UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended~~September~~ June 30, ~~2007~~2008



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. YES ü 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. YES NO ü (NOTE: As a voluntary filer, not subject to the filing requirements, TNMP filed all reports under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months.)

Indicate by check mark whether 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 ü

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 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). YES NO ü

As of ~~November 1, 2007, 76,777,076~~August 4, 2008, 86,400,262 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 ~~November 1, 2007~~August 4, 2008 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 ~~November 1, 2007~~August 4, 2008 was 6,358 all held indirectly by PNMR (and none held by non-affiliates).

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

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

ii2

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

INDEX

Page No.

~~INDEX~~GLOSSARY

PART I. FINANCIAL INFORMATION 0; 4

	~~Page No.~~
~~GLOSSARY~~	1
~~PART I. FINANCIAL INFORMATION~~
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
~~PNM RESOURCES, INC. AND SUBSIDIARIES~~
~~CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS~~	4
~~CONDENSED CONSOLIDATED BALANCE SHEETS~~	5
~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~	7
~~CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME~~	9
~~PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY~~
~~CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS~~	10
~~CONDENSED CONSOLIDATED BALANCE SHEETS~~	11
~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~	13
~~CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME~~	15
~~TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES~~
~~CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS~~	16
~~CONDENSED CONSOLIDATED BALANCE SHEETS~~	17
~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~	19
~~CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME~~	21
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~	22
~~ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~	65
~~ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK~~	96
~~ITEM 4. CONTROLS AND PROCEDURES~~	~~105~~
~~PART II. OTHER INFORMATION~~
~~ITEM 1. LEGAL PROCEEDINGS~~	~~107~~
~~ITEM 1A. RISK FACTORS~~	~~107~~
~~ITEM 6. EXHIBITS~~	~~108~~
~~SIGNATURE~~	~~109~~

PNM RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) &# 160; 6

CONDENSED CONSOLIDATED BALANCE SHEETS 0; 7

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS9

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS’ EQUITY 11

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) 12

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) 13

CONDENSED CONSOLIDATED BALANCE SHEETS 14

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 0; 16

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDER’S EQUITY 18

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) 19

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS &# 160; 20

CONDENSED CONSOLIDATED BALANCE SHEETS 0; 21

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 0; 23

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDER’S EQUITY 25

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 26

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 27

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 70

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 91

ITEM 4. CONTROLS AND PROCEDURES ; 99

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS 100

ITEM 1A. RISK FACTORS 0; 100

ITEM 6. EXHIBITS 60; 102

SIGNATURE 0; 103

~~iii~~3

GLOSSARY

Definitions:
Afton		Afton Generating Station
AG		New Mexico Attorney General
ALJ		Administrative Law Judge
Altura		Altura Power L.P.
APB		Accounting Principles Board
APS		Arizona Public Service Company
~~Avistar~~		~~Avistar, Inc.~~
BART	Best Available Retrofit Technology
Board		Board of Directors of PNMR
BTU		British Thermal Unit
CAIR		EPA’s Clean Air Interstate Rule
Cal PX		California Power Exchange
Cal ISO		California Independent System Operator
Cascade		Cascade Investment, L.L.C.
Constellation		Constellation Energy Commodities Group, Inc.
Continental		Continental Energy Systems, LLC
CRHC		Cap Rock Holding Corporation, a subsidiary of Continental
CTC		Competition Transition Charge
Decatherm		Million BTUs
Delta		Delta-Person Limited Partnership
EaR		Earnings at Risk
ECJV		ECJV Holdings, LLC
EEI		Edison Electric Institute
EIP		Eastern Interconnection Project
EITF		Emerging Issues Task Force
EnergyCo		EnergyCo, LLC, a ~~joint venture between~~limited liability corporation, owned 50% by each of PNMR and ECJV
EPA		United States Environmental Protection Agency
EPE		El Paso Electric
ERCOT		Electric Reliability Council of Texas
ESPP		Employee Stock Purchase Plan
FASB		Financial Accounting Standards Board
FCPSP		First Choice Power Special Purpose, L.P.
FERC		Federal Energy Regulatory Commission
FIN		FASB Interpretation Number
FIP		Federal Implementation Plan
FSP		FASB Staff Position
First Choice		First Choice Power, L. P. and Subsidiaries
Four Corners		Four Corners Power Plant
FPPAC		Fuel and Purchased Power Adjustment Clause
GAAP		Generally Accepted Accounting Principles in the United States of America
GWh		Gigawatt hours
ISO		Independent System Operator
LIBOR		London Interbank Offered Rate
Lordsburgh		Lordsburg Generating Station
Luna		Luna Energy Facility
MD&A		Management’s Discussion and Analysis of Financial Condition and Results of Operations
~~Moody’s~~ Moody's		Moody’s Investor Services, Inc.
MW		Megawatt
Navajo Acts		Navajo Nation Air Pollution Prevention and Control Act, the Navajo Nation Safe Drinking Water Act, and the Navajo Nation Pesticide Act

NDT		Nuclear Decommissioning Trusts for PVNGS
Ninth Circuit		United States Court of Appeals for the Ninth Circuit
NMGC		New Mexico Gas Company, Inc., a subsidiary of Continental
NMED		New Mexico Environment Department
NMPRC		New Mexico Public Regulation Commission
NOPR		Notice of Proposed Rulemaking
NOX		Nitrogen Oxides
NOI		Notice of Inquiry
NRC		United States Nuclear Regulatory Commission
NSPS		New Source Performance Standards

NSR		New Source Review
~~OASIS~~		~~Open Access Same Time Information System~~
OATT	Open Access Transmission Tariff
O&M		Operations and Maintenance
~~PCRBs~~		~~Pollution Control Revenue Bonds~~
PGAC	Purchased Gas Adjustment Clause
PG&E		Pacific Gas and Electric Co.
PNM		Public Service Company of New Mexico and ~~Subsidiary~~Subsidiaries
PNM Facility		PNM’s $400 Million Unsecured Revolving Credit Facility
PNMR		PNM Resources, Inc. and Subsidiaries
PNMR Facility		PNMR’s $600 Million Unsecured Revolving Credit Facility
PPA		Power Purchase Agreement
PRP		Potential Responsible Party
PSA		Power Supply Agreement
PSD		Prevention of Significant Deterioration
PUCT		Public Utility Commission of Texas
PVNGS		Palo Verde Nuclear Generating Station
Pyramid		Tri-State Pyramid Unit 4
REC		Renewable Energy Certificates
REP		Retail Electricity Provider
RMC		Risk Management Committee
RTO		Regional Transmission Organization
SCE		Southern Cal Edison Company
SDG&E		~~San~~ Diego Gas and Electric Company
SEC		United States Securities and Exchange Commission
SFAS		FASB Statement of Financial Accounting Standards
SJCC		San Juan Coal Company
SJGS		San Juan Generating Station
SOAH		State Office of Administrative Hearings
SO2		Sulfur Dioxide
SPS		Southwestern Public Service Company
SRP		Salt River Project
S&P		Standard and Poors Ratings Services
TECA		Texas Electric Choice Act
TNMP		Texas-New Mexico Power Company and Subsidiaries
TNMP Facility		TNMP’s $200 Million Unsecured Revolving Credit Facility
TNP		TNP Enterprises, Inc. and Subsidiaries
~~Throughput~~ Tri-State		~~Volumes of gas delivered, whether or not owned~~Tri-State Generation and Transmission Association, Inc.
Twin Oaks		Assets of Twin Oaks Power, L.P. and Twin Oaks Power III, L.P.
~~VaR~~ Valencia		Valencia Energy Facility
VaR		Value at Risk

Accounting Pronouncements (as ~~amended)~~amended and interpreted):
EITF ~~03-11~~02-3		EITF Issue No. ~~03-11~~ 02-3 “~~Reporting Realized Gains and Losses on~~Issues Involved in Accounting for Derivative ~~Instruments that are Subject to FASB Statement~~ ~~No. 133 and Not~~ Contracts Held for Trading Purposes” and Contracts Involved in Energy Trading and Risk Management Activities”
~~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 46R	FIN 46R “Consolidation of Variable Interest Entities an Interpretation of ARB No. 51”
FSP FIN 4839-1		FASB Staff Position FIN 39-1 – “Amendment of FASB Interpretation No. ~~48 “~~~~Accounting for Uncertainty in Income Taxes~~”39”
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~~”112
~~SFAS 112~~	SFAS No. 112 “Employers’ Accounting for Postemployment Benefits – an amendment of FASB Statements No. 5 and 43”
SFAS 115		SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities”
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 142		SFAS No. 142 “Goodwill and Other Intangible Assets”
SFAS 144		SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”
SFAS ~~149~~157		SFAS No. ~~149~~157 “~~Amendment~~Fair Value Measurements”
SFAS 159		SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement ~~133 on~~No. 115”
SFAS 161		SFAS No. 161 “Disclosure about Derivative Instruments and Hedging Activities – an Amendment of FASB Statement No. 133”
SFAS ~~154~~162		SFAS No. ~~154~~162 “The Hierarchy of Generally Accepted Accounting ~~Changes and Error Corrections~~”Principles”

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PNM RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,						Three Months Ended		Six Months Ended
	2007			2006			2007			2006			June 30,		June 30,
				(As Restated,						(As Restated,			2008	2007	2008	2007
				See Note 16)						See Note 16)			(In thousands, except per share amounts)
	(In thousands, except per share amounts)
Operating Revenues:
Electric	$	569,566		$	580,967		$	1,511,749		$	1,506,786		$ 580,243	$ 505,400	$ 944,645	$ 942,234
Gas		59,537			69,001			351,162			345,346
Other		334			197			708			503		67	169	167	379
Total operating revenues		629,437			650,165			1,863,619			1,852,635		580,310	505,569	944,812	942,613

Operating Expenses:
Cost of energy sold		408,981			366,688			1,144,034			1,099,160
Cost of energy													398,698	311,465	633,079	528,277
Administrative and general		69,256			69,599			204,803			201,215		59,392	50,600	106,754	108,927
Energy production costs		57,669			38,813			157,749			120,762		45,557	51,674	96,761	99,056
Impairment of goodwill and other intangible assets													136,179	-	136,179	-
Regulatory disallowances													-	-	30,248	-
Depreciation and amortization		36,714			39,899			116,851			112,182		34,650	34,222	68,686	69,063
Transmission and distribution costs		20,858			19,723			65,619			60,087		15,110	14,953	28,486	29,608
Taxes other than income taxes		14,263			18,382			51,886			53,607		13,484	16,759	26,350	33,331
Total operating expenses		607,741			553,104			1,740,942			1,647,013		703,070	479,673	1,126,543	868,262
Operating income		21,696			97,061			122,677			205,622
Operating income (loss)													(122,760)	25,896	(181,731)	74,351

Other Income and Deductions:
Interest income		10,053			9,902			27,882			28,969		4,412	7,583	9,942	17,375
Gains (losses) on investments held by NDT		3,897			(166	)		6,898			1,888		(677)	2,957	(4,382)	3,001
Other income		1,686			1,333			5,613			4,368		226	1,817	1,116	3,722
Equity in net earnings of EnergyCo		10,556			-			12,166			-
Carrying charges on regulatory assets		-			2,038			-			6,015
Equity in net earnings (loss) of EnergyCo													(2,523)	2,272	(27,606)	1,610
Other deductions		(2,056	)		(1,519	)		(8,572	)		(5,532	)	(3,199)	(5,506)	(7,081)	(6,482)
Net other income and deductions		24,136			11,588			43,987			35,708		(1,761)	9,123	(28,011)	19,226

Interest Charges:
Interest on long-term debt		25,167			24,108			67,910			70,906		24,197	15,836	43,105	36,899
Other interest charges		10,088			16,063			35,084			34,326		7,823	11,158	16,750	24,996
Total interest charges		35,255			40,171			102,994			105,232		32,020	26,994	59,855	61,895

Earnings before Income Taxes		10,577			68,478			63,670			136,098
Earnings (Loss) before Income Taxes													(156,541)	8,025	(269,597)	31,682

Income Taxes (see Note 15)		2,073			24,826			4,997			50,198
Income Taxes (Benefit)													(10,425)	(13,935)	(52,477)	(5,554)

Preferred Stock Dividend Requirements of Subsidiary		132			132			396			396		132	132	264	264

Net Earnings	$	8,372		$	43,520		$	58,277		$	85,504
Earnings (Loss) from Continuing Operations													(146,248)	21,828	(217,384)	36,972

Net Earnings per Common Share (see Note 5):
Earnings (Loss) from Discontinued Operations, net of Income
Taxes (Benefit) of $1,824, $(1,040), $15,479 and $8,477													2,762	(1,588)	25,261	12,934

Net Earnings (Loss)													$(143,486)	$ 20,240	$(192,123)	$ 49,906

Earnings (Loss) from Continuing Operations per Common Share:
Basic	$	0.11		$	0.62		$	0.76		$	1.24		$ (1.79)	$ 0.28	$ (2.74)	$ 0.48
Diluted	$	0.11		$	0.62		$	0.75		$	1.23		$ (1.79)	$ 0.28	$ (2.74)	$ 0.47
Net Earnings (Loss) per Common Share:
Basic													$ (1.76)	$ 0.26	$ (2.42)	$ 0.65
Diluted													$ (1.76)	$ 0.26	$ (2.42)	$ 0.64

Dividends Declared per Common Share	$	0.23		$	0.22		$	0.69		$	0.66		$ 0.125	$ 0.230	$ 0.355	$ 0.46

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

PNM RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30,		December 31,		June 30,		December 31,
	2007		2006		2008		2007
	(In thousands)				(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	16,739	$	123,419	$	137,877	$	17,763
Special deposits		1,295		5,146		3,354		1,717
Accounts receivable, net of allowance for uncollectible accounts of $7,542 and $6,899		180,954		168,126
Accounts receivable, net of allowance for uncollectible accounts of $7,017 and $6,021						149,644		134,325
Unbilled revenues		94,920		116,878		96,564		74,896
Other receivables		96,174		73,744		66,816		90,002
Inventories		57,597		63,329
Materials, supplies, and fuel stock						44,330		41,312
Regulatory assets		20,576		17,507		249		157
Derivative instruments		54,521		59,312		245,613		49,257
Income taxes receivable		42,965		65,210		46,818		39,189
Current assets of discontinued operations						77,686		120,061
Other current assets		51,483		63,414		71,134		37,198

Total current assets		617,224		756,085		940,085		605,877

Other Property and Investments:
Investment in PVNGS lessor notes		192,568		257,659		183,884		192,226
Equity investment in EnergyCo		261,657		-		175,057		248,094
Investments held by NDT		138,999		123,143		130,806		139,642
Other investments		52,038		46,577		40,348		47,749
Non-utility assets, net of accumulated depreciation of $1,433 and $1,365		7,056		7,565
Non-utility property, net of accumulated depreciation of $1,946 and $1,570						9,876		6,968

Total other property and investments		652,318		434,944		539,971		634,679

Utility Plant:
Electric plant in service		3,758,831		4,263,068		4,240,902		3,920,071
Gas plant in service		756,352		721,168
Common plant in service and plant held for future use		126,718		157,064		141,619		128,119
		4,641,901		5,141,300		4,382,521		4,048,190
Less accumulated depreciation and amortization		1,689,373		1,639,156		1,502,790		1,464,625
		2,952,528		3,502,144		2,879,731		2,583,565
Construction work in progress		367,710		230,871		164,877		299,574
Nuclear fuel, net of accumulated amortization of $18,806 and $14,008		53,659		28,844
Nuclear fuel, net of accumulated amortization of $15,454 and $15,395						59,609		52,246

Net utility plant		3,373,897		3,761,859		3,104,217		2,935,385

Deferred Charges and Other Assets:
Regulatory assets		542,295		553,564		442,756		481,872
Pension asset		10,817		8,853		21,965		17,778
Goodwill		495,664		495,738		366,856		495,664
Other intangible assets, net of accumulated amortization of $3,035 and $2,052		76,219		102,202
Other intangible assets, net of accumulated amortization of $4,017 and $3,362						67,866		75,892
Derivative instruments		27,990		39,886		39,363		45,694
Non-current assets of discontinued operations						541,428		526,539
Other deferred charges		52,045		77,703		62,286		52,756

Total deferred charges and other assets		1,205,030		1,277,946		1,542,520		1,696,195
	$	5,848,469	$	6,230,834	$	6,126,793	$	5,872,136

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

PNM RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30,		December 31,		June 30,			December 31,
	2007		2006		2008			2007
	(In thousands, except share information)				(In thousands, except share information)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Short-term debt	$	648,684	$	764,345	$	426,651		$	665,900
Current installments of long-term debt		448,935		3,298		470,334			449,219
Accounts payable		169,790		214,229		158,850			148,955
Accrued interest and taxes		62,026		98,789		50,714			57,766
Regulatory liabilities		15,709		1,172		4,885			-
Derivative instruments		69,112		68,575		263,238			53,832
Current liabilities of discontinued operations						42,722			96,003
Other current liabilities		131,188		225,653		134,873			112,394

Total current liabilities		1,545,444		1,376,061		1,552,267			1,584,069

Long-term Debt		1,233,563		1,765,907		1,517,007			1,231,859

Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		574,314		586,283		560,334			600,187
Accumulated deferred investment tax credits		27,678		30,236		25,330			26,825
Regulatory liabilities		396,216		389,330		337,471			332,372
Asset retirement obligations		65,100		61,338		69,753			66,466
Accrued pension liability and postretirement benefit cost		129,577		134,799		57,789			60,022
Derivative instruments		30,912		14,581		40,769			55,206
Non-current liabilities of discontinued operations						89,314			89,848
Other deferred credits		127,428		155,860		164,278			121,342

Total deferred credits and other liabilities		1,351,225		1,372,427		1,345,038			1,352,268

Total liabilities		4,130,232		4,514,395		4,414,312			4,168,196

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		11,529			11,529

Common Stockholders’ Equity:
Common stock outstanding (no par value, 120,000,000 shares authorized: issued
and outstanding 76,770,266 and 76,648,472 shares)		1,041,111		1,040,451
Accumulated other comprehensive income, net of income tax		23,075		28,909
and outstanding 86,390,701 and 76,814,491 shares)						1,286,708			1,042,974
Accumulated other comprehensive income (loss), net of income tax						(24,587	)		11,208
Retained earnings		642,522		635,550		438,831			638,229

Total common stockholders’ equity		1,706,708		1,704,910		1,700,952			1,692,411

	$	5,848,469	$	6,230,834	$	6,126,793		$	5,872,136

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

PNM RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 30,
	2007			2006
				(As Restated,			Six Months Ended June 30,
				See Note 16)			2008			2007
	(In thousands)						(In thousands)
Cash Flows From Operating Activities:
Net earnings	$	58,277		$	85,504
Adjustments to reconcile net earnings to net cash flows from operating activities:
Net earnings (loss)							$	(192,123	)	$	49,906
Adjustments to reconcile net earnings (loss) to net cash flows from operating activities:
Depreciation and amortization		141,220			131,543			79,991			97,093
Allowance for equity funds used during construction		(1,201	)		(499	)
Amortization of prepayments on PVNGS firm-sales contracts								(4,084	)		-
Deferred income tax expense (benefit)		4,769			(624	)		(23,498	)		13,062
Equity in net earnings of EnergyCo		(12,166	)		-
Equity in net (earnings) loss of EnergyCo								27,606			(1,610	)
Net unrealized losses on derivatives		15,618			4,485			5,174			7,940
Realized gains on investments held by NDT		(6,898	)		(1,888	)
Realized (gains) losses on investments held by NDT								4,382			(3,001	)
Realized loss on Altura contribution		3,637			-			-			3,637
Impairment loss on intangible assets		3,380			-
Impairment loss on utility plant		19,500			-
Carrying charges on regulatory assets and liabilities		(692	)		(7,267	)
Impairment of goodwill and other intangible assets								136,179			3,380
Amortization of fair value of acquired Twin Oaks sales contract		(35,073	)		(48,720	)		-			(35,073	)
Stock based compensation expense		6,115			6,648			2,431			5,250
Excess tax benefit from stock-based payment arrangements		(9	)		(2,050	)
Regulatory disallowances								30,248			-
Other, net		(3,089	)		(2,856	)		(1,140	)		(1,958	)
Changes in certain assets and liabilities:
Accounts receivable		(20,430	)		47,169
Unbilled revenues		21,958			23,790
Regulatory assets		(6,037	)		25,920
Accounts receivable and unbilled revenues								(900	)		40,247
Materials, supplies, fuel stock, and natural gas stored								(5,936	)		(5,337	)
Other current assets								(17,909	)		(908	)
Other assets		20,373			(320	)		(4,482	)		1,701
Accrued pension liability and postretirement benefit costs		(2,753	)		(4,381	)
Accounts payable		(40,340	)		(102,956	)		(41,485	)		(42,325	)
Accrued interest and taxes		(8,520	)		55,006			(15,559	)		(14,709	)
Deferred credits		(22,332	)		(10,524	)
Other current liabilities								32,953			(7,987	)
Other liabilities		(8,331	)		(11,798	)		428			(22,116	)
Net cash flows from operating activities		126,976			186,182			12,276			87,192

Cash Flows From Investing Activities:
Utility plant additions		(336,597	)		(195,493	)		(162,005	)		(213,070	)
Proceeds from sales of investments held by NDT		99,525			65,759			77,047			62,697
Purchases of investments held by NDT		(104,455	)		(66,578	)		(77,650	)		(66,903	)
Proceeds from sales of utility plant		25,041			-			1,184			25,041
Return of principal on PVNGS lessor notes		24,296			22,937			10,986			11,953
Change in restricted special deposits								3,696			(12,240	)
Investments in EnergyCo		(45,040	)		-			-			(2,540	)
Distributions from EnergyCo		362,275			-			-			362,275
Net additions to restricted special deposits		(10,203	)		-
Twin Oaks acquisition		-			(481,058	)
Other, net		4,443			2,922			(3,332	)		5,263
Net cash flows used from investing activities		19,285			(651,511	)
Net cash flows from investing activities								(150,074	)		172,476

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

PNM RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 30,
	2007			2006
				(As Restated,			Six Months Ended June 30,
				See Note 16)			2008			2007
	(In thousands)						(In thousands)
Cash Flows From Financing Activities:
Short-term borrowings (repayments), net		(115,661	)		506,900			(321,717	)		(204,675	)
Long-term borrowings		20,000			-			452,750			20,000
Redemption of long-term debt		(100,500	)		-			(148,935	)		(100,500	)
Issuance of common stock		3,309			40,847			249,547			2,127
Proceeds from stock option exercise		10,935			9,921			86			10,773
Purchase of common stock to satisfy stock awards		(18,078	)		(14,273	)		(1,245	)		(17,693	)
Excess tax benefits from stock-based payment arrangements		9			2,050
Excess tax benefits (tax shortfall) from stock-based payment arrangements								(513	)		8
Dividends paid		(52,545	)		(44,472	)		(35,625	)		(34,766	)
Payments received on PVNGS firm-sales contracts								73,173			-
Other, net		(410	)		(2,977	)		(9,612	)		(311	)
Net cash flows from financing activities		(252,941	)		497,996			257,909			(325,037	)

Change in Cash and Cash Equivalents		(106,680	)		32,667			120,111			(65,369	)
Cash and Cash Equivalents at Beginning of Period		123,419			68,199			17,791			123,419
Cash and Cash Equivalents at End of Period	$	16,739		$	100,866		$	137,902		$	58,050

Supplemental Cash Flow Disclosures:
Interest paid, net of capitalized interest	$	90,799		$	103,642		$	62,639		$	58,323
Income taxes paid (refunded), net	$	2,904		$	(620	)	$	(4,702	)	$	-

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

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. 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		38,095
Total liabilities contributed		101,363
Other comprehensive income		(12,651	)
Total liabilities and OCI contributed		88,712

Net contribution to EnergyCo	$	555,741

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

Activities related to the consolidation of Valencia as of May 30, 2008 (see Note 16):
Utility plant additions	$ 87,310
Increase in short-term borrowings	$ 82,468

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

810

PNM RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF ~~COMPREHENSIVE INCOME~~CHANGES IN COMMON STOCKHOLDERS’ EQUITY

(Unaudited)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2007

2006

2007

2006

(As Restated,

(As Restated,

See Note 16)

See Note 16)

(In thousands)

Net Earnings
$ 8,372 $ 43,520 $ 58,277 $ 85,504

Other Comprehensive Income:

Unrealized Gain (Loss) on Investment Securities:

Unrealized holding gains arising during
the period, net of income tax (expense)
of $(1,549) $(586), $(4,070) and $(7,567) 2,364 894 6,210 11,546
Reclassification adjustment for (gains) included in
net earnings, net of income tax expense
of $2,401, $48, $2,493 and $503 (3,664 ) (73 ) (3,804 ) (767 )

Fair Value Adjustment for Designated Cash Flow Hedges:

Change in fair market value, net of income tax expense
(benefit) of $(4,887), $(8,425), $6,079 and $(4,874) 7,414 12,589 (9,333 ) 7,076
Reclassification adjustment for (gains) losses included in
net earnings, net of income tax expense (benefit)
of $482, $(3,822), $(653) and $3,442 (638 ) 7,003 1,093 (5,021 )

Total Other Comprehensive Income (Loss)
5,476 20,413 (5,834 ) 12,834

Total Comprehensive Income
$ 13,848 $ 63,933 $ 52,443 $ 98,338

			Accumulated
	Common Stock		Other		Total Common
	Number of	Aggregate	Comprehensive	Retained	Stockholders’
	Shares	Value	Income (Loss)	Earnings	Equity
		(Dollars in thousands)

Balance at December 31, 2007	76,814,491	$1,042,974	$ 11,208	$ 638,229	$1,692,411
Adoption of SFAS 157	-	-	-	10,422	10,422
Exercise of stock options	-	(1,130)	-	-	(1,130)
Tax shortfall from stock-based compensation arrangements	-	(513)	-	-	(513)
Stock based compensation expense	-	2,431	-	-	2,431
Sale of common stock	9,531,589	242,427	-	-	242,427
Common stock issued to ESPP	44,621	519	-	-	519
Net earnings (loss)	-	-	-	(192,123)	(192,123)
Total other comprehensive income (loss)	-	-	(35,795)	-	(35,795)
Dividends declared on common stock	-	-	-	(17,697)	(17,697)
Balance at June 30, 2008	86,390,701	$1,286,708	$ (24,587)	$ 438,831	$1,700,952

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

911

PNM RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

Three Months Ended June 30, Six Months Ended June 30,
2008 2007 2008 2007
(In thousands)
Net Earnings (Loss) $ (143,486 ) $ 20,240 $ (192,123 ) $ 49,906

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 $(1,089), $(2,230), $412, and $(3,486) 1,662 3,403 (629 ) 5,320
Reclassification adjustment for (gains) included in
net earnings (loss), net of income tax expense
of $824, $787, $1,726, and $1,058 (1,257 ) (1,201 ) (2,634 ) (1,614 )

Fair Value Adjustment for Designated Cash Flow Hedges:
Change in fair market value, net of income tax (expense)
benefit of $14,069, $(1,387), $20,858, and $10,795 (20,224 ) 1,996 (30,430 ) (16,578 )
Reclassification adjustment for (gains) losses included in
net earnings (loss), net of income tax expense (benefit)
of $(848) $288, $1,403, and $(962) 1,250 (454 ) (2,102 ) 1,562

Total Other Comprehensive Income (Loss) (18,569 ) 3,744 (35,795 ) (11,310 )

Comprehensive Income (Loss) $ (162,055 ) $ 23,984 $ (227,918 ) $ 38,596

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

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

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)

(Unaudited)

	Three Months Ended						Nine Months Ended						Three Months Ended June 30,		Six Months Ended June 30,
	September 30,						September 30,						2008	2007	2008	2007
	2007			2006			2007			2006			(In thousands)
				(As Restated,						(As Restated,
				See Note 16)						See Note 16)
	(In thousands)
Operating Revenues:
Electric	$	360,446		$	302,900		$	901,072		$	873,665
Gas		59,537			69,001			351,162			345,346
Total operating revenues		419,983			371,901			1,252,234			1,219,011
Electric Operating Revenues													$ 386,058	$ 300,331	$ 638,723	$ 540,683

Operating Expenses:
Cost of energy sold		263,223			208,968			758,518			733,640
Cost of energy													247,589	185,346	383,284	288,519
Administrative and general		46,887			43,750			134,136			125,397		31,409	29,125	58,236	60,628
Energy production costs		60,004			36,314			144,163			116,629		47,974	42,748	101,556	83,135
Impairment of goodwill													51,143	-	51,143	-
Regulatory disallowances													-	-	30,248	-
Depreciation and amortization		26,004			25,373			78,562			74,517		20,896	20,729	41,866	41,484
Transmission and distribution costs		16,388			14,858			51,273			45,081		9,598	10,003	18,505	19,732
Taxes other than income taxes		8,712			7,763			27,418			25,490		7,086	7,777	14,105	14,415
Total operating expenses		421,218			337,026			1,194,070			1,120,754		415,695	295,728	698,943	507,913
Operating income (loss)		(1,235	)		34,875			58,164			98,257		(29,637)	4,603	(60,220)	32,770

Other Income and Deductions:
Interest income		10,386			8,562			25,738			26,585		4,878	7,192	10,969	14,898
Gains (losses) on investments held by NDT		3,897			(166	)		6,898			1,888		(677)	2,957	(4,382)	3,001
Other income		1,193			1,030			3,420			2,508		(392)	999	156	2,020
Other deductions		(871	)		(667	)		(3,386	)		(3,023	)	(1,116)	(1,883)	(3,430)	(2,480)
Net other income and deductions		14,605			8,759			32,670			27,958		2,693	9,265	3,313	17,439

Interest Charges:
Interest on long-term debt		13,405			13,080			37,797			38,106		14,766	9,058	25,296	18,549
Other interest charges		3,485			1,945			10,824			5,237		2,857	3,683	6,430	7,338
Total interest charges		16,890			15,025			48,621			43,343		17,623	12,741	31,726	25,887

Earnings (Loss) before Income Taxes		(3,520	)		28,609			42,213			82,872		(44,567)	1,127	(88,633)	24,322

Income Taxes (Benefit)		(1,762	)		10,961			15,902			32,124		2,441	350	(14,648)	9,187

Earnings (Loss) from Continuing Operations													(47,008)	777	(73,985)	15,135

Earnings (Loss) from Discontinued Operations, net of Income
Taxes (Benefit) of $1,824, $(1,040), $15,479 and $8,477													2,762	(1,588)	25,261	12,934

Net Earnings (Loss)	$	(1,758	)	$	17,648		$	26,311		$	50,748		(44,246)	(811)	(48,724)	28,069

Preferred Stock Dividend Requirements		132			132			396			396
Preferred Stock Dividends Requirements													132	132	264	264

Net Earnings (Loss) Available for Common Stock	$	(1,890	)	$	17,516		$	25,915		$	50,352		$ (44,378)	$ (943)	$ (48,988)	$ 27,805

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

1013

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

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30,		December 31,		June 30,		December 31,
	2007		2006		2008		2007
	(In thousands)				(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	2,715	$	11,886	$	44,499	$	4,303
Special deposits		975		376		3,034		1,397
Accounts receivable, net of allowance for uncollectible accounts of $1,685 and $1,788		115,516		122,648
Accounts receivable, net of allowance for uncollectible accounts of $1,061 and $729						88,365		78,094
Unbilled revenues		42,766		81,166		38,280		32,039
Other receivables		81,966		62,040		53,703		79,842
Affiliate accounts receivable		44		8,905		-		271
Inventories		55,691		51,801
Materials, supplies, and fuel stock						42,925		39,771
Regulatory assets		20,576		17,507		249		157
Derivative instruments		30,243		27,750		30,653		14,859
Income taxes receivable		-		13,222
Current assets of discontinued operations						77,686		120,061
Other current assets		34,758		51,231		43,169		28,926

Total current assets		385,250		448,532		422,563		399,720

Other Property and Investments:
Investment in PVNGS lessor notes		231,924		257,659		217,902		231,582
Investments held by NDT		138,999		123,143		130,806		139,642
Other investments		24,102		15,634		15,424		20,733
Non-utility property		976		966		976		976

Total other property and investments		396,001		397,402		365,108		392,933

Utility Plant:
Electric plant in service		2,900,446		2,742,795		3,359,109		3,055,953
Gas plant in service		756,352		721,168
Common plant in service and plant held for future use		18,237		72,806		17,400		18,237
		3,675,035		3,536,769		3,376,509		3,074,190
Less accumulated depreciation and amortization		1,391,895		1,279,349		1,178,193		1,157,775
		2,283,140		2,257,420		2,198,316		1,916,415
Construction work in progress		346,682		191,403		131,326		259,386
Nuclear fuel, net of accumulated amortization of $18,806 and $14,008		53,659		28,844
Nuclear fuel, net of accumulated amortization of $15,454 and $15,395						59,609		52,246

Net utility plant		2,683,481		2,477,667		2,389,251		2,228,047

Deferred Charges and Other Assets:
Regulatory assets		404,896		410,979		314,438		348,719
Pension asset						5,777		2,859
Derivative instruments		21,683		12,504		6,961		37,359
Goodwill		102,775		-		51,632		102,775
Non-current assets of discontinued operations						541,428		526,539
Other deferred charges		64,237		66,465		71,941		64,449

Total deferred charges and other assets		593,591		489,948		992,177		1,082,700
	$	4,058,323	$	3,813,549	$	4,169,099	$	4,103,400

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

1114

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

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30,		December 31,		June 30,			December 31,
	2007		2006		2008			2007
	(In thousands, except share information)				(In thousands, except share information)
LIABILITIES AND STOCKHOLDER’S EQUITY
Current Liabilities:
Short-term debt	$	285,584	$	251,300	$	86,651		$	321,000
Current installments of long-term debt		300,000		710		299,991			299,969
Accounts payable		96,734		138,577		72,200			72,864
Affiliate accounts payable		8,338		16,898		16,202			19,948
Accrued interest and taxes		60,251		41,340		36,010			26,385
Regulatory liabilities		15,709		1,172		4,885			-
Derivative instruments		44,159		43,096		38,727			17,896
Current liability of discontinued operations						42,722			96,003
Other current liabilities		62,665		81,552		89,068			59,468

Total current liabilities		873,440		574,645		686,456			913,533

Long-term Debt		705,654		987,205		1,055,709			705,701

Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		380,257		368,256		402,650			409,430
Accumulated deferred investment tax credits		27,497		29,404		25,234			26,634
Regulatory liabilities		355,621		335,196		289,857			285,782
Asset retirement obligations		64,372		60,493		68,981			65,725
Accrued pension liability and postretirement benefit cost		124,532		129,595		54,037			56,101
Derivative instruments		24,868		14,100		10,122			47,597
Non-current liabilities of discontinued operations						89,314			89,848
Other deferred credits		101,099		112,990		138,322			98,295

Total deferred credits and liabilities		1,078,246		1,050,034		1,078,517			1,079,412

Total liabilities		2,657,340		2,611,884		2,820,682			2,698,646

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		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		932,523			932,523
Accumulated other comprehensive income, net of income tax		14,502		8,761
Accumulated other comprehensive income (loss), net of income tax						(10,191	)		7,580
Retained earnings		442,430		415,875		414,556			453,122

Total common stockholder’s equity		1,389,454		1,190,136		1,336,888			1,393,225

	$	4,058,323	$	3,813,549	$	4,169,099		$	4,103,400

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

1215

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

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Nine Months Ended

September 30,

2007

2006

(As Restated,

See Note 16)

(In thousands)
Cash Flows From Operating Activities:

Net earnings $ 26,311 $ 50,748
Adjustments to reconcile net earnings to net cash flows from operating activities:
Depreciation and amortization 100,224 88,659
Allowance for equity funds used during construction (1,077 ) (348 )
Deferred income tax (benefit) (14,695 ) (15,760 )
Net unrealized losses on derivatives 14,943 1,305
Realized gains on investments held by NDT (6,898 ) (1,888 )
Carrying charges on regulatory assets and liabilities (692 ) (2,597 )
Impairment loss on utility plant 19,500 -
Other, net (1,746 ) (3,677 )
Changes in certain assets and liabilities, net of amounts acquired:
Accounts receivable 16,962 74,126
Unbilled revenues 41,931 35,591
Regulatory assets (6,037 ) 25,944
Other assets 27,254 (9,226 )
Accrued pension liability and postretirement benefit costs (2,538 ) (4,456 )
Accounts payable (44,666 ) (102,307 )
Accrued interest and taxes 29,575 44,147
Deferred credits (19,774 ) (6,456 )
Other liabilities (18,228 ) (29,645 )
Net cash flows from operating activities 160,349 144,160

Cash Flows From Investing Activities:

Utility plant additions (260,250 ) (150,896 )
Proceeds from sales of investments held by NDT 99,525 65,759
Purchases of investments held by NDT (104,455 ) (66,578 )
Proceeds from sales of utility plant 25,041 -
Return of principal on PVNGS lessor notes 24,296 22,937
Net additions to restricted special deposits (10,203 ) -
Other, net 1,653 6,815
Net cash flows from investing activities (224,393 ) (121,963 )

	Six Months Ended June 30,
	2008			2007
	(In thousands)
Cash Flows From Operating Activities:
Net earnings (loss)	$	(48,724	)	$	28,069
Adjustments to reconcile net earnings (loss) to net cash flows from operating activities:
Depreciation and amortization		49,662			66,320
Amortization of prepayments on PVNGS firm-sales contracts		(4,084	)		-
Deferred income tax expense		(3,365	)		(138	)
Net unrealized (gains) losses on derivatives		(8,832	)		10,896
Realized (gains) losses on investments held by NDT		4,382			(3,001	)
Regulatory disallowances		30,248			-
Impairment of goodwill		51,143			-
Other, net		(368	)		(1,188	)
Changes in certain assets and liabilities, net of amounts acquired:
Accounts receivable and unbilled revenues		20,239			64,405
Materials, supplies, fuel stock, and natural gas stored		(6,073	)		(5,121	)
Other current assets		19,823			12,130
Other assets		(1,208	)		456
Accounts payable		(50,553	)		(59,844	)
Accrued interest and taxes		9,124			16,975
Other current liabilities		(6,240	)		(5,076	)
Other liabilities		(1,252	)		(20,221	)
Net cash flows from operating activities		53,922			104,662

