Adjustments related to EITF 03-11 are included in Corporate and Other. ThisEITF 03-11 requires a net presentation of all realized gains and losses on non-normal derivative transactions that do not physically deliver and that are offset by similar transactions during settlement. Management evaluates Wholesale operations on a gross presentation basis due to its primarily net asset-backed marketing strategy and the importance it places on the Company’s ability to repurchase and remarket previously sold capacity.

65

Income taxes and non-operating items are discussed on a consolidated basis for PNMR as presented in PNMR’s Condensed Consolidated Financial Statements.


60

Regulated Operations

PNM Electric

The table below sets forth thesummarizes operating results for PNM Electric:

                                 
  Three Months Ended June 30,  Six Months Ended June 30, 
  2007  2006  Change  %  2007  2006  Change  % 
      (In millions)              (In millions) 
Total operating revenues $171.1  $146.3  $24.8   17.0  $341.3  $285.1  $56.2   19.7 
Cost of energy  65.9   43.3   22.6   52.1   132.4   88.8   43.6   49.1 
Intersegment energy transfer  3.6   8.5   (4.9)  (57.4)  (2.0)  3.3   (5.3)  (160.7)
                         
Gross margin  101.6   94.5   7.1   7.5   210.9   193.0   17.9   9.3 
Operating expenses  73.5   66.9   6.6   10.0   146.2   134.4   11.8   8.8 
Depreciation and amortization  16.4   14.3   2.1   14.5   32.8   29.3   3.5   11.9 
                         
Operating income $11.7  $13.3  $(1.6)  (12.3) $31.9  $29.3  $2.6   8.8 
                         
  
Three Months Ended
   
  
March 31,
   
  
2007
 
2006
 
Variance
 
  (In thousands) 
Total revenues $170,113 $138,778 $31,335 
Cost of energy  66,502  45,474  21,028 
Intersegment energy transfer  (5,658) (5,178) (480)
Gross margin  109,269  98,482  10,787 
Energy production costs  30,934  29,243  1,691 
Transmission and distribution O&M  9,679  7,645  2,034 
Customer related expense  4,503  3,730  773 
Administrative and general  4,380  2,691  1,689 
Total non-fuel O&M  49,496  43,309  6,187 
Corporate allocation  16,977  17,648  (671)
Depreciation and amortization  16,385  14,972  1,413 
Taxes other than income taxes  5,839  6,197  (358)
Income taxes  4,257  3,072  1,185 
Total non-fuel operating expenses  92,954  85,198  7,756 
Operating income $16,315 $13,284 $3,031 
The table below summarizes the significant changes to operating revenues, gross margin and operating income:

                         
  Three Months Ended June 30, 2007  Six Months Ended June 30, 2007 
  Total  Gross  Operating  Total  Gross  Operating 
  Revenues  Margin  Income  Revenues  Margin  Income 
  (In millions)  (In millions) 
Transfer of assets from TNMP $21.8  $6.3  $1.6  $48.9  $12.7  $3.0 
Weather  (3.1)  (1.6)  (1.6)  (0.2)  (0.1)  (0.1)
Customer/load growth  6.1   1.9   1.9   6.9   3.0   3.0 
Plant performance  —   4.9   4.4   —   8.1   6.7 
Coal costs  —   (3.6)  (3.6)  —   (6.8)  (6.8)
General operational increases  —   —   (1.7)  —   —   (2.5)
Other  —   (0.8)  (2.6)  0.6   1.0   (0.7)
                   
Total increase (decrease) $24.8  $7.1  $(1.6) $56.2  $17.9  $2.6 
                   

66

The following table shows PNM Electric operating revenues by customer class, including intersegment revenues and average number of customers:

                                 
  Three Months Ended June 30,  Six Months Ended June 30, 
  2007  2006  Change  %  2007  2006  Change  % 
  (In millions, except customers)     (In millions, except customers)   
Residential $58.4  $52.0  $6.4   12.3  $126.2  $107.4  $18.8   17.6 
Commercial  73.1   65.6   7.5   11.5   137.8   122.7   15.1   12.4 
Industrial  25.8   15.6   10.2   65.4   49.2   30.3   18.9   62.3 
Transmission  8.0   7.2   0.8   11.6   16.9   14.2   2.7   18.6 
Other  5.8   5.9   (0.1)  (3.2)  11.2   10.5   0.7   4.9 
                         
  $171.1  $146.3  $24.8   17.0  $341.3  $285.1  $56.2   19.7 
                         
Average customers (thousands)  488.1   428.6   59.5   13.9   487.6   427.3   60.3   14.1 
                         
The following table shows PNM Electric GWh sales by customer class:
                                 
  Three Months Ended June 30,  Six Months Ended June 30, 
  2007  2006  Change  %  2007  2006  Change  % 
  (Gigawatt hours)     (Gigawatt hours) 
Residential  704.9   647.4   57.5   8.9   1,525.6   1,335.9   189.7   14.2 
Commercial  992.6   929.2   63.4   6.8   1,869.5   1,732.9   136.6   7.9 
Industrial  494.2   332.6   161.6   48.6   964.5   646.6   317.9   49.2 
Other  63.4   71.6   (8.2)  (11.4)  119.8   126.4   (6.6)  (5.3)
                         
   2,255.1   1,980.8   274.3   13.9   4,479.4   3,841.8   637.6   16.6 
                         
Effective January 1, 2007, TNMP’s New Mexico operations were transferred to PNM, which increased PNM Electric’s sales volumes, average customers, and income statement line items. Information concerning the TNMP New Mexico operations included in the TNMP Electric segment in 2006 is as follows:
         
  Three Months Ended  Six Months Ended 
  June 30, 2006  June 30, 2006 
  (Dollars in millions) 
Total revenues $21.8  $48.9 
Cost of energy  15.5   36.2 
       
Gross margin  6.3   12.7 
Operating Expenses  3.2   6.6 
Depreciation and amortization  1.5   3.1 
       
Operating income $1.6  $3.0 
       
         
Sales volumes (GWhs)  308.4   590.7 
Average customers (thousands)  49.6   49.6 

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The following discussion of results will exclude variances due to the transfer of New Mexico operations from TNMP on January 1, 2007, that are shown above.
During the second quarter of 2007, cooler temperatures resulted in decreased sales volume, as cooling degree-days decreased 31.4% from the second quarter of 2006. Year-to-date 2007, the impact of weather is minimal, as reduced usage in the second quarter was offset by increased usage during the heating season in the early part of the year. During both the second quarter of 2007 and year-to-date 2007, an increase in average customer counts and load growth resulted in increases in sales volumes and operating revenues.
Higher coal costs at SJGS and Four Corners have decreased gross margin and operating income for the second quarter and year-to-date 2007.
During the second quarter of 2007, improved performance over the prior year at PVNGS resulted in a $6.7 million increase to gross margin. However, O&M costs related to outages at jurisdictional units (Units 1 and 2) increased by $1.6 million during the second quarter of 2007. Improved performance at SJGS over the prior year increased gross margin by $1.6 million for the second quarter and also decreased O&M costs by $1.9 million. Decreased performance at Four Corners compared to the second quarter of 2006 resulted in a $3.4 million decrease to gross margin and a $0.8 million increase to O&M costs.
Year-to-date 2007 compared to 2006, PVNGS performance resulted in a $12.4 million increase to gross margin and a $1.3 million increase in O&M costs. SJGS performance resulted in a $0.4 million increase to gross margin and a $0.9 million decrease to O&M costs. Decreased Four Corners performance resulted in a $4.7 million decrease to gross margin and a $1.0 million increase to O&M costs.
For the second quarter and year-to-date 2007, increases in general operational expenses include costs for materials and supplies, as well as shared services, employee labor, pension and benefit costs.

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TNMP Electric
The table below summarizes the operating results for TNMP Electric:
                                 
  Three Months Ended June 30,  Six Months Ended June 30, 
  2007  2006  Change  %  2007  2006  Change  % 
      (In millions)              (In millions) 
Total operating revenues $43.5  $61.5  $(18.0)  (29.2) $84.5  $124.1  $(39.6)  (32.0)
Cost of energy  7.2   22.7   (15.5)  (68.1)  14.4   49.8   (35.4)  (71.1)
                         
Gross margin  36.3   38.8   (2.5)  (6.4)  70.1   74.3   (4.2)  (5.7)
Operating expenses  17.7   21.0   (3.3)  (15.5)  36.4   42.4   (6.0)  (14.4)
Depreciation and amortization  7.0   7.8   (0.8)  (10.1)  14.0   15.6   (1.6)  (9.8)
                         
Operating income $11.6  $10.0  $1.6   15.4  $19.7  $16.3  $3.4   20.9 
                         
The table below summarizes the significant changes to operating revenues, gross margin and operating income:
                         
  Three Months Ended June 30, 2007  Six Months Ended June 30, 2007 
  Total  Gross  Operating  Total  Gross  Operating 
  Revenues  Margin  Income  Revenues  Margin  Income 
  (In millions)  (In millions) 
Transfer of assets to PNM $(21.8) $(6.3) $(1.6) $(48.9) $(12.7) $(3.0)
Weather  (1.8)  (1.8)  (1.8)  (0.4)  (0.4)  (0.4)
Customer/load growth  0.6   0.6   0.6   1.5   1.5   1.5 
PUCT order  4.1   4.1   3.1   7.9   7.9   6.0 
Transmission prices  0.3   0.3   0.3   0.7   —   — 
Other  0.6   0.6   1.0   (0.4)  (0.5)  (0.7)
                   
Total increase (decrease) $(18.0) $(2.5) $1.6  $(39.6) $(4.2) $3.4 
                   

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The following table shows TNMP Electric operating revenues by customer class, including intersegment revenues, which are eliminated within the presentation of the PNMR Condensed Consolidated Statements of Earnings and shown in the PNMR Segment Information in Note 3, and average number of customers:

                                 
  Three Months Ended June 30,  Six Months Ended June 30, 
  2007  2006(1)  Change  %  2007  2006(1)  Change  % 
  (In millions, except customers)     (In millions, except customers) 
Residential $15.6  $20.7  $(5.1)  (24.3) $30.4  $39.9  $(9.5)  (23.9)
Commercial  17.7   21.9   (4.2)  (18.9)  33.7   42.5   (8.8)  (20.7)
Industrial  1.8   9.3   (7.5)  (80.9)  3.5   22.7   (19.2)  (84.4)
Other  8.4   9.6   (1.2)  (12.5)  16.9   19.0   (2.1)  (11.7)
                         
  $43.5  $61.5  $(18.0)  (29.2) $84.5  $124.1  $(39.6)  (32.0)
                         
Average customers
(thousands)(2)
  225.3   272.2   (46.9)  (17.2)  225.3   271.7   (46.4)  (17.1)
                         
  
Three Months Ended
   
  
March 31,
   
  
2007
 
2006
 
Variance
 
  (In thousands, except customers) 
Residential $67,797 $55,328 $12,469 
Commercial  64,707  57,079  7,628 
Industrial  23,450  14,741  8,709 
Transmission  8,866  7,045  1,821 
Other  5,293  4,585  708 
  $170,113 $138,778 $31,335 
           
Average customers  487,001  425,919  61,082 
(1)The customer class revenues and the average customer count have been reclassified to be consistent with the current year presentation.
(2)Under TECA, customers of TNMP Electric in Texas have the ability to choose First Choice or any other REP to provide energy. The average customers reported above include 130,762 and 146,549 customers of TNMP Electric for the three months ended June 30, 2007 and 2006 and 133,235 and 147,782 customers for the six months ended June 30, 2007 and 2006 who have chosen First Choice as their REP. These customers are also included in the First Choice segment.

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61

The following table shows PNM Electric MWh sales by customer class:

  
Three Months Ended
   
  
March 31,
   
  
2007
 
2006
 
Variance
 
  (Megawatt hours) 
Residential  820,630  688,472  132,158 
Commercial  876,954  803,700  73,254 
Industrial  470,277  314,008  156,269 
Other  56,367  54,863  1,504 
   2,224,228  1,861,043  363,185 

Operating revenues increased $31.3 million, or 22.6%, for the three months ended March 31, 2007, compared to the same period of 2006. Average customers grew 14.3% quarter over quarter and retail MWh sales increased 19.5%. The increases in revenues, customers and MWhs sales were primarily due to the transfer of southern New Mexico operations from TNMP. Such operations had $27.1 million in revenues, 49,480 customers and 0.3 million MWhs in the first quarter 2006 results of TNMP. In addition to the transfer of these operations, PNM Electric revenues increased $4.2 million generally driven by load growth and colder weather.

The gross margin, or operating revenues minus cost of energy sold and intersegment energy transfer, increased $10.8 million, or 11.0%, for the three months ended March 31, 2007, compared to the same period in 2006. The increase to margin was mainly due to the transfer of southern New Mexico operations from TNMP of $6.4 million, improved performance at PVNGS of $5.3 million, and increased usage due to load growth and colder weather of $3.8 million. These increases were partially offset by higher generation costs of $2.8 million, largely as a result of increased coal costs at SJGS, and decreased performance at Four Corners and SJGS of $1.3 million and $1.2 million, respectively.

Total non-fuel O&M expenses increased $6.2 million, or 14.3%, for the three months ended March 31, 2007, compared to the same period of 2006. Energy production costs increased $1.7 million, or 5.8%, due to increased outage costs of $1.0 million, primarily at SJGS, and the absence of a $0.7 million PVNGS decommissioning and decontamination credit received in the first quarter of 2006. Transmission and distribution O&M expenses increased $2.0 million, or 26.6%, mainly due to the transfer of southern New Mexico operations from TNMP of $1.0 million and increased labor costs of $0.8 million. Customer related expenses increased $0.8 million, or 20.7%, primarily due to an increase in labor costs of $0.4 million and the transfer of southern New Mexico operations from TNMP of $0.3 million. Administrative and general expenses increased $1.7 million, or 62.8%, primarily due to an increase in pension and benefit costs of $3.5 million, as costs were recorded as part of administrative and general expenses in 2007 versus recorded as corporate allocation charges in 2006, as discussed below. These increases to expense were partially offset by higher capitalized costs of $1.9 million related to increased construction activity, largely as a result of environmental work at SJGS and expansion of the Afton plant.

Corporate allocation charges decreased $0.7 million, or 3.8%, primarily due to lower pension and benefit costs of $3.5 million, as costs were recorded as part of administrative and general expenses in 2007 versus recorded through the corporate allocation in 2006, as discussed above. This decrease was mostly offset by the transfer of southern New Mexico operations from TNMP of $1.6 million and an increase in incentive-based compensation. Depreciation and amortization increased $1.4 million, or 9.4%, mainly due to the transfer of southern New Mexico operations from TNMP of $1.6 million, the transfer of the Afton plant to a jurisdictional resource of $0.5 million, which is offset in the Wholesale segment, and an increase in asset base of $0.4 million. These increases were partially offset by reduced depreciation at Four Corners due to assets that fully depreciated of $0.6 million and a life extension of the plant of $0.5 million. Taxes other than income decreased $0.4 million, or 5.8%, due to a reduction of prior year Native American taxes of $0.9 million, partially offset by the transfer of southern New Mexico operations from TNMP of $0.4 million.

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TNMP Electric

The table below sets forth the operating results for TNMP Electric:

  
Three Months Ended
   
  
March 31,
   
  
2007
 
2006
 
Variance
 
  (In thousands) 
Operating revenues $40,928 $62,685 $(21,757)
Cost of energy  7,171  27,172  (20,001)
Gross margin  33,757  35,513  (1,756)
Energy production costs  4,923  4,713  210 
Customer related expense  971  1,204  (233)
Administrative and general  2,231  398  1,833 
Total non-fuel O&M  8,125  6,315  1,810 
Corporate allocation  5,700  9,610  (3,910)
Depreciation and amortization  7,000  7,731  (731)
Taxes other than income taxes  4,825  5,607  (782)
Income taxes  352  (673) 1,025 
Total non-fuel operating expenses  26,002  28,590  (2,588)
Operating income $7,755 $6,923 $832 


The following table shows TNMP Electric revenues by customer class, including intersegment revenues, which are eliminated within the presentation of the PNMR Condensed Consolidated Statements of Earnings and shown in the PNMR Segment Information in Note 3, and average number of customers:

  
Three Months Ended
   
  
March 31,
   
  
2007
 
2006(1)
 
Variance
 
  (In thousands, except customers) 
Residential $14,760 $19,271 $(4,511)
Commercial  15,969  20,599  (4,630)
Industrial  1,744  13,319  (11,575)
Other  8,455  9,496  (1,041)
  $40,928 $62,685 $(21,757)
           
Average customers(2)
  225,380  271,103  (45,723)

(1) The customer class revenues presented above for the three months ended March 31, 2006 have been reclassified from prior year presentation in order to be consistent with current year presentation, as a result of changes in customer classifications. Additionally, the average customer count presented above for the three months ended March 31, 2006 has been reclassified from prior year presentation in order to be consistent with the current year presentation for the ESI ID customer count methodology used by the ERCOT.

(2) Under TECA, customers of TNMP Electric in Texas have the ability to choose First Choice or any other REP to provide energy. The average customers reported above include 135,707 and 149,014 customers of TNMP Electric at March 31, 2007 and 2006, respectively, who have chosen First Choice as their REP. These TNMP Electric customers are also included below in the First Choice segment. For PNMR consolidated reporting purposes, these customers are included only once in the consolidated customer count.

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The following table shows TNMP Electric MWhGWh sales by customer class:

                                 
  Three Months Ended June 30,  Six Months Ended June 30, 
  2007  2006(2)  Change  %  2007  2006(2)  Change  % 
  (Gigawatt hours(1))     (Gigawatt hours(1)) 
Residential  579.9   710.4   (130.5)  (18.4)  1,118.3   1,238.3   (120.0)  (9.7)
Commercial  563.7   774.4   (210.7)  (27.2)  1,022.9   1,255.0   (232.1)  (18.5)
Industrial  473.9   462.0   11.9   2.6   881.2   1,018.1   (136.9)  (13.4)
Other  23.9   31.8   (7.9)  (24.4)  48.1   60.7   (12.6)  (20.7)
                         
   1,641.4   1,978.6   (337.2)  (17.0)  3,070.5   3,572.1   (501.6)  (14.0)
                         
  
Three Months Ended
   
  
March 31,
   
  
2007
 
2006 (2)
 
Variance
 
  
(Megawatt hours(1))
 
Residential  538,462  527,880  10,582 
Commercial  459,149  480,586  (21,437)
Industrial  407,345  556,056  (148,711)
Other  24,122  28,959  (4,837)
   1,429,078  1,593,481  (164,403)
(1)The GWh sales reported above include 487.3 and 635.1 GWhs for the three months ended June 30, 2007 and 2006 and 960.3 and 1,110.0 GWhs for the six months ended June 30, 2007 and 2006 used by customers of TNMP Electric respectively, who have chosen First Choice as their REP. These GWhs are also included below in the First Choice segment.
(2)The customer class sales have been reclassified to be consistent with current year presentation.

Effective January 1, 2007, TNMP’s New Mexico operations were transferred to PNM. As a result, TNMP Electric’s sales volumes, average customers, and income statement line items for Electric above have decreased as set forth under PNM Electric above. The following discussion of results will exclude variances due to the transfer of New Mexico operations to PNM on January 1, 2007.

(1)During the second quarter of 2007, cooler temperatures resulted in decreased sales volume, as cooling degree-days decreased 20.4% from the second quarter of 2006. The MWh sales reported above include 473,014 and 474,841 MWh usedreduced usage in the second quarter resulting from the cooler weather was mostly offset by customersincreased usage during the heating season in the early part of TNMP Electric at March 31,the year. During both the second quarter of 2007 and 2006, respectively, who have chosen First Choice as their REP. These MWh are also included belowyear-to-date 2007, an increase in the First Choice segment.

(2) Theaverage customer classcounts has resulted in increases in sales presented above for the three months ended March 31, 2006 have been reclassified from prior year presentation in order to be consistent with current year presentation, as a result of changes in customer classifications.

volumes and operating revenues.
The PUCT issued a signed order on November 2, 2006 related to the stranded costs incurred by TNMP as part of the deregulation of the Texas energy market and the associated carrying charges. As partThe details of this order TNMP will recover approximately $160 million over 14 years to recover the CTC and related carrying costs and approximately $5 million over the course of three years to recover rate case expenses. Also as part of this order, TNMP will return approximately $4 million to customers over the course of one year related to industrial fuel costs. The recovery of the CTC and rate case expenses, net of the industrial fuel credit, will result in increases to revenuesare discussed in the period that these charges are billed or creditedTNMP 2006 Annual Report on Form 10-K/A (Amendment No. 1). This PUCT order resulted in a net increase to customers.

TNMP also recorded regulated assets and liabilities to account for the customer collections and credits. As these charges are collected from and credited to customers, the amountrevenue of the assets and liabilities will be amortized through the income statement. The amortization of these assets and liabilities will result in an increase in administrative and general expenses related to the rate case expenses, and an increase in depreciation and amortization costs related to the net of the CTC asset and industrial fuel credit liability amortizations.

Operating revenues decreased $21.8$4.1 million or 34.7%, for the three months ended March 31, 2007, compared to the same period of 2006. Average customers fell 16.9% quarter over quarter and retail electricity sales decreased 10.3% to 1.4 million MWhs in the firstsecond quarter of 2007 compared to 1.6 million MWhs in the same period of 2006. The decreases in revenues, customers and sales MWhs were primarily due to the transfer of southern New Mexico operations from TNMP, which resulted in the transfer of $27.1 million in revenues, 49,480 customers and 0.3 million MWhs that were included in the first quarter 2006 results of TNMP to PNM. After consideration of the transfer of southern New Mexico operations to PNM, TNMP Electric revenues increased $5.4 million. TNMP collected $4.0 million in additional revenues during the first three months of 2007 related to the PUCT order discussed above, which consists of the net of a $4.6 million increase for the collection of the CTC, a $0.4 million increase for the collection of rate case expenses, and a $1.0 million decrease related to a industrial fuel credit to customers. In addition, revenues increased due to load growth and colder weather.

Gross margin decreased $1.8 million, or 4.9%, for the three months ended March 31, 2007, compared to the same period of 2006, mainly due to the transfer of southern New Mexico operations to PNM Electric of $6.4 million and a $0.7 million increase in transmission expenses from third-party providers, which were partially offset by the $4.0 million increase in revenues associated with the PUCT signed order discussed above and increases due to load growth and colder weather.

64
Total non-fuel O&M expenses increased $1.8 million, or 28.7%, for the three months ended March 31, 2007, compared to the same period of 2006. Administrative and general expenses increased $1.8 million, or 460.6%, primarily due to $2.3 million of pension and benefit costs and regulatory costs that were recorded in administrative and general expenses in the first quarter of 2007 versus recorded through the corporate allocation in 2006, as discussed below. In addition, administrative and general expenses increased $0.4 million related to the recognition of rate case expenses that are recovered in revenues by the PUCT signed order discussed above. These increases were partially offset by a $0.4 million decrease in pension and benefit costs and the transfer of $0.2 million of expenses related to southern New Mexico operations to PNM Electric.

Corporate allocation charges decreased $3.9 million, or 40.7%, for the three months ended March 31, 2007, compared to the same period of 2006, primarily due to the transfer of southern New Mexico operations to PNM Electric of $1.6 million and $2.3 million of pension and benefit costs and regulatory expenses that were recorded in administrative and general expenses in the first quarter of 2007 versus being recorded through the corporate allocation in 2006, as discussed above. Depreciation and amortization expense decreased $0.7 million, or 9.5%, to $7.0 million for the three months ended March 31, 2007. The transfer of southern New Mexico operations to PNM Electric decreased depreciation and amortization expenses by $1.6 million. This decrease was partially offset by the $0.5an increase in amortization expense of $0.9 million. Year-to-date, a $7.9 million net increase in amortization of CTC and industrial fuel credit assets and liabilitiesrevenues related to the same PUCT order discussed above andwas partially offset by an increase in amortization expense of $0.3 million due to$1.9 million.
Increased transmission prices caused an increase in revenues in both the asset base. Taxessecond quarter of 2007 and year-to-date 2007. In the second quarter, this increase to revenues also had a favorable impact on operating income. Year-to-date, the increase in revenues was completely offset by an increase in transmission costs paid to other than income decreased $0.8 million, or 13.9%, mainly due to the transfer of southern New Mexico operations to PNM Electric of $0.4 million and a reduction in Texas franchise tax, which was recorded to taxes other than income in 2006 versus being included in operating income taxes in 2007, resulting in no net impact to earnings.utilities.

71



65

PNM Gas

The table below sets forthsummarizes the operating results for PNM Gas:

                                 
  Three Months Ended June 30,  Six Months Ended June 30, 
  2007  2006  Change  %  2007  2006  Change  % 
      (In millions)              (In millions) 
Total operating revenues $75.2  $69.0  $6.2   9.0  $291.7  $276.5  $15.2   5.5 
Cost of energy  45.1   42.2   2.9   6.9   206.8   199.9   6.9   3.5 
                         
Gross margin  30.1   26.8   3.3   12.3   84.9   76.6   8.3   10.8 
Operating expenses  25.9   25.9   —   0.2   51.6   51.0   0.6   1.1 
Depreciation and amortization  6.1   6.0   0.1   1.2   12.2   11.9   0.3   2.8 
                         
Operating income $(1.9) $(5.1) $3.2   62.7  $21.1  $13.7  $7.4   53.8 
                         
  
Three Months Ended
   
  
March 31,
   
  
2007
 
2006
 
Variance
 
  (In thousands) 
Operating revenues $216,532 $207,525 $9,007 
Cost of energy  161,713  157,691  4,022 
Gross margin  54,819  49,834  4,985 
Energy production costs  485  488  (3)
Transmission and distribution O&M  7,939  6,668  1,271 
Customer related expense  3,601  3,538  63 
Administrative and general  2,720  1,501  1,219 
Total non-fuel O&M  14,745  12,195  2,550 
Corporate allocation  8,819  10,755  (1,936)
Depreciation and amortization  6,181  5,920  261 
Taxes other than income taxes  2,048  2,140  (92)
Income taxes  7,922  6,266  1,656 
Total non-fuel operating expenses  39,715  37,276  2,439 
Operating income $15,104 $12,558 $2,546 
The table below summarizes the significant changes to operating revenues, gross margin and operating income:

                         
  Three Months Ended June 30, 2007  Six Months Ended June 30, 2007 
  Total  Gross  Operating  Total  Gross  Operating 
  Revenues  Margin  Income  Revenues  Margin  Income 
  (In millions)  (In millions) 
Gas prices $3.5  $—  $—  $(16.9) $—  $— 
Weather  8.5   1.9   1.9   32.2   6.0   6.0 
Customer growth/usage  (2.2)  (0.2)  (0.2)  6.2   1.3   1.3 
Mark-to-market gains  0.7   0.7   0.7   0.5   0.5   0.5 
Off-system activities  (4.7)  0.3   0.3   (7.0)  0.1   0.1 
Other  0.4   0.6   0.5   0.2   0.4   (0.5)
                   
Total increase (decrease) $6.2  $3.3  $3.2  $15.2  $8.3  $7.4 
                   

72


The following table shows PNM Gas operating revenues by customer class, including intersegment revenues, which are eliminated within the presentation of the PNMR Condensed Consolidated Statements of Earnings and shown in the PNMR Segment Information in Note 3, and average number of customers:

                                 
  Three Months Ended June 30,  Six Months Ended June 30, 
  2007  2006  Change  %  2007  2006  Change  % 
  (In millions, except customers)     (In millions, except customers) 
Residential $48.4  $38.5  $9.9   25.7  $200.7  $180.2  $20.5   11.4 
Commercial  15.5   13.4   2.1   15.7   60.6   57.4   3.2   5.7 
Industrial  0.4   1.5   (1.1)  (70.7)  1.0   2.3   (1.3)  (54.4)
Transportation(1)
  3.4   2.8   0.6   19.2   8.4   7.5   0.9   12.0 
Other  7.5   12.8   (5.3)  (41.1)  21.0   29.1   (8.1)  (28.4)
                         
  $75.2  $69.0  $6.2   9.0  $291.7  $276.5  $15.2   5.5 
                         
Average customers (thousands)  490.5   480.5   10.0   2.1   491.2   480.6   10.6   2.2 
                         
  
Three Months Ended
   
  
March 31,
   
  
2007
 
2006
 
Variance
 
  (In thousands, except customers) 
Residential $152,331 $141,637 $10,694 
Commercial  45,186  44,021  1,165 
Industrial  583  737  (154)
Transportation(1)
  5,014  4,659  355 
Other  13,418  16,471  (3,053)
  $216,532 $207,525 $9,007 
           
Average customers  491,995  480,655  11,340 
(1)Customer-owned gas.

(1) Customer-owned gas.

66

The following table shows PNM Gas throughput by customer class:

                                 
  Three Months Ended June 30,  Six Months Ended June 30, 
  2007  2006  Change  %  2007  2006  Change  % 
  (Thousands of Decatherms)     (Thousands of Decatherms) 
Residential  3,827   3,058   769   25.1   17,771   15,020   2,751   18.3 
Commercial  1,515   1,391   124   8.9   6,149   5,557   592   10.7 
Industrial  50   195   (145)  (74.4)  113   267   (154)  (57.7)
Transportation(1)
  10,149   9,371   778   8.3   20,949   20,402   547   2.7 
Other  500   1,501   (1,001)  (66.7)  1,826   3,067   (1,241)  (40.5)
                         
   16,041   15,516   525   3.4   46,808   44,313   2,495   5.6 
                         
  
Three Months Ended
   
  
March 31,
   
  
2007
 
2006
 
Variance
 
  (Thousands of Decatherms) 
Residential  13,944  11,962  1,982 
Commercial  4,634  4,166  468 
Industrial  63  72  (9)
Transportation(1)
  10,800  11,031  (231)
Other  1,326  1,566  (240)
   30,767  28,797  1,970 
(1)Customer-owned gas.

73


(1) Customer-owned gas.

PNM Gas purchases natural gas in the open market and resells it at no profit to its sales-service customers. As a result, increases or decreases in gas revenues driven by gas costs do not impact the gross margin or operating income of PNM Gas. Operating revenues increased $9.0 million,Increases or 4.3%, fordecreases to gross margin caused by changes in sales-service volumes represent margin earned on the three months ended March 31, 2007, compareddelivery of gas to the same period of 2006, primarily due to $23.9 million of increased usage due to colder weather and $4.9 million due to customer growth. These increases were partially offset by lowercustomers based on regulated rates. Changes in gas prices of $9.2 million, $8.7 million of decreased usage due to customer conservation, and $1.9 million of reduced off-system sales transactions resulting fromresulted in a lack of market activity. Sales volumes increased 6.8% as a result of colder weather and a 2.4% increase in average customer counts, partially offset by customer conservation.

Gross margin increased $5.0 million, or 10.0%, for the three months ended March 31, 2007, compared to the same period of 2006. Increased customer usage resulting from colder weather caused gross margin to increase $4.2 million and customer growth increased gross margin by $1.8 million. These increases were partially offset by decreased customer usage due to conservation of $0.9 million.

Total non-fuel O&M expenses increased $2.6 million, or 20.9%, for the three months ended March 31, 2007, compared to the same period of 2006. Transmission and distribution O&M expenses increased $1.3 million, or 19.1%, largely due to increased repair and maintenance costs and a $0.7$3.5 million increase in labor costs,total revenues during the second quarter and a $16.9 million decrease year-to-date 2007. On May 30, 2006, PNM filed for an increase in base gas service rates of $22.6 million. On June 29, 2007 the NMPRC approved an increase in annual revenues of approximately $9 million for PNM, which included a 9.53% return on equity. PNM filed a Notice of Appeal with the New Mexico Supreme Court on July 27, 2007 and has until August 27, 2007 to file which components will be appealed.
Cooler weather throughout the year resulted in increased revenues and operating income for both the second quarter of 2007 and year-to-date 2007. The year-to-date impact was much larger as costs were recorded to transmission and distribution O&M expensescooler weather in 2007 versus administrative and general expensesthe heating season resulted in 2006, as discussed below. Administrative and general expenses increased $1.2 million, or 81.2%, mainly due to $2.1 million of pension and benefit expenses that were included in administrative and general expenseshigher sales volumes in the first quarter of 2007. Year-to-date heating degree-days increased 19.2%.
During the second quarter of 2007, versus being recorded through the corporate allocationan overall increase in the first quarternumber of 2006, as discussed below. This increaseaverage customers was partiallymore than offset by a decreaseshift to more lower usage customers. The year-to-date impact of the shift in laborcustomers was more than offset by the overall increase in customers and reduced customer conservation.
Both the second quarter of 2007 and year-to-date 2007 saw increased revenue and operating income as a result of mark-to-market gains, which did not occur in 2006.
Reduced off-system activity decreased revenues, but has slightly positive impact to margin and operating income, as the decreases in revenues were more than offset by the decreases in costs as costs were recorded to transmission and distribution O&M expenses in 2007 versus being included in administrative and general expenses in 2006, as discussed above.

Corporate allocation charges decreased $1.9 million, or 18.0%, for the three months ended March 31, 2007, compared to the same period of 2006, primarily due to $2.3 million of costs that were recorded to administrative and general expenses in 2007 versus being recorded through the corporate allocation in 2006, as discussed above, primarily related to pension and benefit costs. This decrease was partially offset by a $0.3 million increase in incentive-based compensation. Depreciation and amortization increased $0.3 million, or 4.4%, largely due to an increase in asset base.transactions.

74



67

Unregulated Operations

Wholesale

The table below sets forthsummarizes the operating results for Wholesale:

                                 
  Three Months Ended June 30,  Six Months Ended June 30, 
  2007  2006  Change  %  2007  2006  Change  % 
  (In millions)     (In millions) 
Total operating revenues $194.1  $154.5  $39.6   25.6  $328.6  $334.0  $(5.4)  (1.6)
Cost of energy  165.6   119.9   45.7   38.2   242.0   262.7   (20.7)  (7.9)
Intersegment energy transfer  (3.5)  (8.5)  5.0   57.4   2.0   (3.3)  5.3   160.7 
                         
Gross margin  32.0   43.1   (11.1)  (25.7)  84.6   74.6   10.0   13.4 
Operating expenses  19.2   18.3   0.9   4.6   45.0   30.2   14.8   48.9 
Depreciation and amortization  6.2   7.2   (1.0)  (13.5)  13.9   10.3   3.6   35.2 
                         
Operating income $6.6  $17.6  $(11.0)  (62.3) $25.7  $34.1  $(8.4)  (24.6)
                         
  
Three Months Ended
   
  
March 31,
   
  
2007
 
2006
 
Variance
 
  (In thousands) 
Operating revenues $134,551 $179,488 $(44,937)
Cost of energy  76,347  142,877  (66,530)
Intersegment energy transfer  5,658  5,178  480 
Gross margin  52,546  31,433  21,113 
Energy production costs  16,117  7,898  8,219 
Transmission and distribution O&M  50  19  31 
Customer related expense  423  258  165 
Administrative and general  2,179  1,441  738 
Total non-fuel O&M  18,769  9,616  9,153 
Corporate allocation  3,182  1,193  1,989 
Depreciation and amortization  7,759  3,161  4,598 
Taxes other than income taxes  3,750  976  2,774 
Income taxes  3,937  5,014  (1,077)
Total non-fuel operating expenses  37,397  19,960  17,437 
Operating income $15,149 $11,473 $3,676 
The table below summarizes the significant changes to operating revenues, gross margin and operating income:

                         
  Three Months Ended June 30, 2007  Six Months Ended June 30, 2007 
  Total  Gross  Operating  Total  Gross  Operating 
  Revenues  Margin  Income  Revenues  Margin  Income 
  (In millions)  (In millions) 
Twin Oaks $(4.2) $(2.9) $(3.6) $32.6  $21.7  $4.1 
Mark-to-market gains (losses)  9.7   (13.3)  (13.3)  (17.5)  (9.7)  (9.7)
Marketing activity  30.5   0.3   0.3   (25.7)  (10.4)  (10.4)
Plant performance  3.6   5.8   7.5   5.1   9.3   11.3 
Coal costs  —   (0.6)  (0.6)  —   (1.1)  (1.1)
General operational increases  —   —   0.1   —   —   (1.1)
Other  —   (0.4)  (1.4)  0.1   0.2   (1.5)
                   
Total increase (decrease) $39.6  $(11.1) $(11.0) $(5.4) $10.0  $(8.4)
                   

75

The following table shows Wholesale operating revenues by type of sale, including intersegment revenues, and average number of customers:

                                 
  Three Months Ended June 30,  Six Months Ended June 30, 
  2007  2006  Change  %  2007  2006  Change  % 
  (In millions)     (In millions) 
Long-term sales $77.5  $73.9  $3.6   4.8  $153.0  $105.2  $47.8   45.5 
Short-term sales  116.6   80.6   36.0   44.7   175.6   228.8   (53.2)  (23.2)
                         
  $194.1  $154.5  $39.6   25.6  $328.6  $334.0  $(5.4)  (1.6)
                         