Cash Flows From Investing Activities:
Utility plant additions		(134,187	)		(149,648	)
Proceeds from sales of NDT investments		77,047			62,697
Purchases of NDT investments		(77,650	)		(66,903	)
Proceeds from sales of utility plant		837			25,041
Return of principal on PVNGS lessor notes		12,645			11,953
Change in restricted special deposits		3,696			(12,240	)
Other, net		1,703			1,466
Net cash flows from investing activities		(115,909	)		(127,634	)

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

1316

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

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Nine Months Ended

September 30,

2007

2006

(As Restated,

See Note 16)

(In thousands)
Cash Flows From Financing Activities:

Short-term borrowings (repayments), net 35,310 (31,926 )
Long-term borrowings 20,000 -
Dividends paid (396 ) (396 )
Other, net (41 ) 87
Net cash flows from financing activities 54,873 (32,235 )

Change in Cash and Cash Equivalents
(9,171 ) (10,038 )
Cash and Cash Equivalents at Beginning of Period
11,886 12,690
Cash and Cash Equivalents at End of Period
$ 2,715 $ 2,652

Supplemental Cash Flow Disclosures:

Interest paid, net of capitalized interest $ 49,839 $ 47,307
Income taxes paid, net $ - $ 455

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 10
Utility plant, net 96,468
Goodwill 102,775
Deferred charges 1,377
Total assets transferred from TNMP 216,074

Current liabilities 17,313
Long-term debt 1,065
Deferred credits and other liabilities 30,673
Total liabilities transferred from TNMP 49,051

Net assets transferred – increase in common stockholder’s equity $ 167,023

	Six Months Ended June 30,
	2008			2007
	(In thousands)
Cash Flows From Financing Activities:
Short-term borrowings (repayments), net		(316,817	)		(7,179	)
Long-term borrowings		350,000			20,000
Payments received on PVNGS firm-sales contracts		73,173			-
Dividends paid		(264	)		(264	)
Other, net		(3,912	)		(41	)
Net cash flows from financing activities		102,180			12,516

Change in Cash and Cash Equivalents		40,193			(10,456	)
Cash and Cash Equivalents at Beginning of Period		4,331			11,886
Cash and Cash Equivalents at End of Period	$	44,524		$	1,430

Supplemental Cash Flow Disclosures:
Interest paid, net of capitalized interest	$	33,175		$	29,758
Income taxes paid (refunded), net	$	(1,855	)	$	-


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.
Current assets	$	15,444
Other property and investments		10
Utility plant, net		96,468
Goodwill		102,775
Deferred charges		1,377
Total assets transferred from TNMP		216,074

Current liabilities		17,313
Long-term debt		1,065
Deferred credits and other liabilities		30,673
Total liabilities transferred from TNMP		49,051

Net assets transferred – increase in common stockholder’s equity	$	167,023
Activities related to the consolidation of Valencia as of May 30, 2008 (see Note 16):
Utility plant additions	$	87,310
Increase in short-term borrowings	$	82,468

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

1417

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

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF ~~COMPREHENSIVE INCOME~~CHANGES IN COMMON STOCKHOLDER’S EQUITY

(Unaudited)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2007

2006

2007

2006

(As Restated,

(As Restated,

See Note 16)

See Note 16)

(In thousands)

Net Earnings (Loss) Available for Common Stock
$ (1,890 ) $ 17,516 $ 25,915 $ 50,352

Other Comprehensive Income (Loss):

Unrealized Gain (Loss) on Investment Securities:

Unrealized holding gains arising during
the period, net of income tax (expense)
of $(1,549), $(586), $(4,070) and $(7,567) 2,364 894 6,210 11,546
Reclassification adjustment for (gains) included in
net earnings, net of income tax expense
of $2,401, $48, $2,493 and $503 (3,664 ) (73 ) (3,804 ) (767 )

Fair Value Adjustment for Designated Cash Flow Hedges:

Change in fair market value, net of income tax expense
(benefit) of $(903), $566, $(1,886) and $6,195 1,378 (864 ) 2,877 (9,453 )
Reclassification adjustment for (gains) losses included in
net earnings, net of income tax expense (benefit)
of $826, $334, $(300) and $4,138 (1,261 ) (510 ) 458 (6,314 )

Total Other Comprehensive Income (Loss)
(1,183 ) (553 ) 5,741 (4,988 )

Total Comprehensive Income (Loss)
$ (3,073 ) $ 16,963 $ 31,656 $ 45,364

					Accumulated
	Common Stock				Other						Total Common
	Number of		Aggregate		Comprehensive			Retained			Stockholder’s
	Shares		Value		Income (Loss)			Earnings			Equity
			(Dollars in thousands)

Balance at December 31, 2007		39,117,799	$	932,523	$	7,580		$	453,122		$	1,393,225
Adoption of SFAS 157		-		-		-			10,422			10,422
Net earnings (loss)		-		-		-			(48,724	)		(48,724	)
Total other comprehensive income (loss)		-		-		(17,771	)		-			(17,771	)
Dividends on preferred stock		-		-		-			(264	)		(264	)
Balance at June 30, 2008		39,117,799	$	932,523	$	(10,191	)	$	414,556		$	1,336,888

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

1518

~~TEXAS-NEW~~PUBLIC SERVICE COMPANY OF NEW MEXICO ~~POWER COMPANY~~ AND SUBSIDIARIES

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
	(In thousands)
Net Earnings (Loss) Available for Common Stock	$	(44,378	)	$	(943	)	$	(48,988	)	$	27,805

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 $(1,089), $(2,230), $412 and $(3,486)		1,662			3,403			(629	)		5,320
Reclassification adjustment for (gains) included in
net earnings (loss), net of income tax expense
of $824, $787, $1,726 and $1,058		(1,257	)		(1,201	)		(2,634	)		(1,614	)

Fair Value Adjustment for Designated Cash Flow Hedges:
Change in fair market value, net of income tax (expense)
benefit of $8,434, $(723), $9,134 and $(1,511)		(12,870	)		1,103			(13,937	)		2,305
Reclassification adjustment for (gains) losses included in
net earnings (loss), net of income tax expense (benefit)
of $(225), $236, $374 and $(599)		343			(361	)		(571	)		913

Total Other Comprehensive Income (Loss)		(12,122	)		2,944			(17,771	)		6,924

Comprehensive Income (Loss)	$	(56,500	)	$	2,001		$	(66,759	)	$	34,729

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

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)

(Unaudited)

	Three Months Ended						Nine Months Ended						Three Months Ended June 30,						Six Months Ended June 30,
	September 30,						September 30,						2008			2007			2008			2007
	2007			2006			2007			2006			(In thousands)
	(In thousands)
Electric Operating Revenues:	$	52,680		$	43,728		$	137,144		$	118,972
Electric Operating Revenues													$	47,118		$	43,536		$	89,346		$	84,464

Operating Expenses:
Cost of energy sold		7,544			7,050			21,936			20,644
Cost of energy														7,935			7,221			15,747			14,392
Administrative and general		6,024			7,451			22,288			24,512			7,074			7,361			13,645			16,263
Impairment of goodwill														34,456			-			34,456			-
Depreciation and amortization		7,082			6,422			21,123			18,934			8,777			7,041			17,136			14,041
Transmission and distribution costs		4,465			3,547			14,332			11,755			5,508			4,945			9,972			9,868
Taxes other than income taxes		6,503			6,455			16,741			17,127
Taxes, other than income taxes														4,931			5,413			9,370			10,238
Total operating expenses		31,618			30,925			96,420			92,972			68,681			31,981			100,326			64,802
Operating income		21,062			12,803			40,724			26,000
Operating income (loss)														(21,563	)		11,555			(10,980	)		19,662

Other Income and Deductions:
Interest income		25			296			888			632			4			776			5			864
Other income		397			281			1,444			534			606			770			1,020			1,046
Carrying charges on regulatory assets		-			2,038			-			6,015
Other deductions		(25	)		(17	)		(99	)		(60	)		(10	)		(46	)		(28	)		(73	)
Net other income and deductions		397			2,598			2,233			7,121			600			1,500			997			1,837

Interest Charges:
Interest on long-term debt		4,890			6,433			17,475			19,297			2,801			6,153			7,209			12,585
Other interest charges		878			852			2,242			2,484			1,564			718			2,145			1,364
Total interest charges		5,768			7,285			19,717			21,781
Net interest charges														4,365			6,871			9,354			13,949

Earnings before Income Taxes		15,691			8,116			23,240			11,340
Earnings (Loss) Before Income Taxes														(25,328	)		6,184			(19,337	)		7,550

Income Taxes		5,463			2,645			7,840			3,975			3,425			1,950			5,686			2,378

Net Earnings from Continuing Operations		10,228			5,471			15,400			7,365

Discontinued Operations, net of income tax
expense of $0, $250, $0 and $1,237		-			519			-			2,617

Net Earnings	$	10,228		$	5,990		$	15,400		$	9,982
Net Earnings (Loss)													$	(28,753	)	$	4,234		$	(25,023	)	$	5,172

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

1620

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30,		December 31,		June 30,		December 31,
	2007		2006		2008		2007
	(In thousands)				(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	54	$	2,542	$	73	$	187
Special deposits		50		-		50		50
Accounts receivable, net of allowance for uncollectible accounts of $0 and $31		10,653		10,317
Accounts receivable, net of allowance for uncollectible accounts of $94 and $0						12,076		8,789
Unbilled revenues		4,368		6,000		5,321		4,392
Other receivables		5,023		1,515		8,386		1,063
Affiliate accounts receivable		10,833		-		1,017		8,005
Inventories		1,662		1,509
Federal income tax receivable		32,053		40,473
Materials and supplies						1,419		1,425
Income taxes receivable						-		881
Other current assets		581		944		1,820		501

Total current assets		65,277		63,300		30,162		25,293

Other Property and Investments:
Other investments		555		511		554		554
Non-utility property, net of accumulated depreciation of $0 and $3		2,111		2,120
Non-utility property						2,111		2,111

Total other property and investments		2,666		2,631		2,665		2,665

Utility Plant:
Electric plant in service		775,622		925,538		799,030		781,355
Common plant in service and plant held for future use		488		589		488		488
		776,110		926,127		799,518		781,843
Less accumulated depreciation and amortization		269,183		326,404		283,243		274,128
		506,927		599,723		516,275		507,715
Construction work in progress		13,953		13,799		23,985		22,493

Net utility plant		520,880		613,522		540,260		530,208

Deferred Charges and Other Assets:
Regulatory assets		137,399		142,585		128,318		133,154
Goodwill		261,121		363,764		226,665		261,121
Pension asset		10,817		8,853		16,188		14,919
Other deferred charges		6,349		9,205		5,621		5,432

Total deferred charges and other assets		415,686		524,407		376,792		414,626

	$	1,004,509	$	1,203,860	$	949,879	$	972,792

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

1721

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30,		December 31,		June 30,			December 31,
	2007		2006		2008			2007
	(In thousands, except share information)				(In thousands, except share information)
LIABILITIES AND STOCKHOLDER’S EQUITY
Current Liabilities:
Short-term debt					$	150,000		$	-
Short-term debt – affiliate	$	18,500	$	-		2,100			3,404
Current installments of long-term debt		148,935		2,523		167,650			148,882
Accounts payable		2,831		11,332		6,179			5,666
Affiliate accounts payable		1,552		15,673		3,525			3,456
Accrued interest and taxes		21,006		23,110		35,871			35,204
Other current liabilities		3,933		7,579		3,553			1,785

Total current liabilities		196,757		60,217		368,878			198,397

Long-term Debt		167,503		420,546		-			167,609

Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		125,258		145,641		117,658			120,274
Accumulated deferred investment tax credits		181		832		96			191
Regulatory liabilities		40,595		54,134		47,614			46,590
Asset retirement obligations		651		686		690			662
Accrued pension liability and postretirement benefit cost		5,044		5,203		3,752			3,922
Other deferred credits		2,062		1,982		2,766			1,699

Total deferred credits and other liabilities		173,791		208,478		172,576			173,338

Total liabilities		538,051		689,241		541,454			539,344

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
issued and outstanding 6,358 shares)						64			64
Paid-in-capital		427,320		492,812		427,320			427,320
Accumulated other comprehensive income, net of income tax		562		562		823			823
Retained earnings		38,512		21,149
Retained earnings (deficit)						(19,782	)		5,241

Total common stockholder’s equity		466,458		514,619		408,425			433,448

	$	1,004,509	$	1,203,860	$	949,879		$	972,792

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

1822

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 30,						Six Months Ended June 30,
	2007			2006			2008			2007
	(In thousands)						(In thousands)
Cash Flows From Operating Activities:
Net earnings	$	15,400		$	9,982
Adjustments to reconcile net earnings to net cash flows from operating activities:
Net earnings (loss)							$	(25,023	)	$	5,172
Adjustments to reconcile net earnings (loss) to
net cash flows from operating activities:
Depreciation and amortization		20,991			24,733			19,072			15,724
Rate case amortization		2,777			-
Allowance for equity funds used during construction		(124	)		(151	)
Impairment of goodwill								34,456			-
Deferred income tax expense (benefit)		(3,253	)		(536	)		(2,712	)		(2,205	)
Carrying charges on deferred stranded costs		-			(6,015	)
Interest on retail competition transition obligation		-			1,345
Other, net		(1,108	)		(1,445	)		(1,254	)		(693	)
Changes in certain assets and liabilities:
Accounts receivable		(10,033	)		1,619
Unbilled revenues		(1,899	)		(1,100	)
Accounts receivable and unbilled revenues								(4,310	)		(8,686	)
Materials and supplies								5			(292	)
Other current assets								59			(549	)
Other assets		(892	)		1,665			(668	)		(315	)
Accrued pension liability and postretirement benefit costs		(216	)		(498	)
Accounts payable		(5,679	)		(1,765	)		514			(5,508	)
Accrued interest and taxes		7,554			6,259			1,614			(2,422	)
Change in affiliate accounts		(17,338	)		14,513
Other current liabilities								1,456			(12,895	)
Other liabilities		(1,081	)		(1,591	)		305			(539	)
Net cash flows from operating activities		5,099			47,015			23,514			(13,208	)

Cash Flows From Investing Activities:
Cash Flows From Investing Activities -
Utility plant additions		(26,837	)		(29,301	)		(22,464	)		(17,249	)
Other, net		-			66
Net cash flows from investing activities		(26,837	)		(29,235	)

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

1923

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Nine Months Ended

September 30,

2007

2006

(In thousands)
Cash Flows From Financing Activities:

Short-term debt - affiliate 18,500 -
Redemption of long-term debt (100,500 ) -
Equity contribution by parent 101,249 -
Other, net 1 115
Net cash flows from financing activities 19,250 115

Change in Cash and Cash Equivalents
(2,488 ) 17,895
Cash and Cash Equivalents at Beginning of Period
2,542 16,228
Cash and Cash Equivalents at End of Period
$ 54 $ 34,123

Supplemental Cash Flow Disclosures:

Interest paid, net of capitalized interest $ 19,693 $ 17,962
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 10
Utility plant, net 96,468
Goodwill 102,775
Deferred charges 1,377
Total assets transferred to PNM 216,074

Current liabilities 17,313
Long-term debt 1,065
Deferred credits and other liabilities 30,673
Total liabilities transferred to PNM 49,051

Net assets transferred – common stock redeemed $ 167,023

	Six Months Ended June 30,
	2008			2007
	(In thousands)
Cash Flow From Financing Activities:
Short-term borrowings		150,000			-
Short-term borrowings – affiliate		(1,304	)		27,200
Redemption of long-term debt		(148,935	)		(100,500	)
Equity contribution by parent		-			101,249
Other, net		(925	)		-
Net cash flows from financing activities		(1,164	)		27,949

Change in Cash and Cash Equivalents		(114	)		(2,508	)
Cash and Cash Equivalents at Beginning of Period		187			2,542
Cash and Cash Equivalents at End of Period	$	73		$	34

Supplemental Cash Flow Disclosures:
Interest paid, net of capitalized interest	$	10,112		$	14,127
Income taxes paid (refunded), net	$	(858	)	$	-


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.
Current assets	$	15,444
Other property and investments		10
Utility plant, net		96,468
Goodwill		102,775
Deferred charges		1,377
Total assets transferred to PNM		216,074

Current liabilities		17,313
Long-term debt		1,065
Deferred credits and other liabilities		30,673
Total liabilities transferred to PNM		49,051

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.

2024

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF ~~COMPREHENSIVE INCOME~~CHANGES IN COMMON STOCKHOLDER’S EQUITY

(Unaudited)

							Accumulated					Total
	Common Stock						Other					Common
	Number of		Aggregate		Paid-in		Comprehensive		Retained			Stockholder’s
	Shares		Value		Capital		Income		Earnings (Deficit)			Equity
					(Dollars in thousands)

Balance at December 31, 2007		6,358	$	64	$	427,320	$	823	$	5,241		$	433,448
Net earnings (loss)		-		-		-		-		(25,023	)		(25,023	)
Balance at June 30, 2008		6,358	$	64	$	427,320	$	823	$	(19,782	)	$	408,425

Three Months Ended

Nine Months Ended

September 30,

September 30,

2007

2006

2007

2006
(In thousands)

Net Earnings and Total Comprehensive Income
$ 10,228 $ 5,990 $ 15,400 $ 9,982

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

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
	2008			2007		2008			2007
	(In thousands)
Net Earnings (Loss) and Comprehensive Income	$	(28,753	)	$	4,234	$	(25,023	)	$	5,172

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

2126

PNM RESOURCES, INC. AND SUBSIDIARIES

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

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 management, the accompanying unaudited interim Condensed Consolidated Financial Statements reflect all normal and recurring accruals and adjustments that are necessary to present fairly the consolidated financial position at ~~September~~June 30, ~~2007~~2008 and December 31, ~~2006,~~2007, the consolidated results of operations and comprehensive income for the three months and ~~nine~~six months ended ~~September~~June 30, 2008 and 2007 and ~~2006 and~~ the consolidated ~~statements of~~ cash flows for the ~~nine~~six months ended ~~September~~June 30, ~~2007~~2008 and ~~2006.~~2007. The preparation of financial statements in conformity with ~~generally accepted accounting principles in the United States~~GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could ultimately differ from those estimated. 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 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 that are included in their respective ~~2006~~2007 Annual Reports on Form ~~10-K/A (Amendment No. 1).~~10-K.

Principles of Consolidation

The Condensed Consolidated Financial Statements of each of PNMR, PNM, and TNMP include their accounts and those of subsidiaries in which that entity owns a majority voting interest. PNMR’s primary subsidiaries are PNM, TNMP, First Choice and, through May 31, 2007, Altura. PNM consolidates the PVNGS Capital ~~Trust.~~Trust and Valencia. See Note 16. PNMR shared ~~services~~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, lease payments, 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 the 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~~2007 Condensed Consolidated Financial Statements and Notes thereto have been reclassified to conform to the ~~2007~~2008 financial statement presentation. ~~Income taxes, which previously had been separated between operating expense~~

Dividends on Common Stock

Dividends on PNMR’s common stock are declared by its Board. The timing of the declaration of dividends is dependent on the timing of meetings and other ~~income~~actions of the Board. This has historically resulted in dividends considered to be attributable to the second quarter of each year being declared through actions of the Board during the third quarter of the year. The Board declared dividends on common stock considered to be for the second quarter of $0.23 per share in July 2007. On August 11, 2008, the Board declared a dividend of $0.125 per share. The amounts declared in July 2007 and ~~deductions~~August 2008 are reflected as being in the second quarter and included in “Dividends Declared per Common Share” on the PNMR Condensed Consolidated Statements of Earnings ~~is being presented on~~(Loss). On August 12, 2008, PNM declared a ~~combined basis. In addition, certain sections on the Condensed Consolidated Balance Sheets have been rearranged in the current presentation.~~dividend payable to PNMR amounting to $40 million.

At December 31, 2006, certain income tax receivables and payables were shown on a net basis. 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.

2227

PNM RESOURCES, INC. AND SUBSIDIARIES

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

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(2)	Acquisitions and Dispositions

~~(2)~~

~~Acquisitions, Impairments,~~PNM Gas Sale; Termination of Cap Rock Acquisition

On January 12, 2008, PNM reached a definitive agreement to sell its natural gas operations, which comprise the PNM Gas segment, to NMGC, a subsidiary of Continental, for $620 million in cash. In a separate transaction conditioned upon the sale of the natural gas operations, PNMR proposed to acquire CRHC, Continental’s regulated Texas electric transmission and distribution business, for $202.5 million in cash. On July 22, 2008, PNMR and Continental agreed to terminate the agreement for the acquisition of CRHC. The termination agreement provides that Continental will pay PNMR $15.0 million, but only upon the closing of the PNM Gas transaction. PNMR expects to use the proceeds from the sale of PNM Gas to retire debt, fund future electric capital expenditures and for other corporate purposes. The agreement for the sale of PNM Gas contains a number of customary representations and warranties and indemnification provisions as well as closing conditions, including regulatory and third party approvals. The parties may terminate the agreement under certain circumstances and may be obligated to pay a termination fee in connection therewith. The sale of the natural gas operations is subject to, among other conditions, receiving approval from the NMPRC. On June 13, 2008, PNMR received notice of early termination of the waiting period required under the Hart-Scott-Rodino antitrust rules. Notification of early termination is considered antitrust clearance of the transaction. The Company filed testimony with the NMPRC in March 2008 for approvals required for the sale of its gas utility operations and for transition services to be provided to NMGC. Hearings have been rescheduled to begin September 12, 2008. Pending all approvals, the transaction is expected to close by the end of 2008. There are no material relationships between the PNMR and Continental parties other than in respect of the transactions described herein. See Note 14 for financial information concerning PNM Gas, which is classified as discontinued operations in the accompanying financial statements.

Twin Oaks Acquisition 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 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 obligated Altura to sell power through September 2007 at which time the second contract began and extends for three years. In comparing the pricing terms of the contractual obligations against the forward price of electricity in the relevant market at the acquisition date, PNMR concluded that the contracts were below market. In accordance with SFAS 141, the contracts were recorded at fair value to be amortized as an increase in operating revenue over the contract 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, ~~$94.9~~a liability of $147.3 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. For the second contract,~~ $29.6 million was recorded ~~in other deferred credits. As of May 31,~~for the second contract. During the three months and six months ended June 30, 2007, PNMR ~~had~~ amortized ~~$105.9~~$20.0 million and $35.0 million for the first contract and nothing for the second contract.

The Twin Oaks purchase agreement also included the development rights for a possible 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 as of April 1, 2007 and determined that the asset was impaired, resulting in a pre-tax loss of $3.4 million, which was recorded in second quarter energy production costs.

In 2006, the NMPRC approved a stipulation to allow PNM to convert its 141-megawatt combustion turbine Afton Generating Station to a combined cycle plant and bring Afton into retail rates in its next rate case, which was anticipated to be effective January 1, 2008. The Afton costs, including the costs of conversion, allowable for ratemaking were stipulated to be the lower of the actual cost or $187.6 million. The combined cycle plant was declared commercial on October 12, 2007 and is now anticipated to come into PNM’s retail rates effective approximately May 7, 2008. During the final start-up stages, problems were encountered that required piping modifications and significant problems were encountered with the control software and interfaces. Furthermore, the new turbine and generator experienced problems that required inspection of all five bearings. The combination of these issues caused delays and increased costs. The total Afton costs will exceed the stipulated maximum amount and the excess will not be recoverable in rates. Therefore, the Afton asset has been impaired, as defined under GAAP. The estimated pre-tax impairment charge, including future expenditures, is $19.5 million ($11.8 million after income taxes), which was recorded by PNM in energy production costs at September 30, 2007.

On June 29, 2007, a wholly-owned subsidiary of PNMR purchased 100% of a trust that 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 financial statements. The funds for the purchase were provided by PNMR. The lease remains in effect and this transaction has no impact on PNM’s consolidated financial statements.

~~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)~~

(3)

Segment Information

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

Effective as of December 31, 2007, management changed the methodology it uses to operate and ~~non-recurring items are included~~assess the business activities of the Company as described in the ~~Corporate and Other segment. As discussed below and effective January 1,~~ 2007 ~~TNMP’s New Mexico operations were transferred to PNM Electric. See Note 14.~~Annual Reports on Form 10-K. The ~~2006~~ segment information ~~does not reflect this transfer.~~presented below includes recasting prior period information to be consistent with the new methodology.

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

~~REGULATED OPERATIONS~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

PNM Electric

PNM Electric ~~is a regulated~~includes the retail electric utility operations of PNM that are subject to traditional rate regulation by the NMPRC. PNM Electric provides integrated electricity services ~~including~~that include the generation, transmission and distribution of electricity for retail electric customers in New Mexico ~~and~~as well as the sale of transmission to third ~~parties~~parties. PNM Electric includes the generation and sale of electricity into the wholesale market. This includes optimization of PNM’s jurisdictional assets as well as the capacity of its generating plants excluded from retail rates. Although the FERC has jurisdiction over the wholesale rates, they are not subject to traditional rate of return regulation. PNM Electric also includes the ~~PNM Wholesale segment.~~purchase power contract with Valencia, which is a variable interest entity and is consolidated by PNM. See Note 16.

TNMP Electric

TNMP Electric is a regulated utility operating in ~~Texas and, through December 31, 2006, in New Mexico.~~Texas. TNMP’s operations are subject to traditional rate of return 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 Gas

PNM Gas ~~is a regulated utility that~~ distributes natural gas to most of the major communities in New ~~Mexico.~~Mexico and is subject to traditional rate regulation by the NMPRC. 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.

As described in Note 2, 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 includes~~entered into an agreement to sell its gas operations on January 12, 2008. PNM ~~Wholesale~~Gas is reported as discontinued operations in the accompanying financial statements and through May 31, 2007, 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 certain aspects of the rates of PNM Wholesale, it is included in unregulated operations because PNM Wholesale is not ~~subject to traditional rate of return regulation. Twin Oaks is~~ included in the ~~consolidated~~segment information presented below. Financial information regarding PNM Gas is presented in Note 14.

Altura

The Altura segment includes the results of ~~operations for PNMR~~Twin Oaks from the date of its acquisition by PNMR on April 18, 2006 ~~through May 31, 2007, at which time Altura was contributed~~until its contribution to ~~EnergyCo.~~EnergyCo as of June 1, 2007. See ~~Notes~~Note 2 and Note 11. ~~Power from Twin Oaks is sold at wholesale through ERCOT.~~

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, it is ~~included in unregulated operations because First Choice is~~ not subject to traditional rate of return regulation. First Choice has also entered into speculative trading transactions in order to attempt to take advantage of market opportunities. As explained in Note 4, First Choice has closed out its speculative positions and has ended any further speculative trading due to market volatility and the deterioration of the forward basis market. On August 11, 2008, PNMR announced that it has decided to pursue strategic alternatives for First Choice.

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. EnergyCo’s revenues and expenses are not included in PNMR’s consolidated revenues and expenses or the following tables. See Notes 2 and 11.

2529

PNM RESOURCES, INC. AND SUBSIDIARIES

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

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~CORPORATE AND OTHER~~Corporate and Other

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

~~Adjustments related to EITF 03-11 are included in Corporate~~also reflects activities of the PNMR holding company, including earnings (loss) of EnergyCo and ~~Other. EITF 03-11 requires a net presentation of all realized gains~~interest expense on PNMR short-term 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 ability to repurchase and remarket previously sold capacity.long-term debt.

The following tables present summarized financial information for PNMR by reportable segment. Excluding PNM Gas, which is presented as discontinued operations, PNM has only one reporting segment. TNMP also operates in only one reportable segment. Therefore, tabular segment information is not presented for PNM and ~~PNM, as restated, by operating segment. Explanations for footnotes (a) through (g) follow the tables.~~TNMP.

2630

PNM RESOURCES, INC. AND SUBSIDIARIES

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

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

PNMR SEGMENT INFORMATION

~~PNMR SEGMENT INFORMATION~~

	Regulated									Unregulated													PNM			TNMP			First			Corporate
2008																							Electric			Electric			Choice			and Other			Consolidated
	PNM			TNMP									First			Corporate													(In thousands)
2007	Electric (d)			Electric (d)			PNM Gas			Wholesale			Choice			and Other				Consolidated
							(In thousands)
*Three Months Ended September 30, 2007:*
Three Months Ended June 30, 2008:
Operating revenues	$	203,083		$	31,405		$	59,537		$	204,125		$	177,694		$	(46,407	)	(a)	$	629,437		$	386,034		$	32,209		$	162,224		$	(157	)	$	580,310
Intersegment revenues		2,931			21,275			-			-			-			(24,206	)			-			24			14,909			-			(14,933	)		-
Total revenues		206,014			52,680			59,537			204,125			177,694			(70,613	)			629,437			386,058			47,118			162,224			(15,090	)		580,310
Cost of energy		67,771			7,544			33,958			211,162			159,179			(70,633	)	(a)		408,981			247,589			7,935			158,082			(14,908	)		398,698
Intersegment energy transfer		21,928			-			-			(21,928	)		-			-				-
Gross margin		116,315			45,136			25,579			14,891			18,515			20				220,456			138,469			39,183			4,142			(182	)		181,612
Operating expenses		70,816			16,695			23,775			13,764			13,583			23,413		(f)		162,046			147,210			51,969			72,803			(2,260	)		269,722
Depreciation and amortization		16,448			7,081			5,869			3,054			470			3,792				36,714			20,896			8,777			579			4,398			34,650
Operating income (loss)		29,051			21,360			(4,065	)		(1,927	)		4,462			(27,185	)			21,696			(29,637	)		(21,563	)		(69,240	)		(2,320	)		(122,760	)

Interest income		8,330			24			(91	)		1,750			489			(449	)			10,053			4,878			4			393			(863	)		4,412
Equity in net earnings of EnergyCo		-			-			-			-			-			10,556				10,556
Equity in net earnings (loss) of EnergyCo																								-			-			-			(2,523	)		(2,523	)
Other income (deductions)		2,308			372			92			1,682			99			(1,158	)			3,395			(2,185	)		596			(7	)		(2,054	)		(3,650	)
Net interest charges		(9,001	)		(5,768	)		(3,729	)		(3,544	)		(638	)		(12,575	)			(35,255	)		(17,623	)		(4,365	)		(320	)		(9,712	)		(32,020	)

Segment earnings before income taxes		30,688			15,988			(7,793	)		(2,039	)		4,412			(30,811	)			10,445
Segment earnings (loss) before income taxes																								(44,567	)		(25,328	)		(69,174	)		(17,472	)		(156,541	)

Income taxes (benefit)		12,149			5,576			(3,085	)		(807	)		1,667			(13,427	)	(f)		2,073			2,441			3,425			(8,755	)		(7,536	)		(10,425	)
Preferred stock dividend requirements																								132			-			-			-			132

Segment net earnings (loss)	$	18,539		$	10,412		$	(4,708	)	$	(1,232	)	$	2,745		$	(17,384	)		$	8,372
Segment net earnings (loss) from continuing operations																							$	(47,140	)	$	(28,753	)	$	(60,419	)	$	(9,936	)	$	(146,248	)

*Nine Months Ended September 30, 2007:*
Six Months Ended June 30, 2008:
Operating revenues	$	540,702		$	82,046		$	351,162		$	515,689		$	463,214		$	(89,194	)	(a)	$	1,863,619		$	638,673		$	60,027		$	246,393		$	(281	)	$	944,812
Intersegment revenues		6,565			55,098			92			17,048			78			(78,881	)			-			50			29,319			-			(29,369	)		-
Total revenues		547,267			137,144			351,254			532,737			463,292			(168,075	)			1,863,619			638,723			89,346			246,393			(29,650	)		944,812
Cost of energy		200,154			21,936			240,766			453,148			395,858			(167,828	)	(a)		1,144,034			383,284			15,747			263,351			(29,303	)		633,079
Intersegment energy transfer		19,898			-			-			(19,898	)		-			-				-
Gross margin		327,215			115,208			110,488			99,487			67,434			(247	)			719,585			255,439			73,599			(16,958	)		(347	)		311,733
Operating expenses		217,029			53,064			75,308			58,690			41,701			34,265		(b,f)		480,057			273,793			67,443			88,258			(4,716	)		424,778
Depreciation and amortization		49,220			21,122			18,114			17,000			1,411			9,984				116,851			41,866			17,136			1,049			8,635			68,686
Operating income (loss)		60,966			41,022			17,066			23,797			24,322			(44,496	)			122,677			(60,220	)		(10,980	)		(106,265	)		(4,266	)		(181,731	)

Interest income		20,101			888			362			4,486			1,506			539				27,882			10,969			5			870			(1,902	)		9,942
Equity in net earnings of EnergyCo		-			-			-			-			-			12,166				12,166
Equity in net earnings (loss) of EnergyCo																								-			-			-			(27,606	)		(27,606	)
Other income (deductions)		3,490			1,345			265			2,977			66			(4,600	)			3,543			(7,656	)		992			(72	)		(3,611	)		(10,347	)
Net interest charges		(28,187	)		(19,717	)		(9,683	)		(19,261	)		(1,814	)		(24,332	)			(102,994	)		(31,726	)		(9,354	)		(614	)		(18,161	)		(59,855	)

Segment earnings before income taxes		56,370			23,538			8,010			11,999			24,080			(60,723	)			63,274
Segment earnings (loss) before income taxes																								(88,633	)		(19,337	)		(106,081	)		(55,546	)		(269,597	)

Income taxes (benefit)		22,317			7,954			3,171			4,750			9,086			(42,281	)	(b,c,f)		4,997			(14,648	)		5,686			(21,597	)		(21,918	)		(52,477	)
Preferred stock dividend requirements																								264			-			-			-			264

Segment net earnings (loss)	$	34,053		$	15,584		$	4,839		$	7,249		$	14,994		$	(18,442	)		$	58,277
Segment net earnings (loss) from continuing operations																							$	(74,249	)	$	(25,023	)	$	(84,484	)	$	(33,628	)	$	(217,384	)

*At September 30, 2007:*
Total assets	$	2,488,262		$	988,470		$	657,067		$	369,085		$	369,817		$	975,768			$	5,848,469
At June 30, 2008:
Total assets*																							$	3,549,985		$	949,879		$	544,531		$	463,284		$	5,507,679
Goodwill	$	102,775		$	261,121		$	-		$	-		$	131,768		$	-			$	495,664		$	51,632		$	226,665		$	88,559		$	-		$	366,856

* Excludes total assets of PNM Gas discontinued operations of $619,114.

2731

PNM RESOURCES, INC. AND SUBSIDIARIES

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

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

PNMR SEGMENT INFORMATION

~~PNMR SEGMENT INFORMATION~~

Regulated

Unregulated

PNM

TNMP

First

Corporate

2006

Electric (d)

Electric (d)

PNM Gas

Wholesale

Choice

and Other

Consolidated

(In thousands)
Three Months Ended September 30, 2006:

Operating revenues $ 159,301 $ 50,961 $ 69,001 $ 193,150 $ 186,972 $ (9,220 ) (a) $ 650,165
Intersegment revenues 2,414 19,280 245 11,551 - (33,490 ) -
Total revenues
161,715 70,241 69,246 204,701 186,972 (42,710 ) 650,165
Cost of energy 55,271 27,987 43,889 135,986 146,337 (42,782 ) (a) 366,688
Intersegment energy transfer (5,861 ) - - 5,861 - - -
Gross margin
112,305 42,254 25,357 62,854 40,635 72 283,477
Operating expenses 66,808 20,877 25,546 15,150 17,307 829 (e) 146,517
Depreciation and amortization 15,241 7,899 6,007 7,894 510 2,348 39,899
Operating income (loss)
30,256 13,478 (6,196 ) 39,810 22,818 (3,105 ) 97,061

Interest income 6,380 296 668 1,346 877 335 9,902
Other income (deductions) 224 2,406 79 (45 ) (57 ) (1,053 ) 1,554
Net interest charges (9,037 ) (7,294 ) (3,115 ) (12,226 ) (166 ) (8,333 ) (40,171 )

Segment earnings before income taxes
27,823 8,886 (8,564 ) 28,885 23,472 (12,156 ) 68,346

Income taxes (benefit) 11,015 2,896 (3,391 ) 11,436 8,358 (5,488 ) (e) 24,826

Segment net earnings (loss)
$ 16,808 $ 5,990 $ (5,173 ) $ 17,449 $ 15,114 $ (6,668 ) $ 43,520

Nine Months Ended September 30, 2006:

Operating revenues $ 439,977 $ 141,367 $ 345,346 $ 499,281 $ 446,962 $ (20,298 ) (a) $ 1,852,635
Intersegment revenues 6,852 53,015 386 39,402 - (99,655 ) -
Total revenues
446,829 194,382 345,732 538,683 446,962 (119,953 ) 1,852,635
Cost of energy 144,053 77,810 243,748 398,732 354,745 (119,928 ) (a) 1,099,160
Intersegment energy transfer (2,515 ) - - 2,515 - - -
Gross margin
305,291 116,572 101,984 137,436 92,217 (25 ) 753,475
Operating expenses 201,174 63,366 76,516 45,315 45,852 3,448 (e) 435,671
Depreciation and amortization 44,529 23,462 17,921 18,210 1,518 6,542 112,182
Operating income (loss)
59,588 29,744 7,547 73,911 44,847 (10,015 ) 205,622

Interest income 19,517 632 2,401 3,948 1,385 1,086 28,969
Other income (deductions) 638 6,632 169 991 (292 ) (1,795 ) 6,343
Net interest charges (26,580 ) (21,792 ) (9,203 ) (25,559 ) (638 ) (21,460 ) (105,232 )

Segment earnings before income taxes
53,163 15,216 914 53,291 45,302 (32,184 ) 135,702

Income taxes (benefit) 21,047 5,221 362 21,109 16,118 (13,659 ) (e) 50,198

Segment net earnings (loss)
$ 32,116 $ 9,995 $ 552 $ 32,182 $ 29,184 $ (18,525 ) $ 85,504

At September 30, 2006:

Total assets
$ 1,992,550 $ 1,151,141 $ 631,729 $ 1,086,354 $ 405,997 $ 575,615 $ 5,843,386
Goodwill
$ - $ 363,763 $ - $ - $ 131,678 $ - $ 495,441

2007	PNM			TNMP						First			Corporate
	Electric			Electric			Altura			Choice			and Other			Consolidated
Three Months Ended June 30, 2007							(In thousands)
Operating revenues	$	300,331		$	26,480		$	28,592		$	150,002		$	164		$	505,569
Intersegment revenues		-			17,056			-			31			(17,087	)		-
Total revenues		300,331			43,536			28,592			150,033			(16,923	)		505,569
Cost of energy		185,346			7,221			9,897			125,863			(16,862	)		311,465
Gross margin		114,985			36,315			18,695			24,170			(61	)		194,104
Operating expenses		89,653			17,719			5,066			12,961			8,587			133,986
Depreciation and amortization		20,729			7,041			3,074			470			2,908			34,222
Operating income (loss)		4,603			11,555			10,555			10,739			(11,556	)		25,896

Interest income		7,192			776			28			534			(947	)		7,583
Equity in net earnings of EnergyCo		-			-			-			-			2,272			2,272
Other income (deductions)		2,073			724			1			8			(3,538	)		(732	)
Net interest charges		(12,741	)		(6,871	)		(3,066	)		(1,061	)		(3,255	)		(26,994	)

Segment earnings (loss) before income taxes		1,127			6,184			7,518			10,220			(17,024	)		8,025

Income taxes (benefit)		350			1,950			2,976			3,854			(23,065	)		(13,935	)
Preferred stock dividend requirements		132			-			-			-			-			132

Segment earnings from continuing operations	$	645		$	4,234		$	4,542		$	6,366		$	6,041		$	21,828

Six Months Ended June 30, 2007
Operating revenues	$	540,683		$	50,641		$	65,395		$	285,520		$	374		$	942,613
Intersegment revenues		-			33,823			-			78			(33,901	)		-
Total revenues		540,683			84,464			65,395			285,598			(33,527	)		942,613
Cost of energy		288,519			14,392			22,063			236,679			(33,376	)		528,277
Gross margin		252,164			70,072			43,332			48,919			(151	)		414,336
Operating expenses		177,910			36,369			17,326			28,118			11,199			270,922
Depreciation and amortization		41,484			14,041			7,684			941			4,913			69,063
Operating income (loss)		32,770			19,662			18,322			19,860			(16,263	)		74,351

Interest income		14,898			864			146			1,017			450			17,375
Equity in net earnings of EnergyCo		-			-			-			-			1,610			1,610
Other income (deductions)		2,541			973			-			(34	)		(3,239	)		241
Net interest charges		(25,887	)		(13,949	)		(8,564	)		(1,176	)		(12,319	)		(61,895	)

Segment earnings (loss) before income taxes		24,322			7,550			9,904			19,667			(29,761	)		31,682

Income taxes (benefit)		9,187			2,378			3,921			7,419			(28,459	)		(5,554	)
Preferred stock dividend requirements		264			-			-			-			-			264

Segment earnings (loss) from continuing operations	$	14,871		$	5,172		$	5,983		$	12,248		$	(1,302	)	$	36,972

At June 30, 2007:
Total Assets*	$	3,427,895		$	1,002,001		$	-		$	409,602		$	363,288		$	5,202,786
Goodwill	$	102,601		$	260,144		$	-		$	131,768		$	-		$	494,513

* Excludes total assets of PNM Gas discontinued operations of $590,167.

2832

PNM RESOURCES, INC. AND SUBSIDIARIES

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

TEXAS-NEW MEXICO POWER COMPANYAND 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 September 30, 2007:

Operating revenues $ 203,083 $ 59,537 $ 204,125 $ (46,762 ) (a) $ 419,983
Intersegment revenues 2,931 $ - - (2,931 ) -
Total revenues
206,014 59,537 204,125 (49,693 ) 419,983
Cost of energy 67,771 33,958 211,162 (49,668 ) (a) 263,223
Intersegment energy transfer 21,928 - (21,928 ) - -
Gross margin
116,315 25,579 14,891 (25 ) 156,760
Operating expenses 70,816 23,775 13,764 23,636 (g) 131,991
Depreciation and amortization 16,448 5,869 3,054 633 26,004
Operating income (loss)
29,051 (4,065 ) (1,927 ) (24,294 ) (1,235 )

Interest income 8,330 (91 ) 1,750 397 10,386
Other income (deductions) 2,308 92 1,682 5 4,087
Net interest charges (9,001 ) (3,729 ) (3,544 ) (616 ) (16,890 )

Segment earnings before income taxes
30,688 (7,793 ) (2,039 ) (24,508 ) (3,652 )

Income taxes (benefit) 12,149 (3,085 ) (807 ) (10,019 ) (g) (1,762 )

Segment net earnings (loss)
$ 18,539 $ (4,708 ) $ (1,232 ) $ (14,489 ) $ (1,890 )

Nine Months Ended September 30, 2007:

Operating revenues $ 540,702 $ 351,162 $ 450,294 $ (89,924 ) (a) $ 1,252,234
Intersegment revenues 6,565 92 17,048 (23,705 ) -
Total revenues
547,267 351,254 467,342 (113,629 ) 1,252,234
Cost of energy 200,154 240,766 431,084 (113,486 ) (a) 758,518
Intersegment energy transfer 19,898 - (19,898 ) - -
Gross margin
327,215 110,488 56,156 (143 ) 493,716
Operating expenses 217,029 75,308 41,365 23,288 (g) 356,990
Depreciation and amortization 49,220 18,114 9,316 1,912 78,562
Operating income (loss)
60,966 17,066 5,475 (25,343 ) 58,164

Interest income 20,101 362 4,339 936 25,738
Other income (deductions) 3,490 265 2,978 (197 ) 6,536
Net interest charges (28,187 ) (9,683 ) (10,738 ) (13 ) (48,621 )

Segment earnings before income taxes
56,370 8,010 2,054 (24,617 ) 41,817

Income taxes (benefit) 22,317 3,171 813 (10,399 ) (g) 15,902

Segment net earnings (loss)
$ 34,053 $ 4,839 $ 1,241 $ (14,218 ) $ 25,915

At September 30, 2007:

Total assets
$ 2,506,777 $ 663,831 $ 369,085 $ 518,630 $ 4,058,323
Goodwill
$ 102,775 $ - $ - $ - $ 102,775

~~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 September 30, 2006:

Operating revenues $ 159,301 $ 69,001 $ 141,340 $ (9,418 ) (a) $ 360,224
Intersegment revenues 2,414 245 11,551 (2,533 ) 11,677
Total revenues
161,715 69,246 152,891 (11,951 ) 371,901
Cost of energy 55,271 43,889 121,730 (11,922 ) (a) 208,968
Intersegment energy transfer (5,861 ) - 5,861 - -
Gross margin
112,305 25,357 25,300 (29 ) 162,933
Operating expenses 66,808 25,546 10,573 (242 ) 102,685
Depreciation and amortization 15,241 6,007 3,408 717 25,373
Operating income (loss)
30,256 (6,196 ) 11,319 (504 ) 34,875

Interest income 6,380 668 1,268 246 8,562
Other income (deductions) 224 79 (44 ) (195 ) 64
Net interest charges (9,037 ) (3,115 ) (4,020 ) 1,148 (15,024 )

Segment earnings before income taxes
27,823 (8,564 ) 8,523 695 28,477

Income taxes (benefit) 11,015 (3,391 ) 3,374 (37 ) 10,961

Segment net earnings (loss)
$ 16,808 $ (5,173 ) $ 5,149 $ 732 $ 17,516

Nine Months Ended September 30, 2006:

Operating revenues $ 439,977 $ 345,346 $ 414,714 $ (20,801 ) (a) $ 1,179,236
Intersegment revenues 6,852 386 39,402 (6,865 ) $ 39,775
Total revenues
446,829 345,732 454,116 (27,666 ) 1,219,011
Cost of energy 144,053 243,748 373,363 (27,524 ) (a) 733,640
Intersegment energy transfer (2,515 ) - 2,515 - -
Gross margin
305,291 101,984 78,238 (142 ) 485,371
Operating expenses 201,174 76,516 37,285 (2,378 ) 312,597
Depreciation and amortization 44,529 17,921 9,760 2,307 74,517
Operating income (loss)
59,588 7,547 31,193 (71 ) 98,257

Interest income 19,517 2,401 3,823 844 26,585
Other income (deductions) 638 169 977 (807 ) 977
Net interest charges (26,580 ) (9,203 ) (11,683 ) 4,123 (43,343 )

Segment earnings before income taxes
53,163 914 24,310 4,089 82,476

Income taxes 21,047 362 9,624 1,091 32,124

Segment net earnings
$ 32,116 $ 552 $ 14,686 $ 2,998 $ 50,352

At September 30, 2006:

Total assets
$ 2,008,424 $ 631,729 $ 392,788 $ 461,802 $ 3,494,743

~~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 above tables are as follows:~~

~~(a)~~(4)

~~Reflects EITF 03-11 impact of $46.8 million~~Energy Related Derivative Contracts and ~~$9.4 million for the three months ended September 30, 2007 and 2006 and $89.9 million and $20.8 million for the nine months ended September 30, 2007 and 2006.~~

~~(b)~~

For the nine months ended September 30, 2007, includes EnergyCo formation costs of $4.2 million, impairment loss on Twin Oaks intangible assets of $3.4 million, and a loss related to the contribution of Altura to EnergyCo of $3.6 million (all included in operating expenses) and an income tax benefit of $4.4 million (included in income 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 in 2007, and excluded from PNM Electric and included in TNMP Electric in 2006.

~~(e)~~

For the three months and nine months ended September 30, 2006, includes TNP and Twin Oaks acquisition integration costs of $0.9 million and $3.7 million and an income tax benefit of $0.3 million and $1.4 million in income taxes.

~~(f)~~

For the three months and nine months ended September 30, 2007, includes costs of the Afton impairment of $19.5 million (See Note 2) and the business improvement plan of $12.6 million (See Note 17) (included in operating expenses) and an income tax benefit of $12.7 million (included in income taxes).

~~(g)~~

For the three months and nine months ended September 30, 2007, includes costs of the Afton impairment of $19.5 million (See Note 2) and the business improvement plan of $6.9 million (See Note 17) (included in operating expenses) and an income tax benefit of $10.5 million (included in income taxes).Fair Value Disclosures

~~(4)~~

Energy Related Derivative Contracts

~~OVERVIEW~~Overview

Under derivative accounting and related rules for energy contracts, the Company accounts for its various derivative instruments for the purchase and sale of energy ~~differently~~ based on the Company’s intent. Energy contracts that do not qualify for the normal sales and purchases exception are recorded at fair ~~value on the Condensed Consolidated Balance Sheets.~~value. Note 8 of Notes to Consolidated Financial Statements in the ~~2006~~2007 Annual Reports on Form ~~10-K/A (Amendment No. 1)~~10-K contains information regarding energy related derivative contracts. See Note 7 for additional information regarding interest rate ~~swaps.~~swaps, which are fair value hedges.

For derivative transactions meeting the definition of a cash flow or fair value 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 and the methods utilized to assess the effectiveness of the hedges.

~~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 contracts recorded at fair value that do not qualify or are not designated for hedge accounting are classified as trading transactions or economic hedges. Trading transactions are defined as derivative instruments used to take advantage of existing market opportunities. Changes in the fair value of trading transactions are reflected on a net basis in operating revenues. Economic hedges are defined as derivative instruments, including long-term power agreements, used to hedge generation assets and purchase power costs. Changes in the fair value of economic hedges 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. Changes in the fair value of contracts qualifying for cash flow hedge accounting 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~~extent effective. Ineffectiveness gains and ~~liabilities on~~losses were immaterial for 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.~~three months and six months ended June 30, 2008 and 2007. The amounts shown as current assets and current liabilities relate to contracts that will be settled in the next twelve months. Gains or losses related to cash flow hedge instruments are reclassified from accumulated other comprehensive income when the hedged transaction settles and impacts earnings. Based on market prices at ~~September~~June 30, ~~2007,~~2008, after-tax gains of ~~$2.5~~less than $0.1 million for PNMR and ~~$3.1~~losses of $8.3 million for PNM would be reclassified from other comprehensive income into earnings during the next twelve months. However, the actual amount reclassified into earnings ~~could~~will vary due to future changes in market prices. As of ~~September~~June 30, ~~2007,~~2008, the maximum length of time over which the Company is hedging its exposure to the variability in future cash flows is through ~~September 2008.~~December 31, 2010.

~~GAAP defines~~The contracts recorded at fair value that do not qualify or are not designated for hedge accounting are classified as either trading transactions or economic hedges. Trading transactions are defined as derivative instruments that are either speculative and expose the Company to market risk or transactions that lock in margin with no forward market risk and are not economic hedges. Changes in the fair value of trading transactions are reflected on a ~~financial instrument~~net basis in operating revenues. Economic hedges are defined as derivative instruments, including long-term power agreements, used to hedge generation assets, purchased power costs, and customer load requirements. Changes in the ~~amount at which the instrument could be exchanged~~fair value of economic hedges are reflected in ~~a current transaction between willing parties, other than~~results of operations, with changes related to sales contracts included in ~~a forced sale or liquidation.~~ operating revenues and changes related to purchase contracts included in cost of energy.

Fair value is based on current market quotes as available and ~~are~~is supplemented by modeling techniques and assumptions made by the Company to the extent quoted market prices or volatilities are not available. Generally, market data to value these instruments is available for up to five years for gas swaps and electricity contracts and up to 18 months for options. The remaining periods are referred to as the illiquid period and are valued using internally developed pricing data. The Company regularly assesses the validity and availability of pricing data for the illiquid period of its derivative transactions. Although management uses its best judgment in estimating the fair value of these ~~financial~~ instruments, there are inherent limitations in any estimation technique.

~~The~~Effective January 1, 2008, the Company ~~has entered into~~adopted SFAS 157, SFAS 159, and FSP FIN 39-1. SFAS 157 defines fair value, establishes a ~~limited number of derivative energy contracts with terms~~framework for measuring fair value under GAAP, and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that ~~extend through 15 years. Observable~~would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market ~~data is not available~~ for the ~~illiquid period~~asset or liability in an orderly transaction between market participants on the measurement date. FSP 157-2 delayed the effective date of these contracts.. In the third quarter of 2007, the Company refined the modeling technique used to value the impacts of the illiquid periods and the utilization of net present value in fair valuing its portfolio. In the second quarter of 2007, PNM implemented new market price curve models and assumptions. The cumulative effect of these changes in valuation is accounted for as a change in accounting estimate under SFAS 154. The effect of the change in estimate was a decrease to net earnings for PNMR and PNM of $1.3 million and $2.5 million for the three and nine months ended September 30, 2007, which is $0.02 and $0.03 per diluted share for PNMR.

~~PNM recognized an ineffectiveness loss on its fair value hedge of $0.9 million in the nine months ended September 30, 2007, which is included in operating revenues. Ineffectiveness~~157 for certain ~~cash flow hedges was immaterial during the nine months ended September 30, 2007.~~nonfinancial assets and nonfinancial liabilities measured on a nonrecurring basis, primarily

3233

PNM RESOURCES, INC. AND SUBSIDIARIES

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

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

goodwill and other intangible assets, and the Company has not elected to early adopt SFAS 157 for these items. SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. FSP FIN 39-1 permits a reporting entity to offset fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting arrangement and to offset fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against fair value amounts recognized for derivative instruments in accordance with FSP FIN 39-1.

Prior to January 1, 2008, the Company deferred gains and losses at inception of certain derivative contracts whose fair value was not evidenced by observable market data in accordance with EITF 02-3. For those gains and losses not evidenced by observable market data, the transaction price was used as the fair value of the derivative contract. Any difference between the transaction price and the model fair value was considered an unrecognized gain or loss at inception of the contract. These unrecognized gains and losses were recorded in income as the contracts settled. The adoption of SFAS 157 on January 1, 2008, eliminated the deferral of these gains and losses resulting in the recognition of previously deferred gains and losses as a net after-tax increase of $10.4 million in the beginning balance of retained earnings for both PNMR and PNM and had no impact on TNMP.

As stated in SFAS 157, valuations of derivative assets and liabilities must take into account nonperformance risk including the effect of the Company’s own credit standing. Nonperformance risk refers to the risk that the obligation will not be fulfilled and affects the value at which the liability is transferred. Effective January 1, 2008, the Company updated its methodology to include the impact of the nonperformance risk and its own credit standing. The Company did not elect to irrevocably fair value any additional financial assets and liabilities under SFAS 159 and did not elect to offset fair values of its derivative instruments under FSP FIN 39-1.

At June 30, 2008, amounts recognized for the right to reclaim cash collateral are $43.9 million for PNMR and $8.5 million for PNM. In addition, obligations to return cash collateral were $2.2 million for PNMR and none for PNM.

The following tables do not include activity related to PNM Gas. See Note 14.

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

PNMR

PNMR’s commodity derivative instruments are summarized as follows:

	September 30,			December 31,			September 30,			December 31,			June 30,			December 31,			June 30,			December 31,
	2007			2006			2007			2006			2008			2007			2008			2007
Type of Derivative	Mark-to-Market Instruments						Hedge Instruments						Mark-to-Market Instruments						Hedge Instruments
				(In thousands)												(In thousands)
Current Assets
Energy contracts	$	14,568		$	17,773		$	2,075		$	7,208		$	92,621		$	14,486		$	-		$	864
Gas fixed-for-float swaps and futures		33,251			21,875			1,483			4,655
Swaps and futures														85,341			25,653			8,111			524
Options		2,973			4,032			160			-			46,564			7,372			12,976			358
PGAC portion of options, swaps and hedges		-			-			10,449			16,748
Total current assets		50,792			43,680			14,167			28,611			224,526			47,511			21,087			1,746

Deferred Charges
Energy contracts		4,123			2,666			-			26,991			18,964			14,133			-			-
Gas fixed-for-float swaps		16,790			7,288			2,026			1,872
Swaps and futures														19,668			26,898			731			-
Options		5,051			1,028			-			-			-			4,663			-			-
PGAC portion of options, swaps and hedges		-			-						3,337
Total deferred charges		25,964			10,982			2,026			32,200			38,632			45,694			731			-

Total Assets		76,756			54,662			16,193			60,811			263,158			93,205			21,818			1,746

Current Liabilities
Energy contracts		(15,237	)		(16,499	)		-			-			(145,464	)		(19,842	)		(16,911	)		-
Gas fixed-for-float swaps		(35,062	)		(21,518	)		(777	)		(6,845	)
Swaps and futures														(65,827	)		(25,308	)		(899	)		(1,058	)
Options		(7,124	)		(4,003	)		(462	)		(109	)		(34,137	)		(7,594	)		-			(30	)
Regulatory liabilities for gas off-system
sales, fixed-for-float swaps and forward
physical trades		(615	)		-			-			-
PGAC portion of options, swaps and hedges		-			-			(10,449	)		(16,748	)
Total current liabilities		(58,038	)		(42,020	)		(11,688	)		(23,702	)		(245,428	)		(52,744	)		(17,810	)		(1,088	)

Long-term Liabilities																	-						-
Energy contracts		(7,944	)		(7,472	)		-			(154	)		(14,017	)		(42,009	)		(9,895	)		-
Gas fixed-for-float swaps		(3,253	)		(862	)		(41	)		(1,915	)
Swaps and futures														(16,815	)		(4,465	)		(42	)		(32	)
Options		(19,673	)		(842	)		-			-			-			(8,700	)		-			-
PGAC portion of options, swaps and hedges		-			-			-			(3,337	)
Total long-term liabilities		(30,870	)		(9,176	)		(41	)		(5,406	)		(30,832	)		(55,174	)		(9,937	)		(32	)

Total Liabilities		(88,908	)		(51,196	)		(11,729	)		(29,108	)		(276,260	)		(107,918	)		(27,747	)		(1,120	)

Net Total Assets and Liabilities	$	(12,152	)	$	3,466		$	4,464		$	31,703		$	(13,102	)	$	(14,713	)	$	(5,929	)	$	626

First Choice Trading Activities

In 2007, First Choice entered into a series of forward trades that arbitraged basis differentials among certain ERCOT delivery zones. During the three months ended March 31, 2008, these trades were negatively affected by extreme transmission congestion within the ERCOT market. This congestion resulted in historically high basis differences between the various delivery zones. As a result, in the first quarter of 2008, First Choice recorded a total pre-tax loss of $47.1 million in the trading margins from these speculative trades that is reflected in electric revenues. Because of continued market volatility and the concern that the forward basis market would continue to deteriorate, First Choice decided to end any further speculative trading. In the second quarter of 2008, First Choice incurred an additional $1.9 million loss to close out remaining speculative positions, including transaction costs. Of the speculative trading losses, $23.4 million has not cash settled and represents unrealized losses on its remaining forward positions at June 30, 2008. The majority of these positions will cash settle before December 31, 2008. No significant additional costs are expected related to speculative trading.

3335

PNM RESOURCES, INC. AND SUBSIDIARIES

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

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

PNM

PNM’s commodity derivative instruments are summarized as follows:

	September 30,			December 31,			September 30,			December 31,			June 30,			December 31,			June 30,			December 31,
	2007			2006			2007			2006			2008			2007			2008			2007
Type of Derivative	Mark-to-Market Instruments						Hedge Instruments						Mark-to-Market Instruments						Hedge Instruments
				(In thousands)												(In thousands)
Current Assets
Energy contracts	$	12,388		$	16,374		$	2,075		$	1,057		$	620		$	2,587		$	-		$	864
Gas fixed-for-float swaps		12,173			1,950			1,418			1,615
Swaps and futures														13,276			6,650			4,031			422
Options		2,178			2,986			-			-			12,726			4,336			-			-
PGAC portion of options, swaps and hedges		-			-			10,449			16,748
Total current assets		26,739			21,310			13,942			19,420			26,622			13,573			4,031			1,286

Deferred Charges
Energy contracts		552			2,666			-			-			954			9,443			-			-
Gas fixed-for-float swaps		14,271			7,101			2,026			1,872
Swaps and futures														6,007			23,253			-			-
Options		4,835			825			-			-			-			4,663			-			-
PGAC portion of options, swaps and hedges		-			-			-			3,337
Total deferred charges		19,658			10,592			2,026			5,209			6,961			37,359			-			-

Total Assets		46,397			31,902			15,968			24,629			33,583			50,932			4,031			1,286

Current Liabilities
Energy contracts		(10,030	)		(10,928	)		-			-			(6,251	)		(6,872	)		(16,911	)		-
Gas fixed-for-float swaps		(17,998	)		(6,440	)		(397	)		(2,872	)
Swaps and futures														(14,723	)		(6,037	)		(842	)		(868	)
Options		(5,285	)		(3,255	)		-			-			-			(4,119	)		-			-
Regulatory liabilities for gas off-system
sales, fixed-for-float swaps and forward
physical trades		(615	)		-			-			-
PGAC portion of options, swaps and hedges		-			-			(10,449	)		(16,748	)
Total current liabilities		(33,928	)		(20,623	)		(10,846	)		(19,620	)		(20,974	)		(17,028	)		(17,753	)		(868	)

Long-term Liabilities
Energy contracts		(4,272	)		(7,472	)		-			(154	)		(185	)		(38,172	)		(9,895	)		-
Gas fixed-for-float swaps		(960	)		(421	)		(41	)		(1,915	)
Swaps and futures														-			(693	)		(42	)		(32	)
Options		(19,595	)		(801	)		-			-			-			(8,700	)		-			-
PGAC portion of options, swaps and hedges					-			-			(3,337	)
Total long-term liabilities		(24,827	)		(8,694	)		(41	)		(5,406	)		(185	)		(47,565	)		(9,937	)		(32	)

Total Liabilities		(58,755	)		(29,317	)		(10,887	)		(25,026	)		(21,159	)		(64,593	)		(27,690	)		(900	)

Net Total Assets and Total Liabilities	$	(12,358	)	$	2,585		$	5,081		$	(397	)	$	12,424		$	(13,661	)	$	(23,659	)	$	386

Sale of Wholesale Contracts

On January 18, 2008, PNM entered into an agreement to sell certain wholesale power, natural gas and transmission contracts. These contracts represent a significant portion of the wholesale activity portfolio of PNM Electric, and include several long-term sales and purchase power agreements. Included in the sales agreement were the Tri-State Pyramid Unit 4 operating lease and certain transmission agreements, which were not considered derivative instruments under SFAS 133. The derivative contracts included in the sale were fair valued and reflected in the above table at December 31, 2007 as current assets of $6.3 million, deferred charges of $35.8 million, current liabilities of $10.7 million, and long-term liabilities of $47.6 million. In connection with the adoption of SFAS 157, pre-tax gains on these contracts amounting to $17.2 million were recorded as an adjustment to January 1, 2008 retained earnings. On June 19, 2008 PNM completed the sale for $6.1 million. PNM recognized gains on these contracts of $2.9 million and $5.1 million in the three months and six months ended June 30, 2008. PNM provided the buyer with a $10 million letter of credit for 18 months in connection with PNM’s representations regarding the contracts.

3436

PNM RESOURCES, INC. AND SUBSIDIARIES

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

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Sale of Power from PVNGS Unit 3

In April 2008, PNM entered into three separate contracts for the sale of capacity and energy related to its entire ownership interest in PVNGS Unit 3, which is 135 MW. Under two of the contracts, PNM will sell 90 MW of firm capacity and energy. Under the remaining contract, PNM will sell 45 MW of unit contingent capacity and energy. The term of the contracts is May 1, 2008 through December 31, 2010. Under the two firm contracts, the two buyers made prepayments of $40.6 million and $30.0 million. These amounts are recorded to a deferred revenue account and amortized over the life of the contracts. The amount to be amortized in the next 12 months is included in other current liabilities in the Condensed Consolidated Balance Sheet and the remainder is included in other deferred credits. The prepayments received under the firm contracts, as well as required subsequent monthly payments on them, are shown as a financing activity in the Condensed Consolidated Statement of Cash Flows as required by GAAP. The firm contracts are considered energy derivatives and a loss of $4.8 million was recognized at inception. Future changes in the fair value of the firm contracts will be accounted for as cash flow hedges and included in accumulated other comprehensive income. The contingent contract is accounted for as a normal sale.

~~(5)~~

Fair Value Disclosures

Effective January 1, 2008, the Company determines the fair market values of its instruments based on the fair value hierarchy established in SFAS 157, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. The fair values determinations at June 30, 2008 are as follows:

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Fair Value Measurements

	Total			Quoted Prices in Active Market for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
				(In thousands)
PNMR
Assets
Commodity derivatives	$	284,976		$	116,113		$	148,503		$	20,360
NDT		130,806			88,216			42,590			-
Rabbi Trust		1,841			1,831			10			-
Interest rate swaps		803			-			803			-
Total Assets		418,426			206,160			191,906			20,360

Liabilities
Commodity derivatives		(304,007	)		(72,704	)		(230,806	)		(497	)
Interest rate swaps		(803	)		-			(803	)		-
Total Liabilities		(304,810	)		(72,704	)		(231,609	)		(497	)
Net Total Assets and Total Liabilities	$	113,616		$	133,456		$	(39,703	)	$	19,863

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

PNM
Assets
Commodity derivatives	$	37,614		$	6,401	$	11,547		$	19,666
NDT		130,806			88,216		42,590			-
Rabbi Trust		1,841			1,831		10			-
Interest rate swaps		803			-		803			-
Total Assets		171,064			96,448		54,950			19,666

Liabilities
Commodity derivatives		(48,849	)		-		(48,849	)		-
Interest rate swaps		(803	)		-		(803	)		-
Total Liabilities		(49,652	)		-		(49,652	)		-
Net Total Assets and Total Liabilities	$	121,412		$	96,448	$	5,298		$	19,666

A reconciliation of the changes in Level 3 fair value measurements is as follows:

Recurring Fair Value Measurements Using Significant Unobservable Inputs

(Level 3)

	Three Months Ended						Six Months Ended
	June 30, 2008						June 30, 2008
	PNMR			PNM			PNMR			PNM
				(In thousands)
Level 3 Fair Value Assets and Liabilities
Balance at December 31, 2007							$	2,061		$	2,679
Adoption of SFAS 157								16,407			16,407
Balance at beginning of period	$	32,946		$	33,348			18,468			19,086
Total gains included in earnings		6,912			7,605			16,164			16,917
Total gains included in other comprehensive income		88			-			88			-
Purchases, issuances, and settlements1		(20,083	)		(21,287	)		(14,857	)		(16,337	)
Balance at June 30, 20082	$	19,863		$	19,666		$	19,863		$	19,666
Total gains included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the end of the period	$	10,242		$	10,484		$	16,195		$	16,632

(1) Represents unearned and prepaid option premiums received and paid during the period for contracts still held at end of period and sale of PNM Electric wholesale contracts.

(2)	There were no transfers in or out of Level 3 during the period.

Gains and losses (realized and unrealized) for Level 3 fair value measurements included in earnings for the three and six months ended June 30, 2008 are reported in operating revenues and cost of energy as follows:

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Three Months Ended Six Months Ended
June 30, 2008 June 30, 2008
PNMR
Operating
Revenues

Cost of
Energy
Total
Operating
Revenues

Cost of
Energy
Total
(In thousands)
Total gains (losses) included in earnings $ (824 ) $ 7,736 $ 6,912 $ (1,087 ) $ 17,251 $ 16,164
Change in unrealized gains or losses relating to assets still held at reporting date $ (351 ) $ 10,593 $ 10,242 $ (546 ) $ 16,741 $ 16,195

PNM
Total gains (losses) included in earnings $ (213 ) $ 7,818 $ 7,605 $ (224 ) $ 17,141 $ 16,917
Change in unrealized gains or losses relating to assets still held at reporting date $ - $ 10,484 $ 10,484 $ - $ 16,632 $ 16,632

(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. Information regarding the computation of earnings per share is as follows:

Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
(In thousands)
Earnings (Loss):
Earnings (loss) from continuing operations $ (146,248) $ 21,828 $ (217,384) $  36,972
Earnings (loss) from discontinued operations 2,762 (1,588) 25,261 12,934
Net Earnings (Loss) $ (143,486) $ 20,240 $ (192,123) $  49,906

Average Number of Common Shares Outstanding 81,698 76,695 79,274 76,677
Dilutive Effect of Common Stock Equivalents (a):
Stock options and restricted stock - 659 - 680
Equity-linked units - 1,439 - 1,089
Average Common and Common Equivalent
Shares Outstanding 81,698 78,793 79,274 78,446

Per Share of Common Stock – Basic:
Earnings (loss) from continuing operations $  (1.79) $    0.28 $    (2.74) $     0.48
Earnings (loss) from discontinued operations 0.03 (0.02) 0.32 0.17
Net Earnings (Loss) $  (1.76) $    0.26 $    (2.42) $     0.65

Per Share of Common Stock – Diluted:
Earnings (loss) from continuing operations $  (1.79) $    0.28 $    (2.74) $     0.47
Earnings (loss) from discontinued operations 0.03 (0.02) 0.32 0.17
Net Earnings (Loss) $  (1.76) $    0.26 $    (2.42) $     0.64

Three Months Ended

Nine Months Ended

September 30,

September 30,

2007

2006

2007

2006

(In thousands, except per share amounts)

Net Earnings
$ 8,372 $ 43,520 $ 58,277 $ 85,504

Average Number of Common Shares Outstanding
76,736 69,726 76,697 69,125
Dilutive effect of common stock equivalents (a):

Stock options and restricted stock 422 691 594 565
Equity-linked units 403 344 860 94
Average Common and Common Equivalent

Shares
77,561 70,761 78,151 69,784

Net Earnings per Share of Common Stock:

Basic $ 0.11 $ 0.62 $ 0.76 $ 1.24
Diluted $ 0.11 $ 0.62 $ 0.75 $ 1.23

~~(a)~~

Excludes the effect of average anti-dilutive common stock equivalents related to out-of-the-money stock options of 1,318,628 and 652,133 for the three months and 760,400 and 1,469,333 for the nine months ended September 30, 2007 and 2006, respectively.

3539

PNM RESOURCES, INC. AND SUBSIDIARIES

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

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(a)

At June 30, 2008, PNMR had 2,890,155 out-of-the-money stock options and 873,200 in-the-money stock options that are anti-dilutive. In addition, PNMR’s privately held equity-linked units are anti-dilutive. Based on the current price of PNMR’s common stock, it is anticipated that 4,778,000 common stock equivalents will be issued in connection with the settlement of the purchase contracts that are contained in the units.

(6)

Stock-Based Compensation

Information concerning stock-based compensation plans is contained in Note 13 of Notes to Consolidated Financial Statements in the ~~2006~~2007 Annual Reports on Form ~~10-K/A (Amendment No. 1).~~10-K.

Stock Options

The following table represents stock option activity for the ~~nine~~six months ended ~~September~~June 30, ~~2007:~~2008:

								Weighted-										Weighted-
				Weighted-		Aggregate		Average					Weighted-		Aggregate			Average
				Average		Intrinsic		Remaining					Average		Intrinsic			Remaining
				Exercise		Value		Contract Life					Exercise		Value			Contract Life
Options for PNMR Common Stock	Shares			Price		(In thousands)		(Years)		Shares			Price		(In thousands)			(Years)

Outstanding at beginning of period		2,999,606		$	21.02						3,264,898		$	23.26
Granted		766,400			30.47						554,261			11.91
Exercised		(431,965	)		20.44						(5,001	)		16.13
Forfeited		(28,707	)		27.34						(50,803	)		25.57

Outstanding at end of period		3,305,334		$	23.25	$	99		7.36		3,763,355		$	21.54	$	(36,010	)		7.34

Options exercisable at end of period		1,936,269		$	19.97	$	6,409		6.16		2,634,551		$	22.00	$	(26,432	)		5.84

Options available for future grant		2,478,829									1,942,024

The following table provides additional information concerning stock option activity for the ~~nine~~six months ended ~~September~~June 30:

Options for PNMR Common Stock	2007		2006		2008		2007
	(In thousands, except per share amounts)				(In thousands, except per share amounts)

Weighted-average grant date fair value per share of options granted	$	4.70	$	3.87	$	1.39	$	4.70
Total intrinsic value of options exercised during the period	$	4,854	$	5,691	$	15	$	4,847

3640

PNM RESOURCES, INC. AND SUBSIDIARIES

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

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Restricted Stock

The following table summarizes nonvested restricted stock activity for the ~~nine~~six months ended ~~September~~June 30, ~~2007:~~2008:

Weighted-
Weighted-

Average
Average
Nonvested Restricted

Grant-Date
Grant-Date
PNMR Common Stock

Shares

Fair Value
Shares Fair Value

Nonvested at beginning of period 161,769 $ 24.55 169,750 $ 26.09
Granted 106,400 $ 28.79 125,250 $ 11.56
Vested (93,554 ) $ 24.20 (79,656 ) $ 25.70
Forfeited (765 ) $ 26.34 (5,005 ) $ 26.44

Nonvested at end of period 173,850 $ 26.13 210,339 $ 17.54

The total fair value of shares of restricted stock that vested during the ~~nine~~six months ended ~~September~~June 30, ~~2007~~2008 was ~~$2.3~~$2.0 million.

37
~~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)~~

(7)
~~Capitalization~~
Financing

Information concerning financing activities is contained in Note 6 of Notes to Consolidated Financial Statements in the ~~2006~~2007 Annual Reports on Form ~~10-K/A (Amendment No. 1).~~10-K.

Financing Activities

On May 5, 2008, PNM entered into a $300 million unsecured delayed draw term loan facility (as amended, the “Term Loan Agreement”) with Merrill Lynch Bank USA, Morgan Stanley Senior Funding, Inc. and Wachovia Bank, National Association, as initial lenders. The Term Loan Agreement allowed PNM, at its option, to borrow, on no more than two occasions, up to $300 million at any time prior to 45 days before April 30, 2009.  In the event of a downgrade in senior unsecured debt credit ratings of PNM, PNM may be required to borrow money under the Term Loan Agreement.  Borrowings must be repaid on April 30, 2009, or 45 days before that date if PNM makes no optional borrowings under the credit facility.  PNM must pay interest and fees from time to time based upon its then-current senior unsecured debt credit ratings.  The Term Loan Agreement is to be used for general corporate purposes.  Borrowings under the Term Loan Agreement are conditioned on the ability of PNM to make certain representations.  The Term Loan Agreement includes customary covenants, including requirements to maintain a maximum consolidated debt-to-consolidated capitalization ratio and a minimum consolidated earnings before interest, income taxes, depreciation and amortization to consolidated interest expense ratio.  The Term Loan Agreement provides that if PNM receives net cash proceeds from the sale of certain debt securities or the sale of assets, the amount of the commitments under the Term Loan Agreement may be reduced.  As described below, on May 13, 2008, PNM completed the offering of $350 million aggregate principal amount of senior unsecured notes.  On May 28, 2008, PNM was notified that the lenders under the Term Loan Agreement had reduced their commitments to $150 million.  The Term Loan Agreement provides that upon the closing of the sale of PNM Gas described in Note 2, any amounts outstanding must be repaid and remaining commitments for borrowings would be terminated.  No borrowings have been made under the Term Loan Agreement.