The following table shows Wholesale revenuesGWh sales by class of sales transactions, including intersegment revenues, which are eliminated withintype:
                                 
  Three Months Ended June 30,  Six Months Ended June 30, 
  2007  2006  Change  %  2007  2006  Change  % 
  (Gigawatt hours)     (Gigawatt hours) 
Long-term sales  1,184.4   1,102.4   82.0   7.4   2,346.6   1,680.9   665.7   39.6 
Short-term sales  1,700.4   1,569.1   131.3   8.4   3,140.8   3,789.9   (649.1)  (17.1)
                         
   2,884.8   2,671.5   213.3   8.0   5,487.4   5,470.8   16.6   0.3 
                         
The Twin Oaks power plant was included in the presentation ofWholesale segment from the PNMR Condensed Consolidated Statements of Earnings andtime it was purchased on April 18, 2006 through May 31, 2007 when it was contributed to EnergyCo. The Wholesale segment income statement includes Twin Oaks during this period as shown in the PNMR Segment Information in Note 3:following table:

                                 
  For the Period          For the Period    
  April 1-  April 18 -          January 1-  April 18 -    
  May 31,  June 30,          May 31,  June 30,    
  2007  2006  Change  %  2007  2006  Change  % 
  (Dollars in millions)     (Dollars in millions) 
Total operating revenues $28.6  $32.8  $(4.2)  (12.7) $65.4  $32.8  $32.6   99.6 
Cost of energy  9.9   11.2   (1.3)  (10.9)  22.1   11.2   10.9   98.6 
                         
Gross margin  18.7   21.6   (2.9)  (13.6)  43.3   21.6   21.7   100.2 
Operating expenses  5.0   3.4   1.6   46.8   17.3   3.4   13.9   401.9 
Depreciation and amortization  3.1   4.0   (0.9)  (22.4)  7.7   4.0   3.7   93.9 
                         
Operating income $10.6  $14.2  $(3.6)  (25.8) $18.3  $14.2  $4.1   28.8 
                         
Sales Volumes (GWhs)  427.9   492.4   (64.5)  (13.1)  915.9   492.4   423.5   86.0 
                         

76

  
Three Months Ended
   
  
March 31,
   
  
2007
 
2006
 
Variance
 
  (In thousands) 
Long-term contracts $75,494 $31,234 $44,260 
Short-term sales  59,057  148,254  (89,197)
  $134,551 $179,488 $(44,937)


68

The following table shows discussion of results will exclude variances due to the timing of PNMR’s ownership of the Twin Oaks power plant that are shown above.
Changes in mark-to-market positions had a positive impact on revenue for the second quarter of 2007, driven by an increase in short-term revenues of $18.6 million; however, this increase was more than offset by increased costs, which resulted in decreases to both gross margin and operating income. Mark-to-market changes also decreased year-to-date gross margin and operating income, as lower revenues were partially offset by lower costs.
Wholesale MWhmarketing activity, which includes long-term contract growth, sales of SO2 credits, as well as other activities, increased revenue for the second quarter of 2007, but the increase in revenue was almost completely offset by customer class:

  
Three Months Ended
   
  
March 31,
   
  
2007
 
2006
 
Variance
 
  (Megawatt hours) 
Long-term contracts  1,162,214  578,544  583,670 
Short-term sales  1,440,366  2,220,752  (780,386)
   2,602,580  2,799,296  (196,716)

an increase in costs associated with these activities, resulting in a slight increase to gross margin and operating income. Operating revenuesincome year-to-date was decreased $44.9 million, or 25.0%, from the prior year. This decrease in Wholesale electric sales wasby marketing activity primarily due to decreased short-term sales of $89.2 million, or 60.2%. The decrease in short-term sales is mainly due to lower mark-to-market revenues of $27.2 million, an 11.4% decrease in average sales price, and a decrease in revenues from marketing activity, including the absence of market opportunities that allowed for the forward sale of first quarter 2006 excess resourcesresources.
During the second quarter of 2007, improved performance over the prior year at PVNGS resulted in September 2005 when market prices were high. When prices fella $7.3 million increase to gross margin and a $1.5 million decrease to O&M costs. Improved performance at SJGS over the prior year increased gross margin by $1.7 million for the second quarter, but increased O&M costs by $0.1 million. Decreased performance at Four Corners compared to the second quarter of 2006 resulted in earlya $3.2 million decrease to gross margin and a $0.3 million decrease to O&M costs.
Year-to-date 2007 compared to 2006, PNM Wholesale covered the forward sales with lower-priced market purchasesPVNGS performance resulted in an $11.9 million increase to gross margin and utilized the excess resources to create additional sales opportunities. Short-term revenues were further decreased by a $2.0 million decrease in sales of $4.7O&M costs. SJGS performance resulted in a $1.2 million increase to gross margin and a large industrial customer$0.1 million decrease to O&M costs. Decreased Four Corners performance resulted in New Mexico. These decreases were partially offset by a net$3.7 million decrease to gross margin and a $0.2 million increase in plant availability, as increased outagesto O&M costs.
Increased coal costs at SJGS and Four Corners were more than offset by significantly stronger performance at PVNGS, which increasedhave decreased gross margin and operating income for both the availability of less expensive excess energy available to be soldsecond quarter and year-to-date 2007.
For the second quarter and year-to-date 2007, increases in the wholesale market. The decreases in short-term sales were partially offset by an increase in long-term contracts of $44.3 million, or 141.7%. The acquisition of Twin Oaks, which took place in April 2006, increased long-term revenue by $36.8 million, of which $16.4 million related to an existing power agreementgeneral operational expenses include costs for materials and $20.0 million for the amortization of the fair value of a sales contract existingsupplies as of the date of the acquisition (see Note 2). Long-term revenues also increasedwell as a result of a new customer contract of $9.3 million. Wholesale sold 2.6 million MWh of electricity in the first quarter of 2007 compared to 2.8 million MWh for the same period in 2006, a decrease of 7.0%.

Gross margin increased $21.1 million, or 67.2%, for the three months ended March 31, 2007, compared to the same period of 2006, primarily due to the acquisition of Twin Oaks, which increased margin $24.6 million. The increase in revenues due to an increase in plant availability, net of the associated increase in generation costs, increased margin by $4.1 million. The change in PNM Wholesale’s mark-to-market positions increased $4.1 million during the three months ended March 31, 2007, compared to increases of $0.5 million during the same period of 2006 and resulting in a $3.6 million increase to gross margin. These increases were partially offset by the absence of first quarter 2006 forward sales discussed above of $10.8 million and a $0.5 million increase in coal costs, largely at SJGS.

Total non-fuel O&M expenses increased $9.2 million, or 95.2%, for the three months ended March 31, 2007, compared to the same period of 2006. Energy production costs increased $8.2 million, or 104.1%, due primarily to the addition of the Twin Oaks and Luna power plants of $7.0 million and $0.7 million, respectively, both of which were not operational under PNMR in the first quarter of 2006. Costs also increased due to the absence of a $0.4 million PVNGS decommissioning and decontamination credit received in the first quarter of 2006. Administrative and general costs increased $0.7 million, or 51.2%, mainly due to a reduction of prior-year PVNGS payroll expenses in the first quarter of 2006, the addition of Twin Oaks costs, and an increase inshared service, employee labor, pension and benefit costs that were recorded as administrative and general expenses in the first quarter of 2007 versus recorded through the corporate allocation in 2006, as discussed below.costs.

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Corporate allocation charges increased $2.0 million, or 166.7%, for the three months ended March 31, 2007, compared to same period of 2006, primarily due to the addition of Twin Oaks, which was partially offset by pension and benefit costs that were recorded as administrative and general expenses in the first quarter of 2007 versus being recorded in the corporate allocation line item in 2006, as discussed above. Depreciation and amortization increased $4.6 million, or 145.5%, mainly due to the addition of Twin Oaks and Luna operations of $4.6 million and $0.5 million, respectively, which was partially offset by the transfer of the Afton plant to a jurisdictional resource of $0.5 million. Taxes other than income increased $2.8 million or 284.2%, mainly due to the addition of Twin Oaks.

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First Choice

The table below sets forthsummarizes the operating results for First Choice:

                                 
  Three Months Ended June 30,  Six Months Ended June 30, 
  2007  2006  Change  %  2007  2006  Change  % 
  (In millions)     (In millions) 
Total operating revenues $150.0  $154.9  $(4.9)  (3.1) $285.6  $260.0  $25.6   9.8 
Cost of energy  125.8   118.1   7.7   6.6   236.7   208.4   28.3   13.6 
                         
Gross margin  24.2   36.8   (12.6)  (34.4)  48.9   51.6   (2.7)  (5.2)
Operating expenses  13.0   15.3   (2.3)  (15.7)  28.1   28.6   (0.5)  (1.5)
Depreciation and amortization  0.5   0.5   —   (7.8)  0.9   1.0   (0.1)  (6.6)
                         
Operating income $10.7  $21.0  $(10.3)  (48.8) $19.9  $22.0  $(2.1)  (9.8)
                         
  
Three Months Ended
   
  
March 31,
   
  
2007
 
2006
 
Variance
 
  (In thousands) 
Operating revenues $135,565 $105,082 $30,483 
Cost of energy  110,816  90,335  20,481 
Gross margin  24,749  14,747  10,002 
Customer related expense  3,864  3,577  287 
Administrative and general  9,145  3,612  5,533 
Total non-fuel O&M  13,009  7,189  5,820 
Corporate allocation  1,914  4,809  (2,895)
Depreciation and amortization  471  498  (27)
Taxes other than income taxes  234  1,180  (946)
Income taxes  3,407  300  3,107 
Total non-fuel operating expenses  19,035  13,976  5,059 
Operating income $5,714 $771 $4,943 
The following table summarizes the significant changes to operating revenues, gross margin and operating income:

                         
  Three Months Ended June 30, 2007  Six Months Ended June 30, 2007 
  Total  Gross  Operating  Total  Gross  Operating 
  Revenues  Margin  Income  Revenues  Margin  Income 
  (In millions)  (In millions) 
Weather $(10.2) $(3.0) $(3.0) $(4.2) $(1.0) $(1.0)
Customer mix/price  6.7   (8.8)  (7.7)  34.3   2.8   4.8 
Mark-to-market positions  (2.1)  (1.6)  (1.6)  (5.8)  (5.8)  (5.8)
Bad debt expense  —   —   (1.7)  —   —   (1.9)
Incentive-based compensation  —   —   1.9   —   —   0.7 
Other operating expenses  —   —   1.4   —   —   (0.2)
Other  0.7   0.8   0.4   1.3   1.3   1.3 
                   
Total increase (decrease) $(4.9) $(12.6) $(10.3) $25.6  $(2.7) $(2.1)
                   

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The following table shows First Choice electric operating revenues by customer class, including intersegment revenues, which are eliminated within the presentation of the PNMR Condensed Consolidated Statements of Earnings and shown in the PNMR Segment Information in Note 3, andaverage number of customers:

                                 
  Three Months Ended June 30,  Six Months Ended June 30, 
  2007  2006(1)  Change  %  2007  2006(1)  Change  % 
  (In millions, except customers)     (In millions, except customers) 
Residential $88.4  $89.2  $(0.8)  (0.8) $174.0  $148.8  $25.2   16.9 
Mass-market  18.0   23.7   (5.7)  (24.3)  34.1   42.5   (8.4)  (19.8)
Mid-market  37.8   33.9   3.9   11.7   68.4   53.3   15.1   28.2 
Mark-to-market(4)
  1.7   3.8   (2.1)  (55.1)  (0.3)  5.5   (5.8)  (104.7)
Other  4.1   4.3   (0.2)  (5.8)  9.4   9.9   (0.5)  (4.1)
                         
  $150.0  $154.9  $(4.9)  (3.1) $285.6  $260.0  $25.6   9.8 
                         
Actual customers
(thousands)(2,3)
  249.5   230.1   19.4   8.4   249.5   230.1   19.4   8.4 
                         
  
Three Months Ended
   
  
March 31,
   
  
2007
 
2006(1)
 
Variance
 
  (In thousands, except customers) 
Residential $85,552 $59,601 $25,951 
Mass-market  16,169  18,821  (2,652)
Mid-market  30,557  19,447  11,110 
Trading(4)
  1,134  1,836  (702)
Other  2,153  5,377  (3,224)
  $135,565 $105,082 $30,483 
           
Actual customers (2,3)
  256,931  219,071  37,860 
(1)The customer class revenues and the customer counts have been reclassified to be consistent with the current year presentation.
(2)See note above in the TNMP Electric segment discussion about the impact of TECA.
(3)Due to the competitive nature of First Choice’s business, actual customer count at June 30 is presented in the table above as a more representative business indicator than the average customers that are shown in the table for TNMP customers.
(4)Includes financial gas trading.

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(1) The customer class revenues presented above for the three months ended March 31, 2006 have been reclassified from prior year presentation in order to be consistent with current year presentation, as a result of changes in customer classifications. Additionally, the customer counts presented above for the three months ended March 31, 2006 have been reclassified from prior year presentation in order to be consistent with the current year presentation for the ESI ID customer count methodology used by the ERCOT.

(2) See note above in the TNMP Electric segment discussion about the impact of TECA.

(3) Due to the competitive nature of First Choice’s business, actual customer count at March 31 is presented in the table above as a more representative business indicator than the average customers that are shown in the table for TNMP customers. First Choice had 256,465 average customers and 220,525 average customers for the three months ended March 31, 2007 and 2006, respectively. The 220,525 average customers for the three months ended March 31, 2006 have been reclassified from prior year presentation in order to be consistent with the current year presentation for the ESI ID customer count methodology used by the ERCOT.

(4) Includes gas trading.

70

The following table shows First Choice MWhGWh electric sales by customer class:

                                 
  Three Months Ended June 30,  Six Months Ended June 30, 
  2007  2006(2)  Change  %  2007  2006(2)  Change  % 
  (Gigawatt hours(1))     (Gigawatt hours(1)) 
Residential  638.0   636.7   1.3   0.2   1,252.9   1,064.2   188.7   17.7 
Mass-market  110.8   160.6   (49.8)  (31.0)  210.7   281.6   (70.9)  (25.2)
Mid-market  329.7   308.4   21.3   6.9   589.6   486.1   103.5   21.3 
Other  8.0   13.6   (5.6)  (41.6)  17.2   26.6   (9.4)  (35.3)
                         
   1,086.5   1,119.3   (32.8)  (2.9)  2,070.4   1,858.5   211.9   11.4 
                         
  
Three Months Ended
   
  
March 31,
   
  
2007
 
2006(2)
 
Variance
 
  
(Megawatt hours(1))
 
Residential  614,908  427,544  187,364 
Mass-market  99,866  121,027  (21,161)
Mid-market  259,876  177,643  82,233 
Other  9,279  13,005  (3,726)
   983,929  739,219  244,710 

(1)
(1)See note above in the TNMP Electric segment discussion about the impact of TECA.
(2)The customer class sales have been reclassified to be consistent with current year presentation.
Cooler weather throughout 2007 resulted in lower sales volumes and reduced operating income for both the second quarter and year-to-date 2007. The cooler weather had a large impact on the second quarter as cooling degree-days are down 20.4% compared to the second quarter of 2006.
For the second quarter of 2007, an overall increase in customers and increased sales prices increased revenues, but were more than offset by an increase in purchase prices and a shift in the TNMP Electric segment discussion aboutmix of overall customers to include more lower margin customers, resulting in a decrease to gross margin and operating income. Year-to-date 2007, the impactincrease in sales prices was greater than the increase in purchase prices, resulting in an increase to margin and operating income. However, the increase in total customers was more than offset by the shift in the mix of TECA.customers to lower margin customers.

(2)The customer class sales presented aboveA mark-to-market gain of $1.7 million during the second quarter of 2007, and a loss of $0.3 million year-to-date, compared to gains of $3.3 million and $5.5 million for the three months ended March 31,second quarter and year-to-date 2006 have been reclassified from prior year presentationresulted in orderreduced income compared to be consistent with current year presentation,last year.
Bad debt expense has increased in 2007, primarily in the second quarter, compared to 2006, resulting in a decrease to operating income. A reduction in incentive-based compensation as a result of changeslower than projected earnings in customer classifications.

Operating revenues increased $30.5 million, or 29.0%,2007 has decreased operating expenses for both the second quarter and year-to-date 2007. Other operating expenses were reduced for the three months ended March 31,second quarter and year-to-date 2007 compared to the same period of 2006. The increase in revenues was primarily due to $28.2 million in increased usage due to colder weather and customer growth as well as $5.4 million due to increased sales prices. These increases were partially offset by lower mark-to-market gains.

Gross margin increased $10.0 million, or 67.8%, for the three months ended March 31, 2007, compared to the same period of 2006, primarily due to improved price margins on customer sales of $12.8 million, which was partially offset by a decrease in the net change of mark-to-market positions.

Total non-fuel O&M expenses increased $5.8 million, or 81.0%, for the three months ended March 31, 2007, compared to the same period of 2006. Customer related expenses increased $0.3 million, or 8.0%, due to an increase in bad debt expense. Administrative and general expenses increased $5.5 million, or 153.2%, mainly due to an increase in costs related to the outsourcing of customer service operations. Year-to-date 2007, these savings were offset by an increase in marketing expenses to support growth in the business.

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EnergyCo
Upon the contribution of Altura to EnergyCo, EnergyCo became a separate segment for PNMR effective June 1, 2007. Subsequent to June 30, 2007, EnergyCo completed the acquisition of one electric generating plant and announced plans to co-develop an additional generating unit. See Notes 2 and 11. PNMR accounts for its investment in EnergyCo using the equity method of accounting. A summary of EnergyCo’s results of operations to Alliance Data Systemsfor the month of $2.6 millionJune 2007 is as follows:
     
  For the 
  Period of June 1 
  - June 30, 2007 
  (In thousands) 
     
Operating revenue $14,366 
Cost of energy  4,561 
    
Gross margin  9,805 
Operating expenses  2,767 
Depreciation and amortization  1,528 
    
Operating income  5,510 
Other income  24 
Net interest charges  (818)
    
Net earnings $4,716 
    
     
50 percent of net earnings $2,358 
Amortization of basis difference in EnergyCo  584 
    
PNMR equity in net earnings of EnergyCo $2,942 
    
Corporate and higher incentive-based compensation expensesOther
Operating revenues decreased along with an offsetting decrease in cost of $1.2 million. In addition, advertising costsenergy for both the second quarter and the costs to acquire customers increased asyear-to-date was a result of effortseliminations made at the corporate level for transactions between PNM Electric and TNMP’s New Mexico operations that are no longer necessary as these assets were transferred to grow the customer base.PNM Electric on January 1, 2007.