On May 8, 2008, PNM entered into a $100 million unsecured letter of credit facility pursuant to a reimbursement agreement (as amended, the “Reimbursement Agreement”) with Deutsche Bank AG and Royal Bank of Canada, as lenders.  The Reimbursement Agreement allows PNM to obtain, from time to time, standby letters of credit up to the aggregate amount of $100 million at any time prior to April 30, 2009.  The letter of credit and commitment fees will vary depending upon the then-current senior unsecured debt credit rating for PNM.  The Reimbursement Agreement will be used for general corporate purposes, including supporting margin requirements
41
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

under hedging agreements.  Letter of credit issuances under the Reimbursement Agreement are conditioned on the ability of PNM to make certain customary representations.  The Reimbursement Agreement includes customary covenants, including requirements to maintain a maximum consolidated debt-to-consolidated capitalization ratio and a minimum consolidated earnings before interest, income taxes, depreciation and amortization to consolidated interest expense ratio.  No letters of credit have been issued under this arrangement.
    On May 16, 2008, PNM issued $350 million aggregate principal amount of senior unsecured notes. The notes pay interest semi-annually at a rate of 7.95% per year, payable on May 15 and November 15 of each year, beginning November 15, 2008, and mature on May 15, 2018.
PNMR previously issued 4,945,000 6.75% publicly held equity-linked units.  Each of these equity-linked units consisted of a purchase contract and a 5.0% undivided beneficial ownership interest in one of PNMR’s senior notes with a stated amount of $1,000, which corresponds to a $50.00 stated amount of PNMR’s senior notes. The senior notes were scheduled to mature in May 2010 (subject to the remarketing described below) and bore interest at a rate of 4.8% per year.  The purchase contracts entitled their holders to contract adjustment payments of 1.95% per year on the stated amount of $50.00.  Each purchase contract contained a mandatory obligation for the holder to purchase, and PNMR to sell, at a purchase price of $50.00 in cash, shares of PNMR’s common stock on or before May 16, 2008.  Generally, the number of shares each holder of the equity-linked units was obligated to purchase depended on the average closing price per share of PNMR’s common stock over a 20-day trading period ending on the third trading day immediately preceding May 16, 2008, with an adjusted maximum price of $32.08 per share and minimum price of $26.29 per share.  In accordance with the terms of the equity-linked units, the senior note components were remarketed prior to May 16, 2008.  The proceeds from the remarketed senior notes amounted to $247.3 million and were utilized by the holders of the equity-linked units to satisfy their obligations to purchase 9,403,412 shares of PNMR’s common stock for the same aggregate amount on May 16, 2008.  In connection with the remarketed senior notes, PNMR sold an additional $102.7 million of senior notes with the same terms for a total offering of $350 million.  The senior notes pay interest semi-annually at a rate of 9.25% per year, payable on May 15 and November 15 of each year, beginning November 15, 2008, and mature on May 15, 2015.

PNMR also has outstanding 4,000,000 privately held 6.625% equity-linked units.  Each of these equity-linked units consists of a purchase contract and a 2.5% undivided beneficial ownership interest in one of PNMR’s senior notes with a stated amount of $1,000, which corresponds to a $25.00 stated amount of PNMR’s senior notes.  The ownership interest in the senior notes is pledged to secure the holder’s obligation to purchase PNMR common or preferred stock under the related purchase contract.  The senior notes are scheduled to mature in August 2010 (subject to the remarketing described below) and bear interest at the annual rate of 5.1%.  The purchase contracts entitle the holder to quarterly contract adjustment payments of 1.525% per year on the stated amount of $25.00.  Each purchase contract contains a mandatory obligation for the holder to purchase, and PNMR to sell, at a purchase price of $25.00 in cash, shares of PNMR’s common stock (or preferred stock in a ratio of 1/10 of a preferred share for each share of common stock) aggregating $100 million on or before November 16, 2008.  Generally, the number of shares the holder is obligated to purchase depends on the average closing price per share of PNMR’s common stock over a 20-day trading period ending on the third trading day immediately preceding November 16, 2008, with a maximum price of $25.12 per share and minimum price of $20.93 per share.  Beginning on November 7, 2008, PNMR will attempt to remarket the senior notes.  If the remarketing is successful, the interest rate on the senior notes may change to a rate selected by the remarketing agent, and the maturity of the senior notes may be extended to a date selected by PNMR subject to certain conditions.  If the remarketing of the senior notes is not successful, the maturity and interest rate of the senior notes will not change and holder of the equity-linked units will have the option of putting its senior notes to PNMR to satisfy its obligations under the purchase contracts.  Although there can be no assurance, PNMR expects that the remarketing of the senior notes will be successful.

Short-term Debt

PNMR and PNM have revolving credit facilities for borrowings up to $600 million under the PNMR Facility and $400 million ~~respectively,~~under the PNM Facility that primarily expire in 2012 and local lines of credit amounting to ~~$15~~$10.0 million and ~~$13.5 million, respectively.~~$8.5 million.  PNMR and PNM also have commercial paper programs under which they may issue up to ~~$400~~
42
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

$400 million and $300 million of commercial paper ~~respectively.~~although these commercial paper programs are currently suspended and no commercial paper has been issued since March 11, 2008.  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.  ~~PNMR~~

On March 7, 2008, TNMP entered into a $150 million short-term ~~bridge~~bank loan agreement ~~for temporary financing~~with two banks.  TNMP borrowed $150 million under this agreement on April 9, 2008 and used the proceeds to redeem the remaining $148.9 million of ~~Twin Oaks.  See Note 2. On April 17, 2007, PNMR repaid~~its 6.125% senior unsecured notes prior to the ~~balance due on the bridge loan.~~maturity date of June 1, 2008.

On May 15, 2008, TNMP entered into a credit agreement with eight lenders for the TNMP Facility.  The TNMP Facility provides TNMP with a revolving credit facility for up to $200 million.  In connection with entering into the TNMP Facility, TNMP withdrew as a borrower under the PNMR Facility and is no longer a party under the PNMR Facility.  There have been no borrowings under the TNMP Facility.

At June 30, 2008, the weighted average interest rate was 3.83% for the PNMR Facility, 3.67% for the PNM Facility, and 3.40% for the TNMP short-term bank loan. Short-term debt outstanding consists of:

September 30,

December 31,

Short-term Debt

2007

2006

(In thousands)

PNM
Commercial paper $ 70,584 $ 251,300
Revolving credit facility 215,000 -
285,584 251,300
PNMR
Commercial paper 65,000 263,550
Revolving credit facility 298,000 -
Local lines of credit 100 -
Bridge loan - 249,495

$ 648,684 $ 764,345
June 30, December 31,
Short-term Debt 2008 2007
(In thousands)

PNM
Commercial paper $              - $ -
Revolving credit facility - 321,000
Delayed draw term loan facility - -
Local lines of credit - -
Total PNM - 321,000
TNMP
Short-term bank loan 150,000 -
Revolving credit facility - -
Total TNMP 150,000 -
PNMR
Commercial paper - -
Revolving credit facility 190,000 343,500
Local lines of credit - 1,400
Total PNMR 190,000     344,900
Total PNM, TNMP and PNMR
340,000 665,900
Valencia 86,651 -

$  426,651 $ 665,900

The June 30, 2008 Condensed Consolidated Balance Sheets of PNMR and PNM include $86.7 million of short-term debt of Valencia, which is a variable interest entity that is consolidated by PNM beginning May 30, 2008.  See Note 16.  As of June 30, 2008, TNMP had outstanding borrowings of $2.1 million from PNMR under its intercompany loan agreement.

At ~~November 1, 2007,~~August 4, 2008, PNMR, PNM, and ~~PNM~~TNMP had ~~$188.2~~$252.8 million, $380.7 million, and ~~$129.7~~$198.5 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 September 30, 2007, TNMP had outstanding borrowings of $18.5 million from PNMR under its 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 the SJGS.  PNMR is obligated to pay amounts equal to the principal and interest on the PCRBs.credit.  In addition, PNM ~~issued $20.0~~had availability of $150 million ~~of senior unsecured notes to secure~~under the Term Loan Agreement and ~~guarantee~~$100 million under the ~~PCRBs. Both the PCRBs and the senior unsecured notes mature in 2037 and bear interest~~Reimbursement Agreement.  Total availability 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 September 30, 2007, PNM had received $9.8August 4, 2008 was $630.7 million ~~from the trust. The senior unsecured notes are included in long-term debt in the Condensed Consolidated Balance Sheets of~~for PNM and, ~~PNMR and the amount remaining in the trust is~~on a ~~restricted special deposit and included in other investments since it is restricted~~consolidated basis, $1,082.0 million for ~~the acquisition of items that will be included in utility plant.~~PNMR.  At August 4, 2008, PNMR,

3843
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND ~~SUBSIDIARY~~SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

~~Effective June 15, 2007,~~PNM, and TNMP ~~redeemed $100.0~~had cash balances of $54.8 million, of its 6.125% Senior Notes Due 2008 at a redemption price of 100.5% of the principal amount redeemed, plus accrued interest. To facilitate the redemption, PNMR made a cash contribution, recorded as equity, of $101.2$54.4 million, ~~to TNP, which then made an equity contribution to TNMP in the same amount.~~and none.

PNMR has entered into three fixed-to-floating interest rate swaps with an aggregate notional principal amount of $150.0 million.  Under these swaps, PNMR receives a 4.40% fixed interest payment on the notional principal amount on a semi-annual basis and pays a floating rate equal to the six month LIBOR plus 58.15 basis points (0.5815%) on the notional amount through September 15, 2008.  The floating rate was 6.09% at December 31, 2007 and was reset to 3.28% on March 17, 2008.  The swaps are accounted for as fair-value hedges with ~~a liability~~an asset position of ~~approximately $1.8~~$0.8 million at ~~September~~June 30, ~~2007,~~2008, with a corresponding ~~reduction~~addition to current maturities of long-term debt.

Stockholders’ Equity

See Financing Activities above for information on PNMR common stock issued in connection with its publicly held equity-linked units.  PNMR offers new shares of PNMR common stock through the ~~PNM~~PNMR Direct Plan and an equity distribution agreement.  The equity distribution agreement is currently suspended.  For the ~~nine~~six months ended ~~September~~June 30, ~~2007,~~2008, PNMR sold ~~a combined total of 80,216~~128,177 shares of its common stock through the PNMR Direct Plan ~~and the equity distribution agreement~~ for net proceeds of ~~$2.2~~$1.8 million.  PNMR also issued ~~41,578~~44,621 shares of its common stock for ~~$1.1~~$0.5 million through its ESPP during the ~~nine~~six months ended ~~September~~June 30, ~~2007.~~2008.

(8)
Pension and Other Postretirement Benefit Plans

PNMR and its subsidiaries ~~(other than TNP, TNMP and First Choice) have a~~maintain qualified defined benefit pension ~~plan, a plan~~plans, postretirement benefit plans providing medical and dental benefits, ~~to eligible retirees,~~ and an executive retirement ~~program~~programs (“PNM Plans” and “TNMP Plans”).  PNMR ismaintains the ~~sponsor of the PNM Plans and is legally obligated~~legal obligation for the benefits owed to participants under them.  TNP, TNMP and First Choice have a qualified defined benefit pension plan, 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.  The TNMP retiree medical plan has been merged into the PNMR retiree medical plan although they continue to be accounted for and funded separately.these plans.

Readers should refer to Note 12 of Notes to the Consolidated Financial Statements in the ~~2006~~2007 Annual Reports on Form ~~10-K/A (Amendment No. 1)~~10-K 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 tables present the components of the PNM Plans’ net periodic benefit cost (income):

Three Months Ended September 30,
Three Months Ended June 30,

Pension Plan

Other Postretirement Benefits

Executive Retirement Program
Pension Plan Other Postretirement Benefits Executive Retirement Program

2007

2006

2007

2006

2007

2006
2008 2007 2008 2007 2008 2007
(In thousands) (In thousands)

Components of Net Periodic

Benefit Cost (Income)

Service cost $ 36 $ 126 $ 632 $ 678 $ 14 $ 14 $ - $ 36 $ 178 $ 632 $ 14 $ 14
Interest cost 7,953 7,710 1,928 1,842 272 264 8,317 7,953 2,086 1,928 284 272
Expected long-term return on assets (10,195 ) (10,139 ) (1,464 ) (1,355 ) - - (10,336 ) (10,195 ) (1,532 ) (1,464 ) - -
Amortization of net loss 972 1,210 1,461 1,670 24 25 481 972 1,204 1,461 13 24
Amortization of prior service cost 79 79 (1,422 ) (1,422 ) 3 3 79 79 (1,422 ) (1,422 ) 3 3
Net periodic benefit cost (income)
$ (1,155 ) $ (1,014 ) $ 1,135 $ 1,413 $ 313 $ 306 $ (1,459 ) $ (1,155 ) $ 514 $ 1,135 $ 314 $ 313

44
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Nine Months Ended September 30,
Six Months Ended June 30,

Pension Plan

Other Postretirement Benefits

Executive Retirement Program
Pension Plan Other Postretirement Benefits Executive Retirement Program

2007

2006

2007

2006

2007

2006
2008 2007 2008 2007 2008 2007
(In thousands) (In thousands)

Components of Net Periodic

Benefit Cost (Income)

Service cost $ 108 $ 378 $ 1,897 $ 2,035 $ 42 $ 42 $ - $ 72 $ 356 $ 1,264 $ 28 $ 28
Interest cost 23,858 23,131 5,784 5,525 816 791 16,634 15,906 4,172 3,856 568 544
Expected long-term return on assets (30,585 ) (30,417 ) (4,393 ) (4,064 ) - - (20,672 ) (20,389 ) (3,064 ) (2,927 ) - -
Amortization of net loss 2,917 3,630 4,382 5,010 70 74 962 1,944 2,408 2,922 26 46
Amortization of prior service cost 238 238 (4,265 ) (4,265 ) 10 10 158    158 (2,844 ) (2,844 ) 6 6
Net periodic benefit cost (income)
$ (3,464 ) $ (3,040 ) $ 3,405 $ 4,241 $ 938 $ 917 $ (2,918 ) $ (2,309 ) $ 1,028 $ 2,271 $ 628 $ 624

For the three months ended September 30, 2007 and 2006, PNM contributed $1.5 million and $1.5 million, respectively, to trusts for other postretirement benefits.  For the nine months ended September 30, 2007 and 2006, PNM contributed $4.6 million and $4.6 million, respectively, to trusts for other postretirement benefits.  PNM expects to make contributions totaling $6.0 million during 2007 to trusts for other postretirement benefits.  PNM does not anticipate making any contributions to the pension orplan trust during 2008.  For the three months ended June 30, 2008 and 2007, PNM contributed $1.8 million and $1.5 million to trusts for other postretirement benefits and $2.8 million and $3.1 million for the six months ended June 30, 2008 and 2007.  PNM expects to make contributions totaling $4.9 million during the year ended December 31, 2008 to the trust for other postretirement benefits.  Disbursements under the executive retirement ~~plans~~program, which are funded by the Company and considered to be contributions to the plan, were $0.4 million and $0.4 million in the three months ended June 30, 2008 and 2007 and $0.8 million and $0.8 million in the six months ended June 30, 2008 and 2007, and are expected to total $1.5 million during ~~2007.~~2008.

40
~~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 Plans

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

Three Months Ended September 30,
Three Months Ended June 30,

Pension Plan

Other Postretirement Benefits

Executive Retirement Program
Pension Plan Other Postretirement Benefits Executive Retirement Program

2007

2006

2007

2006

2007

2006
2008 2007 2008 2007 2008 2007
(In thousands) (In thousands)
Components of Net Periodic

Benefit Cost (Income)

Service cost $ - $ - $ 98 $ 106 $ - $ - $ - $ - $ 71 $ 98 $ - $ -
Interest cost 1,057 1,085 165 178 19 19 1,061 1,057 179 165 19 19
Expected long-term return on assets (1,710 ) (1,754 ) (114 ) (114 ) - - (1,659 ) (1,710 ) (122 ) (114 ) - -
Amortization of net gain - - (39 ) - - - (36 ) (2 ) (68 ) (39 ) - -
Amortization of prior service cost (2 ) - 15 15 - - - - 15 15 - -
Net Periodic Benefit Cost (Income)
$ (655 ) $ (669 ) $ 125 $ 185 $ 19 $ 19 $ (634 ) $ (655 ) $ 75 $ 125 $ 19 $ 19

45
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Nine Months Ended September 30,
Six Months Ended June 30,

Pension Plan

Other Postretirement Benefits

Executive Retirement Program
Pension Plan Other Postretirement Benefits Executive Retirement Program

2007

2006

2007

2006

2007

2006
2008 2007 2008 2007 2008 2007
(In thousands) (In thousands)
Components of Net Periodic

Benefit Cost (Income)

Service cost $ - $ - $ 295 $ 318 $ - $ - $ - $ - $ 142 $ 196 $ - $ -
Interest cost 3,171 3,254 496 533 57 57 2,122 2,114 358 330 38 38
Expected long-term return on assets (5,130 ) (5,263 ) (342 ) (342 ) - - (3,318 ) (3,420 ) (244 ) (228 ) - -
Amortization of net gain (5 ) - (117 ) - - - (72 ) (4 ) (136 ) (78 ) - -
Amortization of prior service cost - - 45 45 - - - - 30 30 - -
Net Periodic Benefit Cost (Income)
$ (1,964 ) $ (2,009 ) $ 377 $ 554 $ 57 $ 57 $ (1,268 ) $ (1,310 ) $ 150 $ 250 $ 38 $ 38

For the three and nine months ended September 30, 2007, TNMP contributed $0.1 million and $0.4 million, respectively, to trusts for other postretirement benefits.  For the three and nine months ended September 30, 2006, TNMP made no contributions to trusts for other postretirement benefits.  TNMP expects to make contributions totaling $0.5 million during 2007 to trusts for other postretirement benefits.  TNMP does not anticipate making any contributions to the pension ortrust during 2008.  For the three months ended June 30, 2008 and 2007, TNMP made no and $0.3 million contributions to the trust for other postretirement benefit and made $0.2 million and $0.3 million for the six months ended June 30, 2008 and 2007.  TNMP expects to make contributions totaling $0.4 million during the year ended December 31, 2008 to the trust for other postretirement benefits.  Disbursements under the executive retirement ~~plans~~program, which are funded by the Company and considered to be contributions to the plan, were less than $0.1 million in the three months and six months ended June 30, 2008 and 2007, and are expected to total $0.2 million during ~~2007.~~

41
~~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)~~
2008.

(9)
(9)
Commitments and Contingencies

~~OVERVIEW~~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 or cash flows, although the outcome of litigation, investigations and other legal proceedings is inherently uncertain.

~~COMMITMENTS AND CONTINGENCIES RELATED TO THE ENVIRONMENT~~Commitments and Contingencies Related to the Environment

~~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~~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, as amended effective July 1, 2007, 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 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~~has established 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.reasonable

PNM’s Energy Portfolio Procurement Plan for 2008, filed September 4, 2007 with the NMPRC, seeks approval to recover costs associated with certain RECs.  No new renewable energy procurements are proposed in this filing.  The deadline set by the NMPRC for protests to the plan has expired and no protests are pending.  The NMPRC is required to act on the plan by November 29, 2007, but can extend the period for action for an additional ninety days.  If the NMPRC does not take timely action, the plan is approved by operation of law.

4246
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND ~~SUBSIDIARY~~SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

cost threshold that began at 1 percent of all customers’ aggregated overall annual electric charges, increasing by 0.2 percent annually until 2011, at which time it will be 2 percent, and then increasing by 0.25 percent annually until reaching 3 percent in 2015.

On July 1, 2008, PNM filed its annual renewable energy plan for 2009.  Costs incurred under a NMPRC-approved plan are authorized to be included for recovery in a future rate proceeding.  PNM requested: (1) approval to continue its program for purchasing RECs from customers with photovoltaic (“PV”) distributed generation systems sized no larger than 10 kW at a price of $0.13 per REC per kWh generated, which was initially approved in December 2005, beyond the currently authorized budget and cost recovery in order to avoid a suspension of the program that would otherwise be necessary by early 2010; (2) approval to implement a program to acquire RECs from customers with PV systems sized greater than 10 kW and up to 1 MW at a price of $0.13 per REC per kWh generated and for cost recovery; and (3) approval to supplement the plan with any new projects that result for the two requests for proposals (“RFPs”) that PNM has recently issued for renewable resources.  One of the RFPs was jointly issued with three other electric providers for a concentrated solar power project using solar parabolic trough technology that would be located in New Mexico.  The second RFP was for diverse non-wind renewable energy.  PNM’s filing also reported on PNM's termination of the biomass project described below and indicated that PNM may need additional resources to meet the renewable energy portfolio standard requirement for 2010 and the diversity requirements for 2011.

The Clean Air Act

Regional Haze

On April 22, 1999, the EPA announced final regional haze rules.  These regulations required states to submit state implementation plans (“SIPs”) by December 2007 to demonstrate “reasonable progress” towards achieving natural visibility conditions in certain “Class I Areas,” including several on the Colorado Plateau.  SIPs are required to consider and potentially apply BART for certain older major stationary sources.
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 had requested a BART analysis for nitrogen oxides and ~~particulate~~particulates be done for each of the four units at SJGS.  ~~The Company~~PNM submitted the analysis to the NMED in early June 2007.  Based on the results of the BART analysis, PNM did not recommend that any additional pollution control equipment be installed on any of the SJGS units beyond that which is being installed. PNM believes the controls being installed constitute BART.  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.

In addition, EPA Region 9 requested APS to perform a BART analysis for Four Corners.  APS completed the analysis and submitted it to the EPA on January 30, 2008.  The EPA will now review the submission and determine what constitutes BART for Four Corners.  APS’ recommendations include the installation of certain pollution control equipment that it believes constitutes BART.  Once APS receives the EPA’s final determination, Four Corners will have five years to complete the installation of the equipment and to achieve the emission limits established by EPA Region 9.  Until the EPA makes a final determination on this matter, the Company cannot accurately estimate the expenditures that may be required.  As a result, PNM’s current environmental expenditure estimates do not include amounts for Four Corners BART expenditures.

47
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

While the Company continues to monitor these matters, at the present time the Company cannot predict whether the agencies will agree with either PNM’s or APS’ BART recommendations or, if the agencies disagree with those recommendations for SJGS or Four Corners, the nature of the BART controls the agencies may ultimately mandate and the resulting financial or operational impact.

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 U.S. 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 U.S. Circuit Court of Appeals for the Fourth Circuit ruling in favor of Duke Energy Corporation 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 Circuit 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 trigger 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~~a consent decree of May 10, 2005. As a result, PNM filed petitions with the U.S. 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~~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~~stipulated order entered by the ~~Stipulated Order~~court 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 legal fees and costs incurred with respect to post-decree administration and disputes.  The parties have settled the fee request for 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)~~

On October 2, 2007, PNM received notice of a force majeure event from Babcock & Wilcox (“B&W”), PNM’s contractor for the environmental upgrade project at SJGS.  In the notice, B&W claimed a potential labor shortage could impact construction of improvements on Units 3 and 4.  PNM is currently evaluating the situation with B&W.  Although the evaluation may take several weeks, PNM was required to submit notice to Plaintiffs and NMED by October 16, 2007, to preserve its rights with respect to force majeure under the Consent Decree.  If PNM, the Plaintiffs and NMED subsequently agree that the circumstances constitute a force majeure event, construction schedules may be revised under the Consent Decree.

The ~~Consent Decree~~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.  ~~PNM has placed $1.0~~As of June 30, 2008, PNM’s share of the total amount of stipulated penalties is $3.2 million of which $3.0 million had been deposited into the escrow ~~as potential stipulated penalties.~~account and the remaining amount was deposited subsequently.  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 submitted its response to NMED on May 23, 2007.  To date, the NMED has taken no further action with respect to the requested information.

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,
48
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 Nation 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 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.

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)~~

Four Corners Federal Implementation Plan Litigation

~~In September 1999,~~On April 30, 2007, the EPA ~~proposed~~adopted a source specific 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 Four Corners. On September 12, 2006, the EPA proposed a revised FIP to establish air quality standards at Four Corners.

APS, the Four Corners operating agent, 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~~maintain and enhance dust ~~within 18 months after the FIP becomes effective.  APS filed a Petition for Review on~~suppression methods.  On July 2, 2007, APS, the plant operator, filed a petition for review in the U.S. ~~Circuit~~District 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~~has intervened in this action.  On July 6, 2007, ~~challenging whether~~ the ~~FIP complies~~Sierra Club and other parties filed a petition for review with the ~~requirements of~~same court challenging the FIP’s compliance with the Clean Air ~~Act.~~

~~The Court consolidated~~Act and APS has intervened in their action.  In APS’ lawsuit, APS challenges two key provisions of the ~~APS and Sierra Club petitions~~FIP:  a 20% opacity limit on ~~August 10, 2007.  On September 17, 2007,~~certain fugitive dust emissions, which the EPA filed a motion ~~for limited voluntary~~to remand ~~of the record~~ and to vacate ~~the briefing schedule~~in early December 2007, and stay the proceedings during the time period of the remand to give the EPA time to provide additional technical justification for the FIP limits.  In particular, the EPA asked the court for an opportunity to provide a ~~full explanation in response to APS’ position during the FIP rulemaking that~~20% stack opacity limit on Units 4 and ~~5 could not continuously attain~~5.  Briefing in this case is now complete and oral argument occurred in May 2008.  APS anticipates that the ~~opacity standard even when no malfunction~~court will issue its opinion before the end of 2008.  Although the ~~equipment was occurring and to address APS’ request for an allowance for exceedences of~~Company cannot predict the ~~opacity standard up to 0.2 percent of~~outcome or the time for each reporting period.  APS filed its response in opposition to EPA’s motion to remand the record on October 1, 2007, and on October 12, 2007, the Court denied EPA’s motion to remand.  APS believes the proper remedy for an agency’s failure to justify a rule or respond adequately to comments in the rulemaking process is to vacate the rule, not to remand the record.  The Company is unable to determine the impacttiming of these matters, ~~on its results of operations and financial position.~~

~~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.  PNMCompany does not ~~currently expect this FIP to~~believe that they will have a material adverse ~~effect~~impact on ~~its~~the Company’s financial position, results of operations or cash ~~flows or liquidity.~~flows.

Santa Fe Generating Station

PNM and the NMED conducted investigations of gasoline and chlorinated solvent groundwater contamination detected beneath the site of the former Santa Fe Generating Station 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 meets 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
49
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

the 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.

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)~~

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 site of the former Santa Fe Generating Station.  The investigation will study possible sources for the chlorinated solvents in the groundwater.  In December 2007, PNM provided certain groundwater data at the request of the NMED.  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.  The Office of Surface Mining is in the process of developing revisions to the Surface Mining Control and Reclamation Act (“SMCRA”) Title IV and V that would specifically address the placement of coal combustion products (“CCP’s”) in surface mines.  PNM understands that these revisions do not represent a major overhaul of the SMCRA regulations and ~~SJCC have been participating~~will continue to support the mine placement of CCP’s.  PNM expects the proposed regulations to be published by the end of summer 2008.

EPA is currently working on a Notice of Data Availability (“NODA”) on the placement of CCP’s in ~~various sessions sponsored by~~surface impoundments and landfill.  The NODA allows additional data and information to be collected and could cause EPA to ~~consider rulemaking for~~revisit its current regulations on the disposal of ~~coal combustion products.  The rulemaking would be pursuant to the Bevill Amendment of the Resource Conservation and Recovery Act.~~CCP’s in surface impoundments or landfill.  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.~~position, because the majority of the CCP’s from SJGS are placed in the mine and not surface impoundments or landfills.

~~NRC Matters~~In June, the U.S. House of Representatives Subcommittee on Energy and Mineral Resources conducted an oversight hearing on how the federal government should address the health and environmental risks of coal combustion wastes.  This is the first of a number of hearings the subcommittee will hold.  PNM cannot predict the outcome of these hearings but does not believe additional regulations will result.

Gila River Indian Reservation Superfund Site

By letter dated April 25, 2008, the EPA informed PNM that it may be a PRP in the Gila River Indian Reservation Superfund Site in Maricopa County, Arizona.  PNM, along with SRP, APS and EPE, owns a parcel of property on which a transmission pole and a portion of a transmission line are located.  The property abuts the Gila River Indian Community boundary and, at one time, may have been part of an airfield where crop dusting took place.  Currently, the EPA is only seeking payment from PNM and other PRPs for past cleanup-related costs involving contamination from the crop dusting.  Based upon the total amount of cleanup costs reported by the EPA in its letter to PNM, the resolution of this matter is not expected to have a material adverse impact on PNM’s financial position, results of operations, or cash flows.

Other Commitments and Contingencies

PVNGS Liability and Insurance Matters

The PVNGS participants have insurance 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 million and the balance by an industry-wide retrospective assessment program.  If losses at any nuclear power plant covered by the program exceed the accumulated funds, PNM could be assessed retrospective premium adjustments.  The maximum assessment per reactor under the program for each nuclear incident is $100.6 million, subject to an annual limit of $15.0 million per incident, to be periodically adjusted for inflation.  Based on PNM’s 10.2% interest in the three PVNGS units, PNM’s maximum
50
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

potential assessment per incident for all three units is $30.8 million, with an annual payment limitation of $4.6 million.

The PVNGS participants maintain “all risk” (including nuclear hazards) insurance for property damage to, and decontamination of, property at PVNGS in the aggregate amount of $2.75 billion, a substantial portion of which must first be applied to stabilization and decontamination.  The participants have also secured insurance against portions of any increased cost of generation or purchased power and business interruption resulting from a sudden and unforeseen accidental outage of any of the three units.  The property damage, decontamination, and replacement power coverages are provided by Nuclear Electric Insurance Limited (“NEIL”).  PNM is subject to retrospective assessments under all NEIL policies if NEIL’s losses in any policy year exceed accumulated funds.  The maximum amount of retrospective assessments PNM could incur under the current NEIL policies totals $7.4 million.  The insurance coverage discussed in this and the previous paragraph is subject to policy conditions and exclusions.

NRC Matters

In October 2006, the NRC conducted an inspection of the PVNGS emergency diesel generators after a ~~Palo Verde~~PVNGS 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~~PVNGS’ safety injection systems, resulted in PVNGS Unit 3 being placed in the “multiple/repetitive degraded cornerstone” column of the NRC’s Action Matrix (“(“Column 4”), which has resulted in an enhanced NRC inspection ~~regimen.~~  regime.  Although only PVNGS Unit 3 is in NRC’s Column 4, in order to adequately assess the need for improvements, APS management has been conducting site-wide assessments of equipment and operations.

Preliminary work in support of the NRC’s enhanced inspection ~~regimen~~regime took place throughout the summer of 2007.  On June 21, 2007, the NRC issued aan initial confirmatory action letter confirming APS’ commitments ~~as operator,~~ regarding specific actions APS will take to improve ~~PVNGS’s~~PVNGS’ performance.  From October 1, 2007, through November 2, 2007, a team of NRC inspectors performed on-site in-depth inspections of PVNGS equipment and operations.  The NRC’s inspection results were presented at a public meeting on December 19, 2007, and documented in an NRC letter to APS ~~expects~~dated February 1, 2008.  The inspection report indicated that the facility is being operated safely but also identified certain performance deficiencies.  On December 31, 2007, APS submitted its improvement plan to ~~be informed~~the NRC, which addresses issues identified by APS management during its site-wide assessments of equipment and operations that occurred during 2007.  The NRC reviewed the adequacy of this improvement plan and issued a revised confirmatory action letter on February 15, 2008 that outlines the actions APS must take in order for the NRC to return the PVNGS site to the NRC’s routine inspection and assessment process.   This revised confirmatory action letter was anticipated as part of the NRC’s inspection ~~findings~~procedure.  On March 31, 2008, APS submitted to the NRC a revision to its improvement plan to address issues raised by the NRC in ~~late December 2007 or January 2008.~~its inspection report.  The NRC will continue to provide increased oversight at PVNGS until the facility demonstrates sustained performance improvement.  APS continues to cooperate fully with the NRC throughout this process.  Following receipt of the inspection findings and APS’ revisions to improvement plans to address the inspection findings, the NRC is expected to issue a revised confirmatory action letter in the first quarter of 2008. ~~The Company is unable to predict the outcome of this matter or any potential impact on PVNGS operating costs.~~
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.  The NRC also offered to resolve the potential escalated enforcement action through alternative dispute resolution, which APS elected to do.  As a result, a settlement was reached under which APS agreed to take a number of corrective actions, including specified training for certain PVNGS personnel and follow up reporting to the NRC.  As a result of these commitments, the NRC agreed not to pursue any further enforcement action in connection with this matter.  The agreement between APS and the NRC became effective upon the NRC’s issuance of a confirmatory order, dated October 19, 2007.

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~~

~~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 $100.6 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 $30.8 million, with an annual payment limitation of $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.  In 2005, 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 determine 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.
51
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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’~~several gas leaseholders and has other 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.claimants.  PNM cannot predict the outcome of any future disputes between SJCC and ~~Western Gas or~~ other gas leaseholders.

Republic Savings Bank Litigation

In 1992, Meadows Resources, Inc., an inactive subsidiary of PNMR, and its subsidiaries (“Plaintiffs”) filed suit against the Federal government in the United States Court of Claims, alleging breach of contract arising from the seizure of Republic Savings Bank (“RSB”).  RSB was seized and liquidated after the Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”) prohibited certain accounting practices authorized by contracts with the Federal government.  The Federal government filed a counterclaim alleging breach of obligation to maintain RSB’s net worth and moved to dismiss Meadows’ claims for lack of standing.

Discovery was completed in 1999 and Plaintiffs filed a motion for summary judgment in December 1999 on the issue of liability and on the issue of damages.  The Federal government filed a cross motion for summary judgment and opposed Plaintiffs’ motion.

On January 25, 2008, the judge in this matter entered his opinion granting the Federal government’s motion to dismiss Meadows for lack of standing, denying the Federal government’s motion for summary judgment and granting the remaining Plaintiffs’ motion for summary judgment on the issues of liability and damages, awarding the remaining Plaintiffs damages in the amount of $14.9 million.  The Court determined that Plaintiffs should receive restitution damages in the amount of $17 million for the initial cash contribution into RSB, reduced by the Federal government’s contribution of $3 million and enhanced by the $0.9 million profit received by the FDIC upon selling the business of RSB.  Meadows received payment from the FDIC in October 2004 in the amount of $0.3 million, representing the final distribution of the receivership.  This payment reduces the amount of damages owed to $14.6 million.

The Company is unable to predict the ultimate outcome of this litigation as both parties have rights to seek rehearing and appeal.

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 ~~proceedings relating~~of these in relation 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
52
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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.~~equity, which is still pending before FERC. In November 2007, FERC issued an order denying other rehearing petitions regarding the cost recovery calculation methodology, including the appropriateness of earning a return by load serving entities.  This was not an order on PNM’s specific rehearing request.  However, to preserve its rights to appeal the issues, PNM filed an appeal in the Ninth Circuit Court of Appeals on these cost recovery rehearing orders.  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 U.S. 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 which PNM has participated, regarding these and the multiple other appeals pending before it, to assess the opportunities for ~~settlement, in which PNM has participated.~~settlement.  The Ninth Circuit issued an order initially declaring a 45-day ~~time out~~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~~The Ninth Circuit ~~extended~~has continued to extend 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.~~Circuit.  Representatives of PNM continue to attend and participate in the mediation and case management 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 August 2007, the Ninth Circuit further extended the time-out period for settlement discussions to continue until November ~~16,~~ 2007.  In October 2007, PNM attended an additional case management conference hosted by the Ninth Circuit.  The time-out period established by the Ninth Circuit expired in mid-November 2007.  Subsequently, the Ninth Circuit issued its mandate in the Lockyer v. FERC case and allowed the appellate process to continue in other pending appeals.  As a result, various petitions for rehearing of the court’s prior decisions have been filed in the Ninth Circuit.  PNM participated with a group of sellers in a petition for rehearing in the CPUC v. FERC appeal.  The petitions for rehearing are currently pending before the Ninth Circuit.

In December 2007, the Ninth Circuit issued the mandate in the Lockyer v. FERC case and formally remanded this proceeding back to FERC.  See California Attorney General Complaint below.

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
53
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Ninth Circuit.  As a participant in the proceedings before ~~the~~ FERC, PNM also participated in the appeal proceedings.  Oral argument in the case was held onin January 8, 2007.  In August 2007, the Ninth Circuit issued its decision on appeal and determined that FERC erred in excluding certain purchases in the Pacific Northwest spot markets from consideration in the Pacific Northwest refund proceeding, and that FERC should have taken into account evidence of manipulation in the California spot markets that was presented after the original evidentiary proceeding. The court remanded the case to FERC to reconsider its decision to deny refunds, in light of the evidence of market manipulation and the various recent Ninth Circuit decisions, but did not require FERC to order refunds.  In September 2007, the Ninth Circuit extended the time period for filing petitions for rehearing on their decision until November 16, 2007.  At the conclusion of the time-out period, several parties filed petitions for rehearing of the Ninth Circuit’s decision.  PNM did not participate in any of the petitions for rehearing but continues to monitor the appeal.  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~~appeal.

~~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 thirteen 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 engaged in a gaming practice that violated either the Cal ISO or Cal PX tariffs.  ~~Additionally,~~However, 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.  In October 2007, Enron entered a settlement with the final parties litigating against them and filed the settlement at FERC, which is still pending before FERC.

In November 2007, FERC staff initiated a settlement proceeding designed to determine how the proceeds from the penalty amounts should be allocated among participants in the Cal PX and Cal ISO markets (Phase II Distribution proceedings).  PNM has participated in several settlement conferences regarding proposed allocations of these funds.  The ~~parties will now have the opportunity to file exceptions before the matter goes to FERC.~~settlement process is still ongoing.  PNM cannot predict the ~~final~~ultimate outcome of this proceeding.
54
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

California Power Exchange and Pacific Gas and Electric Bankruptcies

In 2001, ~~Southern California Edison Company~~SCE 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.

49
~~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 in September 2004 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 October 2004, PNM joined the group of competitive Sellers and filed a petition for rehearing at the Ninth Circuit.  In July 2006, the Ninth Circuit denied rehearing.  In December 2006, PNM joined a group of sellers in filing a petition for writ of certiorari in the U.S. 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~~In November 2007, the Ninth Circuit’s time-out period expired and in December 2007, the Ninth Circuit issued its mandate remanding the case back to FERC.

Upon remand to FERC, numerous parties filed motions at FERC regarding the appropriate procedures to occur on remand for the ~~appeal are now awaiting~~ disposition of the ~~case back~~case.  In March 2008, FERC issued its order on remand indicating that it will establish trial type hearings to determine if specific Sellers’ violation of FERC’s quarterly reporting requirements led to an unjust and unreasonable rate for these Sellers in Cal ISO and Cal Px markets during the 2000-2001 time period.  The order required sellers to submit revised quarterly reports to FERC for review.  PNM filed its quarterly sales transaction reports per FERC’s order.  The order also established settlement procedures for the matters.  An initial settlement conference was held in April 2008.  PNM has participated in these settlement proceedings. Several parties filed petitions for rehearing of FERC’s order. PNM participated with the other members of the Competitive Sellers Group to respond to the petition for rehearing.  The petitions for rehearing are currently pending before FERC.  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 June 2005, the lawsuit was removed to Federal Court.  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~~were filed in
55
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

the case by the parties, ~~but~~and oral argument ~~has not yet been scheduled.  The Company cannot predict~~was held in March 2008.  In April 2008, by memorandum opinion, the Ninth Circuit affirmed the District Court’s dismissal of the complaint.  No petition for rehearing of the decision was filed by the California Attorney General.  As such, the Ninth Circuit’s decision became final ~~outcome of this litigation nor whether PNM will be required~~and the case is now over as to ~~make refunds or pay damages under these claims.~~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~~NOI 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 became 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 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.  In December 2007, FERC issued its order on rehearing and clarified and revised some aspects of its initial order and rule designated as Order ~~890 is still pending before~~890-A.  FERC did not specifically rule on the ~~FERC.~~request PNM filed for clarification on transmission used for network generation resources.  The order reiterated its general rule on this topic, which had no impact on PNM operations.  In January 2008, multiple parties filed requests for rehearing of Order 890-A.  PNM did not join any of these rehearing requests.  The Company ~~is awaiting FERC action on rehearing requests.~~  cannot predict the outcome of the final rule.

The Company’s transmission group ~~has been working to prepare~~completed the numerous FERC compliance filings required by Order 890.  On May 30, 2007, the Company posted its initial compliance filing and its transmission planning proposal on its website.  PNM will continue making the required compliance filings and will participate in FERC’s technical conferences regarding Order 890 reliability standards.  ~~The Company cannot predict what impact the final rule will have on its operations.~~

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)~~
~~FERC Office of Market Oversight and Investigations~~

In November 2005, PNM received notice that the FERC Division of Operational Audits of the Office of Enforcement formerly known as the Office of Market Oversight and Investigations would perform a compliance audit of the Company.  The audit covered the period from January 2004 to the present and examined the Company’s compliance with the FERC standards of conduct and OASIS requirements, compliance of the Company’s transmission practices 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 make periodic reports every quarter thereafter per the staff’s recommendation.  There were no significant findings in the final audit report and PNM has no further action required in 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 U.S. District Court for the District of Wyoming issued an order granting the motion and dismissing some of the defendants, including the Company. The relator then appealed to the U.S. Court of Appeals for the Tenth Circuit.

51
~~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 Company subsequently executed a settlement agreement with the private relator pursuant to which the relator agreed to dismiss his appeal, the Company agreed to forego any efforts to seek attorney fees, costs and expenses, and the parties provided mutual releases.  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 and 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.

Biomass Project

PNM ~~has~~ entered into a 20-year contract for the purchase of 3532 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 or to start construction by July 2, 2007.  As a result, PNM delivered a ~~Remediable Event~~remediable event of ~~Default~~default letter to the biomass project owner.  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 required to remedy the condition within 180 days of the notice dated May 25, 2007.  A hearing was held on August 20, 2007 on the owner’s appeal of the denial of the air permit.  The air permit was subsequently approved on October 2, 2007.

The biomass project owner filed an application in August 2007 for a renewable energy production tax credit in connection with the project.   ~~Production tax credit to all applicants is limited to two million megawatt hours per year.~~  The project owner’s application was initially denied, ~~on September 27, 2007,~~ on grounds that the owner had not demonstrated the project was a qualifying facility for the credit because it had not shown there was a sufficient amount of wood fuel under contract.  The project owner filed an appeal and ultimately obtained the
56
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

production tax credit.  PNM expected the biomass facility to begin commercial operations in late 2009 or early 2010, provided adequate financing was obtained by June 1, 2008.  However, financing was not obtained by that date, and PNM notified the owner on June 12, 2008, of the immediate termination of the agreement.  On June 23, 2008, the owner advised PNM that ~~decision on October 10, 2007.  The Company~~it disputed the basis for the termination.  PNM is unable to predict the outcome of this matter.

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~~built, owns and ~~operate~~operates the facility while PNM will be the sole purchaser of the electricity generated. The ~~total projected construction cost for the~~Valencia facility is from $100 million to $105 million. The term of the power purchase agreement is for 20 years beginning June 1, 2008, with the full output of the plant estimated up to an average of 148 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).  PNM has evaluated the accounting treatment of this PPA and concluded that until the plant reachesbegan commercial operation ~~there are no impacts~~ on May 30, 2008.  For financial accounting purposes PNM ~~since it has no financial risks.  However, after commercial operation is achieved, PNM will consolidate~~consolidates the plant under FIN 46R since it ~~will absorb~~absorbs the majority of the variability in the cash flows of the plant.  See Note 16.

On May 31, 2007, the office of the AG and the staff of the NMPRC filed a ~~Petition For Formal Review~~petition for formal review requesting the NMPRC to investigate the PPA 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 PPA.  On June 21, 2007, the NMPRC ordered PNM to respond to the ~~Petition~~petition so that the NMPRC could ascertain PNM’s position on the matters raised before proceeding further with processing the ~~Petition.~~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’s and AG’s request for determination of the ratemaking treatment for the agreement.  On November 6, 2007, the NMPRC issued an order, which appointed a hearing examiner and directed her to consider the issues raised in the petition and the response, including whether ~~PNM's~~PNM’s actions in entering into the PPA and in reporting that transaction to the NMPRC were consistent with statute and NMPRC rules.  The Company is unable to predict the outcome of this matter.

52
~~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)~~

(10)
Regulatory and Rate Matters

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 were appealed by various Texas cities to a Texas district court.  TNMP and ~~FCP~~First Choice have intervened and will defend the PUCT’s Final Order approving the NUS.

~~Energy Agreement~~First Choice Request for ERCOT Alternative Dispute Resolution

~~In 2003,~~On June 30, 2008, First Choice ~~and Constellation executed~~filed a ~~power supply agreement~~request for alternative dispute resolution with ERCOT alleging 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 ofERCOT incorrectly applied 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~~protocols with respect to ~~transactions entered into prior to~~congestion management during the ~~termination until both parties have fulfilled all~~first quarter of ~~their obligations with respect to such transactions or such transactions have been terminated for default or reasons related to regulatory changes.~~2008.  First Choice requests that ERCOT resolve the dispute by restating certain elements of its first quarter 2008

53
57

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

congestion management data and by refunding to First Choice allegedly overstated congestion management charges.  The amount at issue in First Choice’s claim can only be determined by running ERCOT market models with corrected inputs but First Choice believes that the amount is significant.  ERCOT protocols provide that ERCOT will notify potentially impacted market participants and subsequently consider the merits of First Choice’s allegations.~~PNM~~  The Company is unable to predict the outcome of this matter.

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~~customers, including 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~~customers, which would not be affected by the fee increase.  The petition requested an increase in base gas service rates of $22.6 million and an increase in miscellaneous on-demand service rates of ~~approximately~~ $0.2 million.  The request was 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 requested 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 June 29, 2007 the NMPRC unanimously approved an increase in annual revenues of approximately $9 million for PNM.  The NMPRC based the new rates on a revenue requirement needed to earn a 9.53% return on equity.  The NMPRC did not approve PNM’s request for the true-up mechanism for operational costs based on system-wide gas consumption.  PNM and the AG filed ~~a Notice of Appeal~~appeals with the New Mexico Supreme ~~Court on July 27, 2007.  The AG filed his Notice of Appeal on July 31, 2007.~~Court.  The AG’s appeal seeks reversal of the NMPRC decision on one issue – weather normalization.  PNM’s appeal seeks reversal of the NMPRC determination of the required return on equity and on four cost-of-service accounting issues.  If PNM’s appeal is successful in all respects and the AG’s appeal is unsuccessful, PNM’s authorized annual revenue would increase by about $10 million.  If PNM’s appeal is unsuccessful in all respects and the AG’s appeal is upheld, PNM’s annual revenues would decrease by $6.8 million.  ~~Initial briefs are due to be filed November 20, 2007.~~The Supreme Court has scheduled oral argument for September 16, 2008.  PNM is unable to predict the outcome of these appeals.

Electric Rate Case

On February 21, 2007, PNM filed a general electric rate case requesting the NMPRC to approve an increase in service fees to all of PNM’s retail customers except those formerly served by TNMP.  The request iswas designed to provide PNM’s electric utility an opportunity to earn a 10.75% return on equity.  The application also ~~requests~~requested authorization to implement a ~~Fuel and Purchased Power Adjustment Clause~~FPPAC 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.  Hearings were held in December 2007.  At the hearing PNM adjusted its revenue increase request to $76.9 million.  On ~~September 6, 2007,~~April 24, 2008, the NMPRC ~~extended~~issued a final order in the ~~suspension~~case that resulted in a revenue increase of $34.4 million.  The rate increase provides for a 10.1% return on equity. New rates reflecting the $34.4 million increase were effective for bills rendered on and after May 1, 2008.  In its final order, the NMPRC disallowed recovery of costs associated with the RECs used to meet the New Mexico Renewable Energy Portfolio Standards that were being deferred as regulatory assets, but did allow PNM the opportunity to seek recovery in the next rate case if it can demonstrate that it incurred an actual incremental cost for its compliance with the RPS.  The NMPRC also ruled that recovery of coal mine decommissioning costs should be capped at $100 million.  The order results in PNM being unable to assert it is probable, as defined under GAAP, that the costs previously deferred on PNM’s ~~proposed~~balance sheet will be recoverable through future rates charged to ~~May 7,~~its customers.  Accordingly, as of March 31, 2008, PNM recorded regulatory disallowances for pre-tax write offs of $19.6 million for coal mining decommissioning costs and ~~directed~~$10.6 million for deferred REC costs.  PNM ~~to file supplemental testimony~~is evaluating whether it will be successful in meeting the criteria set forth by the NMPRC.  PNM has appealed the treatment of coal mine decommissioning and ~~exhibits to correct certain errors in PNM’s February 21, 2007 filing that PNM had brought~~the RECs to the ~~NMPRC’s attention.~~New Mexico Supreme Court.  The required supplemental testimony and exhibits were filed on September 10, 2007.  As supplemented by this filing, PNM’s rate application requests an increase in electric revenues of $82.4 million, an increase of 14.8% over test period revenue.  The NMPRC staff,AG has moved to intervene.  To the AG, and other intervenors have filed testimony and recommendations regarding PNM's rate application that propose substantial reductions to PNM's proposed rates. These parties also stated their opposition to PNM's proposal to implement a Fuel and Purchased Power Adjustment Clause.extent PNM is ~~preparing rebuttal testimony~~successful in demonstrating these costs are recoverable through future rate proceedings, the costs will be restored to refute the positions of these parties and further support its position.  A hearing is scheduled to begin December 5, 2007.  A recommended decision of the hearing examiner is due by February 28, 2008.  PNMPNM’s balance sheet. The Company is unable to predict the outcome of ~~the rate proceeding.~~

~~NMPRC Inquiry on Fuel and Purchased Power Adjustment Clauses~~this matter.

On October 16, 2007, the NMPRC voted to open a notice of inquiry that may eventually lead to establishing simple and consistent rules for the implementation of fuel and purchased power cost adjustment clauses for all investor-owned utilities and electric cooperatives in New Mexico.  The investor-owned utilities and electric cooperatives are being asked to respond to a series of questions, the responses to which which will be discussed at a future workshop.  The NMPRC staff was directed to make a filing dealing with the need for consistency of the fuel clauses, streamlining, and whether a single methodology would be beneficial and should be applied to all of the utilities. Responses to the notice of inquiry are due by December 3, 2007.

5458
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND ~~SUBSIDIARY~~SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Emergency FPPAC

On March 20, 2008, PNM and the International Brotherhood of Electrical Workers Local No. 611, filed a joint motion in the general electric rate case requesting NMPRC authorization to implement an Emergency FPPAC on an interim basis.  The motion requested immediate authority to implement an Emergency FPPAC for a period of 24 months or until the effective date of new rates in PNM’s next rate case, whichever is earlier.

On May 22, 2008, following an evidentiary hearing, the NMPRC issued a final order that approved the Emergency FPPAC with certain modifications relating to power plant performance and the treatment of revenue from SO2 allowances.  The Emergency FPPAC permits PNM to recover its actual fuel and purchased power costs up to $0.024972 per kWh, which is an increase of $0.008979 per kWh above the fuel costs included in base rates.  PNM is unable to predict if actual fuel and purchased power costs will exceed the cap during the period the Emergency FPPAC is in effect. PNM implemented the Emergency FPPAC as modified on June 2, 2008 and expects to recover $58 million to $62 million annually.  Motions for rehearing were filed by NMPRC staff and intervenors on June 12, 2008 and June 23, 2008.  PNM filed timely responses to these motions.  The NMPRC denied the motions for rehearing on July 8, 2008.  Appeals from the final order may be filed within 30 days from the last date on which a rehearing motion is denied.  The Albuquerque Bernalillo County Water Utility Authority filed an appeal on August 1, 2008.  PNM is unable to predict if other appeals will be filed or the final outcome.

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. 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. Fuel cost charges for 2005 and 2006 are being addressed as part of the finding in the Golden Spread fuel charge adjustment clause case pending before the FERC, in which PNM is an intervenor.  The hearing was held in that case and in May 2006, the ALJ issued an initial 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 finding in the Golden Spread fuel charge adjustment clause case pending before the FERC, in which PNM is an intervenor.decision.  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 unbundle 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~~certain limited 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~~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.~~staff.  On October 19, 2006, PNM, SPS and FERC ~~Trial Staff~~staff each filed reply comments contending that opposition to the limited settlement was without merit.  The Settlement Judge and the ALJ have certified the contested partial settlement and sent it to ~~the~~ FERC for final approval.  The limited 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 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.  However, FERC removed the Golden Spread item from its agenda.  In September 2007, ~~the~~ FERC open meeting agenda again indicated the Golden Spread complaint case initial decision was on the docket for consideration by the FERC.  SPS and Golden Spread
59
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

filed a motion to defer FERC action on the initial decision to provide yet additional time for them to reach settlement.  PNM and another intervenor in the case filed their opposition to the motion requesting the FERC to proceed to issue an order on the initial decision of the ALJ.  However, FERC removed the Golden Spread item from its open meeting agenda and did not issue an order on the initial decision.  In November 2007, SPS again filed a motion at FERC to defer action on the Golden Spread case alleging it was close to settlement with Golden Spread.  The motion was unopposed and granted.  In December 2007, SPS, Golden Spread and Occidental Petroleum filed a settlement at FERC.  The settling parties recognized the need for FERC to rule on the ALJ’s recommended decision in the Golden Spread complaint case.  PNM did not oppose the settlement.

In April 2008, FERC issued its order in the Golden Spread complaint case and affirmed in part and reversed in part the ALJ’s initial decision.  FERC affirmed the decision of the ALJ that SPS violated its tariffs, and did not overturn the ALJ’s decision requiring SPS to make refunds.  However, FERC did truncate the refund period to the period beginning January 1, 2005.  Additionally, there was no identification of the amount of refunds owed to PNM in the order.  In a separate order issued on the same day, FERC approved the SPS-Golden Spread settlement entered in the case. The Company filed a petition for rehearing of FERC’s order, as did other entities, including SPS, which are still pending before FERC.  PNM cannot predict if the ~~settlement~~final outcome of the case at FERC.

Gas Utility Assets Sale and Service Abandonment

On March 11, 2008, PNM filed its application at the NMPRC seeking regulatory approval for the sale of the gas utility assets and approval for the abandonment of its natural gas utility service in New Mexico.  In a separate application filed simultaneously at the NMPRC, NMGC requested approval to purchase PNM Gas’s utility assets, requested the issuance of a Certificate of Convenience and Necessity to operate the gas utility and provide natural gas utility service in New Mexico, and for various other regulatory approvals.  On March 17, 2008, PNM and NMGC filed a joint motion to consolidate the applications before the NMPRC.  By order dated March 27, 2008, the NMPRC consolidated the two applications into one docket and appointed a hearing examiner in the case to hear the case.  Discovery has commenced in the case.  The Company filed testimony with the NMPRC in March 2008 for approvals required for the sale of its gas utility service and for transition services to be provided to NMGC.  PNM and NMGC continue to respond to discovery requests.  Hearings have been rescheduled to begin September 12, 2008.  On August 12, 2008, the NMPRC staff, the AG, PNM and NMGC filed a motion to vacate the current procedural schedule and to move the hearing date to start on September 16, 2008.  This motion indicates the filing parties have agreed to a stipulation resolving the issues in the proceeding and anticipate that stipulation will be filed on August 20, 2008.  The motion was conditionally approved on August 13, 2008. PNM is unable to predict the outcome of the case.

NMPRC Inquiry on Fuel and Purchased Power Adjustment Clauses

On October 16, 2007, the NMPRC opened a NOI that may lead to establishing simple and consistent rules for the implementation of FPPACs for all investor-owned utilities and electric cooperatives in New Mexico.  The investor-owned utilities and electric cooperatives were asked to respond to a series of questions; the responses will be discussed at a future workshop.  The NMPRC staff was directed to make a filing dealing with the need for consistency of the fuel clauses, streamlining, and whether a single methodology would be beneficial and should be applied to all of the utilities.  PNM filed its comments on December 3, 2007.

NMPRC Rulemaking On Disincentives to Energy Efficiency Programs

On January 29, 2008, the NMPRC issued a NOI to identify disincentives in utility expenditures on energy efficiency and measures to mitigate those disincentives, including specific ratemaking alternatives.  In a procedural order issued April 1, 2008, the NMPRC determined that the proceeding should be conducted as a rulemaking and appointed a Hearing Examiner to conduct workshops as part of the process.  Workshops have begun and will continue at least through August 2008.  A revised rule is expected to be approved by the ~~FERC or what~~end of 2008.

60
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Investigation Into Executive Compensation

On December 11, 2007, the NMPRC issued an order docketing an investigation into whether the level of compensation paid to executives by investor-owned New Mexico utilities is reasonable and prudent.  The order required all such utilities to submit certain information and documents by January 11, 2008.  PNM made the required filing.  No further proceedings are scheduled at this time.

PVNGS Unit 2 Lease Interest Transfer

On June 29, 2007, a wholly-owned subsidiary of PNMR purchased 100% of a trust, which owns a 2.26% 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. In January 2008, PNM filed an application at the NMPRC seeking approval to acquire the beneficial ownership interest in the trust from the PNMR subsidiary.  PNM requested recovery of the costs of acquiring the Unit 2 interest through inclusion in its electric rates.  The filing also requested certain variances from NMPRC filing and reporting requirements normally required for general diversification filings.  Discovery has commenced in the proceeding and the Company has been responding to discovery requests made by NMPRC staff and intervenors in the case.  The procedural schedule has changed several times, and the hearing in the case is currently set for October 2008.  The Company cannot predict the outcome of ~~the fuel cost adjustment clause~~this proceeding at ~~the FERC will be.~~

~~TNMP~~this time.

In April 2008, PNM also filed an application at FERC seeking FERC approval of the proposed acquisition of the PVNGS Unit 2 interest.  FERC established a comment date in early May 2008, and no comments or interventions were filed in the docket.  On June 30, 2008, FERC issued its order approving the transfer of the PVNGS Unit 2 interest to PNM.

TNMP ~~Competitive Transition Charge~~

TNMP 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.~~costs and the Supreme Court has requested response to those filings.

55
~~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 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 occurred May 9, 2007 and~~Texas.  On January 31, 2008, the Court ~~took~~of Appeals affirmed the ~~matter under advisement.~~District Court and PUCT decisions.  TNMP and other parties have filed a request with the Texas Supreme Court to review the Court of Appeals decision.

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.~~CTC. The PUCT concluded that the correct rate at which a utility should accrue carrying costs through a ~~stranded cost~~CTC 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 will affect TNMP by lowering the previously 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 disagreed with TNMP’s calculation of the ~~interest~~carrying cost rate, the matter was referred to SOAH for a hearing on the merits. The parties 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~~a
61
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

carrying cost rate of 8.06%. As this calculation differs from TNMP’s methodology and result, TNMP filed exceptions on July 2, 2007.  At the July 20, 2007 open meeting, the PUCT unanimously rejected the proposed order regarding the calculation of ~~TNMP's~~TNMP’s on-going ~~interest~~carrying cost rate for the CTC. The PUCT approved the 8.31% ~~interest~~ rate proposed by TNMP and the PUCT staff.  The PUCT ~~will issue~~issued a ~~signed~~ final order and ~~then~~ TNMP ~~will be required to make~~made a compliance filing to ~~implement~~put the new ~~rates.~~rates that were to go into effect on February 1, 2008.  Intervenors have asserted objections to the compliance filing and those objections are pending at the PUCT.  PUCT staff urges that the PUCT make the new rate effective as of December 27, 2007 when the PUCT’s order establishing the correct rate became final.  In response to intervenors, the ALJ has suspended TNMP’s February 1, 2008 rate implementation pending a hearing.  The hearing has been completed and the parties are awaiting a recommended decision from the ALJ.

60-Day Rate Review

In November 2005, TNMP made its required 60-day rate review filing.  TNMP’s case establishes a CTC 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-year period.  The PUCT allowed TNMP to begin collecting its CTC 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~~

In January 2007, PNMR and ECJV, a wholly owned subsidiary of Cascade, created EnergyCo ~~a joint venture,~~ to serve expanding U.S. markets throughout the Southwest, Texas and the West.  PNMR and ECJV each have a 50 percent ownership interest in EnergyCo, a limited liability company.  ~~To fund startup expenses~~See Note 22 of ~~EnergyCo, both members contributed $2.5 million~~the Notes to ~~EnergyCo~~Consolidated Financial Statements in the ~~three months ended March 31, 2007.~~

PNMR accounts for its investment in EnergyCo using the equity method of 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.

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)~~
~~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 was a payment by PNMR of $2.1 million.

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 obligationsAnnual Reports 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 distributed $87.5 million to each of PNMR and ECJV from a long-term borrowing under this facility.

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.

Form 10-K.  PNMR has no commitments or guarantees with respect to EnergyCo.

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)~~

Summarized financial information for EnergyCo is as follows:

Three Months

Nine Months

Ended

Ended

September 30, 2007

(In thousands)

Revenues $ 100,463 $ 114,828
Expenses and other income 81,249 93,563
Earnings before income taxes 19,214 21,265
Income taxes⁽¹⁾
399 399
Net earnings $ 18,815 $ 20,866

50 percent of net earnings $ 9,408 $ 10,433
Plus amortization of basis difference in EnergyCo 1,148 1,733
PNMR equity in net earnings of EnergyCo $ 10,556 $ 12,166
Results of Operations

Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
(In thousands)
Operating revenues $ 304,462 $ 14,366 $ 478,540 $ 14,366
Cost of sales 259,927 4,561 457,097 4,561
Gross margin 44,535 9,805 21,443 9,805
Non-fuel operations and maintenance expenses 4,947 799 9,603 799
Administrative and general expenses 7,697 2,314 13,799 3,647
Impairment of intangible assets 21,795 - 21,795 -
Depreciation and amortization expense 7,658 1,528 15,227 1,528
Interest expense 4,789 818 11,357 818
Taxes other than income tax 3,609 1,004 7,269 1,004
Other (income) and deductions (449 ) (34 ) (706 ) (43 )
Earnings (loss) before income taxes (5,511 ) 3,376 (56,901 ) 2,052
Income taxes (benefit)(1)
91 - (293 ) -
Net earnings (loss) $ (5,602 ) $ 3,376 $ (56,608 ) $ 2,052

50 percent of net earnings (loss) $ (2,801 ) $ 1,688 $ (28,304 ) $ 1,026
Amortization of basis difference in EnergyCo 278 584 698 584
PNMR equity in net earnings (loss) of EnergyCo $ (2,523 ) $ 2,272 $ (27,606 ) $ 1,610
(1) Represents the Texas Margin Tax, which is considered an income tax.

As of September 30, 2007

(In thousands)

Current assets $ 92,417
Net utility plant 833,607
Deferred assets 331,129
Total assets 1,257,153

Current liabilities 85,329
Long-term debt 622,778
Other long-term liabilities 26,506
Total liabilities 734,613

Owners’ equity $ 522,540

50 percent of owners’ equity $ 261,270
Unamortized PNMR basis difference in EnergyCo 387
PNMR equity investment in EnergyCo $ 261,657

5862
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND ~~SUBSIDIARY~~SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Financial Position

June 30, 2008 December 31, 2007
(In thousands)

Current assets $ 247,095 $ 119,255
Net property, plant and equipment 898,642 853,492
Deferred assets 254,130 297,197
Total assets 1,399,867 1,269,944

Current liabilities 288,556 88,812
Long-term debt 700,778 650,778
Other long-term liabilities 60,869 34,344
Total liabilities 1,050,203 773,934

Owners’ equity $ 349,664 $ 496,010

50 percent of owners’ equity $ 174,832 $ 248,005
Unamortized PNMR basis difference in EnergyCo 225 89
PNMR equity investment in EnergyCo $ 175,057 $ 248,094

SFAS 141 requires that EnergyCo individually value each asset and liability received in the Altura and Altura Cogen Power Plant transactions and initially record them on its balance sheet at the determined fair value.  For both transactions, this accounting results in a significant amount of amortization since the acquired contracts’ pricing terms differ significantly from fair value at the date of acquisition and emission allowances, while acquired from government programs without future cost to EnergyCo, have historically had significant market value.  During the three months and six months ended June 30, 2008, EnergyCo recorded amortization of contracts acquired of $(0.3) million and $1.0 million, which is recorded in operating revenues, and amortization on emission allowances of $1.2 million and $5.3 million, which is recorded in cost of sales.

In July 2008, a federal appeals court ruling by the U.S. Court of Appeals for the District of Columbia Circuit Court invalidated CAIR.  This ruling appears to remove the need for emissions allowance credits under the CAIR program.  EnergyCo currently carries $153.5 million in inventory for emissions allowances, $34.6 million of which fall under the CAIR program, from the purchase of the Altura Cogen plant and contribution of the Twin Oaks plant.  EnergyCo is currently evaluating what impacts this ruling might have on the value of this inventory.

The contribution of Altura created a basis difference between PNMR’s recorded investment in EnergyCo and 50 percent of EnergyCo’s equity.  While the portion of the basis difference related to contract amortization will only continue through 2010, other basis differences, including a difference related to emission allowances, will continue to exist through the life of the Altura plant.  For the three months and six months ended June 30, 2008, the basis difference adjustment detailed above of $0.2 million and $0.6 million relates mainly to contract amortization with insignificant offsets related to the other minor basis difference components.

EnergyCo intends to have an active hedging program that covers a multi-year period.  The level of hedging at any given time varies depending on current market conditions and other factors.  Economic hedges that do not qualify for or are not designated as cash flow hedges or normal purchases/sales under SFAS 133 are derivative instruments that are required to be marked to market.  Changes in the fair value of economic hedges resulted in an increase in net earnings of $8.1 million in the three months ended June 30, 2008 and a reduction of net earnings of $39.0 million in the six months ended June 30, 2008 as a result of higher power prices.  Due to the extreme market volatility experienced in the first quarter in the ERCOT market, EnergyCo made the decision to exit the speculative trading business and close out the speculative trading positions.  In May 2008, EnergyCo closed out all remaining

63
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

speculative positions.  EnergyCo recognized speculative trading losses of $2.4 million in the first quarter of 2008 and less than $0.1 million in the second quarter of 2008.  No additional costs are expected related to speculative trading.

The assets of Altura transferred to EnergyCo included the development rights for a possible 600-megawatt expansion of the Twin Oaks plant, which was classified as an intangible asset.  EnergyCo has made a strategic decision not to pursue the Twin Oaks expansion at this time and, in the three months ended June 30, 2008, has written off the development rights as an impairment of intangible assets amounting to $21.8 million.

(12)
Related Party Transactions

PNMR, PNM, TNMP, and EnergyCo are considered related parties as defined in SFAS 57.  PNMR Services Company provides corporate services to PNMR, its subsidiaries, and 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~~2007 Annual Reports on Form ~~10-K/A (Amendment No. 1).~~10-K.

See Note 11 for information concerning ~~EnergyCo and Note 14 for information concerning the transfer of operations from TNMP to PNM.~~EnergyCo.  The table below summarizes the nature and amount of other related party transactions of PNMR, PNM and TNMP:

Three Months Ended

Nine Months Ended
Three Months Ended Six Months Ended

September 30,

September 30,
June 30, June 30,

2007

2006

2007

2006
2008 2007 2008 2007
(In thousands) (In thousands)
Electricity, transmission and related services billings:
Transmission, distribution and related services billings:
PNM to TNMP $ - $ 11,208 $ 126 $ 39,117 $ - $ - $ - $ 126
TNMP to PNMR 21,057 19,378 55,444 52,545 14,909 16,873 29,319 33,386

Shared services billings from PNMR to:
PNM 21,350 31,366 70,945 93,742
PNM* $ 23,544 $ 23,697 $ 46,411 $ 49,595
TNMP 3,888 6,809 14,006 25,097 5,038 4,587 9,815 10,117

Services billings from PNMR to EnergyCo 4,580 - 7,994 - $ 4,749 $ 2,344 $ 7,224 $ 3,414

Income tax sharing payments from:
PNM to PNMR $ - $ - $ - $ -
PNMR to PNM $ - $ - $ 1,855 $ -
PNMR to TNMP - - 858 -

Capital expenditure billings from PNMR to:
PNM $ - $ - $ - $ 99
TNMP - - - 18

Interest payments:
TNMP to PNMR - - - - $ 28 $ 324 $ 117 $ 592

* PNM shared services include billings to PNM Gas of $6.0 million and $8.1 million for the three months ended and $12.1 million and $16.6 million for the six months ended June 30, 2008 and 2007.

59
64
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND ~~SUBSIDIARY~~SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(13)
New Accounting Pronouncements

Note 21 of Notes to Consolidated Financial Statements in the ~~2006~~2007 Annual Reports on Form ~~10-K/A (Amendment No. 1)~~10-K 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's Consolidated Financial Statements.~~  See Note 4 regarding the implementation of SFAS 157, SFAS 159, and FSP FIN 39-1.

SFAS 161 – Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133

In March 2008, the FASB released SFAS 161, which is effective for years beginning after November 15, 2008 and changes the disclosure requirements for ~~discussion concerning~~derivative instruments and hedging instruments.  Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, results of operation, and cash flows.  The Company is currently reviewing the ~~adoption~~requirements of ~~FIN 48 as of~~SFAS 161 and will implement the required disclosures no later than January 1, ~~2007.~~2009.

SFAS 162 – The Hierarchy of Generally Accepted Accounting Principles

The current GAAP hierarchy, as set forth in the American Institute of Certified Public Accountants Statement on Auditing Standards No. 69, has been criticized because (1) it is directed to the auditor rather than the entity, (2) it is complex, and (3) it ranks FASB Statements of Financial Accounting Concepts, which are subject to the same level of due process as FASB Statements of Financial Accounting Standards, below industry practices that are widely recognized as generally accepted but that are not subject to due process.  The Board concluded that the GAAP hierarchy should reside in the accounting literature established by the FASB and issued this Statement to achieve that result.  This statement is effective 60 days following the SEC’s approval.  The Company has reviewed the impact of SFAS 162 and does not believe it will result in a change in current practice.

(14)
Discontinued Operations

~~In connection with~~As discussed in Note 2, PNM entered into an agreement to sell its gas operations, which comprise the ~~acquisition of TNP and its principal subsidiaries, TNMP and First Choice,~~PNM Gas segment.  Under GAAP, 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 of PNM Gas are considered to ~~PNMR through redemption~~be held-for-sale beginning December 31, 2007 and presented as discontinued operations on the accompanying balance sheets.  The PNM Gas results of ~~TNMP’s common stock.  PNMR contemporaneously contributed~~operations are excluded from continuing operations and presented as discontinued operations on the ~~TNMP New Mexico operational assets and liabilities~~statements of earnings.  Prior periods have been recast to ~~PNM.~~

be consistent with this presentation.  In accordance with SFAS 144, ~~and EITF 03-13, the Company determined that the New Mexico operations component of TNMP~~no depreciation is ~~required to be reported~~recorded on assets held for sale in 2008.  Summarized financial information for PNM Gas is as discontinued operations in the TNMP Condensed Consolidated Statements of Operations for the period January 1, 2006 through September 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.follows:

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

Nine Months

Ended

Ended

September 30, 2006

(In thousands)

Operating revenues $ 26,513 $ 75,411
Operating expenses and other income 25,744 71,557
Earnings from discontinued operations before income tax 769 3,854
Income tax expense 250 1,237
Earnings from discontinued operations $ 519 $ 2,617

60
65
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND ~~SUBSIDIARY~~SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Results of Operations

~~The following table summarizes the TNMP New Mexico assets and liabilities transferred to PNM:~~
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
(In thousands)
Operating revenues $ 95,568 $ 75,112 $ 316,024 $ 291,569
Cost of energy 64,917 45,068 225,747 206,776
Gross margin 30,651 30,044 90,277 84,793
Operating expenses 22,991 23,808 44,433 47,089
Depreciation and amortization - 5,473 - 11,074
Operating income 7,660 763 45,844 26,630
Other income (deductions) 502 (493 ) 1,443 625
Net interest charges (3,576 ) (2,898 ) (6,547 ) (5,844 )
Segment earnings before income taxes 4,586 (2,628 ) 40,740 21,411
Income taxes 1,824 (1,040 ) 15,479 8,477
Segment earnings (loss) $ 2,762 $ (1,588 ) $ 25,261 $ 12,934

January 1,

2007

(In thousands)
Current assets $ 15,444
Other property and investments 10
Utility plant, net 96,468
Goodwill 102,775
Deferred charges 1,377
Total assets transferred to PNM 216,074

Current liabilities 17,313
Long-term debt 1,065
Deferred credits and other liabilities 30,673
Total liabilities transferred to PNM 49,051

Net assets transferred between entities $ 167,023

Financial Position

June 30, December 31,
2008 2007
(In thousands)
ASSETS
Cash and cash equivalents $ 25 $ 28
Accounts receivable and unbilled revenues, net 50,181 89,699
Regulatory and other current assets 27,480 30,334
Total current assets 77,686 120,061
Gas plant in service 758,351 743,664
Accumulated depreciation and amortization (241,876 ) (245,741 )
Construction work in progress 19,803 22,411
Net utility plant 536,278 520,334
Regulatory and other assets 5,150 6,205
$ 619,114 $ 646,600

LIABILITIES AND EQUITY
Accounts payable and accrued expenses $ 18,313 $ 68,458
Regulatory and other current liabilities 24,409 27,545
Total current liabilities 42,722 96,003
Regulatory liabilities 73,790 72,727
Deferred credits and other liabilities 15,524 17,121
Total deferred credits and other liabilities 89,314 89,848
Equity 487,078 460,749
$ 619,114 $ 646,600

~~(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.  As a result of settlements with the IRS, PNMR has recognized approximately $16.0 million of income tax benefit in June 2007.  Including this benefit, PNMR’s effective tax rate was 7.8% for the nine months ended September 30, 2007.  Without this non-recurring benefit, PNMR’s effective tax rate would have been 33.0% for the nine months ended September 30, 2007.

During the nine months ended September 30, 2007, PNMR established a liability of $15.2 million for additional unrecognized tax benefits, which was offset by deferred income taxes and had no effect on earnings.  At September 30, 2007, PNMR had $17.3 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 $0.5 million of unrecognized tax expense of PNMR and $3.3 million of unrecognized tax expense of PNM will be reversed by September 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.

6166
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND ~~SUBSIDIARY~~SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANYAND 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~~    PNM’s cost-of-gas revenues collected from sales-service customers are included in Interest Expense in the Condensed Consolidated Statements of Operations.  Interest income under FIN 48 for the nine months ended September 30, 2007 was $2.7 million for PNMR.  Due to the settlement discussed above, during the nine months ended September 30, 2007, PNMR reversed interest expense of $4.8 million previously recorded.  At September 30, 2007, PNMR had accumulated accrued interest receivable of $6.8 million and accumulated accrued interest payable of $5.6 million; PNM had accumulated interest receivable of $2.8 million and accumulated interest payable of $0.9 million; and TNMP had accumulated interest receivable of $4.0 million.

The Company files a federal consolidated and several consolidated and separate state income tax returns.  The tax years prior to 2001 are closed to examination by either federal or state taxing authorities.  The years 2003-2004 are currently under federal income 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 September 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, whichrecovered in accordance with ~~GAAP were~~NMPRC regulations through the PGAC and represent a pass-through of the cost of natural gas to the customer.  The NMPRC has approved an agreement regarding the hedging strategy of PNM and the implementation of a price management fund program which includes a continuous monthly balancing account with a carrying charge.  This carrying charge has the effect of keeping PNM whole on purchases of gas since it is compensated for the time value of money that exists due to any delay in collections from customers.

    PNM uses call options and financial swaps to facilitate the hedge strategy. PNM Gas also enters into physical gas contracts to meet the needs of its retail sales-service customers.  Costs and gains and losses for these instruments are deferred and ~~amortized over~~recovered through the ~~lives~~PGAC with no income statement effect.  At June 30, 2008, PNM Gas had $1.7 million of ~~the leases, approximately~~current assets and current liabilities related to these instruments.  At December 31, 2007, PNM Gas had $7.1 million of current assets and current liabilities related to these instruments.  At June 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 time2008, PNM Gas derivatives were valued using Level 2 and ~~attributable to New Mexico customers should have been changed to match the rate-making treatment, which would have resulted~~Level 3 inputs as defined 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 nine months ended September 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.