Corporate allocation charges decreased $2.9Operating expenses increased $5.9 million or 60.2%, for the three months ended March 31, 2007, compared to the same period of 2006, primarily due to a decrease in the percentage of costs allocated to First Choice in the firstsecond quarter of 2007 compared to the same period in 2006 to better align shared serviceand $8.2 million year-to-date 2007. These increases were primarily driven by costs associated with the services provided. Taxes other than income decreased $0.9 million, or 80.2%, largely due to lower gross receipts tax related to Price-to-Beat customer revenues.

Corporate and Other

Corporate Allocations

Corporate allocations, which represent costs that are driven by shared service activities, are allocated to the business segments and are presented in the corporate allocation line item in eachformation of the business segment financial summaries. In total, these costs decreased $7.4 million, or 16.8%EnergyCo joint venture, an impairment loss on intangible assets, and the loss on the contribution of Altura to $36.6EnergyCo of $10.0 million for the three months ended March 31, 2007, compared to the same period of 2006. This decrease was due to $9.1second quarter and $11.2 million ofyear-to-date 2007. Costs were also decreased by depreciation costs recorded directly to each business segment’s administrative and general costs in 2007, versus being recordedthat were allocated through the corporate allocation line item in 2006, primarily related to pensiondriven by the construction of a new data center and benefit costs and regulatory expenses, and a $0.5 million net decrease in consulting costs related to internal audits, legal services, Sarbanes-Oxley and tax compliance costs. These decreases were partially offset by a $0.9 million increase in incentive-based compensation, a $0.7 million increase in depreciation expense foradditional shared service software and an increase in legal reserves for year-to-date 2007. These costs allocated to the business segments in the first quarter of 2007 versus held at Corporate and Otherwere partially offset by costs in 2006 as discussed below.

71

Administrative and General Expenses

As discussed above, costs that are driven by shared service activities are allocated to the business segments through the corporate allocation. Costs related to corporate-level activities are retained in the CorporateTNP and Other segment. TheseTwin Oaks acquisition integration costs increased $1.3of $1.8 million for the three months ended March 31,second quarter and $2.8 million year-to-date, costs that were allocated to EnergyCo in 2007, compared towhich did not exist in 2006, and the same periodabsence of 2006, primarily due to an increaseseverance and other costs in non-recurring costs2006 related to the formationTNP acquisition of EnergyCo and a net change of legal liabilities, partially offset by a decrease in costs allocated to the business segments in the first quarter of 2007 versus held at Corporate and Other in 2006, as discussed above.

Depreciation Expense

Corporate and Other depreciation expense increased $0.6 million, or 29.3%, to $2.6$0.8 million for the three months ended March 31, 2007,second quarter and $1.0 million year-to-date.
Depreciation expense increased primarily due to an increase in asset base as a result of new software implementation and completion of a data center for shared services. These expenses were allocated to the business segments through the corporate allocation.

81


PNMR Consolidated
Taxes Other Than Income

Corporate and Other taxes other thanInterest income increased $1.1 million, or 123.0%, to $1.9 million for the three months ended March 31,decreased in 2007 primarily due to a $0.5 million increase in tax liabilities, a $0.2 million increase in FICA taxes in 2007 associated with the prior year, and an increase in payroll taxes due to increased labor costs and taxes associated with stock options that have been exercised.

PNMR Consolidated

Other Income and Deductions

Interest income increased $0.6 million, or 6.3%, primarily due tolower interest income of $1.0 million on tax assets recorded under FIN 48, which was partially offset by afor the second quarter and $1.3 million year-to-date resulting from lower levelPGAC balances, as well as lower interest income of interest income$0.5 million for the second quarter and $1.1 million year-to-date earned on the PVNGS lessor notes due to lower principal balances.balances, which were partially offset by increased interest income of $0.3 million for the second quarter and $0.5 million year-to-date from higher cash balances at First Choice.

Gains on investment securitiesOther income and deductions decreased $0.9 million, or 92.8%,in 2007 primarily due to lower realized gains related to PVNGS decommissioning trust assets.

Carryingthe decrease of $2.0 million for the second quarter and $4.0 million year-to-date in carrying charges on regulatory assets decreased $2.0 million due toas a result of the absence of interest income earned on TNMP stranded costs in 2006 based on the collection of costs ordered by the PUCT, as discussed in the TNMP Electric segment.

Interest Charges

Other income and deductions also decreased as a result of the amortization of $2.5 million for the second quarter and year-to-date for a wind energy investment in other deductions. These decreases were partially offset by increased realized gains on investments held by the NDT.
PNMR’s consolidated interest charges increaseddecreased primarily due to interest effects of the settlement with the IRS regarding previously unrecognized tax benefits (See Note 15), which reduced interest expense by $9.3$5.5 million for the three months ended March 31, 2007, comparedsecond quarter and year-to-date, and increased capitalized interest on construction of Afton and AFUDC on the SJGS environmental project of $1.4 million for the second quarter and $1.9 million year-to-date. These decreases were partially offset by increased interest of $2.5 million for the second quarter and $6.1 million year-to-date on short-term borrowings, increased interest expense of $1.0 million year-to-date related to the same periodrefinancing of PCRBs, and interest expense on a wind energy investment that began in late 2006. The increase is primarily due to $5.3 million of interest charges related to the bridge loan associated with the Altura purchase of Twin Oaks which occurred on April 18, 2006, increased interest on short-term borrowings of $3.2 million, and the remarketing of $146 million of Pollution Control Revenue Bonds from a 2.1% variable rate to a 4.875% fixed rate of $1.3 million, which was partially offset by reduceddecreased interest expense on tax liabilitiesfor the quarter but increased expense for the year, as that loan was outstanding for only one-half of $0.7 million.

Income Taxes

a month during the second quarter of 2007 compared to two and one-half months of the same period of 2006, but for three and one-half months of 2007 year-to-date, compared to two and one-half months for the same period of 2006.
PNMR’s consolidated income tax expense was $17.9decreased primarily as a result of the settlement with the IRS regarding previously unrecognized tax benefits (See Note 15), which had a $16.0 million non-recurring impact on income taxes for both the three months ended March 31,second quarter and year-to-date of 2007. In addition, 2007 compared to $15.3 million forincome taxes were reduced by a decrease in pre-tax earnings, which were partially offset by a change in taxation by the same periodState of Texas that resulted in 2006. The increaseTexas margin taxes being included in consolidated income tax expense was due to an increase in pre-tax earnings and an increase in the overall effective income tax rate, due partially to the inclusion of2007 versus Texas franchise taxestax being included in operating income tax in 2007 versus taxes other than income in 2006, as discussed in the TNMP Electric segment, resulting in no impact to net earnings.2006. PNMR’s effective operating income tax rates for the three months and six months ended March 31,June 30, 2007 were (277.5%) and 2006 were 38.0%5.5%, respectively, compared to 38.3% and 36.6%, respectively. PNMR’s37.5% for the three months and six months ended June 30, 2006. Excluding the non-recurring impact to income taxes related to the IRS settlement, the effective non-operating income tax rates for the three months ended March 31, 2007 and 2006 were 35.2% and 37.0%, respectively.

72

RESULTS OF OPERATIONS - PNM

THREE MONTHS ENDED MARCH 31, 2007
COMPARED TO THREE MONTHS ENDED MARCH 31, 2006

PNM’s segments are PNM Electric, PNM Gas and PNM Wholesale. The PNM Electric and PNM Gas segments are identical to the segments presented above in “Results of Operations” for PNMR. The PNM Wholesale segment reported for PNM does not include Altura (see Note 2 and Note 3).

PNM’s operating revenues decreased by $62.1 million, or 12.0%, for the threesix months ended March 31,June 30, 2007 compared to the same period of 2006. Gross margin increased $12.2 million, or 6.8%, compared to the prior year quarter. PNM Electric segment gross margins increased $10.8 million from the prior year quarter, while PNM Gas segment gross margins increased $5.0 million from the prior year quarter, as discussed above. PNM Wholesale segment gross margins decreased $3.5 million, resulting predominately from the absence of marketing opportunities that allowed for the forward sale of excess energy in the first quarter of 2006, which was partially offset by increases in plant performance, primarily at PVNGS,would have been 19.7% and an increase in mark-to-market gains.

Total operating expenses decreased $64.1 million, or 13.3%, from the prior year quarter, of which $74.4 million is a decrease in cost of energy included in gross margin above.

Administrative and general costs increased $3.3 million, or 7.9%, primarily due to the transfer of southern New Mexico operations from TNMP to PNM, an increase in legal liabilities, and an increase in incentive-based compensation, which were partially offset by an increase in capitalized costs related to construction activity at the SJGS and Afton plants.

Energy production costs increased $2.9 million, or 7.8%, as a result of increased plant outage costs, largely at SJGS, the addition of Luna operations, which began in April 2006, and the absence of a PVNGS decommissioning and decontamination credit received in the first quarter of 2006.

Depreciation and amortization expenses increased $1.5 million, or 6.0%, primarily due to the transfer of southern New Mexico operations from TNMP, the addition of Luna operations, and an overall increase in asset base. These increases were partially offset by reduced depreciation at Four Corners of $0.7 million due to a group of assets that fully depreciated during the last year and $0.6 million due to a life extension.

Transmission and distribution costs increased $3.3 million, or 23.3%, mainly due to the transfer of southern New Mexico operations from TNMP as well as higher repairs and maintenance costs.

Taxes other than income decreased $0.6 million, or 6.7%, due to a reduction in Native American taxes caused by a true-up in the first quarter of 2006, which was partially offset by the transfer of southern New Mexico operations from TNMP.

PNM’s consolidated income tax expense was $18.3 million for the three months ended March 31, 2007, compared to $19.0 million for the same period of 2006. PNM’s35.7%. PNMR’s effective operating income tax rates for the three months and six months ended March 31,June 30, 2007 and 2006 were 38.8% and 38.3%, respectively. PNM’salso impacted by a reduction in the effective rate applicable to non-operating income primarily due to the impacts of tax ratescredits from a wind energy investment.

82

LIQUIDITY AND CAPITAL RESOURCES
Statements of Cash Flows
The changes in PNMR’s cash flows for the threesix months ended March 31, 2007 and 2006 were 37.6% and 38.8%, respectively.

73

RESULTS OF OPERATIONS - TNMP

THREE MONTHS ENDED MARCH 31, 2007
COMPARED TO THREE MONTHS ENDED MARCH 31, 2006

TNMP operates in only one reportable segment, “TNMP Electric.” Results for the three months ended March 31, 2006 present TNMP’s New Mexico operations as discontinued operations, as these operations were transferred to PNM on January 1, 2007. The impacts of the discontinued operations are not included in the changes discussed below.

The PUCT issued an order on November 2, 2006 related to the stranded costs incurred by TNMP as part of the deregulation of the Texas energy market and the associated carrying charges. As part of this order, TNMP will recover approximately $160 million over 14 years to recover the CTC and their related carrying costs and approximately $5 million over the course of three years to recover rate case expenses. Also as part of this order, TNMP will return approximately $4 million to customers over the course of one year related to industrial fuel costs. The recovery of the CTC and rate case expenses, net of the industrial fuel credit, will result in increases to revenues in the period that these charges are billed or credited to customers.

TNMP also recorded regulated assets and liabilities to account for the customer collections and credits. As these charges are collected from and credited to customers, the amount of the assets and liabilities will be amortized through the income statement. The amortization of these assets and liabilities will result in an increase in administrative and general expenses related to the rate case expenses, and an increase in depreciation and amortization costs related to the net of the CTC asset and industrial fuel credit liability amortizations.

TNMP’s operating revenues from continuing operations increased by $5.4 million, or 15.1%, for the three months ended March 31,June 30, 2007 compared to the same period2006 are summarized as follows:
             
  Six Months Ended June 30, 
  2007  2006  Variance 
  (In millions) 
             
Net cash flows from operating activities $87.2  $111.5  $(24.3)
Net cash flows from investing activities  172.4   (596.2)  768.6 
Net cash flows from financing activities  (325.0)  490.4   (815.4)
          
Net change in cash and cash equivalents $(65.4) $5.7  $(71.1)
          
The change in PNMR’s cash flows from operating activities is a result of 2006. Gross margin increased $4.7 million, or 16.0%, compared to the prior year quarter. TNMP collected $4.0 million in additional revenues during the first three months of 2007 related to the PUCT order discussed above, which consists of the net of a $4.6 million increase for the collection of CTC, a $0.4 million increase for the collection of rate case expenses, and a $1.0 million decrease related to a industrial fuel credit to customers. Revenues and gross margin also increased due toPNM’s higher load growth and colder weather.

Total operating expenses increased $4.1 million, or 14.0%, from the prior year quarter, of which $0.7 million is an increase in cost of energy included in gross margin above.

Administrative and general costs decreased $0.3 million, or 3.4%, primarily due to lower pension and benefit costs.

Depreciation and amortization expenses increased $0.8 million, or 13.4%, due to the $0.5 million net increase in amortization of CTC and industrial fuel credit assets and liabilities related to the PUCT order discussed above and an increase in expense of $0.3 million due to an increase in the asset base.

Transmission and distribution costs increased $1.2 million, or 31.5%, primarily due to an increase in labor and fleet vehicle expenses.

Taxes other than income decreased $0.4 million, or 7.0%, due to a reduction in Texas franchise tax, which was recorded to taxes other than income in 2006 versus included in operating income taxes in 2007 resulting in no net impact to earnings.

TNMP’s consolidated income tax expense was $0.4 million for the three months ended March 31, 2007, compared to a benefit of $0.8 million for the same period of 2006. TNMP’s effective operating income tax rates for the three months ended March 31, 2007 and 2006 were 34.2% and 68.3%, respectively. TNMP’s effective non-operating income tax rates for the three months ended March 31, 2007 and 2006 were 22.6% and 38.2%, respectively.


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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 March 31, 2007, there have been no significant changes with regard to the critical accounting policies disclosed in PNMR’s, PNM’s and TNMP’s Annual Reports on Forms 10-K for the year ended December 31, 2006. The policies disclosed included the accounting for revenue recognition, regulatory assets and liabilities, asset impairment, goodwill and other intangible assets, purchase accounting, pension and postretirement benefits, decommissioning costs, financial instruments and market risk. See Note 15 for discussion concerning the adoption of FIN 48 as of January 1, 2007. 

LIQUIDITY AND CAPITAL RESOURCES

Statements of Cash Flow

PNMR

At March 31, 2007, PNMR had cash and short-term investments of $45.0 million compared to $123.4 million in cash and short-term investments at December 31, 2006.

Cash provided by operating activities for the three months ended March 31, 2007 was $43.6 million compared to $32.4 million for the three months ended March 31, 2006. The increase was primarily due to increases in First Choice Power earnings due to customer and sales growth combined with reduced purchased power prices, PNM utility gross margins driven by load growth and colder weather and improved plant performance, which were partially offset by higher coal costs, decreases inlower plant performance, and lower wholesale marketing activity,activity. In addition, First Choice Power had higher customer growth and increased interest charges on higher short-term debt borrowings. This increase was partiallypricing offset by payments ofchanges in customer mix. There were also higher current liabilities outstanding at December 31, 2006 due to increase incentive based compensation for the 2006 year compared to 2005payouts in 2007 and higher interest payables related tocharges that were a result of higher short-term borrowings. Other significant decreasesborrowings in cash flows included a decrease in cash collections from customer receivables compared to 2006, resulting from higher2007. Higher than normal gas and market prices at the end of 2005 contributed to higher receivable collections in December 2005 that were collected during the first three months of 2006 and a decrease in accrued taxes. These decreases wereas compared to 2007 partially offset by reduced payments forin 2007 associated with gas purchases due to lower gas prices.prices as compared to 2006.

Cash used forPNMR had net positive cash flows from investing activities for the threesix months ended March 31,June 30, 2007 was $76.1 million comparedprimarily due to $39.8 millioncash distributions to PNMR from EnergyCo (See Note 11) and the proceeds from the sales of utility plant, whereas in 2006 PNMR had net cash outflows for the three months ended March 31, 2006. The increase in cash used for investing activities in the current period was due primarily to $37.8 millionacquisition of Twin Oaks. In addition, PNMR incurred increased cash paymentsexpenditures for utility plant additions.additions, including the purchase of assets underlying a portion of PVNGS leased by PNM (See Note 2).

Cash usedThe change in PNMR’s cash flows for financing activities for the threesix months ended March 31,June 30, 2007 was $46.0 million compared to $15.1 million for the three months ended March 31, 2006. During the three months ended March 31, 2007, PNMR made short-term debt repayments of $25.0 million, $11.6 million of purchases of common stock to satisfy stock awards, and $16.9 million of dividends paid, compared to $1.2 million of short-term debt payments, $2.9 million of purchases of common stock to satisfy stock awards, and $13.8 million of dividends paid during the first three months ended March 31, 2006.

PNM

At March 31, 2007, PNM had cash and short-term investments of $6.4 million compared to $11.9 million in cash and short-term investments at December 31, 2006.
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Cash provided by operating activities increased 46.7% to $67.5 million for the three months ended March 31, 2007 compared to $46.0 million for the three months ended March 31, 2006. This increase was largely due to increases in gross marginsis primarily driven by load growth and colder weather and improved plant performance, partially offsetthe redemption of long-term debt by increased coal costs, decreased wholesale marketing activity, and increased interest charges on higher short-term debt borrowings. Significant decreases in cash flows included a decrease in cash collections from customer receivables compared to 2006, resulting from higher than normal gas and market prices in December 2005 that were collected duringTNMP, the first three monthsissuance of 2006,PCRBs by PNM, and a decrease in accrued taxes. These decreases were more than offset by reduced payments for gas purchases dueshort-term debt in 2007 compared to lower gas prices and increased payments received on affiliate receivables from TNMPan increase in short-term debt in 2006 that was primarily related to purchased power and transmissionfinancing the acquisition of energy.Twin Oaks.
Cash used for investing activities for the three months ended March 31, 2007 was $67.8 million compared to $27.1 million for the three months ended March 31, 2006, a decrease of $40.8 million due to a $41.5 million increase in cash used for utility plant additions.

Cash used for financing activities for the three months ended March 31, 2007 was $5.1 million compared to $25.0 million for the three months ended March 31, 2006. The decrease in cash used for financing activities was due primarily to lower levels of short-term debt repayments.

TNMP

At March 31, 2007, TNMP had cash and short-term investments of $0.1 million compared to $2.5 million in cash and short-term investments at December 31, 2006.