~~The following is a summary of the corrections described above:~~

62
~~PNM RESOURCES, INC. AND SUBSIDIARIES~~SFAS 157.
~~PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY~~
~~TEXAS-NEW MEXICO POWER COMPANY~~~~AND SUBSIDIARIES~~

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

Three Months Ended September 30, 2006 Nine Months Ended September 30, 2006
As Previously Reported As Restated As Previously Reported As Restated
(In thousands, except per share amounts) (In thousands, except per share amounts)
Consolidated Statements of Earnings

Energy production costs $ 38,489 $ 38,813 $ 119,790 $ 120,762
Net earnings* 43,844 43,520 86,476 85,504
Net earnings per share
Basic 0.63 0.62 1.25 1.24
Diluted 0.62 0.62 1.24 1.23

Consolidated Statements of Cash Flows

Deferred credits (11,496 ) (10,524 )

Consolidated Statements of Comprehensive Income (Loss)

Total comprehensive income 64,257 63,933 99,310 98,338

* Net earnings also appears in the Consolidated Statements of Cash Flows and Consolidated Statements of Comprehensive Income (Loss)

~~PNM~~

Three Months Ended September 30, 2006 Nine Months Ended September 30, 2006
As Previously Reported As Restated As Previously Reported As Restated
(In thousands, except per share amounts) (In thousands, except per share amounts)

Consolidated Statements of Earnings

Energy production costs $ 35,990 $ 36,314 $ 115,657 $ 116,629
Net earnings* 17,972 17,648 51,720 50,748
Net earnings available for common stock** 17,840 17,516 51,324 50,352

Consolidated Statements of Cash Flows

Deferred credits (7,428 ) (6,456 )

Consolidated Statements of Comprehensive Income (Loss)

Total comprehensive income 17,287 16,963 46,336 45,364

* Net earnings also appears in the Consolidated Statements of Cash Flows and Consolidated Statements of Comprehensive Income (Loss)
**Net earnings available for common stock also appears in the Consolidated Statements of Comprehensive Income (Loss)

63
~~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)~~

~~(17)~~
(15)
Business Improvement Plan

~~The~~As discussed in Note 24 of the Notes to Consolidated Financial Statements in the 2007 Annual Reports on Form 10-K, the Company has undertaken a business improvement process that includes a comprehensive cost structure analysis of its operations and a benchmarking analysis to similar-sized utilities.  The Company is now in the process of implementing a series of initiatives designed to manage future operational costs, maintain financial strength and strengthen its regulated utilities.   The multi-phase process includes a business improvement plan to streamline internal processes and reduce the Company’s work force.  The utility-related process enhancements are designed to improve and centralize business functions.

The Company has existing plans providing severance benefits to employees who are involuntarily terminated due to elimination of their positions.  Under SFAS 112, the severance benefits payable under the Company’s existing plans should be recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated.  At ~~September~~June 30, ~~2007,~~2008, the Company assessed the status of the business improvement plan process and the positions that were probable of being eliminated as determined at that time.  ~~The~~During the three months and six months ended June 30, 2008, the Company ~~then calculated the~~recorded pre-tax severance benefits ~~that would be associated with those positions and recorded a pre-tax expense~~payable of ~~$12.3 million of which $6.9 million was recorded by PNM and~~ $0.3 million ~~was recorded by TNMP.  The Company also incurred~~and $0.5 million and other costs, primarily consulting fees, related to the business improvement plan of ~~$0.3~~$1.2 million ~~at September 30, 2007.~~and $3.2 million.  Substantially all of these costs were recorded by PNMR.  As additional phases of the business improvement plan are developed, the associated costs will be analyzed and ~~recorded as specified by GAAP.~~recorded.

(16)   Variable Interest Entities

Information regarding the Company’s assessment of potential variable interest entities is contained in Note 9 of Notes to the Consolidated Financial Statements in the 2007 Annual Reports on Form 10-K.

On April 18, 2007, PNM entered into a power purchase agreement to purchase all of the electric capacity and energy from Valencia, a natural gas-fired power plant near Albuquerque, New Mexico.  Valencia became operational on May 30, 2008.  A third-party built, owns and operates the facility while PNM is the sole purchaser of the electricity generated. The total construction cost for the facility was $90.0 million. The term of the power purchase agreement is for 20 years beginning June 1, 2008, with the full output of the plant estimated to be 145 MW.  PNM has the option to purchase and own up to 50% of the plant or the variable interest entity. 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).

PNM has evaluated the accounting treatment of this arrangement and concluded that the third party entity that owns Valencia is a variable interest entity and that PNM is the primary beneficiary of the entity under FIN 46R since it will absorb the majority of the variability in the cash flows of the plant.  As the primary beneficiary, PNM has consolidated the entity in its financial statements beginning on the commercial operations date.  Accordingly, the assets, liabilities, operating expenses, and cash flows of Valencia are included in the consolidated financial
67

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

statements of PNM although PNM has no legal ownership interest or voting control of the variable interest entity.  The owner’s equity and net income of Valencia are considered attributable to minority interest.  The owner’s equity is included in other deferred credits and the net income is included in other income and deductions. PNM did not consolidate the variable interest entity prior to May 30, 2008 since PNM had no financial risk.

Summarized financial information for Valencia is as follows:

Results of Operations
May 30, 2008 to
June 30, 2008
(In thousands)
Operating revenues $                             1,416
Operating expenses                                    190
Interest expense                                        225
    Income attributable to minority interest     $                             1,001
Financial Position
June 30, 2008
(In thousands)
Current assets     $                          1,472
Net property, plant and equipment                              90,041
    Total assets                                  91,513
Short-term debt                              86,651
Other current liabilities                                5,016
    Total liabilities                              91,667
Owner' equity - minority interest $                             (154)
As of June 30, 2008, the utility plant serves as collateral for the obligations of this variable interest entity.  As of June 30, 2008, the short-term debt of variable interest entity is to its parent and is non-recourse to both PNMR and PNM.  Subsequent to June 30, 2008, the variable interest entity restructured its financial arrangements with its parent through a new short-term debt obligation of $75.2 million.

(17)   Impairment of Goodwill and Other Intangible Assets

Under the provisions of SFAS 142, the Company evaluates its goodwill and non-amortizing intangible assets for impairment annually at the reporting unit level or more frequently if circumstances indicate that the goodwill or intangible assets may be impaired.  The goodwill and other intangible assets were recorded upon PNMR’s acquisition of TNP and were pushed down to the businesses acquired.  In connection with the transfer of TNMP’s New Mexico operations to PNM, $102.8 million of goodwill was transferred to PNM.

The Company performed its annual testing of these assets as of April 1, 2008.  Application of the impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units and determination of the fair value of each reporting unit.    The fair value of each reporting unit is estimated using a discounted cash flow methodology.  This analysis requires significant judgments, including estimation of
6468
PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

future cash flows, which is dependent on internal forecasts, estimation of long-term growth rates for the business and determination of appropriate weighted average cost of capital for each reporting unit.  Changes in these estimates and assumptions could materially affect the determination of fair value and the conclusion of impairment for each reporting unit.

~~ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~    The market capitalization of PNMR’s common stock has been significantly below book value during 2008, which is an indicator that intangible assets may be impaired.  In addition, changes in the ERCOT market in which First Choice operates have significantly impacted its results of operations.  The first step of the impairment test for goodwill requires that the Company compare the fair value of each reporting unit with its carrying value, including goodwill.  For non-amortizing intangibles, the Company compares the fair value of the intangible asset to its recorded value.  As a result of this analysis, the Company concluded there was an indication of impairment in the reporting units having goodwill and that the First Choice trade name was impaired.  This conclusion requires the Company to perform the second step of the SFAS 142 impairment analysis, determining the amount of goodwill impairment to be recorded.  The amount is calculated by comparing the implied fair value of the goodwill to its carrying amount.  This exercise requires the Company to allocate the fair value determined in step one to the individual assets and liabilities of the reporting unit.  Any remaining fair value would be the implied fair value of goodwill on the testing date.  To the extent the recorded amount of goodwill of a reporting unit exceeds the implied fair value determined in step two, an impairment loss is reflected in results of operations.  Although the impairments of goodwill have no income tax effects, the impairment of the First Choice trade name does have an income tax effect.

Because of the timing and complexity of the calculations required in the second step of the impairment analysis related to the goodwill of First Choice, the Company anticipates finalizing this analysis in the third quarter of 2008.  However, a preliminary estimate of the goodwill impairment has been recorded based on the calculations performed to date and may be revised.  Neither the impairments recorded as of June 30, 2008 nor changes to the estimated amounts impact the Company’s cash flows.  A summary of goodwill and non-amortizing intangible assets and pre-tax impairments recorded in the three months ended June 30, 2008 is as follows:

Balance Balance
before after
Impairment Impairment Impairment
Goodwill:
First Choice $ 131,768 $ 88,559 $ 43,209
PNM 102,775 51,632 51,143
TNMP 261,121 226,665 34,456
Total PNMR $ 495,664 $ 366,856 128,808

Other intangible assets - First Choice trade name $ 68,774 $ 61,403 7,371

Total impairment $ 136,179

69
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations for PNMR is presented on a combined basis, including certain information applicable to PNM and TNMP.  The MD&A for PNM and TNMP ~~only includes a narrative analysis of results of operations~~is presented as 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.  A reference to a “Note” in this Item 2 refers to the accompanying Notes to Condensed Consolidated Financial Statements (Unaudited) included in Item 1, unless otherwise specified.  Certain of the tables below may not visually add due to rounding.

MD&A ~~gives effect~~FOR PNMR

BUSINESS AND STRATEGY

Overview

The overall strategy of PNMR is to concentrate business efforts on its core regulated and unregulated electric businesses.  PNMR intends to focus on its regulated electric business by selling its gas operations, which is expected to close near the end of 2008.  PNMR expects to use the net after-tax proceeds to retire debt, fund future electric capital expenditures and for other corporate purposes.  The growth of the unregulated electric business is expected from the further development of EnergyCo.  The strategic growth of EnergyCo was initiated with PNMR’s contribution of Altura on June 1, 2007 and continued with EnergyCo’s acquisition of the Altura Cogen Power Plant in August 2007 and with EnergyCo’s ongoing joint development project for the Cedar Bayou IV Generating Station with NRG Energy, Inc.  On August 11, 2008, PNMR announced that it has decided to pursue strategic alternatives for First Choice.

The focus on the electric businesses also includes environmental sustainability efforts.  These efforts are comprised of various components including environmental upgrades, energy efficiency leadership, solar generating site and technology feasibility, purchasing power from renewable resources, and climate change leadership.  The investment in environmental sustainability is expected to result in future emission reductions as well as other long-term benefits for the Company.

Another initiative of PNMR is the separation of its merchant operations from PNM, which is being accomplished in several steps.  In June, 2008, PNMR completed the sale of certain wholesale power, natural gas and transmission contracts as an initial step in separating its merchant plant activities from PNM.  In addition, Luna and Lordsburg are required to be separated by January 1, 2010 under an existing NMPRC regulatory order.  These units will either be sold, included in retail rates, or placed in another PNMR subsidiary.  PVNGS Unit 3, which is not subject to the ~~restatement~~separation order, can remain in PNM.  In April 2008, PNM entered into three separate contracts for the sale of capacity and energy related to its entire ownership interest in PVNGS Unit 3, which is 135 MW. Under two of the contracts, PNM sells 90 MW of firm capacity and energy. Under the remaining contract, PNM sells 45 MW of unit contingent capacity and energy. The term of the contracts is May 1, 2008 through December 31, 2010. Under the two firm contracts, the two buyers made prepayments of $40.6 million and $30.0 million. The prepayments have been recorded as deferred revenue and are being amortized over the life of the contracts.

Critical to PNMR’s success for the foreseeable future is the financial health of PNM, PNMR’s largest subsidiary.  In 2007, PNM filed for new electric rates designed to increase operating revenues $76.9 million on an annual basis.  In addition, PNM asked for reinstatement of its FPPAC, which it voluntarily relinquished in 1994 under dramatically different circumstances.  As discussed in Note ~~16.~~10, on April 24, 2008, the NMPRC issued a final order in the case resulting in a revenue increase of $34.4 million and new rates reflecting the increase were effective for bills rendered on and after May 1, 2008.  In its final order, the NMPRC disallowed recovery of costs associated with the PNM’s RECs that are being deferred as regulatory assets and to cap the recovery of coal mine decommissioning costs at $100 million. PNM recorded pre-tax write-offs in the first quarter of 2008 of $19.6 million related to the coal mine decommissioning and $10.6 million for REC costs deferred through March 31, 2008.  PNM has appealed the treatment of coal mine decommissioning and the RECs to the New Mexico Supreme Court.  The AG has moved to intervene.  The Company is unable to predict the outcome of this matter.  As a result of PNM’s filing of the Emergency FPPAC described below, the NMPRC determined that it was unnecessary to address the merits of the FPPAC proposed in PNM’s original case.

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~~MD&A FOR PNMR~~On March 20, 2008, PNM, together with the International Brotherhood of Electrical Workers Local 611, filed a joint motion to implement an Emergency FPPAC. The motion requested immediate authority to implement an Emergency FPPAC for a period of 24 months or until the effective date of new rates in PNM’s next rate case, whichever is earlier.  On May 22, 2008, following an evidentiary hearing, the NMPRC issued a final order that approved the Emergency FPPAC with certain modifications relating to power plant performance and the treatment of revenue from SO2 allowances.  The Emergency FPPAC permits PNM to recover its actual fuel and purchased power costs up to $0.024972 per kWh, which is an increase of $0.008979 per kWh above the fuel costs included in base rates. PNM is unable to predict if actual fuel and purchased power costs will exceed the cap during the period the Emergency FPPAC is in effect.  PNM implemented the Emergency FFPAC as modified on June 2, 2008 and expects to recover $58 million to $62 million annually.  Appeals from the final order may be filed within 30 days from the last date on which a rehearing motion is denied.  The Albuquerque Bernalillo County Water Utility Authority filed an appeal on August 1, 2008.  PNM is unable to predict if other appeals will be filed or the final outcome.

~~BUSINESS AND STRATEGY~~PNM expects to file a general base rate case during the third quarter of 2008 for all of its electric customers in New Mexico, except those previously served by TNMP.  PNM expects new rates to be effective in the third quarter of 2009. The general rate increase will seek recovery of increased capital spending and O&M costs and to replace the existing Emergency FPPAC with a permanent FPPAC.  The rate increase will also seek to include Luna and Lordsburg in rates charged to New Mexico customers.

~~Overview~~TNMP expects to file a general base rate case in Texas on August 29, 2008. TNMP will requests rates become effective October 3, 2008. Rates would become effective on this date, unless the PUCT or those cities retaining original jurisdiction suspend the proposed rates. Suspension of proposed rates is the normal course of action and results in the matter being referred to a contested hearing.  TNMP's last general rate case was filed in March 2000, with rates effective January 1, 2002.

The Company is positioned as a merchant utility, 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 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.EnergyCo

~~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.  PNMR will 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~~was formed with ECJV isas an 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 a large PNMR shareholder.  PNMR and ECJV each have a 50 percent ownership interest in EnergyCo, a limited liability company.

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.  EnergyCo’s anticipated business ~~lines~~activities will consist of:

·   Competitive retail energy ~~sales;~~sales
·   Development, ~~operation~~ownership, and ~~ownership~~active management of diverse generation ~~assets; and~~fleet
·   Wholesale marketing to capture the extrinsic value of the generating fleet
·   Multi-year hedging program to minimize price volatility and ~~trading to optimize its assets.~~maximize cash flow predictability

On June 1, 2007, PNMR contributed its ownership of Altura to EnergyCo at fair market value of $549.6 million, as adjusted to reflect changes in working capital.  ECJV made a cash contribution to EnergyCo equal to 50% of the ~~fair value~~contribution amount and EnergyCo distributed that cash to PNMR.  EnergyCo has entered into a bank ~~financing arrangement.  During~~credit facility for working capital and other corporate purposes.  In August 2007, EnergyCo completed the acquisition of ~~one electric generating plant~~Altura Cogen and announced plans to co-develop ~~another generating unit,~~the Cedar Bayou IV Generating Station, substantial portions of which are financed through EnergyCo’s credit facility.  In addition to purchasing energy-related assets, EnergyCo could continue to grow by PNMR contributing existing unregulated assets and ECJV, in turn, matching those contributions with cash contributions, but any such contributions would be at the option of PNMR and ECJV.

Dividends on Common Stock

On August 11, 2008, the Board declared the regular quarterly dividend on common stock of $0.125 per share, which represents a reduction of 46 percent from the previous quarter. PNMR’s indicated annual rate is $0.50 per share. The Board took this action to improve the Company’s liquidity and set a new foundation for long-term value creation.  The reduction also better aligns PNMR’s dividend yield with industry averages.

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~~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.

Business Improvement Plan

The Company has undertaken a business improvement process that includes a comprehensive cost structure analysis of its operations and a benchmarking analysis to similar-sized utilities.  The Company is now in the process of implementing a series of initiatives designed to manage future operational costs, maintain financial strength and strengthen its regulated utilities.  The multi-phase process includes a business improvement plan to streamline internal processes and reduce ~~the Company’s work force.~~operating costs.  The utility-related process enhancements are designed to improve ~~and centralize~~ business functions.  ~~At September~~For the three months and six months ended June 30, ~~2007, the Company~~2008, PNMR recorded a pre-tax expense of ~~$12.6~~$1.5 million and $3.8 million for costs of the business improvement plan, primarily consulting and severance-related costs.  As additional phases of the business improvement plan are developed, the associated costs will be analyzed and recorded as specified by GAAP.

RESULTS OF OPERATIONS

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~~RESULTS OF OPERATIONS~~

Executive Summary

A summary of PNMR’s net earnings (loss) is as follows:

Three Months Ended
September 30,

Nine Months Ended
September 30,

2007

2006

2007

2006

(In thousands, except per share amounts)

Net earnings $ 8,372 $ 43,520 $ 58,277 $ 85,504
Average common and common
equivalent shares 77,561 70,761 78,151 69,784
Net earnings per diluted share $ 0.11 $ 0.62 $ 0.75 $ 1.23
Three Months Ended June 30, Six Months Ended June 30,
2008 2007 Change 2008 2007 Change
(In millions, except earnings per share)
Earnings (loss) from continuing operations $ (146.2 ) $ 21.8 $ (168.1 ) $ (217.4 ) $ 37.0 $ (254.4 )
Earnings from discontinued operations, net of income taxes 2.8 (1.6 ) 4.4 25.3 12.9 12.4
Net earnings (loss) $ (143.5 ) $ 20.2 $ (163.7 ) $ (192.1 ) $ 49.9 $ (242.0 )
Average common and common equivalent shares outstanding 81.7 78.8 2.9 79.3 78.4 0.9
Earnings (loss) from continuing operations per diluted share $ (1.79 ) $ 0.28 $ (2.07 ) $ (2.74 ) $ 0.47 $ (3.21 )
Net earnings (loss) per diluted share $ (1.76 ) $ 0.26 $ (0.29 ) $ (2.42 ) $ 0.64 $ (3.06 )

The ~~major causes~~components of the changes in ~~net~~ earnings ~~were~~(loss) from continuing operations by segment are:

Three Months Ended Six Months Ended
June 30, 2008 June 30, 2008
(In millions)
PNM Electric $ (47.8 ) $ (89.1 )
TNMP Electric (33.0 ) (30.2 )
Altura (4.5 ) (6.0 )
First Choice (66.8 ) (96.7 )
Corporate and Other (12.7 ) (14.3 )
EnergyCo (3.3 ) (18.1 )
Net change $ (168.1 ) $ (254.4 )

Detailed information regarding the recognition of income tax benefits for a settlement with the IRS regarding previously unrecognized tax benefits; impairment write-down of plant at Afton; business improvement plan costs; a gain on the sale of a turbine; increased plant performance at PVNGS, offset by decreased performance at SJGSchanges in earnings (loss) from continuing and Four Corners; increases due to load growth and weather impacts at PNM Gas and TNMP; decreases in First Choice earnings (excluding net unrealized mark-to-market impacts); reduced margins associated with PNM Electric/Wholesale growth and weather, as increased retail loads resulteddiscontinued operations is included in the use of higher-cost gas generation or purchased power and limited the amount of excess energy available to sell in wholesale markets; net unrealized mark-to-market losses; higher coal costs; non-recurring costs of forming EnergyCo, the loss due to the impairment of intangible assets, and the loss on the contribution of Altura to EnergyCo, offset by earnings from EnergyCo; higher financing costs; recovery of a PUCT order and related carrying charges; realized gains on the NDT; and a gas rate increase.segment information below. The ~~after-tax impacts of these items on net earnings in 2007 compared to 2006 are as follows:~~

Three Months Ended
September 30, 2007

Nine Months Ended
September 30, 2007

(In millions)
            After-tax impacts

IRS settlement $ - $ 16.0
Afton impairment (11.8 ) (11.8 )
Business improvement plan (7.6 ) (7.6 )
Gain on sale of turbine 1.7 1.7
Plant performance (6.6 ) 5.2
PNM Gas growth and weather (0.5 ) 4.2
TNMP growth and weather 1.7 2.5
PNM Electric/Wholesale growth and weather 0.8 (3.3 )
First Choice (excluding net unrealized mark-to-market) (12.4 ) (12.5 )
Net unrealized mark-to-market (2.8 ) (9.9 )
Coal costs (1.4 ) (6.2 )
Twin Oaks and EnergyCo (4.6 ) (9.6 )
Financing (0.7 ) (3.7 )
PUCT order / carrying charges 1.7 3.9
Realized gains on NDT 2.5 3.0
Gas rate increase 0.9 0.9
Other 4.0 -
Change in net earnings $ (35.1 ) $ (27.2 )

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~~The increase~~changes in the number of common and common equivalent shares isare primarily due to ~~new issuances~~shares of ~~PNMR~~ common stock issued in ~~2006~~May 2008 under the publicly held equity-linked units (See Note 7) offset by a reduced number of dilutive shares due to changes in share price.

As discussed in Note 17, the Company performs its annual assessment of its goodwill and non-amortizing assets as of April 1 of each year.  The 2008 assessment indicates that goodwill and the First Choice trade name have been impaired.  EnergyCo has made a strategic decision not to pursue the Twin Oaks expansion at this time and has written off its development rights as an ~~increase~~impairment.  After-tax impairment losses totaling $140.7 million were recorded in the ~~dilutive effect~~three months ended June 30, 2008.

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The impairments of goodwill amounting to $128.8 million have no income tax impacts.  However, the impairment of the ~~equity-linked units.~~First Choice trade name amounting to $7.4 million and PNMR’s equity in the EnergyCo impairment amounting to $10.9 million do have income tax impacts.  The absence of income tax benefits on the goodwill impairments has a significant impact on the effective tax rates of the Company in 2008.  In 2007, PNMR had favorable tax decisions regarding previously unrecognized tax benefits, including a settlement with the IRS, that had a $16.0 million positive impact on income taxes, which reduced the effective tax rate.

Segment Information

The following discussion is based on the segment methodology that PNMR’s management uses for making operating decisions and assessing performance of its various business activities.  Unusual and non-recurring items are included in the Corporate and Other segment.  References to 2006 amounts in the following discussion 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 PNMR’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~~Disclosure Regarding Forward Looking ~~Statements”~~Statements in ~~this~~ Item 2 and to Part II, Item 1A. ~~“Risk~~Risk Factors.”

Adjustments related to EITF 03-11 are included in Corporate and Other.  EITF 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 ability to repurchase and remarket previously sold capacity.

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~~Regulated Operations~~

PNM Electric

The table below summarizes operating results for PNM Electric:

Three Months Ended September 30,

Nine Months Ended September 30,
Three Months Ended June 30, Six Months Ended June 30,

2007

2006

Change

%

2007

2006

Change

%
2008 2007 Change % 2008 2007 Change %
(In millions) (In millions) (Dollars in millions)
Total operating revenues $ 206.0 $ 161.7 $ 44.3 27.4 $ 547.3 $ 446.8 $ 100.5 22.5 $ 386.1 $ 300.3 $ 85.8 28.6 $ 638.7 $ 540.7 $ 98.0 18.1
Cost of energy 89.7 49.4 40.3 81.6 220.1 141.5 78.6 55.5 247.6 185.3 62.3 33.6 383.3 288.5 94.8 32.9
Gross margin 116.3 112.3 4.0 3.6 327.2 305.3 21.9 7.2 138.5 115.0 23.5 20.4 255.4 252.2 3.2 1.3
Operating expenses 70.8 66.8 4.0 6.0 217.0 201.2 15.8 7.9 147.2 89.7 57.5 64.1 273.8 177.9 95.9 53.9
Depreciation and amortization 16.4 15.2 1.2 7.9 49.2 44.5 4.7 10.6 20.9 20.7 0.2 1.0 41.9 41.5 0.4 1.0
Operating income $ 29.1 $ 30.3 $ (1.2 ) (4.0 ) $ 61.0 $ 59.6 $ 1.4 2.3
Operating income (loss) (29.6 ) 4.6 (34.2 ) (743.5 ) (60.2 ) 32.8 (93.0 ) (283.5 )

Interest income 4.9 7.2 (2.3 ) (31.9 ) 11.0 14.9 (3.9 ) (26.2 )
Other income (deductions) (2.2 ) 2.1 (4.3 ) (204.8 ) (7.7 ) 2.5 (10.2 ) (408.0 )
Net interest charges (17.6 ) (12.7 ) (4.9 ) 38.6 (31.7 ) (25.9 ) (5.8 ) 22.4

Earnings (loss) before income taxes (44.6 ) 1.1 (45.7 ) (4,154.5 ) (88.6 ) 24.3 (112.9 ) (464.6 )
Income taxes (benefit) 2.4 0.4 2.0 500.0 (14.6 ) 9.2 (23.8 ) (258.7 )
Preferred stock dividend requirements 0.1 0.1 - - 0.3 0.3 - -
Segment earnings (loss) $ (47.1 ) $ 0.6 $ (47.7 ) (7,950.0 ) $ (74.2 ) $ 14.9 $ (89.1 ) (598.0 )

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The table below summarizes the significant changes to operating revenues, gross margin, earnings before income taxes and ~~operating income:~~segment earnings:

Three Months Ended
September 30, 2007

Nine Months Ended
September 30, 2007

Total

Gross

Operating

Total

Gross

Operating

Revenues

Margin

Income

Revenues

Margin

Income

(In millions) (In millions)
Transfer of assets from TNMP $ 26.5 $ 5.6 $ 0.7 $ 75.4 $ 18.2 $ 3.7
Weather 6.4 2.7 2.7 6.2 2.6 2.6
Customer/load growth 11.5 2.6 2.6 18.4 6.2 6.2
Plant performance - (4.6 ) (6.5 ) - 3.5 0.9
Coal costs - (2.0 ) (2.0 ) - (8.8 ) (8.8 )
General operational increases - - 1.2 - - (2.7 )
Other (0.1 ) (0.3 ) 0.1 0.5 0.2 (0.5 )
Total increase (decrease) $ 44.3 $ 4.0 $ (1.2 ) $ 100.5 $ 21.9 $ 1.4
Three Months Ended June 30, 2008 Six Months Ended June 30, 2008
Earnings (Loss) Earnings (Loss)
Before Segment Before Segment
Total Gross Income Earnings Total Gross Income Earnings
Revenues Margin Taxes (Loss) Revenues Margin Taxes (Loss)
(In millions)
Increased rate recovery including emergency FPPAC $ 11.5 $ 11.5 $ 11.5 $ 6.9 $ 11.5 $ 11.5 $ 11.5 $ 6.9
Regulated sales growth 1.8 1.0 1.0 0.6 7.6 2.3 2.3 1.4
Generation and purchased power cost increases - (0.7 ) (0.7 ) (0.4 ) - (9.3 ) (9.3 ) (5.6 )
Regulated plant availability 24.7 8.3 5.7 3.4 9.3 (13.3 ) (28.2 ) (17.0 )
Sales of SO2 allowances
(13.1 ) (13.1 ) (13.1 ) (7.9 ) (13.2 ) (13.2 ) (13.2 ) (8.0 )
Unregulated margins (1.3 ) 0.6 0.6 0.4 29.5 2.8 2.8 1.7
Gain on sale of merchant portfolio 2.9 2.9 2.9 1.8 5.1 5.1 5.1 3.1
Net unrealized economic hedges 54.9 12.2 12.2 7.4 41.2 17.4 17.4 10.5
Operational costs - - (4.8 ) (2.9 ) - - (2.2 ) (1.3 )
NDT - - (2.6 ) (1.6 ) - - (7.2 ) (4.3 )
Regulatory disallowances - - - - - - (30.2 ) (18.2 )
Impairment of goodwill - - (51.1 ) (51.1 ) - - (51.1 ) (51.1 )
Other 4.4 0.8 (7.3 ) (4.3 ) 7.0 (0.1 ) (10.6 ) (7.2 )
Total increase (decrease) $ 85.8 $ 23.5 $ (45.7 ) $ (47.7 ) $ 98.0 $ 3.2 $ (112.9 ) $ (89.1 )

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

Three Months Ended September 30,

Nine Months Ended September 30,
Three Months Ended June 30, Six Months Ended June 30,

2007

2006

Change

%

2007

2006

Change

%
2008 2007 Change % 2008 2007 Change %
(In millions, except customers) (In millions, except customers) (Dollars in millions)
Residential $ 78.0 $ 60.8 $ 17.2 28.3 $ 204.2 $ 168.1 $ 36.1 21.5 $ 66.6 $ 58.4 $ 8.2 14.0 $ 137.8 $ 126.2 $ 11.6 9.2
Commercial 85.7 70.9 14.8 20.9 223.6 193.6 30.0 15.5 81.7 73.1 8.6 11.8 149.2 137.8 11.4 8.3
Industrial 25.7 16.7 9.0 53.9 74.9 47.1 27.8 59.0 25.4 25.8 (0.4 ) (1.6 ) 51.1 49.2 1.9 3.9
Transmission 10.1 7.7 2.4 31.2 27.0 21.9 5.1 23.3 6.2 6.5 (0.3 ) (4.6 ) 11.5 13.1 (1.6 ) (12.2 )
Other 6.5 5.6 0.9 16.1 17.6 16.1 1.5 9.3
Other retail 6.6 5.8 0.8 13.8 11.9 11.0 0.9 8.2
Wholesale long-term sales 47.4 34.3 13.1 38.2 82.6 61.9 20.7 33.4
Wholesale short-term sales 152.2 96.4 55.8 57.9 194.6 141.5 53.1 37.5
$ 206.0 $ 161.7 $ 44.3 27.4 $ 547.3 $ 446.8 $ 100.5 22.5 $ 386.1 $ 300.3 $ 85.8 28.6 $ 638.7 $ 540.7 $ 98.0 18.1
Average customers (thousands) 490.0 431.5 58.5 13.6 488.3 428.6 59.7 13.9 494.7 488.1 6.6 1.4 494.3 487.6 6.7 1.4

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

Three Months Ended September 30,

Nine Months Ended September 30,
Three Months Ended June 30, Six Months Ended June 30,

2007

2006

Change

%

2007

2006

Change

%
2008 2007 Change % 2008 2007 Change %
(Gigawatt hours) (Gigawatt hours) (Gigawatt hours)
Residential 945.9 756.4 189.5 25.1 2,471.5 2,092.3 379.2 18.1 718.2 704.9 13.3 1.9 1,575.9 1,525.6 50.3 3.3
Commercial 1,181.3 1,008.9 172.4 17.1 3,050.9 2,741.8 309.1 11.3 1,016.2 992.6 23.6 2.4 1,926.6 1,869.5 57.1 3.1
Industrial 488.6 353.4 135.2 38.3 1,453.1 1,000.0 453.1 45.3 410.4 494.2 (83.8 ) (17.0 ) 852.2 964.5 (112.3 ) (11.6 )
Other 79.9 71.8 8.1 11.3 199.7 198.2 1.5 0.8
Other retail 71.2 63.4 7.8 12.3 130.8 119.8 11.0 9.2
Wholesale long-term sales 773.1 631.2 141.9 22.5 1,427.2 1,174.7 252.5 21.5
Wholesale short-term sales 1,089.8 1,286.8 (197.0 ) (15.3 ) 2,169.1 2,453.7 (284.6 ) (11.6 )
2,695.7 2,190.5 505.2 23.1 7,175.2 6,032.3 1,142.9 18.9 4,078.9 4,173.1 (94.2 ) (2.3 ) 8,081.8 8,107.8 (26.0 ) (0.3 )

On May 1, 2008, PNM Electric implemented a $34.4 million base rate increase approved by the NMPRC.  The rate increase provides for a 10.1% return on equity.  Additionally, the NMPRC approved the implementation of an Emergency FPPAC effective June 2, 2008, which is projected to allow PNM Electric to recover an additional $58
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
September 30, 2006

Nine Months Ended
September 30, 2006

(Dollars in millions)
Total revenues $ 26.5 $ 75.4
Cost of energy 20.9 57.2
Gross margin 5.6 18.2
Operating expenses 3.4 10.0
Depreciation and amortization 1.5 4.5
Operating income $ 0.7 $ 3.7

Sales volumes (GWhs) 293.4 848.1
Average customers (thousands) 49.6 49.6

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to $62 million of actual fuel and purchased power costs annually above amounts collected through base rates.  See Note 10.  Implementation of the base rate increase resulted in a $9.2 million increase to revenues and gross margin in the second quarter of 2008.  The ~~following discussion~~Emergency FPPAC resulted in a $2.3 million increase to revenues and gross margin in the second quarter of ~~results will exclude variances due~~2008 when compared to the ~~transfer of New Mexico operations from TNMP on January 1, 2007, that are shown above.~~

~~During the third~~second quarter of 2007, ~~warmer temperatures~~reflecting the net amount of fuel and purchased power costs used to serve retail loads that were recovered in ~~New Mexico resulted in increased sales volume, as cooling degree-days increased 44.6% from the third quarter of 2006.  Year-to-date 2007, increased usage due~~addition to ~~weather~~amounts recovered through base rates.

An increase in the ~~third quarter~~average retail customer count, combined with higher per-customer usage among residential and ~~also during the heating season~~commercial customers, was partially offset by a reduction in sales volumes due to the reduced ~~usage~~operations of a major industrial customer and higher costs to serve this growth.

For the three months ended June 30, the increase in segment earnings associated with sales growth was more than offset by increases in generation prices and purchased power costs.  For the six months ended June 30, increases in generation prices and purchased power costs more than offset the increase in regulated sales growth.

For the three months ended June 30, increased generation from ~~milder temperatures in~~regulated power plants increased system sales revenues, gross margin and segment earnings.  During the ~~second quarter.~~first quarter of 2008, planned outages at SJGS Unit 3 and Four Corners Unit 5, along with the extension of a planned outage for environmental upgrades at SJGS Unit 4 and a planned refueling outage at PVNGS Unit 3, decreased off-system sales revenues, gross margins and segment earnings.  During both the ~~third quarter~~first and second quarters 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 third quarter and year-to-date 2007.~~

During the third quarter of 2007, reduced generation at SJGS from a planned outage, offset by slight improvements in PVNGS and Four Corners performance, resulted in a $4.6 million decrease to gross margin.  Additionally,2008, O&M costs related to ~~outages~~regulated plant performance increased ~~by $1.9 million~~as a result of an increase in the maintenance work performed during the ~~third~~outages, the addition of Afton and an increase in costs for labor, materials and supplies.

A decrease in the sales of SO2 allowances reduced revenues, gross margin and segment earnings.

Unregulated margins decreased over prior year levels due to increased costs to serve long-term sales contracts and decreased availability at PVNGS.  Unregulated margins also benefited from an increase in trading margins primarily driven by losses recognized in the second quarter of 2007.

~~Year-to-date 2007 compared to 2006, PVNGS performance resulted~~A gain on the sale of the merchant portfolio in ~~a $11.2 million increase to~~June 2008 increased revenues, gross margin and segment earnings.  PNM’s merchant portfolio included certain wholesale power, natural gas and transmission contracts that represent a ~~$0.7 million increase in O&M costs.  SJGS performance resulted in a $3.0 million decrease to gross margin~~significant portion of the wholesale activity portfolio of PNM Electric and ~~a $1.0 million increase to O&M costs.  Decreased Four Corners performance resulted in a $4.7 million decrease to gross margin~~include several long-term sales and ~~a $0.9 million increase to O&M costs.~~purchase power agreements.  See Note 4.

~~For~~Changes in net unrealized mark-to-market gains and losses on economic hedges were driven by increased gas and electric price movements during the ~~third quarter~~first and ~~year-to-date 2007, increases in general operational expenses~~second quarters of 2008 compared to the first and second quarters of 2007.

Operational costs include costs for materials and supplies, self-insurance, depreciation, advertising, and interest as well as shared services, employee labor, pension and ~~benefit costs.  In~~benefits.  Increased costs in the ~~third~~second quarter, ~~these increases~~largely driven by interest on higher debt balances and transaction fees associated with the refinancing of debt, were partially offset by decreases in incentive-based ~~and stock-based compensation.~~compensation, as well as cost savings resulting from the business improvement plan.

71
Income related to NDT assets includes realized gains and losses, interest and dividend income and any associated fees and taxes, along with other than temporary impairment losses recognized in accordance with SFAS 115.  This income totaled a loss of $0.2 million in the second quarter of 2008 and a loss of $4.3 million for the six months ending June 30, 2008, compared to a gain of $2.4 million in the second quarter of 2007 and $2.9 million for the six months ending June 30, 2007.

An impairment of goodwill amounting to $51.1 million was recorded in the three months ended June 30, 2008 as a result of the annual impairment assessment (See Note 17).  Regulatory disallowances resulting from the NMPRC’s rate order dated April 24, 2008 include write-offs of $10.6 million for deferred costs of RECs and $19.6 million for coal mine decommissioning costs.

75

TNMP Electric

The table below summarizes the operating results for TNMP Electric:

Three Months Ended September 30,

Nine Months Ended September 30,
Three Months Ended June 30, Six Months Ended June 30,

2007

2006

Change

%

2007

2006

Change

%
2008 2007 Change % 2008 2007 Change %
(Dollars in millions)
Total operating revenues $ 52.7 $ 70.2 $ (17.5 ) (24.9 ) $ 137.1 $ 194.4 $ (57.3 ) (29.5 ) $ 47.1 $ 43.5 $ 3.6 8.3 $ 89.3 $ 84.5 $ 4.8 5.7
Cost of energy 7.6 27.9 (20.3 ) (72.8 ) 21.9 77.8 (55.9 ) (71.9 ) 7.9 7.2 0.7 9.7 15.7 14.4 1.3 9.0
Gross margin 45.1 42.3 2.8 6.6 115.2 116.6 (1.4 ) (1.2 ) 39.2 36.3 2.9 8.0 73.6 70.1 3.5 5.0
Operating expenses 16.6 20.9 (4.3 ) (20.6 ) 53.1 63.4 (10.3 ) (16.2 ) 52.0 17.7 34.3 193.8 67.4 36.4 31.0 85.2
Depreciation and amortization 7.1 7.9 (0.8 ) (10.1 ) 21.1 23.5 (2.4 ) (10.2 ) 8.8 7.0 1.8 25.7 17.1 14.0 3.1 22.1
Operating income $ 21.4 $ 13.5 $ 7.9 58.5 $ 41.0 $ 29.7 $ 11.3 38.0
Operating income (loss) (21.6 ) 11.6 (33.2 ) (286.2 ) (11.0 ) 19.7 (30.7 ) (155.8 )
Interest income - 0.8 (0.8 ) (100.0 ) - 0.9 (0.9 ) (100.0 )
Other income (deductions) 0.6 0.7 (0.1 ) (14.3 ) 1.0 1.0 - -
Net interest charges (4.4 ) (6.9 ) 2.5 (36.2 ) (9.4 ) (13.9 ) 4.5 (32.4 )
Earnings (loss) before income taxes (25.3 ) 6.2 (31.5 ) (508.1 ) (19.3 ) 7.6 (26.9 ) (353.9 )
Income taxes 3.4 2.0 1.4 70.0 5.7 2.4 3.3 137.5
Segment earnings (loss) $ (28.8 ) $ 4.2 $ (33.0 ) (785.7 ) $ (25.0 ) $ 5.2 $ (30.2 ) (580.8 )

The table below summarizes the significant changes to operating revenues, gross margin, earnings before income taxes and ~~operating income:~~segment earnings:

Three Months Ended
September 30, 2007

Nine Months Ended
September 30, 2007

Total

Gross

Operating

Total

Gross

Operating

Revenues

Margin

Income

Revenues

Margin

Income

(In millions) (In millions)
Transfer of assets from PNM $ (26.5 ) $ (5.6 ) $ (0.7 ) $ (75.4 ) $ (18.2 ) $ (3.7 )
Customer/load growth 2.7 2.7 2.7 3.8 3.8 3.8
PUCT order 5.6 5.6 4.6 13.5 13.5 10.7
Transmission prices 0.6 0.1 0.1 1.2 (0.1 ) (0.1 )
Other 0.1 - 1.2 (0.4 ) (0.4 ) 0.6
Total increase (decrease) $ (17.5 ) $ 2.8 $ 7.9 $ (57.3 ) $ (1.4 ) $ 11.3

72
Three Months Ended June 30, 2008 Six Months Ended June 30, 2008
Earnings (Loss) Earnings (Loss)
Before Segment Before Segment
Total Gross Income Earnings Total Gross Income Earnings
Revenues Margin Taxes (Loss) Revenues Margin Taxes (Loss)
(In millions)
Retail growth/weather $ 2.3 $ 2.3 $ 2.3 $ 1.5 $ 2.9 $ 2.9 $ 2.9 $ 1.9
Synergy savings credits - - 0.8 0.5 - - 1.6 1.0
Debt reduction - - 2.3 1.5 - - 3.8 2.5
Operational costs - - (0.8 ) (0.5 ) - - 1.3 0.9
Impairment of goodwill - - (34.5 ) (34.5 ) - - (34.5 ) (34.5 )
Other 1.3 0.6 (1.6 ) (1.5 ) 1.9 0.6 (2.0 ) (2.0 )
Total increase $ 3.6 $ 2.9 $ (31.5 ) $ (33.0 ) $ 4.8 $ 3.5 $ (26.9 ) $ (30.2 )

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

Three Months Ended September 30,

Nine Months Ended September 30,
Three Months Ended June 30, Six Months Ended June 30,

2007

2006⁽¹⁾

Change

%

2007

2006⁽¹⁾

Change

%
2008 2007 Change % 2008 2007 Change %
(In millions, except customers) (In millions, except customers) (Dollars in millions)
Residential $ 23.4 $ 28.8 $ (5.4 ) (18.8 ) $ 53.8 $ 68.8 $ (15.0 ) (21.8 ) $ 17.8 $ 15.6 $ 2.2 14.1 $ 33.1 $ 30.4 $ 2.7 8.9
Commercial 19.2 24.2 (5.0 ) (20.7 ) 52.9 66.7 (13.8 ) (20.7 ) 18.8 17.7 1.1 6.2 35.5 33.7 1.8 5.3
Industrial 2.1 7.5 (5.4 ) (72.0 ) 5.6 30.1 (24.5 ) (81.4 ) 3.3 1.8 1.5 83.3 6.5 3.5 3.0 85.7
Other 8.0 9.7 (1.7 ) (17.5 ) 24.8 28.8 (4.0 ) (13.9 ) 7.2 8.4 (1.2 ) (14.3 ) 14.2 16.9 (2.7 ) (16.0 )
$ 52.7 $ 70.2 $ (17.5 ) (24.9 ) $ 137.1 $ 194.4 $ (57.3 ) (29.5 ) $ 47.1 $ 43.5 $ 3.6 8.3 $ 89.3 $ 84.5 $ 4.8 5.7
Average customers (thousands) ⁽²⁾
226.8 273.5 (46.7 ) (17.1 ) 225.8 272.3 (46.5 ) (17.1 )
Average customers (thousands(1))
229.3 225.3 4.0 1.8 228.3 225.3 3.0 1.3

(1) ~~The customer class revenues and the average customer count have been reclassified.~~

~~(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 ~~135,325~~(in thousands) 119.5 and ~~152,327~~138.9 and customers of TNMP Electric for the three months ended ~~September~~June 30, 2008 and 2007 and ~~2006~~121.9 and ~~139,388 and 155,374~~141.4 customers for the ~~nine~~six months ended ~~September~~June 30, ~~2007~~2008 and ~~2006~~2007 who have chosen First Choice as their REP.  These customers are also included in the First Choice segment.

7376

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

Three Months Ended September 30,

Nine Months Ended September 30,
Three Months Ended June 30, Six Months Ended June 30,

2007

2006⁽²⁾

Change

%

2007

2006⁽²⁾

Change

%
2008 2007 Change % 2008 2007 Change %

(Gigawatt hours⁽¹⁾)

(Gigawatt hours⁽¹⁾)

(Gigawatt hours (1))

Residential 860.4 919.7 (59.3 ) (6.4 ) 1,978.7 2,158.0 (179.3 ) (8.3 ) 637.4 579.9 57.5 9.9 1,175.9 1,118.3 57.6 5.2
Commercial 664.8 757.2 (92.4 ) (12.2 ) 1,687.6 2,012.1 (324.5 ) (16.1 ) 587.2 563.7 23.5 4.2 1,060.9 1,022.9 38.0 3.7
Industrial 543.7 528.5 15.2 2.9 1,424.9 1,546.6 (121.7 ) (7.9 ) 516.6 473.9 42.7 9.0 1,059.7 881.2 178.5 20.3
Other 26.4 32.6 (6.2 ) (19.0 ) 74.5 93.3 (18.8 ) (20.2 ) 26.3 23.9 2.4 10.0 52.8 48.1 4.7 9.8
2,095.3 2,238.0 (142.7 ) (6.4 ) 5,165.7 5,810.0 (644.3 ) (11.1 ) 1,767.5 1,641.4 126.1 7.7 3,349.3 3,070.5 278.8 9.1

(1)   The GWh sales reported above include ~~651.4~~433.0 and ~~726.0~~487.3 GWhs for the three months ended ~~September~~June 30, 2008 and 2007 and ~~2006~~828.0 and ~~1,611.7 and 1,836.0~~960.3 GWhs for the ~~nine~~six months ended ~~September~~June 30, ~~2007~~2008 and ~~2006~~2007 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.~~
Increases in the average customer count and warmer temperatures in the second quarter more than offset milder temperatures in the first quarter, resulting in increases in sales volumes.  The increase in sales volumes and higher service fees approved by the PUCT increased operating revenues and gross margin.

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 dueCredits from synergy savings related to the ~~transfer~~acquisition of ~~New Mexico~~TNMP operations by PNMR were returned to ~~PNM on January 1, 2007.~~customers from July 2005 through June 2007, as ordered by the PUCT.  The completion of the return of these savings in 2007 resulted in increased 2008 earnings.

~~During both~~Second quarter 2008 segment earnings also benefited from lower interest charges resulting from a $100 million long-term debt reduction in the ~~third~~second quarter of 2007 and ~~year-to-date 2007, an increase~~the refinancing of $148.9 million of debt in ~~average customer counts has resulted in increases in sales volumes and operating revenues.~~the second quarter of 2008.

~~The PUCT issued~~An impairment of goodwill amounting to $34.5 million was recorded in the three months ended June 30, 2008 as a ~~signed order on November 2, 2006 related to the stranded costs incurred by TNMP as part~~result of the ~~deregulation of the Texas energy market~~annual impairment assessment (See Note 17).

Operational costs include costs for materials and ~~the associated carrying charges.  The details of this order are discussed~~supplies, self-insurance, depreciation and advertising, as well as shared services, employee labor, pension and benefits.  Increased building maintenance and shared service costs in the ~~TNMP 2006 Annual Report on Form 10-K/A (Amendment No. 1).  This PUCT order resulted~~second quarter were more than offset by decreases in ~~a net increase to revenue of $5.6 million~~incentive-based compensation in the ~~third~~first quarter ~~of 2007 that was partially offset by an increase in amortization expense of $1.0 million.  Year-to-date, a $13.5 million net increase in revenues related to~~and savings resulting from the ~~same PUCT order was partially offset by an increase in amortization expense of $2.8 million.~~business improvement plan.

Increased transmission prices caused an increase in revenues in both the third quarter of 2007 and year-to-date 2007.  In the third 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 utilities.

74

PNM Gas

The table below summarizes the operating results for PNM ~~Gas:~~Gas, which is classified as discontinued operations in the Condensed Consolidated Statements of Earnings (Loss):

Three Months Ended September 30,

Nine Months Ended September 30,
Three Months Ended June 30, Six Months Ended June 30,

2007

2006

Change

%

2007

2006

Change

%
2008 2007 Change % 2008 2007 Change %
(In millions) (In millions) (Dollars in millions)
Total operating revenues $ 59.5 $ 69.2 $ (9.7 ) (14.0 ) $ 351.3 $ 345.7 $ 5.6 1.6 $ 95.6 $ 75.1 $ 20.5 27.3 $ 316.0 $ 291.6 $ 24.4 8.4
Cost of energy 33.9 43.8 (9.9 ) (22.6 ) 240.8 243.7 (2.9 ) (1.2 ) 64.9 45.1 19.8 43.9 225.7 206.8 18.9 9.1
Gross margin 25.6 25.4 0.2 0.8 110.5 102.0 8.5 8.3 30.7 30.0 0.7 2.3 90.3 84.8 5.5 6.5
Operating expenses 23.8 25.6 (1.8 ) (7.0 ) 75.3 76.6 (1.3 ) (1.7 ) 23.0 23.8 (0.8 ) (3.4 ) 44.4 47.1 (2.7 ) (5.7 )
Depreciation and amortization 5.9 6.0 (0.1 ) (1.7 ) 18.1 17.9 0.2 1.1 - 5.5 (5.5 ) (100.0 ) - 11.1 (11.1 ) (100.0 )
Operating income $ (4.1 ) $ (6.2 ) $ 2.1 33.9 $ 17.1 $ 7.5 $ 9.6 128.0 7.7 0.8 6.9 862.5 45.8 26.6 19.2 72.2
Interest income 0.4 (0.5 ) 0.9 (180.0 ) 1.3 0.5 0.8 160.0
Other income (deductions) 0.1 - 0.1 - 0.1 0.2 (0.1 ) (50.0 )
Net interest charges (3.6 ) (2.9 ) (0.7 ) 24.1 (6.5 ) (5.8 ) (0.7 ) 12.1
Earnings (loss) before income taxes 4.6 (2.6 ) 7.2 (276.9 ) 40.7 21.4 19.3 90.2
Income taxes 1.8 (1.0 ) 2.8 (280.0 ) 15.5 8.5 7.0 82.4
Segment earnings (loss) $ 2.8 $ (1.6 ) $ 4.4 (275.0 ) $ 25.3 $ 12.9 $ 12.4 96.1

77
The table below summarizes the significant changes to operating revenues, gross margin, earnings before income taxes and ~~operating income:~~segment earnings:

Three Months Ended
September 30, 2007

Nine Months Ended
September 30, 2007

Total

Gross

Operating

Total

Gross

Operating

Revenues

Margin

Income

Revenues

Margin

Income

(In millions) (In millions)
Gas prices $ (3.7 ) $ - $ - $ (20.5 ) $ - $ -
Weather (1.6 ) (1.1 ) (1.1 ) 32.0 5.1 5.1
Customer growth/usage (1.7 ) 0.3 0.3 3.7 1.8 1.8
Net unrealized mark-to-market gains and losses (0.3 ) (0.3 ) (0.3 ) 0.3 0.3 0.3
Rate increase 1.4 1.4 1.4 1.4 1.4 1.4
Off-system activities (3.7 ) 0.1 0.1 (10.7 ) 0.5 0.5
Other (0.1 ) (0.2 ) 1.7 (0.6 ) (0.6 ) 0.5
Total increase (decrease) $ (9.7 ) $ 0.2 $ 2.1 $ 5.6 $ 8.5 $ 9.6

75
Three Months Ended June 30, 2008 Six Months Ended June 30, 2008
Earnings (Loss) Earnings (Loss)
Before Segment Before Segment
Total Gross Income Earnings Total Gross Income Earnings
Revenues Margin Taxes (Loss) Revenues Margin Taxes (Loss)
(In millions)
Retail gas prices $ 11.1 $ - $ - $ - $ 0.8 $ - $ - $ -
Rate increase 1.6 1.6 1.6 1.0 5.1 5.1 5.1 3.1
Retail growth/weather 4.5 0.5 0.5 0.3 15.0 2.0 2.0 1.2
Off-system activities 4.4 0.3 0.3 0.2 5.3 0.2 0.2 0.1
Operational costs - - 0.5 0.3 - - 2.4 1.4
Discontinuation of depreciation on assets - - 5.4 3.3 - - 10.6 6.4
Other (1.1 ) (1.7 ) (1.1 ) (0.7 ) (1.8 ) (1.8 ) (0.9 ) 0.2
Total increase (decrease) $ 20.5 $ 0.7 $ 7.2 $ 4.4 $ 24.4 $ 5.5 $ 19.3 $ 12.4

The following table shows PNM Gas operating revenues by customer class ~~including intersegment revenues,~~included in earnings from discontinued operations within the presentation of Condensed Consolidated Statements of Earnings (Loss) and average number of customers:

Three Months Ended September 30,

Nine Months Ended September 30,
Three Months Ended June 30, Six Months Ended June 30,

2007

2006

Change

%

2007

2006

Change

%
2008 2007 Change % 2008 2007 Change %
(In millions, except customers) (In millions, except customers) (Dollars in millions)
Residential $ 31.4 $ 34.6 $ (3.2 ) (9.2 ) $ 232.1 $ 214.7 $ 17.4 8.1 $ 59.2 $ 48.4 $ 10.8 22.3 $ 215.7 $ 200.7 $ 15.0 7.5
Commercial 10.4 12.3 (1.9 ) (15.4 ) 71.1 69.7 1.4 2.0 19.1 15.5 3.6 23.2 63.9 60.6 3.3 5.4
Industrial 0.5 1.0 (0.5 ) (50.0 ) 1.5 3.2 (1.7 ) (53.1 ) 1.3 0.4 0.9 225.0 2.1 1.0 1.1 110.0
Transportation⁽¹⁾
2.5 2.7 (0.2 ) (7.4 ) 10.9 10.1 0.8 7.9 3.7 3.4 0.3 8.8 9.8 8.4 1.4 16.7
Other 14.7 18.6 (3.9 ) (21.0 ) 35.7 48.0 (12.3 ) (25.6 ) 12.3 7.4 4.9 66.2 24.5 20.9 3.6 17.2
$ 59.5 $ 69.2 $ (9.7 ) (14.0 ) $ 351.3 $ 345.7 5.6 1.6 $ 95.6 $ 75.1 $ 20.5 27.3 $ 316.0 $ 291.6 $ 24.4 8.4
Average customers (thousands) 490.0 481.1 8.9 1.8 490.8 481.0 9.8 2.0 496.3 490.5 5.8 1.2 497.2 491.2 6.0 1.2

(1)   Customer-owned gas.

The following table shows PNM Gas throughput by customer class:

Three Months Ended September 30,

Nine Months Ended September 30,
Three Months Ended June 30, Six Months Ended June 30,

2007

2006

Change

%

2007

2006

Change

%
2008 2007 Change % 2008 2007 Change %
(Thousands of Decatherms) (Thousands of Decatherms) (Thousands of Decatherms)
Residential 2,244 2,450 (206 ) (8.4 ) 20,015 17,471 2,544 14.6 3,747.6 3,826.8 (79.2 ) (2.1 ) 18,035.1 17,770.9 264.2 1.5
Commercial 1,138 1,320 (182 ) (13.8 ) 7,288 6,877 411 6.0 1,477.1 1,515.0 (37.9 ) (2.5 ) 6,071.2 6,149.5 (78.3 ) (1.3 )
Industrial 65 129 (64 ) (49.6 ) 178 395 (217 ) (54.9 ) 136.0 50.1 85.9 171.5 227.9 113.2 114.7 101.3
Transportation⁽¹⁾
9,784 8,769 1,015 11.6 30,733 29,171 1,562 5.4 9,192.8 10,149.2 (956.4 ) (9.4 ) 20,569.3 20,948.9 (379.6 ) (1.8 )
Other 1,774 2,327 (553 ) (23.8 ) 3,599 5,394 (1,795 ) (33.3 ) 957.4 499.5 457.9 91.7 1,990.1 1,825.0 165.1 9.0
15,005 14,995 10 0.1 61,813 59,308 2,505 4.2 15,510.9 16,040.6 (529.7 ) (3.3 ) 46,893.6 46,807.5 86.1 0.2

(1)   Customer-owned gas.

Due to the pending sale of the PNM Gas business, the Company is reporting this segment as discontinued operations as required under GAAP.  See Note 14.  Certain corporate items that historically were allocated to the PNM Gas segment cannot be included as discontinued operations and were reassigned to PNM Electric for previously reported periods.  These items include officer compensation, depreciation on common utility and shared-service assets, and postage costs.  The after-tax amount of costs reassigned in the three and six months ended June 30, 2007 totaled $1.6 million and $3.3 million.  Beginning in 2008, these costs were reallocated among all PNMR business segments.

7678

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.  Increases or decreases to gross margin caused by changes in sales-service volumes represent margin earned on the delivery of gas to customers based on regulated rates.  ~~On May 30, 2006, PNM filed for an increase in base gas service rates of $22.6 million.~~

On June 29, 2007, the NMPRC unanimously approved an increase in annual revenues of approximately $9 million for PNM Gas, which included a 9.53% return on equity.  ~~PNM and the New Mexico Attorney General have appealed certain aspects of the NMPRC decision to the New Mexico Supreme Court, which is pending.~~See Note 10.  Implementation of ~~the approved~~this rate increase resulted in an increase to revenues and gross margin ~~for~~in 2008.

Customer growth resulted in increased operating revenues and gross margin.  This was partially offset by weather impacts, as temperatures across the ~~third~~service area were colder than normal levels early in the year, particularly in January, but were milder than temperatures experienced during the first quarter ~~and year-to-date~~of 2007.

~~Warmer weather in~~Revenues from off-system activity increased during the ~~third quarter resulted in decreased revenues~~first and ~~operating income for the third quarter of 2007.  However, for year-to-date 2007, this impact was~~second quarters due to increased gas prices, which were largely offset by ~~cooler weather throughout the first half of the year, resulting in increased revenues and operating income.  Year-to-date heating degree-days increased 16.1%.~~

During the third quarter of 2007, an overall increase in the number of average customers was more than offset by a shift to more lower-usage customers, which results in a decrease in revenues but still represents an increase in gross margin and operating income.  The year-to-date impact of the shift in customers was more than offset by the overall increase in customers and reduced customer conservation.

The third quarter of 2007 saw decreased revenue and operating income as a result of changes in net unrealized mark-to-market gains and losses, which was offset by increased revenue and operating income in the first half of the year.

~~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~~increases in costs for the transactions.

77

~~Unregulated Operations~~

~~Wholesale~~

~~The table below summarizes~~  In the ~~operating results for Wholesale:~~

Three Months Ended September 30,

Nine Months Ended September 30,

2007

2006

Change

%

2007

2006

Change

%

(In millions) (In millions)
Total operating revenues $ 204.1 $ 204.7 $ (0.6 ) (0.3 ) $ 532.7 $ 538.7 $ (6.0 ) (1.1 )
Cost of energy 189.2 141.8 47.4 33.4 433.2 401.3 31.9 7.9
Gross margin 14.9 62.9 (48.0 ) (76.3 ) 99.5 137.4 (37.9 ) (27.6 )
Operating expenses 13.7 15.2 (1.5 ) (9.9 ) 58.7 45.3 13.4 29.6
Depreciation and amortization 3.1 7.9 (4.8 ) (60.8 ) 17.0 18.2 (1.2 ) (6.6 )
Operating income $ (1.9 ) $ 39.8 $ (41.7 ) (104.8 ) $ 23.8 $ 73.9 $ (50.1 ) (67.8 )

~~The table below summarizes the significant changes~~second quarter of 2008, increased activity resulted in a slight increase to ~~operating revenues, gross~~ margin, ~~and operating income:~~

Three Months Ended
September 30, 2007

Nine Months Ended
September 30, 2007

Total

Gross

Operating

Total

Gross

Operating

Revenues

Margin

Income

Revenues

Margin

Income

(In millions) (In millions)
Twin Oaks $ (51.8 ) $ (37.6 ) $ (28.5 ) $ (19.2 ) $ (15.9 ) $ (24.4 )
Net unrealized mark-to-market gains and losses (7.5 ) (4.4 ) (4.4 ) (24.7 ) (13.9 ) (13.9 )
Marketing activity 61.3 (3.8 ) (3.8 ) 35.7 (13.2 ) (14.1 )
Plant performance (2.3 ) (2.6 ) (4.5 ) 2.8 6.7 7.7
Coal costs - (0.4 ) (0.4 ) - (1.5 ) (1.5 )
General operational increases - - (0.1 ) - - (2.1 )
Other (0.3 ) 0.8 - (0.6 ) (0.1 ) (1.8 )
Total increase (decrease) $ (0.6 ) $ (48.0 ) $ (41.7 ) $ (6.0 ) $ (37.9 ) $ (50.1 )

The Twin Oaks power plant was included in the Wholesale segment from the time it was purchased on April 18, 2006 through May 31, 2007 when it was contributed to EnergyCo.  The above Wholesale segment information includes Twin Oaks during this period as shown in the following table:

For the Period

For the Period

July 1 –
September 30

January 1 – May 31,

April 18 –
September 30

2006

2007

2006

Change

(Dollars
in millions)

(Dollars in millions)

Total operating revenues $ 51.8 $ 65.4 $ 84.6 $ (19.2 )
Cost of energy 14.2 22.1 25.4 (3.3 )
Gross margin 37.6 43.3 59.2 (15.9 )
Operating expenses 4.6 17.3 8.0 9.3
Depreciation and amortization 4.5 7.7 8.5 (0.8 )
Operating income $ 28.5 $ 18.3 $ 42.7 $ (24.4 )
Sales Volumes (GWhs) 618.6 915.9 1,111.0 (195.1 )

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

Three Months Ended September 30,

Nine Months Ended September 30,

2007

2006

Change

%

2007

2006

Change

%

(In millions) (In millions)
Long-term sales $ 48.1 $ 91.4 $ (43.3 ) (47.4 ) $ 201.1 $ 196.6 $ 4.5 2.3
Short-term sales 156.0 113.3 42.7 37.7 331.6 342.1 (10.5 ) (3.1 )
$ 204.1 $ 204.7 $ (0.6 ) (0.3 ) $ 532.7 $ 538.7 $ (6.0 ) (1.1 )

~~The following table shows Wholesale GWh sales by type:~~

Three Months Ended September 30,

Nine Months Ended September 30,

2007

2006

Change

%

2007

2006

Change

%

(Gigawatt hours) (Gigawatt hours)
Long-term sales 867.8 1,319.0 (451.2 ) (34.2 ) 3,214.4 2,999.9 214.5 7.2
Short-term sales 2,270.5 1,719.1 551.4 32.1 5,411.3 5,509.0 (97.7 ) (1.8 )
3,138.3 3,038.1 100.2 3.3 8,625.7 8,508.9 116.8 1.4

79

~~The following 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 net unrealized mark-to-market gains and losses decreased revenues, gross margin and operating income for both the third quarter and year-to-date 2007, driven primarily by losses on economic hedges as a result of a change in valuation technique for the illiquid period that will settle in future periods.

~~For the third quarter and year-to-date, increases in revenues from wholesale marketing activities were~~which more than offset ~~by increases in costs to support these activities, as a greater percentage of joint-dispatch resources were used to serve an increasing retail load, resulting~~the slight decrease experienced in the ~~use of higher-cost gas generation or purchased power and limiting the amount of excess resources available to sell in the wholesale market.~~  ~~The year-to-date decrease in gross margin and operating income includes the absence of the forward sale of~~ first quarter ~~2006 excess resources.~~due to reduced activity.

During the third quarter of 2007, reduced generation at SJGS from a planned outage, offset by slight improvements in PVNGS and Four Corners performance, resulted in a $2.6 million decrease to gross margin.  Additionally, O&MOperational costs ~~related to outages at SJGS and PVNGS increased by $1.9 million during the third quarter of 2007.~~

Year-to-date 2007 compared to 2006, PVNGS performance resulted in a $12.0 million increase to gross margin and a $1.3 million decrease in O&M costs.  SJGS performance resulted in a $1.6 million decrease to gross margin and a $0.2 million increase to O&M costs.  Four Corners performance resulted in a $3.7 million decrease to gross margin and a $0.1 million increase to O&M costs.

~~Increased coal costs at SJGS and Four Corners have decreased gross margin and operating income for both the third quarter and year-to-date 2007.~~

~~For the third quarter and year-to-date 2007, increases in general operational expenses~~ include costs for materials and supplies, self-insurance and advertising, as well as shared ~~service,~~services, employee labor, pension and ~~benefit costs.  In the third quarter,~~benefits.  Decreases in these costs ~~were mostly offset by~~in 2008 represent decreases in incentive-based ~~and stock-based compensation.~~compensation, as well as cost savings resulting from the business improvement plan.

80
Due to the pending sale of the gas business, the assets held for sale have not been depreciated in accordance with SFAS 144. If PNM Gas was not treated as discontinued operations, depreciation of $5.4 million and $10.6 million would have been recorded in the three and six months ended June 30, 2008.

Altura

Effective June 1, 2007, PNMR contributed Altura, including the Twin Oaks business, to EnergyCo.  See Note 2.  Accordingly, Altura’s results of operations are included in PNMR for the three months and six months ended June 30, 2007, but not in 2008.

First Choice

The table below summarizes the operating results for First Choice:

Three Months Ended September 30,

Nine Months Ended September 30,
Three Months Ended June 30, Six Months Ended June 30,

2007

2006

Change

%

2007

2006

Change

%
2008 2007 Change % 2008 2007 Change %
(In millions) (In millions) (Dollars in millions)
Total operating revenues $ 177.7 $ 187.0 $ (9.3 ) (5.0 ) $ 463.3 $ 447.0 $ 16.3 3.6 $ 162.2 $ 150.0 $ 12.2 8.1 $ 246.4 $ 285.6 $ (39.2 ) (13.7 )
Cost of energy 159.2 146.4 12.8 8.7 395.9 354.8 41.1 11.6 158.1 �� 125.9 32.2 25.6 263.4 236.7 26.7 11.3
Gross margin 18.5 40.6 (22.1 ) (54.4 ) 67.4 92.2 (24.8 ) (26.9 ) 4.1 24.2 (20.1 ) (83.1 ) (17.0 ) 48.9 (65.9 ) (134.8 )
Operating expenses 13.5 17.3 (3.8 ) (22.0 ) 41.7 45.9 (4.2 ) (9.2 ) 72.8 13.0 59.8 460.0 88.3 28.1 60.2 214.2
Depreciation and amortization 0.5 0.5 - - 1.4 1.5 (0.1 ) (6.7 ) 0.6 0.5 0.1 20.0 1.0 0.9 0.1 11.1
Operating income $ 4.5 $ 22.8 $ (18.3 ) (80.3 ) $ 24.3 $ 44.8 $ (20.5 ) (45.8 )
Operating income (loss) (69.2 ) 10.7 (79.9 ) (746.7 ) (106.3 ) 19.9 (126.2 ) (634.2 )
Interest income 0.4 0.5 (0.1 ) (20.0 ) 0.9 1.0 (0.1 ) (10.0 )
Other income (deductions) - - - - (0.1 ) - (0.1 ) -
Net interest charges (0.3 ) (1.1 ) 0.8 (72.7 ) (0.6 ) (1.2 ) 0.6 (50.0 )
Earnings (loss) before income taxes (69.2 ) 10.2 (79.4 ) (778.4 ) (106.1 ) 19.7 (125.8 ) (638.6 )
Income taxes (benefit) (8.8 ) 3.9 (12.7 ) (325.6 ) (21.6 ) 7.4 (29.0 ) (391.9 )
Segment earnings (loss) $ (60.4 ) $ 6.4 $ (66.8 ) (1,043.8 ) $ (84.5 ) $ 12.2 $ (96.7 ) (792.6 )

79

The following table summarizes the significant changes to operating revenues, gross margin, earnings (loss) before income taxes, and ~~operating income:~~segment earnings (loss):

Three Months Ended
September 30, 2007

Nine Months Ended
September 30, 2007

Total

Gross

Operating

Total

Gross

Operating

Revenues

Margin

Income

Revenues

Margin

Income

(In millions) (In millions)
Weather $ (7.0 ) $ (1.8 ) $ (1.8 ) $ (9.9 ) $ (2.4 ) $ (2.4 )
Customer growth/usage 3.3 (1.1 ) (1.1 ) 27.8 (1.2 ) (1.2 )
Retail per-MWh margins 2.1 (11.5 ) (10.2 ) 12.0 (7.6 ) (4.4 )
Trading margin (7.1 ) (7.1 ) (7.1 ) (14.3 ) (14.3 ) (14.3 )
Bad debt expense - - (0.1 ) - - (2.1 )
Incentive-based compensation - - 2.1 - - 2.8
Other (0.6 ) (0.6 ) (0.1 ) 0.7 0.7 1.1
Total increase (decrease) $ (9.3 ) $ (22.1 ) $ (18.3 ) $ 16.3 $ (24.8 ) $ (20.5 )

81
Three Months Ended June 30, 2008 Six Months Ended June 30, 2008
Earnings (Loss) Earnings (Loss)
Before Segment Before Segment
Total Gross Income Earnings Total Gross Income Earnings
Revenues Margin Taxes (Loss) Revenues Margin Taxes (Loss)
(In millions)
Usage/weather $ 0.2 $ (3.6 ) $ (3.6 ) $ (2.3 ) $ (6.2 ) $ (5.7 ) $ (5.7 ) $ (3.7 )
Retail margins 15.6 (15.6 ) (15.6 ) (10.1 ) 15.7 (20.5 ) (20.5 ) (13.3 )
Trading margin - - - - (47.3 ) (47.3 ) (47.3 ) (30.4 )
Unrealized economic hedges (3.6 ) (0.9 ) (0.9 ) (0.6 ) (1.4 ) 7.6 7.6 4.9
Bad debt expense - - (4.9 ) (3.2 ) - - (4.6 ) (3.0 )
Other operational costs - - (4.4 ) (2.8 ) - - (5.0 ) (3.2 )
Impairment of goodwill and other intangible assets - - (50.6 ) (48.0 ) - - (50.6 ) (48.0 )
Other - - 0.6 0.2 - - 0.3 -
Total increase (decrease) $ 12.2 $ (20.1 ) $ (79.4 ) $ (66.8 ) $ (39.2 ) $ (65.9 ) $ (125.8 ) $ (96.7 )

The following table shows First Choice operating revenues by customer class, including intersegment revenues, and actual number of customers:

Three Months Ended September 30,

Nine Months Ended September 30,
Three Months Ended June 30, Six Months Ended June 30,

2007

2006⁽¹⁾

Change

%

2007

2006⁽¹⁾

Change

%
2008 2007 Change % 2008 2007 Change %
(In millions, except customers) (In millions, except customers) (Dollars in millions)
Residential $ 124.1 $ 119.1 $ 5.0 4.2 $ 298.1 $ 267.9 $ 30.2 11.3 $ 109.7 $ 88.4 $ 21.3 24.1 186.4 $ 174.0 $ 12.4 7.1
Mass-market 16.2 23.2 (7.0 ) (30.2 ) 50.5 65.9 (15.4 ) (23.4 ) 13.7 18.0 (4.3 ) (23.9 ) 29.6 34.3 (4.7 ) (13.7 )
Mid-market 40.5 37.7 2.8 7.4 109.5 93.3 16.2 17.4 37.8 38.1 (0.3 ) (0.8 ) 73.4 69.0 4.4 6.4
Trading gains (losses) (5.7 ) 1.4 (7.1 ) (507.1 ) (7.3 ) 7.1 (14.4 ) (202.8 ) (1.9 ) (1.9 ) - - (49.0 ) (1.7 ) (47.3 ) 2,782.4
Other 2.6 5.6 (3.0 ) (53.6 ) 12.5 12.8 (0.3 ) (2.3 ) 2.9 7.4 (4.5 ) (60.8 ) 6.0 10.0 (4.0 ) (40.0 )
$ 177.7 $ 187.0 $ (9.3 ) (5.0 ) $ 463.3 $ 447.0 $ 16.3 3.6 $ 162.2 $ 150.0 $ 12.2 8.1 $ 246.4 $ 285.6 $ (39.2 ) (13.7 )
Actual customers (thousands) ^(2,3)
258.6 243.4 15.2 6.2 258.6 243.4 15.2 6.2
Actual customers (thousands)(1,2)
253.8 249.5 4.3 1.7 253.8 249.5 4.3 1.7

~~(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 September 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.

82

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

Three Months Ended September 30,

Nine Months Ended September 30,

2007

2006⁽²⁾

Change

%

2007

2006⁽²⁾

Change

%

(Gigawatt hours ⁽¹⁾)

(Gigawatt hours ⁽¹⁾)

Residential 886.5 847.3 39.2 4.6 2,139.5 1,911.5 228.0 11.9
Mass-market 101.3 157.6 (56.3 ) (35.7 ) 312.7 440.4 (127.7 ) (29.0 )
Mid-market 348.9 345.3 3.6 1.0 944.5 846.5 98.0 11.6
Other 11.3 5.2 6.1 117.3 21.6 15.5 6.1 39.4
1,348.0 1,355.4 (7.4 ) (0.5 ) 3,418.3 3,213.9 204.4 6.4

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

(2)   ~~The~~Due to the competitive nature of First Choice’s business, actual customer ~~class sales have been reclassified to be consistent with current year presentation.~~count at June 30 is presented in the table above as a more representative business indicator than average customers.

~~Cooler weather throughout 2007~~The following table shows First Choice GWh electric sales by customer class:

Three Months Ended June 30, Six Months Ended June 30,
2008 2007 Change % 2008 2007 Change %

(Gigawatt hours) (1)

Residential 709.1 638.0 71.1 11.1 1,272.8 1,252.9 19.9 1.6
Mass-market 68.2 111.1 (42.9 ) (38.6 ) 163.0 211.4 (48.4 ) (22.9 )
Mid-market 304.5 332.0 (27.5 ) (8.3 ) 583.3 595.6 (12.3 ) (2.1 )
Other 5.4 5.3 0.1 1.9 9.8 10.4 (0.6 ) (5.8 )
1,087.2 1,086.4 0.8 0.1 2,028.9 2,070.3 (41.4 ) (2.0 )

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

A shift in the customer mix to include lower margin customers resulted in ~~lower sales volumes~~a decrease to gross margin and ~~reduced operating income~~segment earnings for both the ~~third~~second quarter and year-to-date ~~2007.~~

For the third quarter and year-to-date 2007, an increase in customers resulted in increased revenues compared to 2006, but changes in the overall customer mix and reduced usage per customer caused a decrease in gross margin and operating income.

2008.  An increase in the average retail sales price over ~~2006~~2007 levels, ~~for the third quarter and year-to-date 2007~~largely related to higher purchased power costs, resulted in increased sales revenues. However, ~~this was more than offset by increased purchase~~these higher power ~~prices and transmission charges, causing~~costs resulted in a decrease in the average retail ~~margin per MWh sold.~~margin.  Average market clearing prices
80
within ERCOT have increased 115 percent since December of 2007.  A delay in implementing price increases on fixed price term customer renewals, coupled with contractual limitations on monthly price increases for floating rate customers prevented First Choice from recouping the dramatic increase in purchase power costs. Losses on unrealized economic hedges in the second quarter 2008 and a gain year-to-date represent unrealized fair value estimates related to forward energy contracts and are not necessarily indicative of the amounts that will be realized upon settlement.

For the ~~third quarter,~~six months ended June 30, a decrease in trading margins from a ~~$1.4 million gain in 2006 to a $5.7~~$1.7 million loss in 2007 ~~resulted in a net $7.1 million decrease to operating income.  Year-to-date, a decrease in trading margins from a $7.0 million gain in 2006~~ to a ~~$7.3~~$49.0 million loss in ~~2007~~2008 resulted in ~~a net $14.3~~an after-tax $30.4 million decrease in segment earnings.  The losses were primarily the result of a series of speculative forward trades that arbitraged basis differentials among certain ERCOT delivery zones.  Because of continued market volatility and the concern that the forward basis market would continue to ~~operating income.  Current year~~deteriorate, First Choice decided to end any further speculative trading.  In the second quarter of 2008, First Choice incurred a $1.9 million loss to close out remaining speculative positions.  Of the speculative trading losses, ~~were driven by third quarter market~~$23.4 million has not cash settled and represents unrealized losses on its remaining forward positions at June 30, 2008.  The majority of these positions will cash settle before December 31, 2008.  No significant additional costs are expected related to ~~surplus power supply that decreased in value due to a decrease in market heat rates, largely due to milder weather, along with a decrease in gas prices.~~speculative trading.

~~Bad debt expense remained flat during~~Impairments of goodwill of $43.2 million and the First Choice trade name of $7.4 million pre-tax ($4.8 million after-tax) were recorded in the three months ended June 30, 2008 as a result of the annual impairment assessment (See Note 17).  Because of the timing and complexity of the calculations required in the impairment analysis related to the goodwill of First Choice, the Company anticipates finalizing this analysis in the third quarter of ~~2007, but increased during the first half~~2008.  However, a preliminary estimate of the ~~year, resulting~~goodwill impairment has been recorded based on the calculations performed to date and may be revised, as allowed by GAAP.