Cash used for operating activities for the three months ended March 31, 2007 was $23.8 million compared to cash provided by operating activities of $8.0 million for the three months ended March 31, 2006. TNMP’s net earnings decreased due to the transfer of its New Mexico operations to PNM on January 1, 2007. In addition to the decrease in net earnings, TNMP used $18.4 million of cash to settle affiliate liabilities to First Choice Power and other REPs related to retail competition in Texas as ordered under TECA. Other increased uses of cash during the three months ended March 31, 2007 included payments on 2006 year-end current liabilities, as costs related to the purchased power and transmission of energy increased over the prior year, including payments for purchased power to PNM.

Cash used for investing activities for the three months ended March 31, 2007 was $7.8 million compared to $7.2 million for the three months ended March 31, 2006. The increase in cash used for investing activities resulted from higher levels of utility plant additions for the three months ended March 31, 2007.

Cash provided by financing activities for the three months ended March 31, 2007 included $29.2 million received from an intercompany loan provided by PNMR.
Capital Requirements

PNMR

Total capital requirements consist of construction expenditures and cash dividend requirements for both common and preferred stock, subject to board review or approval.stock. The main focus of PNMR’s current construction program is upgrading generation resources, including those relating to pollution control equipment, upgrading and expanding the electric and gas transmission and distribution systems, and purchasing nuclear fuel. Projections for total capital requirements for 2007 are $457.5$485.8 million, including construction expenditures of $386.5$414.8 million. Total capital requirements for the years 2007-2011 are projected to be $2,406.2$2,426.8 million, including construction expenditures of $1,980.8$1,990.7 million. This projection includes $56.0 million for completion of the expansion at Afton.Afton and $150.6 million for the SJGS environmental project to install low NOX combustion control and mercury reduction technologies, as well as equipment to increase SO2 controls. These estimates are under continuing review and subject to on-going adjustment.

adjustment, as well as to board review and approval.
The Company continues to look for appropriately priced generation acquisition and expansion opportunities to support retail electric load growth, for the continued expansion of its long-term contract business, and to supplement its natural transmission position in the southwestsouthwestern and west areas of thewestern United States.

During the first quarterhalf of 2007, the Company utilized cash generated from operations and cash on hand, as well as its liquidity arrangements, to covermeet its capital requirements and construction expenditures. On April 18, 2006, PNMR borrowed $480.0 million under a bridge loan facility for temporary financing of the Twin Oaks acquisition. On April 17, 2007, PNMR repaid the remaining principal balance of $249.5 million under the bridge loan at its maturity through a borrowing of $250.5 million under the PNMR Facility, PNMR’s $600.0 million revolving credit facility. In additionfacility, which amount has been repaid.

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As discussed in Note 7 to Condensed Consolidated Financial Statements, TNMP redeemed $100 million of its senior unsecured notes using funds from PNMR and PNMR received $7.6 million from the $250.5initial draw under $20 million borrowingof PCRBs issued by the City of Farmington, New Mexico during the six months ended June 30, 2007. As discussed in Note 11, PNMR received cash distributions from EnergyCo aggregating $362.3 million during this same period. PNMR and PNM have an aggregate of $486.2$631.4 million of commercial paper outstanding as of MayAugust 1, 2007. PNMR, including its subsidiaries, also has $716.6$616.6 million in senior unsecured notes and $347.3 million in equity-linked units (which include a debt component) that will come due through 2011, none of which are$148.9 million in unsecured notes is due within the next twelve months.

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As discussed under “Resultsin Note 11, EnergyCo purchased an electric generating plant in August 2007 for $467.5 million for which PNMR and ECJV each made a cash contribution to EnergyCo of Operations - Executive Summary” above,$42.5 million. In addition, EnergyCo has announced an agreement for the co-development of an additional generating unit for which its share of the construction costs is anticipated to be approximately $195 million. PNMR has entered into a non-binding lettercurrently anticipates that the remaining amounts of intent underfinancing for these EnergyCo projects will be obtained from EnergyCo’s credit facility. To the extent EnergyCo’s credit facility should be insufficient to finance the current projects, PNMR and ECJV may, at their option, provide additional funds to EnergyCo. Likewise, if EnergyCo undertakes additional projects, which Twin Oaksrequire funds that would exceed the capacity of its current credit facility and EnergyCo is unable to obtain additional financing capabilities, PNMR and ECJV may be asked to provide additional funding, but such funding would be transferredat the option of PNMR and ECJV. PNMR is unable to EnergyCo and PNMR would receive a cash distribution from EnergyCo of approximately $277 million. PNMR anticipates this transactionpredict if these possibilities will occur on or, about June 1, 2007. If this cash distribution doesif they do occur, PNMR expects the above borrowing on the PNMR Facility willamount or timing of additional funds that would be repaid from the proceeds.provided to EnergyCo.

ThePNMR’s equity-linked units contain mandatory obligations under which the holders are required to purchase $347.3 million of PNMR equity securities in 2008. The equity-linked units also provide that, prior to settlement of those purchase obligations, the debt component of the equity-linked units, which is scheduled to mature in 2010, will be remarketed. If the remarketing is successful, the debt may be extended to dates selected by PNMR and the interest rates will be adjusted to the current rates at that date. If the remarketing of the debt is not successful, the holders of the equity-linked units may satisfy their obligations to purchase PNMR equity securities by tendering the debt to PNMR. The effect of these terms is that, if the remarketing is successful, PNMR would receive $347.3 million in cash for its equity securities and the debt would continue to mature in 2010 or such later date selected by PNMR in the remarketing. If the remarketing is not successful, the issuance of PNMR equity securities would offset the retirement of the debt without requiring payment in cash by PNMR. PNMR expects the remarketing of the debt will be successful.

In addition to cash anticipated to be received from the EnergyCo distribution and the equity-linked units described above and its internal cash generation, the Company anticipates that it will be necessary to obtain additional permanentlong-term financing in the form of debt refinancing, new debt, and/or new equity in order to fund its capital requirements and the repayment of senior unsecured notes during the 2007-2011 period. To the extent the cash anticipated to be received from the EnergyCo distribution and the equity-linked units is not received, the need for new financing will be increased. Although the Company currently has no specific plans or commitments for additional permanent financing, it believes that its internal cash generation, credit arrangements, and access to capital markets will provide sufficient resources to meet the Company’s capital requirements and retire its senior unsecured notes at maturity. To cover the difference in the amounts and timing of cash generation and cash requirements, the Company intends to use short-term borrowings under its current and future liquidity arrangements.

Liquidity
PNM

The main focus of PNM’s current construction program, subject to board review or approval, is to upgrade generation resources, to upgrade and expand the electric and gas transmission and distribution systems and to purchase nuclear fuel. Projections for total capital requirements for 2007 are $318.5 million, including construction expenditures of $318.0 million. Total capital requirements for the years 2007 through 2011 are projected to be $1,670.9 million, including construction expenditures of $1,668.3 million. This includes $56.0 million for PNM’s expansion of Afton and $116.0 million for the SJGS environmental project to install low NOX combustion control and mercury reduction technologies, as well as equipment to increase SO2 controls. Also included in PNM’s capital requirements are $24.0 million for the Rio Puerco second phase loop, which will install approximately 15 miles of gas pipeline, and $38.0 million to add a 345,000 volt switching station to Rio Puerco. These estimates are under continuing review and subject to on-going adjustment.

No amounts are outstanding under the PNM Facility, PNM’s $400.0 million revolving credit facility. In addition to $221.6 million of commercial paper outstanding as of May 1, 2007, PNM has $300.0 million in senior unsecured notes that will come due in September 2008.

In addition to its internal cash generation, PNM anticipates that it will be necessary to obtain additional capital in the form of debt refinancing, new debt, and/or equity infusions from PNMR in order to fund its capital requirements and the repayment of senior unsecured notes during the 2007-2011 period. Although PNM currently has no specific plans or commitments for additional permanent financing, it believes that its internal cash generation, credit arrangements, and access to capital markets will provide sufficient resources to meet PNM’s capital requirements and retire its senior unsecured notes at maturity. To cover the difference in the amounts and timing of cash generation and cash requirements, PNM intends to use short-term borrowings under its current and future liquidity arrangements.

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TNMP

The main focus of TNMP’s current construction program, subject to board review or approval, is to upgrade and expand its electric transmission and distribution systems. Projections for total capital requirements for 2007 are $46.8 million. Total capital requirements are projected to be $219.0 million for the years 2007 through 2011. These estimates are under continuing review and subject to on-going adjustment.

After receipt of required regulatory approvals, including approval from the FERC, TNMP’s New Mexico and Arizona assets were transferred to PNM effective January 1, 2007. In accordance with conditions imposed by the FERC on debt previously issued by TNMP, the Company committed that an appropriate proportion of debt issued under those FERC conditions would be retired with cash contributed by PNMR and that the retired TNMP debt would result in, at a minimum, the ratio of TNMP New Mexico and Arizona property additions to Texas property additions funded by such debt. The Company also committed that TNMP debt would be retired to the extent necessary or advisable to maintain a TNMP equity to debt capitalization ratio in excess of 30%, to maintain any required interest rate coverage ratios, and to maintain TNMP’s credit rating. No TNMP debt has yet been retired as a result of the asset transfer.
In addition to $29.2 million of borrowings from PNMR as of May 1, 2007, TNMP has $248.9 million and $167.7 million of senior unsecured notes that become due in June 2008 and January 2009, respectively.

In addition to its internal cash generation, TNMP anticipates that it will be necessary to obtain additional capital in the form of debt refinancing, new debt, and/or equity infusions from PNMR in order to fund its capital requirements and the repayment of senior unsecured notes during the 2007-2011 period. Although TNMP currently has no specific plans or commitments for additional permanent financing, it believes that its internal cash generation, credit arrangements, and access to capital markets will provide sufficient resources to meet TNMP’s capital requirements and retire its senior unsecured notes at maturity. To cover the difference in the amounts and timing of cash generation and cash requirements, TNMP intends to use short-term borrowings under its current and future liquidity arrangements.

Liquidity

Borrowing Arrangements Between PNMR and Subsidiaries

In February 2006, the Board approved affiliate borrowing arrangements between PNMR and its subsidiaries that would authorize each subsidiary to borrow up to $50.0 million from PNMR. 

Pursuant to a separate borrowing arrangement, PNM has issued a $20.0 million promissory note to PNMR.  Initially this promissory note was payable on or before September 30, 2006.  The agreement was extended prior to its expiration and is now payable on or before September 30, 2007.  As of May 1, 2007 there were no outstanding borrowings on the promissory note.

PNMR

At May 1, 2007, PNMR, exclusive of PNM, had $615.0 million of liquidity arrangements. ThePNMR’s liquidity arrangements consist of $600.0 million from the PNMR Facility that primarily expires in 2011 and $15.0 million in local lines of credit. As of May 1, 2007, PNMR had $250.5 borrowed underinclude the PNMR Facility and no amounts borrowed under the local linesPNM Facility both of credit. PNMR had $49.2 million ofwhich primarily expire in 2012. These facilities provide short-term borrowing capacity and also allow letters of credit outstanding.
to be issued, which reduce the available capacity under the facilities. Both PNMR and PNM also have lines of credit with local financial institutions.
PNMR has established a commercial paper program under which it may issue up to $400.0 million in commercial paper for up to 270 days. The commercial paper is unsecureddays and the proceeds are used for short-term cash management needs. The PNMR Facility serves as a backstop for the outstanding commercial paper. Operationally, this means the aggregate borrowings under the commercial paper program and the revolving credit facility for PNMR cannot exceed the maximum amount of the PNMR Facility. At May 1, 2007, there were $264.6 million of borrowings outstanding under this program.

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PNMR’s ability, if required, to access the capital markets at a reasonable cost and to provide for other capital needs is largely dependent upon its ability to earn a fair return on equity, its results of operations, its credit ratings, its ability to obtain required regulatory approvals and conditions in the financial and wholesale markets. Financing flexibility is enhanced by providing a high percentage of total capital requirements from internal sources and having the ability, if necessary, to issue long-term securities and to obtain short-term credit.

On April 16, 2007, Moody’s changed the rating of PNMR's credit outlook to negative from stable. S&P considered PNMR’s outlook negative as of the date of this report. As of March 31, 2007, S&P and Moody’s rated PNMR’s senior unsecured notes issued in March 2005 (see “Financing Activities” below) as BBB- and Baa3, respectively. PNMR's commercial paper program, which is discussed above, has been rated P-3 by Moody's and A-3 by S&P. The Company is committed to maintaining or improving its investment grade ratings.

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.

PNM

At May 1, 2007, PNM had $413.5 million of liquidity arrangements. The liquidity arrangements consist of $400.0 million from the PNM Facility that primarily expires in 2011 and $13.5 million in local lines of credit. At May 1, 2007, there were no amounts borrowed against the local lines of credit or the PNM Facility; however, $3.1 million of letters of credit were outstanding, which reduces the available capacity under the PNM Facility.

PNM has a commercial paper program under which PNMit may issue up to $300.0 million in commercial paper for up to 365 days. The commercial paper is unsecured and the proceeds are used for short-term cash management needs. The PNMR Facility and the PNM Facility servesserve as a support for PNM'sthe outstanding commercial paper. Operationally, this means the aggregate borrowings under the commercial paper program and the revolving credit facility for each of PNMR and PNM cannot exceed the maximum amount of the PNM Facility. At Maythat entity’s revolving credit facility.

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A summary of these arrangements as of August 1, 2007 PNM had $221.6 million in commercial paper outstanding under this program.is as follows:

PNM’s ability, if required, to access the capital markets at a reasonable cost and to provide for other capital needs is largely dependent upon its ability to earn a fair return on equity, its results of operations, its credit ratings, its ability to obtain required regulatory approvals and conditions in the financial and wholesale markets. Financing flexibility is enhanced by providing a high percentage of total capital requirements from internal sources and having the ability, if necessary, to issue long-term securities and to obtain short-term credit.

On April 16, 2007, Moody’s changed the rating of PNM’s credit outlook to negative from stable. S&P considered PNM’s outlook negative as of the date of this report. As of March 31, 2007, S&P rated PNM’s business position as six and its senior unsecured notes as BBB. As of March 31, 2007, Moody’s rated PNM’s senior unsecured notes as Baa2 and its preferred stock as Ba1. PNM's commercial paper program has been rated P-2 by Moody's and A-3 by S&P. The Company is committed to maintaining or improving its investment grade ratings.

TNMP

TNMP is a borrower and can issue notes of up to $100.0 million under the PNMR Facility. Any borrowings made by TNMP under this sublimit are not guaranteed by PNMR. At May 1, 2007, TNMP had no outstanding borrowings under the PNMR Facility, but did have $1.9 million letters of credit outstanding, which reduces available capacity under the PNMR Facility.

TNMP’s ability, if required, to access the capital markets at a reasonable cost and to provide for other capital needs is largely dependent upon its ability to earn a fair return on equity, its results of operations, its credit ratings, its ability to obtain required regulatory approvals and conditions in the financial and wholesale markets. Financing flexibility is enhanced by providing a high percentage of total capital requirements from internal sources and having the ability, if necessary, to issue long-term securities and to obtain short-term credit.
On April 16, 2007, Moody’s changed the rating of TNMP’s credit outlook to negative from stable. S&P considered TNMP’s outlook negative as of the date of this report. As of March 31, 2007, S&P rated TNMP’s senior unsecured notes at BBB. As of March 31, 2007, Moody’s rated TNMP’s senior unsecured notes at Baa3. The Company is committed to maintaining or improving its investment grade ratings.

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Off-Balance Sheet Arrangements

The Company’s off-balance sheet arrangements primarily consist of PNM’s operating lease obligations for PVNGS Units 1 and 2, the EIP transmission line, and the entire output of Delta, a gas-fired generating plant. These arrangements help ensure PNM the availability of lower-cost generation needed to serve customers. In addition, PNMR’s investment in EnergyCo is accounted for under the equity method of accounting. See Note 15 for further discussion of this arrangement.

As of March 31, 2007, there have been no significant changes to the Company’s off-balance sheet arrangements reported in the 2006 Annual Reports on Form 10-K.

Commitments and Contractual Obligations

PNMR, PNM and TNMP have contractual obligations for long-term debt, operating leases, purchase obligations and certain other long-term liabilities that were summarized in a table of contractual obligations in the 2006 Annual Reports on Form 10-K. The adoption of FIN 48, effective January 1, 2007, was not material to the Company’s contractual obligations. Under FIN 48, certain liabilities related to uncertain tax positions were recognized. See Note 15 for a discussion of these obligations and timing of the payments.

Contingent Provisions of Certain Obligations

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. 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 if the contingent requirements were to be triggered. The most significant consequences resulting from these contingent requirements are detailed in the discussion below.

PNMR

The PNMR Facility contains a “ratings trigger,” for pricing purposes only. If PNMR is downgraded or upgraded by the ratings agencies, the result would be an increase or decrease in interest cost, respectively. In addition, the PNMR Facility contains a contingent requirement that requires PNMR to maintain a debt-to-capital ratio, inclusive of off-balance sheet debt, of less than 65%. If PNMR’s debt-to-capital ratio, inclusive of off-balance sheet debt, were to exceed 65%, it could be required to repay all borrowings under the PNMR Facility, be prevented from drawing on the unused capacity under the PNMR Facility, and be required to provide security for all outstanding letters of credit issued under the PNMR Facility.

PNM

PNM's standard purchase agreement for the procurement of gas for its retail customers contains a contingent requirement that could require PNM to provide security for its gas purchase obligations if the seller were to reasonably believe that PNM was unable to fulfill its payment obligations under the agreement.

The master agreement for the sale of electricity in the WSPP contains a contingent requirement that could require PNM to provide security if its debt were to fall below investment grade rating. The WSPP agreement also contains a contingent requirement, commonly called a material adverse change provision, which could require PNM to provide security if a material adverse change in its financial condition or operations were to occur.

The PNM Facility contains a “ratings trigger,” for pricing purposes only. If PNM is downgraded or upgraded by the ratings agencies, the result would be an increase or decrease in interest cost, respectively. In addition, the PNM Facility contains a contingent provision that requires PNM to maintain a debt-to-capital ratio, inclusive of off-balance sheet debt, of less than 65%. If PNM’s debt-to-capital ratio, inclusive of off-balance sheet debt, were to exceed 65%, PNM could be required to repay all borrowings under the PNM Facility, be prevented from drawing on the unused capacity under the PNM Facility, and be required to provide security for all outstanding letters of credit issued under the PNM Facility.

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If a contingent requirement were to be triggered under the PNM Facility resulting in an acceleration of the outstanding loans under the PNM Facility, a cross-default provision in the PVNGS leases could occur if the accelerated amount is not paid. If a cross-default provision is triggered, the lessors have the ability to accelerate their rights under the leases, including acceleration of all future lease payments.

TNMP

TNMP’s borrowing availability under the PNMR Facility contains a “ratings trigger,” for pricing purposes only. If TNMP is downgraded or upgraded by the ratings agencies, the result would be an increase or decrease in interest cost, respectively. In addition, the PNMR Facility contains a contingent requirement that requires TNMP to maintain a debt-to-capital ratio, inclusive of off-balance sheet debt, of less than 65%. If TNMP’s debt-to-capital ratio, inclusive of off-balance sheet debt, were to exceed 65%, TNMP could be required to repay all borrowings under the PNMR Facility, be prevented from drawing on the unused capacity under the PNMR Facility, and be required to provide security for all outstanding letters of credit issued under the PNMR Facility.

Financing Activities

PNMR

On April 17, 2007, PNMR repaid the balance due on the bridge loan. To facilitate the repayment, PNMR borrowed $250.5 million under its revolving credit facility. As of May 1, 2007, PNMR and PNM had $48.8 million and $188.8 million of availability under their respective revolving credit facilities and local lines of credit, including reductions of availability due to outstanding letters of credit.

             
  PNM  PNMR  PNMR 
  Separate  Separate  Consolidated 
  (In millions) 
             
Financing Capacity:            
Revolving credit facility $400.0  $600.0  $1,000.0 
Local lines of credit  13.5   15.0   28.5 
          
Total financing capacity $413.5  $615.0  $1,028.5 
          
             
Commercial paper program maximum $300.0  $400.0  $700.0 
          
             
Amounts outstanding as of August 1, 2007:            
Commercial paper program $268.6  $362.8  $631.4 
Revolving credit facility  —   —   — 
Local lines of credit  —   —   — 
          
Total short-term debt outstanding  268.6   362.8   631.4 
             
Letters of credit  3.1   30.5   33.6 
          
             
Total short term-debt and letters of credit $271.7  $393.3  $665.0 
          
             
Remaining availability as of August 1, 2007 $141.8  $221.7  $363.5 
          
PNMR has a universal shelf registration statement filed with the SEC for the issuance of debt securities and equity securities, preferred stock, purchase contracts, purchase contract units and warrants. As of March 31,June 30, 2007, PNMR had approximately $400.0 million of remaining unissued securities under this universal registration statement. In addition, in August 2006, PNMR filed a new shelf registration statement with the SEC. This new registration statement can be amended at any time to include additional securities of PNMR. As a result, this new shelf registration statement has unlimited availability, subject to certain restrictions and limitations.

Pursuant to the terms of the PNM Direct Plan, PNMR began offering new shares of PNMR common stock through the plan beginning June 1, 2006. PNMR may also waive the maximum investment limit upon request in individual cases pursuant to the terms of the plan. In August 2006, PNMR entered into an equity distribution agreement to offer and sell up to 8 million shares of PNMR common stock from time to time. The agreement provides that PNMR will not sell more shares than needed for the aggregate gross proceeds from such sales to reach $200.0 million. From January 1, 2007 through MayAugust 1, 2007, PNMR had sold a combined total of 26,79854,170 shares of its common stock through the PNMR Direct Plan and the equity distribution agreement for net proceeds of $0.8$1.6 million.

PNM

PNM has a universal shelf registration statement filed with the SEC for the issuance of debt securities, equity securities, preferred stock, purchase contracts, purchase contract units and warrants. As of March 31,June 30, 2007, PNM had approximately $200.0 million of remaining unissued securities registered under its shelf registration statement.

TNMP

Depending on TNMP’s future business strategy,The Company’s ability, if required, to access the capital markets at a reasonable cost and to provide for other capital needs is largely dependent upon its ability to earn a fair return on equity, its results of operations, its credit ratings, its ability to obtain required regulatory approvals and market conditions in the financial and wholesale markets. Financing flexibility is enhanced by providing a high percentage of total capital requirements from internal sources and having the ability, if necessary, to issue long-term securities and to obtain short-term credit.

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On April 16, 2007, Moody’s changed the credit outlook of PNMR, PNM, and TNMP to negative from stable. S&P considered the outlook of PNMR, PNM, and TNMP as negative as of the date of this report. As of June 30, 2007, ratings on the Company’s securities were as follows:
PNMRPNMTNMP
S&P
Senior unsecured notesBBB-BBBBBB
Commercial paperA3A3*
Moody’s
Senior unsecured notesBaa3Baa2Baa3
Commercial paperP3P2*
Preferred stock*Ba1*
*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.
Off-Balance Sheet Arrangements
PNMR’s off-balance sheet arrangements include PNM’s operating lease obligations for PVNGS Units 1 and 2, the EIP transmission line, and the entire output of Delta, a gas-fired generating plant. See Note 7 of Notes to Consolidated Financial Statements in the 2006 Annual Reports on Form 10-K/A (Amendment No. 1). These arrangements help ensure PNM the availability of lower-cost generation needed to serve customers. In addition, PNMR’s investment in EnergyCo is accounted for under the equity method of accounting. Therefore, EnergyCo’s assets, liabilities, results of operations, and cash flows are not consolidated with PNMR’s other operations. See Note 11 for further discussion of this arrangement and summarized financial information concerning EnergyCo.
Commitments and Contractual Obligations
PNMR, PNM and TNMP have contractual obligations for long-term debt, operating leases, purchase obligations and certain other long-term liabilities that were summarized in a table of contractual obligations in the 2006 Annual Reports on Form 10-K. The adoption of FIN 48, effective January 1, 2007, was not material to the Company’s contractual obligations. Under FIN 48, certain liabilities related to uncertain tax positions have been recognized. See Note 15 for a discussion of these obligations and timing of the payments.
Contingent Provisions of Certain Obligations
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. PNMR, PNM or TNMP could enter into additional long-term financingsbe required to provide security, immediately pay outstanding obligations or be prevented from drawing on unused capacity under certain credit agreements if the contingent requirements were to be triggered. The most significant consequences resulting from these contingent requirements are detailed in the discussion below.
The PNMR Facility and the PNM Facility contain “ratings triggers,” for pricing purposes only. If PNMR or PNM is downgraded or upgraded by the ratings agencies, the result would be an increase or decrease in interest cost, respectively. In addition, these facilities contain contingent requirements that require PNMR and PNM to maintain debt-to-capital ratios, inclusive of off-balance sheet debt, of less than 65%. If the debt-to-capital ratio, inclusive of off-balance sheet debt, were to exceed 65%, the entity could be required to repay all borrowings under its facility, be prevented from drawing on the unused capacity under the facility, and be required to provide security for all outstanding letters of credit issued under the facility.
If a contingent requirement were to be triggered under the PNM Facility resulting in an acceleration of the outstanding loans under the PNM Facility, a cross-default provision in the PVNGS leases could occur if the accelerated amount is not paid. If a cross-default provision is triggered, the lessors have the ability to accelerate their rights under the leases, including acceleration of all future lease payments.

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PNM’s standard purchase agreement for the purposeprocurement of strengthening TNMP’s balance sheet, funding growth and reducinggas for its costretail customers contains a contingent requirement that could require PNM to provide security for its gas purchase obligations if the seller were to reasonably believe that PNM was unable to fulfill its payment obligations under the agreement.
The master agreement for the sale of capital.electricity in the WSPP contains a contingent requirement that could require PNM to provide security if its debt were to fall below investment grade rating. The Company continuesWSPP agreement also contains a contingent requirement, commonly called a material adverse change provision, which could require PNM to evaluateprovide security if a material adverse change in its investment and debt retirement optionsfinancial condition or operations were to optimize its financing strategy and earnings potential. The amountoccur.
No conditions have occurred that would result in any of senior unsecured notes that may be issued is not limited by the senior unsecured notes indenture. However, debt-to-capital requirements in certain of TNMP’s financial instruments and regulatory agreements would ultimately limit the amount of additional debt TNMP would issue.above contingent provisions being implemented.

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Capital Structure

PNMR

PNMR’sThe capitalization includingtables below include the current maturities of long-term debt, at March 31, 2007 and December 31, 2006 is shown below:

  
March 31,
 
December 31,
 
  
2007
 
2006
 
      
Common equity  48.7% 48.8%
Preferred stock  0.3% 0.3%
Long-term debt  51.0% 50.9%
Total capitalization  100.0% 100.0%

Total capitalization doesbut do not include as debt operating lease obligations.

PNM

PNM’s capitalization, including current maturities of long-term debt, at March 31, 2007 and December 31, 2006 is shown below:

  
March 31,
 
December 31,
 
  
2007
 
2006
 
      
Common equity  58.0% 54.1%
Preferred stock  0.5% 0.5%
Long-term debt  41.5% 45.4%
Total capitalization  100.0% 100.0%

TNMP

TNMP’s capitalization, including current maturities of long-term debt, at March 31, 2007 and December 31, 2006 is shown below:

  
March 31,
 
December 31,
 
  
2007
 
2006
 
      
Common equity  45.6% 55.0%
Long-term debt  54.4% 45.0%
Total capitalization  100.0% 100.0%

obligations as debt. The tables for PNM and TNMP above reflect the transfer of TNMP’s New Mexico operations as of January 1, 2007, which decreased the common equity of TNMP and increased the common equity of PNM. This transfer had no impact on PNMR. See Note 14.

         
  June 30,  December 31, 
PNMR 2007  2006 
         
Common equity  50.5%  48.9%
Preferred stock of subsidiary  0.3%  0.3%
Long-term debt  49.2%  50.8%
       
Total capitalization  100.0%  100.0%
       

         
  June 30,  December 31, 
PNM 2007  2006 
         
Common equity  57.8%  54.4%
Preferred stock  0.5%  0.5%
Long-term debt  41.7%  45.1%
       
Total capitalization  100.0%  100.0%
       
         
  June 30,  December 31, 
TNMP 2007  2006 
         
Common equity  59.1%  54.9%
Long-term debt  40.9%  45.1%
       
Total capitalization  100.0%  100.0%
       

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MD&A FOR PNM
82RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2007
COMPARED TO SIX MONTHS ENDED JUNE 30, 2006
PNM’s segments are PNM Electric, PNM Gas and PNM Wholesale. The PNM Electric and PNM Gas segments are identical to the segments presented above for PNMR. The PNM Wholesale segment reported for PNM does not include Twin Oaks. See Notes 2 and 11. The results of operations of these segments are discussed further under “MD&A for PNMR — Results of Operations” above. The results of operations for Twin Oaks is set forth in a table under “MD&A for PNMR — Results of Operations — Unregulated Operations — Wholesale” above.
PNM’s net earnings for the six months ended June 30, 2007 were $28.1 million compared to $33.1 million for the six months ended June 30, 2006. The major causes of changes in net earnings were the decrease in gains from Wholesale marketing activity from 2006 as a result of the absence of market opportunities that allowed for the forward sale of the first quarter 2006 excess resources, mark-to-market losses, an increase in generation prices due to the increase of coal costs, an increase in general operating expenses, and increased financing costs. These decreases were partially offset by improved plant performance, primarily at PVNGS, increased load growth along with the effects of colder weather, primarily at PNM Gas, and the TNMP asset transfer to PNM Electric. The positive or (negative) after-tax impacts of these items on net earnings in 2007 compared to 2006 are as follows:
     
  Six Months Ended 
  June 30, 2007 
  (In millions) 
After-tax Impacts
    
TNMP asset transfer $2.1 
Plant performance  10.9 
Mark-to-market  (5.5)
Coal costs  (4.8)
Wholesale marketing activity  (6.3)
Regulated load growth and weather  6.2 
General operational increases  (2.1)
Financing  (2.1)
Other  (3.4)
    
Net change
 $(5.0)
    
PNM’s consolidated income tax expense was $17.7 million for the six months ended June 30, 2007, compared to $21.2 million for the same period of 2006. PNM’s effective income tax rates for the six months ended June 30, 2007 and 2006 were 38.6% and 39.0%, respectively.

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MD&A FOR TNMP
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2007
COMPARED TO SIX MONTHS ENDED JUNE 30, 2006
TNMP operates in only one reportable segment, “TNMP Electric.” Results for the six months ended June 30, 2006 present TNMP’s New Mexico operations as discontinued operations, as these operations were transferred to PNM on January 1, 2007. See Note 14. TNMP’s results of operations are discussed further under “MD&A for PNMR — Results of Operations — Regulated Operations — TNMP Electric” above.
The PUCT issued an order on November 2, 2006 related to the stranded costs incurred by TNMP as part of the deregulation of the Texas energy market and the associated carrying charges. The details of this order are discussed in TNMP’s Annual Report on Form 2006 10-K.
TNMP’s net earnings for the six months ended June 30, 2007 were $5.2 million compared to $4.0 million for the six months ended June 30, 2006. The major causes of changes in net earnings were the recovery of costs as a result of the PUCT order and customer growth, which was partially offset by the transfer of New Mexico assets to PNM Electric and a decrease in carrying charges on regulatory assets as a result of the absence of interest income earned on TNMP stranded costs in 2006 based on the collection of costs order by the PUCT. The positive or (negative) after-tax impacts of these items on net earnings in 2007 compared to 2006 are as follows:
     
  Six Months Ended 
  June 30, 2007 
  (In millions) 
After-tax Impacts
    
Discontinued operations $(2.1)
Carrying Charges  (2.6)
PUCT order  3.9 
Customer growth  1.0 
Other  1.0 
    
Net change $1.2 
    
TNMP’s consolidated income tax expense from continuing operations was $2.4 million for the six months ended June 30, 2007, compared to $1.3 million for the same period of 2006. TNMP’s effective income tax rates from continuing operations for the six months ended June 30, 2007 and 2006 were 31.5% and 41.3%, respectively.

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OTHER ISSUES FACING THE COMPANY

See Notes 9 and 10 for a discussion of commitments and contingencies and rate and regulatory matters facing the Company.

Global Warming Issues
Global warming increasingly is a concern for the energy industry. Although there continues to be significant debate regarding its existence and extent, scientific evidence suggests that the emission of so-called greenhouse gases (particularly CO2) from fossil fuel-fired generation facilities is a contributing factor. The Company is a founding member of the United States Climate Action Partnership, a group of businesses and leading environmental organizations calling on the federal government to quickly enact strong national legislation to require significant reductions of greenhouse gas emissions and that has issued a landmark set of principles and recommendations to underscore the urgent need for a policy framework on climate change. The Company intends to continue working with this group and with others in order to best address this challenging issue.
The Company believes that future governmental regulations applicable to the Company’s operations will limit emissions of greenhouse gases, although at this point the Company cannot predict with any level of certainty what form such future regulations will take or when they will become effective. Under consideration are limitations on the amount of greenhouse gases that can be emitted (so called “caps”) together with systems of trading permitted emissions capacities. Such a system could require the Company to reduce emissions, although current technology is not available for efficient reduction. Emissions also could be taxed independently of limits.
The NMPRC issued an order on June 19, 2007, requiring that New Mexico utilities factor a standardized cost of carbon emissions into their integrated resource plans using prices ranging between $8 and $40 per metric ton of CO2 emitted. Pursuant to New Mexico law, utility integrated resource plans must be submitted every three years to evaluate renewable energy, energy efficiency, load management, distributed generation and conventional supply-side resources on a consistent and comparable basis, taking into consideration risk and uncertainty of fuel supply, price volatility and costs of anticipated environmental regulations in order to identify the most cost-effective portfolio of resources to supply the energy needs of customers. Under the NMPRC order, starting with each utility’s next required filing of its integrated resource plan, each utility must analyze these standardized prices as projected operating costs with respect to years 2010 and thereafter. The Company’s next integrated resource plan is due to be filed with the NMPRC in July 2008. 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. The Company is required, however, to use these prices for planning purposes, and the prices may not reflect the costs that it ultimately will incur.
On February 26, 2007 five western states (Arizona, California, New Mexico, Oregon and Washington) entered into an accord, called the Western Regional Climate Action Initiative (the “Initiative”), to reduce greenhouse gas emissions from automobiles and certain industries, including utilities. Since then, Utah, British Columbia and Manitoba have joined the Initiative. The Initiative requires the states and provinces to set emission goals within six months and determine a specific plan to meet such goals within eighteen months. The Company is monitoring the impact of this Initiative.
The Company expects the regulation of greenhouse gas emissions to have a material impact on its operations, but it is premature to attempt to quantify its possible costs of these impacts.
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.

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See Note 11 regarding accounting for the investment in EnergyCo and Note 15 for discussion concerning the adoption of FIN 48 as of January 1, 2007. As of June 30, 2007, there have been no other significant changes with regard to the critical accounting policies disclosed in PNMR’s, PNM’s and TNMP’s Annual Reports on Forms 10-K for the year ended December 31, 2006. The policies disclosed included the accounting for revenue recognition, regulatory assets and liabilities, asset impairment, goodwill and other intangible assets, purchase accounting, pension and postretirement benefits, decommissioning costs, financial instruments and market risk.
NEW ACCOUNTING STANDARDS

There have been no new accounting standards issued that materially affected PNMR, PNM or TNMP this period; however, see Note 15 for discussion of FIN 48 implementation.

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

Statements made in this filing that relate to future events or PNMR’s, PNM’s, or 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 and 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, and TNMP’s business, financial condition, cash flow 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 risk that EnergyCo is unable to identify and implement profitable acquisitions, including development of the Cedar Bayou Generating Station and implementation of the acquisition of the Lyondell facility, or that the contribution of assets to EnergyCo by PNMR may not be implemented as expected, or that PNMR and ECJV will not agree to make additional capital contributions to EnergyCo,
·
• The potential unavailability of cash from PNMR’s subsidiaries or EnergyCo due to regulatory, statutory andor contractual restrictions,
·
• The outcome of any appeals of the PUCT order in the stranded cost true-up proceeding,
·
• The ability of First Choice to attract and retain customers,
·
• Changes in ERCOT protocols,
·
• Changes in the cost of power acquired by First Choice,
·
• Collections experience,
·
• Insurance coverage available for claims made in litigation,
·
• Fluctuations in interest rates,
·
• Conditions affecting PNMR’sthe Company’s ability to access the financial markets, or EnergyCo’s access to additional debt financing following the utilization of its existing credit facility,
·
• Weather,
·
• Water supply,
·
• Changes in fuel costs,
·
• Availability of fuel supplies,
·
• The effectiveness of risk management and commodity risk transactions,
·
• Seasonality and other changes in supply and demand in the market for electric power,
·
• Variability of wholesale power prices and natural gas prices,
·
• Volatility and liquidity in the wholesale power markets and the natural gas markets,
·
• Changes in the competitive environment in the electric and natural gas industries,
·
• The performance of generating units, including PVNGS, SJGS, and Four Corners, and EnergyCo generating units, and transmission systems,
·
• The ability to secure long-term power sales,
·
• The risk that the Company and its subsidiaries and EnergyCo may have to commit to substantial capital investments and additional operating costs to comply with new environmental control requirements including possible future requirements to address concerns about global climate change,

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·• The risks associated with completion of generation, including pollution control equipment at SJGS, and the expansion of the Afton Generating Station, and the EnergyCo Cedar Bayou Generating Station, transmission, distribution, and other projects, including construction delays and unanticipated cost overruns,
·
• State and federal regulatory and legislative decisions and actions,
·
• The outcome of legal proceedings,
·
• Changes in applicable accounting principles, and
·
• The performance of state, regional, and national economies.
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Any material changes to risk factors occurring after the filing of PNMR’s, PNM’s, or TNMP’s 2006 Annual Report 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 and Qualitative Disclosures About Market Risk.”

SECURITIES ACT DISCLAIMER

Certain securities, including commercial paper described 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.

92


84

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company uses derivative financial instruments to manage risk as it relates to changes in natural gas and electric prices and changes in interest rates and, historically, adverse market changes for investments held by the Company’s various trusts.rates. The Company also uses certain derivative instruments for wholesale power marketing and natural gas transactions in order to take advantage of favorable price movements and market timing activities in these power markets. The following additional information is provided.

PNMR controls the scope of its various forms of risk through a comprehensive set of policies and procedures and oversight by senior level management and the PNMR Board. The Board’s Finance Committee sets the risk limit parameters. The RMC, comprised of corporate and business segment officers and other managers, oversees all of the risk management activities, which include commodity price, credit, equity, interest rate and business risks. The RMC has oversight for the ongoing evaluation of the adequacy of the risk control organization and policies. PNMR has a risk control organization, headed by an Executive Director of Financial Risk Management, which 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 responsibilities specifically include: establishment of a general policy regarding risk exposure levels and activities in each of the business segments; authority to approve the types of instruments traded; authority to establish a general policy regarding counterparty exposure and limits; authorization and delegation of transaction limits; review and approval of controls and procedures; review and approval of models and assumptions used to calculate mark-to-market and risk exposure; authority to approve and open brokerage and counterparty accounts; review of hedging and risk activities; and quarterly reporting to the Board and its Finance Committee and the PNMR Board on these activities.

The RMC also proposes risk limits, such as VaR and EaR, to the Finance Committee. The Finance Committee ultimately sets the Company's risk limits.

It is the responsibility of each business segment to create its own control procedures and policies within the parameters established by the Finance Committee. The RMC reviews and approves these policies, which are created with the assistance of the Corporate Controller, Director of Internal Audit and the Executive Director of Financial Risk Management. Each business segment’s policies address the following controls: authorized risk exposure limits; authorized instruments and markets; authorized personnel; policies on segregation of duties; policies on mark-to-market accounting; responsibilities for deal capture; confirmation procedures; responsibilities for reporting results; statement on the role of derivative transactions; and limits on individual transaction size (nominal value).

To the extent an open position exists, fluctuating commodity prices 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.

Accounting for Derivatives

Under the derivative accounting rules and the related accounting rules for energy contracts, the Company accounts for its various financial derivative instruments for the purchase and sale of energy differently based on the contract terms. Energy contracts that meet the definition of a derivative under SFAS 133 and do not qualify for athe normal sales and purchase exceptionspurchases 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. Should an energy transaction qualify as a hedge under SFAS 133, fair value changes from year to year are recognized on the balance sheet with a corresponding charge toentry in other comprehensive income to the extent effective. Gains or lossesHedges are recognized in results of operations when the hedged transaction settles and affects earnings.settles. Derivatives that meet the normal sales and purchases exceptionsexception within SFAS 133 are not marked to market but rather recorded in results of operations when the underlying transaction settles.

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. These risks fall into three different categories: price and volume volatility, credit risk of counterparties and adequacy of the control environment. The Company’s operations subject to market risk routinely enter into various derivative instruments such as forward contracts, option agreements and price basis swap agreements to hedge price and volume risk on their purchase and sale commitments, fuel requirements and to enhance returns and minimize the risk of market fluctuations.

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85
PNM’s wholesalePNM Wholesale’s operations, including long-term contracts and short-term sales, are managed primarily through a net asset-backed marketing strategy, whereby PNM’sPNM Wholesale’s aggregate net open forward contract position is covered by its forecasted excess generation capabilities. PNMPNMR would be exposed to market risk if its generation capabilities were to be disrupted or if its retail load requirements were to be greater than anticipated. If PNM were required to cover all or a portion of itsthe net open contract position were required to be covered as a result of the aforementioned unexpected situations, itcommitments would have to meet its commitmentsbe met through market purchases. As such, PNMPNMR is exposed to risks related to fluctuations in the market price of energy that could impact the sales price or purchase price of energy. In addition, the wholesale operations utilize discrete market-based transactions to take advantage of opportunities that present themselves in the ordinary course of business. These positions are subject to market risk that is not mitigated by PNM’s generation capabilities.

First Choice is responsible for energy supply related to the sale of electricity to retail customers in Texas. TECA contains no provisions for the specific recovery of fuel and purchased power costs. The rates charged to new customers acquired by First Choice outside of TNMP’s service territory are not regulated by the PUCT, butcustomers are negotiated with each customer. As a result, changes in fuel and purchased power costs will affect First Choice’s operating results. First Choice is exposed to market risk to the extent that its retail rates or cost of supply fluctuates with market prices. Additionally, fluctuations in First Choice retail load requirements greater than anticipated may subject First Choice to market risk. First Choice’s basic strategy is to minimize its exposure to fluctuations in market energy prices by matching fixed price sales contracts with fixed price supply. In addition, First Choice utilizes discrete market-based transactions to take advantage of opportunities that present themselves in the ordinary course of business. These positions are subject to market risk that is not mitigated by First Choice'sChoice’s retail operations.

The following table shows the net fair value of mark-to-market energy contracts for First Choice and PNM Wholesale included in PNMR’s Condensed Consolidated Balance Sheet:

  
March 31,
 
December 31,
 
  
2007
 
2006
 
  (In thousands) 
Mark-to-market energy contracts:     
Current asset $39,913 $43,680 
Long-term asset  19,697  10,982 
Total mark-to-market assets  59,610  54,662 
Current liability  (39,929) (42,020)
Long-term liability  (12,420) (9,176)
Total mark-to-market liabilities  (52,349) (51,196)
        
Net fair value of mark-to-market energy contracts $7,261 $3,466 

The mark-to-market energy transactions represent net assets at March 31, 2007 and December 31, 2006 after netting all applicable open purchase and sale contracts.

The market prices used to value PNMR mark-to-market energy contracts are based on available market data, including index prices and broker quotations. These valuations can be limited by the availability of market data. When market data is unavailable or lacks sufficient granularityis insufficient to develop reliable pricing, the Company utilizes internally developed pricing data. Generally, the fair market value of energy contracts is based on actively quoted prices, except for options, which incorporate actively quoted prices into an option valuation model. As a result, the Company records liquidity reserves on these contracts for the unrealized market gains and losses in this illiquid period. Generally, the liquid period on which the Company’s valuations are based is up to 18 months for option type contracts and from three to five years for gas and electric commodities. The Company regularly assesses the validity and availability of pricing data for the illiquid period of its derivative transactions and adjusts its liquidity reserves accordingly.

The following table shows the net fair value of mark-to-market energy contracts included in PNMR’s Condensed Consolidated Balance Sheet. See Note 4 for additional information.
86
         
  June 30,  December 31, 
  2007  2006 
  (In thousands) 
Mark-to-market energy contracts:        
Current asset $87,321  $43,680 
Long-term asset  24,605   10,982 
       
Total mark-to-market assets  111,926   54,662 
       
Current liability  (98,820)  (42,020)
Long-term liability  (17,580)  (9,176)
       
Total mark-to-market liabilities  (116,400)  (51,196)
       
Net fair value of mark-to-market energy contracts $(4,474) $3,466 
       
The mark-to-market energy transactions represent net liabilities at June 30, 2007 and net assets at December 31, 2006 after netting all applicable open purchase and sale contracts.

94


The following table details the changes in the net asset or liability balance sheet position from one period to the next for mark to market energy transactions for the operations of First Choice and PNM Wholesale:transactions:

  
Three Months Ended
 
  
March 31,
 
  
2007
 
2006
 
  (In thousands) 
Sources of fair value gain (Loss):       
Fair value at beginning of year $3,466 $3,619 
Amount realized on contracts delivered during period  499  1,202 
Changes in fair value  3,296  1,501 
Net fair value at end of period $7,261 $6,322 
        
Net change recorded as mark-to-market $3,795 $2,703 

The net change in fair value on PNMR’s commodity derivative instruments designated as hedging instruments is summarized as follows:

  
Three Months Ended
 
  
March 31,
 
  
2007
 
2006
 
Type of Derivative
 
Hedge Instruments
 
  (In thousands) 
Change in fair value of energy contracts $(35,718)$(7,541)
Change in fair value of gas fixed for float swaps  8,118  (19,740)
Change in the fair value of options  109  1,008 
Net change in fair value $(27,491)$(26,273)

         
  Six Months Ended 
  June 30, 
  2007  2006 
  Mark-to-Market Instruments 
  (In thousands) 
Sources of fair value gain (loss):        
Fair value at beginning of year $3,466  $4,528 
Amount realized on contracts delivered during period  2,823   (4,108)
Changes in fair value  (10,763)  2,244 
       
Net fair value at end of period $(4,474) $2,664 
       
Net change recorded as mark-to-market $(7,940) $(1,864)
       
The following table provides the maturity of the net assets (liabilities) of PNMR, giving an indication of when these mark-to-market amounts will settle and generate (use) cash. The following values were determined using broker quotes:quotes and option models.:
Fair Value at March 31,June 30, 2007

Maturities
Less than
      
1 year
 
1-3 Years
 
4+ Years
 
Total
  (In thousands)  
$(16) $4,113 $3,164 $7,261
As of March 31, 2007, a decrease in market pricing of PNMR’s mark-to-market energy transactions by 10% would have resulted in a decrease in net earnings of less than 1%. Conversely, an increase in market pricing of these transactions by 10% would have resulted in an increase in net earnings of less than 1%.

87

The following table shows the net fair value of mark-to-market energy contracts for PNM in PNM’s Condensed Consolidated Balance Sheet:

  
March 31,
 
December 31,
 
  
2007
 
2006
 
  (In thousands) 
Mark-to-market energy contracts:     
Current asset $18,117 $21,310 
Long-term asset  14,969  10,592 
Total mark-to-market assets  33,086  31,902 
Current liability  (18,494) (20,623)
Long-term liability  (8,115) (8,694)
Total mark-to-market liabilities  (26,609) (29,317)
        
Net fair value of mark-to-market energy contracts $6,477 $2,585 

The mark-to-market energy transactions represent net assets at March 31, 2007 and December 31, 2006 after netting all applicable open purchase and sale contracts.

The market prices used to value PNM mark-to-market energy contracts are based on available market data, including index prices and broker quotations. These valuations can be limited by the availability of market data. When market data is unavailable or lacks sufficient granularity to develop reliable pricing, the Company utilizes internally developed pricing data. As a result, the Company records liquidity reserves on these contracts for the unrealized market gains and losses in this illiquid period. Generally, the liquid period on which the Company’s valuations are based is up to 18 months for option type contracts and from three to five years for gas and electric commodities. The Company regularly assesses the validity and availability of pricing data for the illiquid period of its derivative transactions and adjusts its liquidity reserves, accordingly.

The following table details the changes in the net asset or liability balance sheet position from one period to the next for mark-to-market energy transactions for the operations of PNM:

  
Three Months Ended
 
  
March 31,
 
  
2007
 
2006
 
  (In thousands) 
Sources of fair value gain (Loss):     
Fair value at beginning of year $2,585 $2,258 
Amount realized on contracts delivered during period  (1,452) 572 
Changes in fair value  5,344  (68)
Net fair value at end of period $6,477 $2,762 
        
Net change recorded as mark-to-market $3,892 $504 

                 
  Less than          
  1 year  1-3 Years  4+ Years  Total 
  (In thousands) 
Net fair value at end of period $(11,499) $1,809  $5,216  $(4,474)
The net change in fair value on PNM’sPNMR’s commodity derivative instruments designated as hedging instruments is summarized as follows:

         
  Six Months Ended 
  June 30, 
  2007  2006 
Type of Derivative Hedge Instruments 
  (In thousands) 
Change in fair value of energy contracts $(34,223) $(988)
Change in fair value of gas fixed for float swaps  6,228   (19,694)
Change in the fair value of options  30   (7,703)
       
Net change in fair value $(27,965) $(28,385)
       
  
Three Months Ended
 
  
March 31,
 
  
2007
 
2006
 
Type of Derivative
 
Hedge Instruments
 
  (In thousands) 
Change in fair value of energy contracts $(2,905)$(7,541)
Change in fair value of gas fixed-for-float swaps  6,991  (14,763)
Change in the fair value of options  -  - 
Net change in fair value $4,086 $(22,304)

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The following table provides the maturity of the net assets (liabilities) of PNM, giving an indication of when these mark-to-market amounts will settle and generate (use) cash. The following values were determined using broker quotes:

Fair Value at March 31, 2007

Maturities
Less than
      
1 year
 
1-3 Years
 
4+ Years
 
Total
  (In thousands)  
$(377) $3,690 $3,164 $6,477

As of March 31, 2007, a decrease in market pricing of PNM’s mark-to-market energy transactions by 10% would have resulted in a decrease in net earnings of less than 1%. Conversely, an increase in market pricing of these transactions by 10% would have resulted in an increase in net earnings of less than 1%.

Risk Management Activities

PNM Wholesale measures the market risk of its long-term contracts and wholesale activities using a VaR calculation to maintain the Company’s total exposure within management-prescribed limits. The Company’s VaR calculation reports the possible market loss for the respective transactions. This calculation is based on the transaction’s fair market value on the reporting date. Accordingly, the VaR calculation is not a measure of the potential accounting mark-to-market loss. The Company utilizes the Monte Carlo simulation model of VaR. The Monte Carlo model utilizes a random generated simulation based on historical volatility to generate portfolio values. VaR models are relatively sophisticated. The quantitative risk information, however, is limited by the parameters established in creating the model. 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. The VaR methodology employs the following critical parameters: volatility estimates, market values of open positions, appropriate market-oriented holding periods and seasonally adjusted correlation estimates. The Company’s VaR calculation considers the Company’s forward position for the next eighteen months. The Company uses a holding period of three days as the estimate of the length of time that will be needed to liquidate the positions. The volatility and the correlation estimates measure the impact of adverse price movements both at an individual position level as well as at the total portfolio level. The two-tailed confidence level established is 99%. For example, if VaR is calculated at $10.0 million, it is estimated that in 990 out of 1000 market simulations the Company’s pre-tax gain or loss in liquidating the portfolio would not exceed $10.0 million in the three days that it would take to liquidate the portfolio.

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PNM Wholesale measures VaR for all transactions that are not directly asset related and have economic risk. For the three months ended March 31,June 30, 2007, the average VaR amount for these transactions was $2.0$4.1 million, with high and low VaR amounts for the period of $3.5$6.4 million and $0.8$1.8 million, respectively. The VaR amount for these transactions at March 31,June 30, 2007 was $3.5$1.8 million. For the threesix months ended March 31,June 30, 2006, the average VaR amount for these transactions was $1.8$0.9 million, with high and low VaR amounts for the period of $3.7$1.9 million and $0.8$0.5 million, respectively. The total VaR amount for these transactions at March 31,June 30, 2006 was $0.9$1.6 million.

First Choice measures the market risk of its activities using an EaR calculation to maintain PNMR’s total exposure within management-prescribed limits. Because of its obligation to serve customers, First Choice must take its obligationscertain contracts to settlement. Accordingly, a measure that evaluates the settlement of First Choice’s positions against earnings provides management with a useful tool to manage its portfolio. First Choice’s EaR calculation reports the possible losses against forecasted earnings for its retail load and supply portfolio. This calculation is based on First Choice’s forecasted earnings on the reporting date. The Company utilizes a Delta/Gamma approximation model of EaR. The Delta/Gamma model calculates a price change within a given time frame, correlation and volatility parameters for each price curve utilized in valuing the mark-to-market of each position to develop a change in value for any position. This process is repeated multiple times to calculate a standard deviation, which is used to arrive at an EaR amount based on a certain confidence level. First Choice utilizes the one-tailed confidence level at 95%. EaR models are relatively sophisticated. The quantitative risk information, however, is limited by the parameters established in creating the model. 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. The EaR calculation considers the Company’s forward position for the next twelve months and holds each position to settlement. The volatility and the correlation estimates measure the impact of adverse price movements both at an individual position level as well as at the total portfolio level. For example, if EaR is calculated at $10.0 million, it is estimated that in 950 out of 1000 market scenarios calculated by the model the losses against the Company’s forecasted earnings over the next twelve months would not exceed $10.0 million.
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The EaR limit established for First Choice’s transactions is $25.0 million. For the threesix months ended March 31,June 30, 2007, the average EaR amount was $15.5$14.0 million, with high and low EaR amounts for the period of $20.5 million and $9.3$5.7 million, respectively. The total EaR amount at March 31,June 30, 2007 was $16.3$7.3 million.

For the six months ended June 30, 2006, the average EaR amount for these transactions was $9.1 million, with high and low EaR amounts for the period of $11.9 million and $6.8 million, respectively. The total EaR amount for these transactions at June 30, 2006 was $9.8 million.
In addition, the CompanyFirst Choice utilizes two VaR measures to manage its market risk. The first VaR limit is based on the same total retail load and supply portfolio as the EaR measure; however, the VaR measure is intended to capture the effects of changes in market prices over a 10 day holding period. This holding period is considered appropriate given the nature of First Choice’s supply portfolio and the constraints faced by First Choice in the ERCOT market. The calculation utilizes the same Monte Carlo simulation approach described above at a 95% confidence level. The VaR amount for these transactions was $4.9$4.5 million at March 31,June 30, 2007. For the threesix months ended March 31,June 30, 2007, the high, low and average mark-to-market VaR amounts were $6.2 million, $2.1 million and $4.5$4.1 million, respectively. The VaR amount for these transactions was $2.8 million at June 30, 2006. For the six months ended June 30, 2006, the high, low and average mark-to-market VaR amounts were $4.3 million, $2.1 million and $3.1 million, respectively.

The second VaR limit was established for First Choice transactions that are subject to mark-to-market accounting as defined by SFAS 133 and SFAS 149.This calculation captures the effect of changes in market prices over a three-day holding period and utilizes the same Monte Carlo simulation approach described above at a 95% confidence level. The VaR amount for these transactions was $1.9$1.8 million at March 31,June 30, 2007. For the threesix months ended March 31,June 30, 2007, the high, low and average mark-to-market VaR amounts were $2.4$4.4 million, $0.7 million and $1.7$2.0 million, respectively. The VaR amount for these transactions was $0.9 million at June 30, 2006. For the six months ended June 30, 2006, the high, low and average mark-to-market VaR amounts were $1.2 million, $0.3 million and $0.7 million, respectively.

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The Company'sCompany’s risk measures are regularly monitored by the Company'sCompany’s RMC. The RMC has put in place procedures to ensure that increases in risk measures that exceed the prescribed limits are reviewed and, if deemed necessary, acted upon to reduce exposures. The VaR and EaR limits represent an estimate of the potential gains or losses that could be recognized on the 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.

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Credit Risk

The Company manages credit for energy commodities on a consolidated basis and uses a credit management process to assess and monitor the financial conditions of counterparties. Credit exposure is regularly monitored by the RMC. The RMC has put procedures in place to ensure that increases in credit risk measures that exceed the prescribed limits are reviewed and, if deemed necessary, acted upon to reduce exposures.

PNM Wholesale

The following table provides information related to PNM Wholesale’s credit exposure as of March 31,June 30, 2007. The table further delineates that exposure by the credit worthiness (credit rating) of the counterparties and provides guidance as to the concentration of credit risk to individual counterparties PNM Wholesale may have.

PNM Wholesale

Schedule of Credit Risk Exposure
June 30, 2007
March 31, 2007
             
          Net 
  (b)  Number  Exposure 
  Net  of  of 
  Credit  Counter  Counter- 
  Risk  -parties  parties 
Rating (a) Exposure  >10%  >10% 
  (Dollars in thousands) 
             
External ratings:            
Investment grade $85,365   3  $51,863 
Non-investment grade  986   —   — 
Split  25   —   — 
Internal ratings:            
Investment grade  —   —   — 
Non-investment grade  917   —   — 
           
Total $87,293      $51,863 
           

      
Net
 
  
(b)
 
Number
 
Exposure
 
  
Net
 
of
 
of
 
  
Credit
 
Counter
 
Counter-
 
  
Risk
 
-parties
 
parties
 
Rating (a)
 
Exposure
 
>10%
 
>10%
 
  (Dollars in thousands) 
        
Investment grade $82,300  2 $48,719 
Internal ratings          
Investment grade  91  -  - 
Non-investment grade  537  -  - 
Total $82,928    $48,719 

(a) 
TheRatingincluded in “Investment Grade” is for counterparties with a minimum S&P rating of BBB- or Moody'sMoody’s rating of Baa3. If the counterparty has provided a guarantee by a higher rated entity (e.g., its parent), determination is based on the rating of its guarantor. The category “Internal Ratings -— Investment Grade” includes those counterparties that are internally rated as investment grade in accordance with the guidelines established in the Company’s credit policy.

 
(b)
The Net Credit RiskExposure is the net credit exposure to PNM from PNM Wholesale operations. This includes long-term contracts, forward sales and short-term sales. The exposure captures the net amounts due to PNM from receivables/payables for realized transactions, delivered and unbilled revenues, and mark-to-market gains/losses (pursuant to contract terms). Exposures are offset according to legally enforceable netting arrangements and reduced by credit collateral. Credit collateral includes cash deposits, letters of credit and performance bonds received from counterparties. Amounts are presented before those reserves that are determined on a portfolio basis.

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The following table provides an indication of the maturity of credit risk by credit ratings of the counterparties.

PNM Wholesale

Maturity of Credit Risk Exposure
June 30, 2007
March 31, 2007

                
     
Greater
 
Total
  Greater Total 
 
Less than
   
than
 
Net
  Less than than Net 
Rating
 
2 Years
 
2-5 Years
 
5 Years
 
Exposure
  2 Years 2-5 Years 5 Years Exposure 
   (In thousands)    (In thousands) 
          
Investment grade $61,232 $17,747 $3,321 $82,300 
Internal ratings             
External ratings: 
Investment grade  91  -  -  91  $51,001 $30,527 $3,837 $85,365 
Non-investment grade  537  -  -  537  986 — — 986 
Split 25 — — 25 
Internal ratings: 
Investment grade — — — — 
Non-investment grade 917 — — 917 
         
Total $61,860 $17,747 $3,321 $82,928  $52,929 $30,527 $3,837 $87,293 
         
The Company provides for losses due to market and credit risk. Credit risk for PNM Wholesale'sWholesale’s largest counterparty as of March 31,June 30, 2007 and December 31, 2006 was $34.6$30.5 million and $29.7 million, respectively.

First Choice

First Choice is subject to credit risk from non-performance by its supply counterparties to the extent these contracts have a mark-to-market value in the favor of First Choice. The Constellation power supply agreement established FCPSP, a bankruptcy remote special purpose entity, to hold all of First Choice'sChoice’s customer contracts and wholesale power and gas contracts. Constellation received a lien on accounts receivable, customer contracts, cash, and the equity of FCPSP as security for FCPSP’s performance under the power supply agreement. The provisions of this agreement severely limit FCPSP’s ability to secure power from alternate sources. Additionally, the terms of the security agreement do not require Constellation to post collateral for any mark-to-market balances in FCPSP’s favor. At March 31,June 30, 2007, the supply contracted with ConstellationFCPSP was in aan unfavorable mark-to-market position for FCPSP. When netted against amounts owed to Constellation, this exposure was approximately $30.1 million.with Constellation. The Constellation power supply agreement collateral provisions will continue as long as FCPSP is purchasing power from Constellation to serve retail customers. The existing pricing mechanism under the Constellation power supply agreement expired on December 31, 2006, and the obligations of Constellation to act as a qualified scheduling entity continue until the expiration of the agreement on December 31, 2007. First Choice'sChoice’s credit exposure to other counterparties at March 31,June 30, 2007 was $1.1$12.0 million and the tenortime period of these exposures extends through 2010.

First Choice’s retail bad debt expense for the threesix months ended March 31,June 30, 2007 was $3.9$7.9 million. A reduction in bad debt expense from retail customers is expected due to reduced customer receivables resulting partially from effective disconnect policies, increased collection activity and refined consumer credit and securitization policies.

Interest Rate Risk

PNMR’s debt issued as part of the equity-linked units sold in March and October 2005 will be remarketed in 2008. If the remarketing is successful, the interest rate on the debt may change to a rate selected by the remarketing agent, and the maturity of the debt may be extended to a date selected by PNMR. If the remarketing of the debt is not successful, the maturity and interest rate of the debt will not change and holders of the equity-linked units will have the option of putting their debt to PNMR to satisfy their obligations under the purchase contracts. PNMR expects that the remarketing of the debt will be successful.

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92

PNMPNMR has long-term debt which subjects it to the risk of loss associated with movements in market interest rates. The majority of PNM’sPNMR’s long-term debt is fixed-rate debt, and therefore, does not expose PNM’sPNMR’s earnings to a major risk of loss due to adverse changes in market interest rates. However, the fair value of all long-term debt instruments would increase by approximately 1.8%1.3%, if interest rates were to decline by 50 basis points from their levels at March 31,June 30, 2007. In general, an increase in fair value would impact earnings and cash flows to the extent not recoverable in rates if PNM were to reacquire all or a portion of its debt instruments in the open market prior to their maturity.

During the three and six months ended March 31,June 30, 2007, PNM contributed cash of approximately $1.5 million and $3.1 million to fundthe trust for other post retirement benefits. PNM also contributed cash of approximatelybenefits and $0 million and $4.9 million to the PVNGS nuclear decommissioning trustNDT. PNM made no contributions to the trusts for the plan year 2006.pension or executive retirement plans. The securities held by all of the trusts had an estimated fair value of $693.8$711.6 million at March 31,June 30, 2007, of which approximately 24.9%24.2% were fixed-rate debt securities that subject PNM to risk of loss of fair value with movements in market interest rates. If rates were to increase by 50 basis points from their levels at March 31,June 30, 2007, the decrease in the fair value of the fixed-rate securities would be approximately 3.4%3.5%, or $5.9$6.1 million. PNM does not currently recover or return through rates any losses or gains on these securities. PNM, therefore, is at risk for shortfalls in its funding of its obligations due to investment losses. PNM does not believe that long-term market returns over the period of funding will be less than required for PNM to meet its obligations. However, this belief is based on assumptions about future returns that are inherently uncertain.

TNMP has long-term debt which subjects it to the risk of loss associated with movements in market interest rates. The majority of TNMP’s long-term debt is fixed-rate debt, and therefore, does not expose TNMP’s earnings to a major risk of loss due to adverse changes in market interest rates. However, the fair value of all long-term debt instruments would increase by approximately 0.5%, if interest rates were to decline by 50 basis points from their levels at March 31, 2007. In general, an increase in fair value would impact earnings and cash flows to the extent not recoverable in rates if TNMP were to re-acquire all or a portion of its debt instruments in the open market prior to their maturity.

During the three and six months ended March 31,June 30, 2007, TNMP did not contribute cashcontributed $0.3 million and $0.3 million to fund pension andthe trust for other postretirement benefits for plan year 2007. TNMP made no contributions to the trust for its pension plan. The securities held by all of the trusts had an estimated fair value of $89.5$91.5 million at March 31,June 30, 2007, of which approximately 23.2%22.3% were fixed-rate debt securities that subject TNMP to risk of loss of fair value with movements in market interest rates. If rates were to increase by 50 basis points from their levels at March 31,June 30, 2007, the decrease in the fair value of the fixed-rate securities would be approximately 4.2%4.0%, or $0.9$0.8 million. TNMP, therefore,The Company is at risk for shortfalls in its funding of its obligations due to investment losses. TNMPThe Company does not believe that long-term market returns over the period of funding will be less than required for TNMP to meet its obligations. However, this belief is based on assumptions about future returns that are inherently uncertain.

Equity Market Risk

The trusts established to fund PNM’s share of the decommissioning costs of PVNGS and pension and other postretirement benefits also hold certain equity securities at March 31,June 30, 2007. These equity securities also expose PNM to losses in fair value. Approximately 61.0%61.3% of the securities held by the various PNM trusts were equity securities as of March 31,June 30, 2007. Similar to the debt securities held for funding decommissioning and certain pension and other postretirement costs, PNM does not recover or earn a return through rates on any losses or gains on these equity securities.

The trusts established to fund TNMP’s pension and other postretirement benefits hold certain equity securities at March 31,June 30, 2007. Approximately 54.2% of the securities held by the various trusts were equity securities as of June 30, 2007. These equity securities also expose the Company to losses in fair value. Approximately 55.4%
Alternatives Investment Risk
The Company has a target of investing 20% of its pension assets in the alternatives asset class. This includes real estate, private equity, and hedge funds. The private equity and hedge fund investments are limited partner structures that are multi-manager multi-strategy funds. This investment approach gives broad diversification and minimizes risk compared to a direct investment in any one component of the securities heldfunds. The general partner oversees the selection and monitoring of the underlying managers. The Company’s Corporate Investment Committee, assisted by its investment consultant, monitors the various trusts were equity securities asperformance of March 31, 2007. TNMP doesthe funds and general partner’s investment process. There is risk associated with these funds due to the nature of the strategies and techniques and the use of investments that do not recover or earn a return through rates on any losses or gains on these equity securities.have readily determinable fair value.

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ITEM 4. CONTROLS AND PROCEDURES

PNMR
PNMR

Disclosure of controls and procedures

procedures.
PNMR maintains disclosure controls and procedures designed to ensure that it is able to collect the information it is required to disclose in the reports it files with the SEC, and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Based on an evaluation of its disclosure controls and procedures as of the end of the period covered by this report conducted by management, with the participation of the Chief Executive and Chief Financial Officer, the Chief Executive and Chief Financial Officer believe that these controls and procedures are effective to ensure that PNMR meets the requirements of SEC Regulation 13A, Rule 13a-15(e) and Rule 15d-15(e).

Changes in internal controls

The following material changes in internal controls occurred during the firstsecond quarter of 2007:

PNMR is currently designing and implementing monitoring controls for its equity investment in EnergyCo to ensure that PNMR maintains its compliance with Section 404 of the Sarbanes-Oxley Act of 2002. It is expected that this effort will continue through the end of 2007.
·  Expanded the functionality of an existing module of an accounting application at TNMP to record accounts receivable and billing activities for Texas market ERCOT electronic data interchange transactions and modified the related business process controls.

·  PNMR is currently engaged in a diligent effort to integrate Twin Oaks' and PNMR’s internal control activities to ensure that PNMR maintains its compliance with Section 404 of the Sarbanes-Oxley Act of 2002. It is expected that this effort will continue through the end of 2007.

Except as described above, there have been no other changes in PNMR’s internal controls over financial reporting for the quarter ended March 31,June 30, 2007, that have materially affected, or are reasonably likely to materially affect, PNMR’s internal control over financial reporting.

PNM
PNM

Disclosure of controls and procedures

PNM maintains disclosure controls and procedures designed to ensure that it is able to collect the information it is required to disclose in the reports it files with the SEC, and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Based on an evaluation of its disclosure controls and procedures as of the end of the period covered by this report conducted by management, with the participation of the Chief Executive and Chief Financial Officer, the Chief Executive and Chief Financial Officer believe that these controls and procedures are effective to ensure that PNM is able to meetmeets the requirements of SEC Regulation 13A, Rule 13a-15(e) and Rule 15d-15(e).

Changes in internal controls

There have been no changes in PNM’s internal controls over financial reporting for the quarter ended March 31,June 30, 2007, that have materially affected, or are reasonably likely to materially affect, PNM’s internal control over financial reporting.

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TNMP
94

TNMP

Disclosure of controls and procedures

TNMP maintains disclosure controls and procedures designed to ensure that it is able to collect the information it is required to disclose in the reports it files with the SEC, and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Based on an evaluation of its disclosure controls and procedures as of the end of the period covered by this report conducted by management, with the participation of the Chief Executive and Chief Financial Officer, the Chief Executive and Chief Financial Officer believe that these controls and procedures are effective to ensure that TNMP meets the requirements of SEC Regulation 13A, Rule 13a-15(e) and Rule 15d-15(e).

Changes in internal controls

The following material changes in internal controls occurred during the first quarter of 2007:

·  Expanded the functionality of an existing module of an accounting application to record accounts receivable and billing activities for Texas market ERCOT electronic data interchange transactions and modified the related business process controls.

Except as described above, thereThere have been no changes in TNMP’s internal controls over financial reporting for the quarter ended March 31,June 30, 2007, that have materially affected, or are reasonably likely to materially affect, TNMP’s internal control over financial reporting.

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95

PART II -— OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Notes 9 and 10 in the Notes to Condensed Consolidated Financial Statements for information related to the following matters, for PNMR, PNM and TNMP, incorporated in this item by reference.

·• Citizen Suit Under the Clean Air Act
·
• Navajo Nation Environmental Issues
·
• Four Corners Federal Implementation Plan Litigation
· Wholesale Power Marketing Antitrust Suit
·• Legal Proceedings discussed under the caption, “Western United States Wholesale Power Market”
·
• Natural Gas Royalties Qui Tam Litigation
·
• TNMP Competitive Transition Charge True-Up Proceeding
·
• San Juan River Adjudication

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 and TNMP’s Annual Reports on Form 10-K for the year ended December 31, 2006.2007.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Annual Meeting
The annual meeting of shareholders was held on May 22, 2007. The matters voted on at the meeting and the results were as follows:
The election of the following nominees to serve as directors as follows:
         
      Votes Against or 
Director Votes For  Withheld 
Terms expiring in 2008:        
Adelmo E. Archuleta  64,181,150   6,204,301 
Julie A. Dobson  64,185,592   6,199,859 
Woody L. Hunt  64,182,949   6,202,502 
C. E. McMahen  63,784,715   6,600,736 
M. T. Pacheco  70,214,216   171,235 
R. M. Price  60,351,592   10,033,859 
B. S. Reitz  70,214,050   171,401 
Jeffry E. Sterba  66,802,203   3,583,248 
Joan B. Woodard  70,218,959   166,492 
The approval of the selection by the Company’s Board of Deloitte & Touche LLP as independent auditors for the fiscal year ending December 31, 2007, was voted on, as follows:
     
Votes For Votes Against or Withheld Abstentions
70,231,908 99,434 54,109

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ITEM 6. EXHIBITS

10.3
2.1PNMRSecond Amendment to CreditContribution Agreement, dated as of December 20, 2006June 1, 2007, among EnergyCo, LLC, PNM Resources, First Choice Power, L.P. and TNMP, as borrowers, the lenders party thereto and Bank of America, N.A., as administrative agentECJV Holdings, LLC
   
10.894.23PNMAmendment FourSeventh Supplemental Indenture, dated as of June 1, 2007, to Underground Coal Sales Agreement effectiveIndenture dated as of March 7, 2007 among San Juan Coal Company,11, 1998, between PNM and Tucson Electric PowerThe Bank of New York Trust Company, N.A. (successor to JPMorgan Chase Bank), as Trustee
   
12.1PNMRRatio of Earnings to Fixed Charges
   
12.2PNMRRatio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
   
31.1PNMRChief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.2PNMRChief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.3PNMChief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.4PNMChief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.5TNMPChief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.6TNMPChief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
32.1PNMRChief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
32.2PNMRChief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
32.3PNMChief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
32.4PNMChief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
32.5TNMPChief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
32.6TNMPChief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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97

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: May 10,August 14, 2007/s/ Thomas G. Sategna
 Thomas G. Sategna
 Thomas G. Sategna
Vice President and Corporate Controller

(Officer duly authorized to sign this report)

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EXHIBIT INDEX
98
Exhibit
No.Description
2.1PNMRContribution Agreement, dated as of June 1, 2007, among EnergyCo, LLC, PNM Resources, and ECJV Holdings, LLC
4.23PNMSeventh Supplemental Indenture, dated as of June 1, 2007, to Indenture dated as of March 11, 1998, between PNM and The Bank of New York Trust Company, N.A. (successor to JPMorgan Chase Bank), as Trustee
12.1PNMRRatio of Earnings to Fixed Charges
12.2PNMRRatio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
31.1PNMRChief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2PNMRChief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.3PNMChief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.4PNMChief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.5TNMPChief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.6TNMPChief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1PNMRChief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2PNMRChief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.3PNMChief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.4PNMChief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.5TNMPChief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.6TNMPChief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

105