Other operational costs include costs for customer acquisition and service, as well as shared services, employee labor, pension, and benefits.  Increased operational costs including higher bad debt expense resulted in a decrease to ~~year-to-date operating income.  Reductions in incentive-based compensation as a result of lower~~segment earnings ~~in 2007 have decreased operating expenses for both the third quarter and year-to-date 2007.~~

83

~~EnergyCo~~

Upon the contribution of Altura to EnergyCo, EnergyCo became a separate segment for PNMR effective June 1, 2007.  During the three months ended September 30, 2007, EnergyCo completed the acquisition of an additional generating plant and announced plans to co-develop a separate facility generating unit.  See Notes 2 and 11.  PNMR accounts for its investment in EnergyCo using the equity method of accounting.  The summary of EnergyCo’s results of operations since June 1, 2007 is as follows:

For the Period

July 1 - September 30, 2007

June 1 - September 30, 2007

(In thousands)

Operating revenue $ 100,463 $ 114,828
Cost of energy 56,419 60,979
Gross margin 44,044 53,849
Operating expenses 12,279 15,046
Depreciation and amortization 5,790 7,318
Operating income 25,975 31,485
Other income and (deductions) 217 241
Net interest expense (6,978 ) (7,796 )
Earnings before income taxes 19,214 23,930
Income taxes ⁽¹⁾
399 399
Net earnings $ 18,815 $ 23,531

50 percent of net earnings $ 9,408 $ 11,765
Amortization of basis difference in EnergyCo 1,148 1,733
PNMR equity in net earnings of EnergyCo $ 10,556 $ 13,498

~~(1)~~   ~~Represents the Texas Margin Tax, which is considered an income tax.~~

EnergyCo’s margin results are mainly driven by spark spread and the availability of its two plants, Twin Oaks and Altura Cogen.  The Altura Cogen facility was acquired on August 1, 2007 and its results are included in EnergyCo’s results from the acquisition date forward.  For the periods shown, Twin Oaks’ output was fully contracted.  Despite two brief unplanned outages, Twin Oaks maintained consistently high plant availability.  Altura Cogen was successfully integrated into EnergyCo and did not experience any unplanned outages during the period, which enabled consistent revenues related to its contracted output.  Altura Cogen has a significant amount of its output available to be sold into the ERCOT market.  Market conditions, including spark spread and heat rate, can impact the profitability of these merchant sales.

~~Corporate and Other~~

~~Operating revenues decreased along with an offsetting decrease in cost of energy~~ for both the second quarter and year-to-date ~~was~~2008.  Unfavorable operating costs were driven largely by an increase in bad debt expense as a result of eliminations 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 PNM Electric on January 1, 2007.residual billing system conversion issues.

~~Operating expenses increased $22.6 million~~On August 11, 2008, PNMR announced that it has decided to pursue strategic alternatives for First Choice.

Corporate and Other

The following table summarizes the ~~third quarter~~significant changes to operating revenues, gross margin, earnings (loss) before income taxes, and segment earnings (loss):

Three Months Ended June 30, 2008 Six Months Ended June 30, 2008
Earnings (Loss) Earnings (Loss)
Before Segment Before Segment
Total Gross Income Earnings Total Gross Income Earnings
Revenues Margin Taxes (Loss) Revenues Margin Taxes (Loss)
(In millions)
Intercompany eliminations $ 2.0 $ - $ - $ - $ 4.1 $ - $ - $ -
EnergyCo formation costs - - 3.0 1.8 - - 4.2 2.5
Loss on contribution of Altura - - 7.0 4.3 - - 7.0 4.3
Equity in earnings (loss) of EnergyCo - - (4.8 ) (3.3 ) - - (29.2 ) (18.1 )
Business improvement plan - - (1.5 ) (1.0 ) - - (4.1 ) (2.5 )
Financing - - (1.5 ) (0.9 ) - - (2.0 ) (1.2 )
Effects of settlement with IRS - - (4.6 ) (18.8 ) - - (4.7 ) (18.8 )
Other (0.2 ) - 2.0 1.9 (0.3 ) - 3.0 1.5
Total increase (decrease) $ 1.8 $ - $ (0.4 ) $ (16.0 ) $ 3.8 $ - $ (25.8 ) $ (32.3 )

The Corporate and Other segment includes consolidation eliminations of revenue and expense between TNMP and First Choice.  In 2007, ~~and $30.8 million year-to-date 2007, primarily driven by third quarter increases for the impairment of Afton of $19.5 million and business improvement plan costs of $12.6 million, in addition to~~PNMR incurred costs associated with ~~the~~ formation of ~~the~~ EnergyCo ~~joint venture, an impairment loss on intangible assets, and the~~as well as a loss on the contribution of Altura to EnergyCo, which are included in the Corporate and Other segment.  Corporate and Other results also include earnings associated with EnergyCo.  Further explanation of ~~$11.2 million year-to-date 2007.  These~~equity in earnings of EnergyCo is shown below.  As part of the business improvement plan to reduce costs ~~were partially offset by third quarter decreases for a $2.8 million gain on the sale of a turbine, $2.4 million for the elimination of a PVNGS capital trust lease,~~ and ~~a $2.1 million true-up~~improve processes in property taxes related to Twin Oaks for periods prior to its contribution to EnergyCo.  Costs were also decreased by depreciation costs that were allocated through the corporate allocation driven by the construction of a new data center and additional shared service software, and the absence of TNP and Twin Oaks acquisition integration costs in 2006 of $0.9 million for the third quarter and $3.7 million year-to-date.

8481
~~Depreciation expense increased primarily due~~future years, costs to ~~an increase~~achieve these savings such as severances and consulting charges were incurred 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.~~

~~PNMR Consolidated~~

~~Realized gains on investments held by the NDT increased $4.1 million for the third quarter and $5.0 million year-to-date primarily resulting~~2008.  Increased financing charges in 2008 resulted from ~~a rebalancing~~remarketing of the ~~asset allocation~~debt component of equity-linked units at a higher interest rate and additional long-term debt, as well as higher short-term borrowings partially offset by lower short-term interest rates. ��In 2007, the ~~investment portfolio.  Carrying charges on regulatory assets decreased $2.0 million for the third quarter~~Corporate and $6.0 million year-to-date as 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.  Other ~~deductions increased primarily due to the amortization of $0.8 million for the third quarter and $3.3 million year-to-date for a wind energy investment.~~

~~PNMR’s consolidated interest charges decreased primarily due to interest effects of the settlement with the IRS~~segment includes favorable tax decisions regarding previously unrecognized tax benefits, (See Note 15), which reduced interest expense by $5.5 million year-to-date 2007, increased capitalized interest on construction of Afton and AFUDC on the SJGS environmental project of $1.6 million for the third quarter and $3.5 million year-to-date, and the reduction of long-term debt at TNMP of $1.5 million for the third quarter and $1.8 million year-to-date. These decreases were partially offset by increased interest of $4.2 million for the third quarter and $9.4 million year-to-date on short-term borrowings, increased interest expense of $1.0 million year-to-date related to the refinancing of PCRBs, and interest expense onincluding a wind energy investment of $0.7 million year-to-date that began in late 2006.  Interest on the debt associated with the Altura purchase of Twin Oaks decreased by $8.0 million for the quarter and $5.4 million year-to-date, as it has been repaid.  The implementation of FIN 48 increased interest expense by $2.4 million during the third quarter and $3.1 million year-to-date.

~~PNMR’s consolidated income tax expense decreased primarily as a result of the~~ settlement with the IRS ~~regarding previously unrecognized tax benefits (See Note 15), which~~that had a $16.0 million non-recurring impact on income ~~taxes~~taxes.

EnergyCo

The table below summarizes the operating results for EnergyCo:

Three Months Ended June 30, Six Months Ended June 30,
2008 2007 Change 2008 2007 Change
(In millions)
Total operating revenues $ 304.5 $ 14.4 $ 290.1 $ 478.5 $ 14.4 $ 464.2
Cost of energy 259.9 4.6 255.4 457.1 4.6 452.5
Gross margin 44.5 9.8 34.7 21.4 9.8 11.6
Operating expenses 38.0 4.1 33.9 52.5 5.5 47.0
Depreciation and amortization 7.7 1.5 6.1 15.2 1.5 13.7
Operating income (loss) (1.3 ) 4.2 (5.5 ) (46.2 ) 2.8 (49.0 )
Other income (deductions) 0.4 - 0.4 0.7 - 0.7
Net interest charges (4.8 ) (0.8 ) (4.0 ) (11.4 ) (0.8 ) (10.5 )
Earnings (loss) before income taxes (5.5 ) 3.4 (8.9 ) (56.9 ) 2.1 (59.0 )
Income tax (benefit) on margin 0.1 - 0.1 0.3 - 0.3
Net earnings (loss) $ (5.6 ) $ 3.4 $ (9.0 ) $ (56.6 ) $ 2.1 $ (58.7 )

50 percent of net earnings (loss) $ (2.8 ) $ 1.7 $ (4.5 ) $ (28.3 ) $ 1.0 $ (29.3 )
P     Plus amortization of basis difference in EnergyCo 0.3 0.6 (0.3 ) 0.7 0.6 0.1
PNMR Equity in net earnings (loss) of EnergyCo $ (2.5 ) $ 2.3 $ (4.8 ) $ (27.6 ) $ 1.6 $ (29.2 )

PNMR evaluates the ~~nine months ended September 30, 2007.  In addition, 2007~~results of operation of EnergyCo on an earnings before interest, income taxes, ~~were reduced~~depreciation, and amortization (“EBITDA”) basis.  In this evaluation of EnergyCo, PNMR also excludes purchase accounting amortization recorded in accordance with SFAS 141, speculative trading and mark to market on forward economic hedges.

SFAS 141 requires that EnergyCo individually value each asset and liability received in the Altura and Altura Cogen transactions and initially record them on its balance sheet at the determined fair value.  For both transactions, this results in a significant amount of amortization since the acquired contracts’ pricing terms differ significantly from fair value at the date of acquisition and the emission allowances, while acquired from government programs without future cost to the plants, have historically had significant market value.  Amortization related to out of market contracts changed the above total operating revenues by a decrease in pre-tax earnings, which were partially offset by a change in taxation by the State of Texas that resulted in Texas margin taxes being included in income tax expense in 2007 versus Texas franchise tax being included in taxes other than income in 2006.  PNMR’s effective tax rates$(0.3) million and $1.0 million for the three months and ~~nine~~six months ended ~~September~~June 30, ~~2007 were 19.6%~~2008.  Amortization for out of market contracts will continue through the expiration of each contract, the latest of which is 2010 for Altura and ~~7.8%, respectively, compared~~2021 for Altura Cogen.  In addition, cost of energy includes $1.2 million and $5.3 million of amortization related to ~~36.3% and 36.9%~~emission allowances acquired in the transactions for the three months and ~~nine~~six months ended ~~September~~June 30, ~~2006.  Excluding~~2008.  The amortizations for emission allowances are recorded as the ~~non-recurring impact to income taxes related to~~allowances are used in plant operations, sold or expire.

In July 2008, a federal appeals court ruling by the ~~IRS settlement, the effective tax rates~~U.S. Court of Appeals for the ~~nine months ended September 30, 2007 would~~District of Columbia Circuit Court invalidated CAIR.  This ruling appears to remove the need for emissions allowance credits under the CAIR program.  EnergyCo currently carries $153.5 million in inventory for emissions allowances, $34.6 million of which fall under the CAIR program, from the purchase of the Altura Cogen plant and contribution of the Twin Oaks plant.  EnergyCo is currently evaluating what impacts this ruling might have ~~been 33.0%.  PNMR’s effective tax rates~~on the value of this inventory.  Following this ruling, the trading markets for emissions allowances have deteriorated, which could impact the ~~three months and nine months ended September 30, 2007 were also impacted by a reduction in the effective rate applicable to non-operating income primarily due to the impacts~~future carrying amount of ~~tax credits from a wind energy investment.~~EnergyCo’s inventory of emission allowances.

EnergyCo intends to have an active hedging program that covers a multi-year period.  The level of hedging at
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any given time varies depending on current market conditions and other factors.  Economic hedges that do not qualify for or are not designated as cash flow hedges under SFAS 133 are derivative instruments that are required to be marked to market.  Changes in the fair value of these instruments resulted in an increase in net earnings of $8.1 million in the three months ended June 30, 2008 and a reduction of net earnings of $39.0 million in the six months ended June 30, 2008 as a result of higher power prices.  Due to the extreme market volatility experienced in the first quarter in the ERCOT market, EnergyCo has made the decision to exit the speculative trading business. As of May 2008, EnergyCo closed out all remaining speculative positions.  EnergyCo recognized speculative trading losses of $2.4 million in the first quarter of 2008 and less than $0.1 million in the second quarter of 2008.  No additional costs are expected related to speculative trading.

Results of operations for EnergyCo for the three months ended June 30, 2008 primarily include the operations of the Altura and Altura Cogen generation stations.  Altura was contributed to EnergyCo on June 1, 2007 and EnergyCo acquired Altura Cogen on August 1, 2007.  Both the generation stations had strong performance during the first six months of 2008, with Altura’s availability significantly higher than the same period in 2007 due to additional outages in the prior year. Since primary operations of EnergyCo did not commence until the contribution of Altura, the earnings for the six months ended June 30, 2007 only reflect start-up costs and one month of Altura operating activity.

The contribution of Altura created a basis difference between PNMR’s recorded investment in EnergyCo and 50 percent of EnergyCo’s equity.  While the portion of the basis difference related to contract amortization will only continue through 2010, other basis differences, including a difference related to emission allowances, will continue to exist through the life of the Altura plant.  For the three months and six months ended June 30, 2008, the basis difference adjustment detailed above of $0.2 million and $0.6 million relate mainly to contract amortization with insignificant offsets related to the other minor basis difference components.

The assets of Altura transferred to EnergyCo included the development rights for a possible 600-megawatt expansion of the Twin Oaks plant, which was classified as an intangible asset.  EnergyCo has made a strategic decision not to pursue the Twin Oaks expansion at this time and, in the three months ended June 30, 2008, has written off the development rights as an impairment of intangible assets amounting to $21.8 million.

LIQUIDITY AND CAPITAL RESOURCES

Statements of Cash Flows

The changes in PNMR’s cash flows for the ~~nine~~six months ended ~~September~~June 30, ~~2007~~2008 compared to ~~2006~~2007 are summarized as follows:

Nine Months Ended September 30,
Six Months Ended June 30,

2007

2006

Change
2008 2007 Change
(In millions) (In millions)

Net cash flows from operating activities $ 127.0 $ 186.2 $ (59.2 ) $ 12.3 $ 87.2 $ (74.9 )
Net cash flows from investing activities 19.2 (651.5 ) 670.7 (150.1 ) 172.4 (322.5 )
Net cash flows from financing activities (252.9 ) 498.0 (750.9 ) 257.9 (325.0 ) 582.9
Net change in cash and cash equivalents $ (106.7 ) $ 32.7 $ (139.4 ) $ 120.1 $ (65.4 ) $ 185.5

The change in PNMR’s cash flows from operating activities reflects ~~higher coal~~lower earnings after adjustments to reconcile to cash flows from operations due primarily to results of operations at First Choice and ~~purchased power costs~~PNM Electric as discussed in Results of Operations. The decrease in operating cash flows is partially offset by ~~higher customer growth and pricing. Other significant decreases in cash flow included~~ settlements in 2007 of 2006 TNMP liabilities to REPs related to retail competition in Texas as ordered under TECA ~~higher~~and payments in 2007 of 2006 incentive based compensation payouts and higher interest charges that were a result of higher average short-term borrowings in 2007. In addition, higher than normal gas and market prices at the end of 2005 contributed to higher receivable collections in 2006 as compared to 2007 partially offset by reduced payments in 2007 associated with gas purchases due to lower prices as compared to 2006.accruals.

~~PNMR had net positive~~The change in cash flows from investing activities ~~for the nine months ended September 30, 2007 primarily due to~~reflects net ~~cash~~ distributions ~~to PNMR~~ from EnergyCo ~~(See Note 11) and~~in 2007 related to the ~~proceeds from the sales~~contribution of ~~utility plant, whereas in 2006 PNMR had net cash outflows for the acquisition of Twin Oaks.  The 2007 cash inflows were mostly~~Altura, partially offset by ~~increased expenditures~~less cash used at PNM for utility plant additions ~~including~~in 2008 compared to 2007 when the ~~purchase of assets underlying a portion of PVNGS leased by PNM (See Note 2)~~ expansion of the Afton plant ~~environmental~~and corporate software upgrades ~~at SJGS, and higher purchases of nuclear fuel for PVNGS in 2007.~~impacted cash flows.

The change in ~~PNMR’s~~ cash flows ~~for~~from financing activities ~~for~~reflects higher long-term borrowings partially offset by the ~~nine months ended September 30, 2007 is primarily driven by~~repayment of short-term borrowings at PNM and PNMR.  In addition, the redemption of long-term debt at
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TNMP was partially offset by ~~TNMP, the~~new short-term borrowings at TNMP. The issuance of ~~PCRBs~~common stock by ~~PNM, and a decrease~~PNMR in ~~short-term debt in 2007 compared~~ 2008 also increased cash flows from financing activities. Cash flows from financing activities continued to ~~an increase in short-term debt in 2006 that was primarily related to financing~~fund construction expenditures as well as strengthen the ~~acquisition of Twin Oaks.~~Company’s liquidity position.

Capital Requirements

Total capital requirements consist of construction expenditures and cash dividend requirements for both common and preferred stock.  The main focus of PNMR’s current construction program is upgrading generation resources, including pollution control equipment, upgrading and expanding the electric and gas transmission and distribution systems, and purchasing nuclear fuel.  On August 11, 2008, the Board declared the regular quarterly dividend on common stock of $0.125 per share, which represents a reduction of 46 percent from the previous quarter. PNMR’s indicated annual rate is $0.50 per share. The Board took this action to improve the Company’s liquidity and set a new foundation for long-term value creation.  The reduction also better aligns PNMR’s dividend yield with industry averages. Projections, including amounts expended through ~~September~~June 30, ~~2007,~~2008, for total capital requirements for ~~2007~~2008 are ~~$501.7~~$414.4 million, including construction expenditures of ~~$430.7~~$356.6 million.  Total capital requirements for the years ~~2007-2011~~2008-2012 are projected to be ~~$2,442.7~~$1,983.6 million, including construction expenditures of ~~$2,006.6~~$1,741.4 million.  This projection includes ~~completion of the expansion at Afton and $150.6~~$81.0 million for the SJGS environmental project to install low NOX combustion control and mercury reduction technologies, as well as equipment to increase SO₂ controls.  These estimates are under continuing review and subject to on-going adjustment, as well as to board review and approval..  On August 11, 2008, PNMR announced that it has decided to pursue strategic alternatives for First Choice.  No significant capital expenditures for First Choice are included in the above amounts.

On March 7, 2008, TNMP entered into a $150 million short-term loan agreement with two banks.  On April 9, 2008, TNMP borrowed $150.0 million under this agreement and used the proceeds to redeem the remaining $148.9 million of its 6.125% senior unsecured notes prior to the maturity date of June 1, 2008.  TNMP is currently evaluating options for refinancing the short-term bank loan which is due on October 9, 2008, including the potential for extending this borrowing for six months, repaying the loan by borrowing under the TNMP Facility, or accessing the public or private securities markets to issue long-term debt in the form of additional senior unsecured notes, or a combination of the foregoing.

As described in Note 7, in May 2008, PNM issued $350 million of senior unsecured notes and PNMR remarketed the senior unsecured notes component of its publicly held equity-linked units.  In connection with the remarketing, PNMR issued an additional $102.7 million of new senior unsecured notes for an aggregate offering of $350 million.

During the first ~~nine~~six months of ~~2007,~~2008, the Company utilized cash from the debt arrangements described above, cash generated from operations and cash on hand, as well as its liquidity arrangements, to meet its capital requirements and construction expenditures.  ~~On April 18, 2006, PNMR borrowed $480.0 million under a bridge loan facility for temporary financing of~~During 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.  As discussed in Note 7, TNMP redeemed $100 million of its senior unsecured notes using funds from PNMR and PNMRsix months ended June 30, 2008, PNM also received ~~$9.8~~$3.7 million from draws under its $20 million of ~~PCRBs~~pollution control revenue bonds issued by the City of Farmington, New ~~Mexico during the nine months ended September 30, 2007.  As discussed in Note 11, PNMR received cash distributions from EnergyCo aggregating $362.3 million during this same period.  PNMR and~~ Mexico.

PNM ~~have an aggregate of $60.2~~has $300.0 million of ~~commercial paper outstanding and $605.0 million of borrowings under revolving credit facilities as of November 1, 2007.  PNMR, including its subsidiaries, also~~senior unsecured notes that mature in September 2008, TNMP has ~~$616.6~~$167.7 million in senior unsecured notes that mature in January 2009, and ~~$347.3~~PNMR has $100.0 million in the debt component of its privately held equity-linked units ~~(which include a~~that currently are scheduled to mature in 2010, but as discussed below, the debt ~~component)~~component of the equity-linked units will be remarketed in 2008 and the maturity may be extended if the remarketing is successful.  PNMR and its subsidiaries have no other long-term debt that ~~will come due through 2011, of which $448.9 million in unsecured notes is~~comes due prior to ~~September 30, 2008.~~2016, except for $13.2 million that is due in installments through 2013.

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As discussed in Note ~~11,~~22 of Notes to Consolidated Financial Statements in the 2007 Annual Reports on Form 10-K, EnergyCo purchased an electric generating plant in August 2007 for ~~$467.5~~$477.9 million, after working capital adjustments, for which PNMR and ECJV each made a cash contribution to EnergyCo of $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 currently anticipates that the remaining amounts of~~$215 million, including financing ~~for these EnergyCo projects will be obtained from EnergyCo’s credit facility.~~costs.  To the extent EnergyCo’s credit facility should be insufficient to finance the current project or additional projects, PNMR and ECJV may, at their option, provide additional funds to EnergyCo.  Likewise, if EnergyCo undertakes additional projects, which require 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 at the option of PNMR and ECJV.  PNMR is unable to predict if ~~these possibilities~~additional funding will ~~occur~~be
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required or, if ~~they do occur,~~required, the amount or timing of additional funds that would be provided to EnergyCo.

PNMR’s privately held equity-linked units contain mandatory obligations under which the holders are required to purchase ~~$347.3~~for cash, $100.0 million of PNMR ~~equity securities~~common or preferred stock in November 2008.  The equity-linked units also provide that, prior to settlement of those purchase obligations, the debt ~~component~~components of the equity-linked units, which isare scheduled to mature in 2010, will be ~~remarketed.~~remarketed beginning November 7, 2008.  The maturity date of the senior notes may be extended in the remarketing and the interest rate will be reset to a level designed to achieve a successful remarketing of the notes.  If the remarketing is successful, PNMR would receive $100.0 million in cash for its equity securities and the debt ~~may be extended~~would continue to ~~dates selected by PNMR and~~mature in 2010, or such later date established in the ~~interest rates will be adjusted to the current rates at that date.~~remarketing.  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~~PNMR instead of ~~these terms is that, if the remarketing is successful, PNMR would receive $347.3 million in~~paying cash for ~~its~~the equity securities, the equity securities would be issued, 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 debtbe cancelled without requiring payment in cash by PNMR.  As discussed below, the credit ratings of PNMR’s debt were recently downgraded.  There has also been an overall deterioration of the credit markets in general.  Although there can be no assurance, PNMR ~~expects~~believes the remarketing ~~of the debt~~ will be successful.

As discussed in Note 2, on January 12, 2008, PNM reached a definitive agreement to sell its natural gas operations, which comprise the PNM Gas segment, for $620 million in cash, subject to regulatory approval by the NMPRC and other conditions.  The parties may terminate the agreement under certain circumstances.  PNMR expects to use the net after-tax proceeds of this transaction to retire debt, fund future electric capital expenditures and for other corporate purposes.

In addition to cash ~~anticipated to~~that may be received from the issuance of equity securities during the settlement of PNMR’s privately held equity-linked units, ~~described above~~the sale of PNM Gas, and its internal cash generation, the Company anticipates that it will be necessary to obtain additional long-term financing in the form of debt refinancing, new debt issuances, and/or new equity in order to fund its capital requirements and the repayment of senior unsecured notes during the ~~2007-2011~~2008-2012 period.  To the extent the cash anticipated to be received from the settlement of the equity-linked units is not received, the need for new financing will be increased.  ~~Although~~

At August 4, 2008, the Company ~~currently~~had short-term debt outstanding of $385.0 million.  In addition, the Company has ~~no specific plans or commitments for additional permanent financing, it~~scheduled maturities of long-term debt aggregating $470.3 million prior to June 30, 2009.  The Company is exploring financial alternatives to meet these obligations.  The Company currently believes that its internal cash generation, credit arrangements, and access to public and private capital markets will provide sufficient resources to meet the Company’s capital requirements and retire or refinance 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.

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Liquidity

~~Liquidity~~

~~PNMR’s~~The Company’s principal liquidity arrangements include the PNMR Facility and the PNM Facility, both of which primarily expire in ~~2012.~~2012, and the TNMP Facility, which expires in May 2009.  These facilities provide short-term borrowing capacity and also allow letters of credit 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 a commercial paper program under which it may issue commercial paper for up to 270 days and PNM has a commercial paper program under which it may issue commercial paper for up to 365 ~~days.~~days although these commercial paper programs are currently suspended and no commercial paper has been issued since March 11, 2008.  The commercial paper is unsecured and the proceeds are used for short-term cash management needs.  The PNMR Facility and the PNM Facility serve as support for the 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 that entity’s revolving credit facility.

On May 5, 2008, PNM entered into a delayed draw term loan facility that matures April 30, 2009 in an aggregate principal amount of up to $300.0 million, which capacity was reduced to $150 million on May 28, 2008.  On May 8, 2008, PNM entered into a $100 million unsecured letter of credit facility, which allows PNM to obtain standby letters of credit up to the aggregate amount of $100 million at any time prior to April 30, 2009.  No borrowings have been made and no letters of credit have been issued under these arrangements.

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A summary of these arrangements as of ~~November 1, 2007~~August 4, 2008 is as follows:

PNM

PNMR

PNMR

Separate

Separate

Consolidated
PNMR PNM TNMP PNMR
(In millions) Separate Separate Separate Consolidated
(In millions)
Financing Capacity:
Revolving credit facility $ 400.0 $ 600.0 $ 1,000.0 $         600.0 $         400.0 $        200.0 $      1,200.0
Local lines of credit 13.5 15.0 28.5 10.0 8.5 - 18.5
Delayed draw term loan facility - 150.0 - 150.0
Letter of credit facility - 100.0 - 100.0
Term loan credit facility - - 150.0 150.0
Total financing capacity $ 413.5 $ 615.0 $ 1,028.5 $         610.0 $         658.5 $        350.0 $      1,618.5

Commercial paper program maximum $ 300.0 $ 400.0 $ 700.0 $         400.0 $         300.0 $               - $        700.0

Amounts outstanding as of November 1, 2007:
Amounts outstanding as of August 4, 2008:
Commercial paper program $ - $ 60.2 $ 60.2 $                - $                 - $               - $               -
Revolving credit facility 275.0 330.0 605.0 235.0 - - 235.0
Local lines of credit 5.7 - 5.7 - - - -
Delayed draw term loan facility - - - -
Term loan credit facility - - 150.0 150.0
Total short-term debt outstanding 280.7 390.2 670.9 235.0 - 150.0 385.0

Letters of credit 3.1 36.6 39.7 122.2 27.8 1.5 151.5

Total short term-debt and letters of credit $ 283.8 $ 426.8 $ 710.6 $         357.2 $           27.8 $       151.5 $        536.5

Remaining availability as of November 1, 2007 $ 129.7 $ 188.2 $ 317.9
Remaining availability as of August 4, 2008 $         252.8 $         630.7 $       198.5 $     1,082.0
Cash balances as of August 4, 2008 $         54.8 $           54.4 $              - $        109.2

The above tables do not include short-term debt of Valencia.  See Note 16.  The remaining availability under the revolving credit facilities varies based on a number of factors, including the timing of collections of accounts receivables and payments for construction and operating expenditures.

PNMR has aan effective universal shelf registration statement ~~filed with the SEC~~ for the issuance of debt securities, ~~and equity securities,~~common stock, preferred stock, purchase contracts, purchase contract units and warrants.  As of ~~September 30, 2007,~~August 4, 2008, PNMR had approximately ~~$400.0~~$150.0 million of remaining unissued securities under this universal shelf registration statement.  In addition, in August 2006, PNMR filed a new automatically effective shelf registration statement with the SEC for ~~equity~~common stock and in April 2008, PNMR filed a new automatically effective shelf registration statement for debt securities.  ~~This~~These new registration ~~statement~~statements can be amended at any time to include additional securities of PNMR.  As a result, ~~this~~these new shelf registration ~~statement has~~statements have unlimited availability, subject to certain restrictions and limitations.

~~Pursuant to the terms of the PNM Direct Plan,~~ PNMR ~~began offering~~offers 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~~Direct Plan and an equity distribution agreement.  The 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.is currently suspended.  From January 1, ~~2007~~2008 through ~~November 1, 2007,~~August 4, 2008, PNMR had sold a ~~combined~~ total of ~~87,026~~137,738 shares of its common stock through the PNMR Direct Plan ~~and the equity distribution agreement~~ for net proceeds of ~~$2.4~~$1.9 million.

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In April 2008, PNM ~~has~~filed a ~~universal~~new shelf registration statement ~~filed with the SEC~~ for the issuance of ~~debt securities, equity securities, preferred stock, purchase contracts, purchase contract units and warrants.~~$750 million of senior unsecured notes that was declared effective on April 29, 2008.  As of ~~September 30, 2007,~~August 4, 2008, PNM had ~~approximately $200.0~~$600.0 million of remaining unissued securities registered under this and a prior shelf registration statement.

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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 conditions in the financial 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~~18, 2008, S&P lowered the credit ~~outlook of~~ratings for PNMR, PNM, and TNMP ~~to negative from stable.~~and placed them on credit watch for possible additional downgrades.  On May 6, 2008, S&P ~~considered~~again lowered the ~~outlook of~~credit ratings for PNMR, PNM, and TNMP asand the outlook was changed to stable for all entities.  On April 25, 2008, Moody’s lowered the credit ratings for PNMR and PNM and continued a review for possible downgrade, while reaffirming TNMP’s ratings with a negative asoutlook.  On May 23, 2008, Moody’s changed the outlook for PNMR and PNM from rating under review for possible downgrade to negative.  The ratings actions have increased borrowing costs for PNMR and PNM; could increase future borrowing costs for PNMR, PNM, and TNMP; required the posting of approximately $14.7 million of letters of credit to support certain contractual arrangements; and could require the ~~date~~posting of ~~this report.~~additional letters of credit or other collateral that would have a negative impact on liquidity. In addition, certain contractual arrangements require that the Company obtain commercial insurance for risks that were previously self-insured.  As of ~~September 30, 2007,~~August 4, 2008, ratings on the Company’s securities were as follows:

PNMR PNM TNMP

S&P
Senior unsecured notes ~~BBB-~~BB- ~~BBB~~BB+ ~~BBB~~BB+
Commercial paper A3B-2 A3B-2 *
Preferred stock * B *
Moody’s
Senior unsecured notes ~~Baa3~~Ba2 ~~Baa2~~Baa3 Baa3
Commercial paper P3NP P2P-3 *
Preferred stock * ~~Ba1~~Ba2 *

*  Not applicable

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

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 issued both public and private equity-linked units in 2005, each of which consisted of a debt component and a purchase contract for PNMR’s ~~investment~~equity securities.  The purchase contracts are forward transactions in ~~EnergyCo is accounted for under~~ the equity ~~method~~securities of ~~accounting.  Therefore, EnergyCo’s assets, liabilities, results of operations, and cash flows~~PNMR that are not ~~consolidated with PNMR’s other operations.~~considered derivatives.  The debt component of the publicly held equity-linked units was remarketed in May 2008 and common stock was issued in exchange for cash received from the purchase contract component thereby ending that off-balance sheet arrangement.  See Note ~~11 for further discussion~~7.  See MD&A – Off-Balance Sheet Arrangements and Notes 6 and 7 of ~~this arrangement and summarized financial information concerning EnergyCo.~~Notes to Consolidated Financial Statements in the 2007 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~~Current Report on Form 8-K filed March 14, 2008.

PNMR entered into a five-year contract on July 1, 2008 for the outsourcing of certain data processing services.  This contract has a five-year base period of performance and three one-year options.  The base contract requires payments aggregating $20.9 million over the five-year term.

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Contingent Provisions of Certain Obligations

As discussed in the 2007 Annual Reports on Form 10-K/A (Amendment No. 1).  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~~

10-K, PNMR, PNM and TNMP have a number of debt obligations and other contractual commitments that contain contingent provisions.  Some of these, if triggered, could affect the liquidity of the Company.  ~~PNMR, PNM or TNMP could be required~~The contingent provisions include contractual increases in the interest rate charged on certain of the Company’s short-term debt obligations in the event of a downgrade in credit ratings and the requirement to provide security ~~immediately pay outstanding obligations or be prevented from drawing on unused capacity~~ under certain contractual agreements. As discussed above, the Company’s credit ~~agreements if the contingent requirements~~ratings were ~~to be triggered.  The most significant consequences resulting from these contingent requirements are detailed~~recently downgraded, which has resulted in increases in the ~~discussion below.~~
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~~The PNMR Facility~~interest rates on certain short-term debt obligations 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 PNMrequirement 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~~to support certain agreements aggregating approximately $14.7 million.  Based on additional credit facilities entered into by PNM and TNMP in May 2008, the ~~facility.~~Company believes its financing arrangements are sufficient to meet the requirements of the contingent provisions.

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.Capital Structure

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.

~~No conditions have occurred that would result in any of the above contingent provisions being implemented.~~

~~Capital Structure~~

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

September 30,

December 31,
2008 2007
PNMR

2007

2006

Common equity 50.2 % 48.9 % 46.0 % 50.0 %
Preferred stock of subsidiary 0.3 % 0.3 % 0.3 % 0.3 %
Long-term debt 49.5 % 50.8 % 53.7 % 49.7 %
Total capitalization 100.0 % 100.0 % 100.0 % 100.0 %

PNM

Common equity 57.7 % 54.4 % 49.5 % 57.8 %
Preferred stock 0.5 % 0.5 % 0.4 % 0.5 %
Long-term debt 41.8 % 45.1 % 50.1 % 41.7 %
Total capitalization 100.0 % 100.0 % 100.0 % 100.0 %

TNMP

Common equity 59.6 % 54.9 % 70.9 % 57.8 %
Long-term debt 40.4 % 45.1 % 29.1 % 42.2 %
Total capitalization 100.0 % 100.0 % 100.0 % 100.0 %

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~~MD&A FOR PNM~~

~~RESULTS OF OPERATIONS~~

~~NINE MONTHS ENDED SEPTEMBER 30, 2007~~
~~COMPARED TO NINE MONTHS ENDED SEPTEMBER 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 nine months ended September 30, 2007 were $25.9 million compared to $50.4 million for the nine months ended September 30, 2006.  The major causes of changes in net earnings were the impairment of Afton; reduced margins associated with PNM Electric/Wholesale growth and weather, as increased retail loads resulted in the use of gas generation or higher-cost purchased power and limited the amount of excess energy available to sell in wholesale markets; mark-to-market losses; an increase in generation prices due to the increase of coal costs; business improvement plan costs; and higher financing costs.  These decreases were partially offset by improved plant performance, primarily at PVNGS, 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:

Nine Months Ended

September 30, 2007

(In millions)
                        After-tax Impacts

TNMP asset transfer $ 2.6
Plant performance 5.2
Net unrealized mark-to-market (8.4 )
Coal costs (6.2 )
PNM Electric/Wholesale growth and weather (3.3 )
PNM Gas growth and weather 4.2
Afton impairment (11.8 )
Business improvement plan (4.2 )
Financing (3.5 )
Other 0.9
Net change $ (24.5 )

PNM’s consolidated income tax expense was $15.9 million for the nine months ended September 30, 2007, compared to $32.1 million for the same period of 2006.  PNM’s effective income tax rates for the nine months ended September 30, 2007 and 2006 were 37.7% and 38.8%, respectively.

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~~MD&A FOR TNMP~~

~~RESULTS OF OPERATIONS~~

~~NINE MONTHS ENDED SEPTEMBER 30, 2007~~
~~COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2006~~

TNMP operates in only one reportable segment, “TNMP Electric.”  Results for the nine months ended September 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/A (Amendment No. 1).

TNMP’s net earnings for the nine months ended September 30, 2007 were $15.4 million compared to $10.0 million for the nine months ended September 30, 2006.  The major causes of changes in net earnings were the recovery of costs as a result of the PUCT order and customer/load growth and weather, which were 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:

Nine Months Ended

September 30, 2007

                     After-tax Impacts
(In millions)
Discontinued operations $ (2.6 )
Carrying Charges (3.9 )
PUCT order 7.8
Growth and weather 2.5
Long-term debt reduction 1.8
Other (0.2 )
Net change $ 5.4

TNMP’s consolidated income tax expense from continuing operations was $7.8 million for the nine months ended September 30, 2007, compared to $4.0 million for the same period of 2006.  TNMP’s effective income tax rates from continuing operations for the nine months ended September 30, 2007 and 2006 were 33.7% and 35.1%, 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.~~Climate Change Issues

~~Global Warming Issues~~

~~Global warming increasingly~~The prospect of future climate change regulations is ~~a concern~~becoming an issue of increasing importance for the energy industry.  A growing body of scientific evidence is demonstrating with a high degree of probability that human activity, especially the burning of fossil fuels, has contributed to increased concentrations of greenhouse gases (“GHG”) in the atmosphere and a rise in average global temperatures.  Although there continues to be ~~significant~~ debate ~~regarding its existence~~over the precise impacts, growing public concern over the potential effects of climate change and ~~extent, scientific evidence suggests~~increased state and federal legislative and regulatory activity calling for the regulation of GHG indicate that climate change legislation is likely to be passed in the ~~emission of so-called greenhouse gases (particularly CO~~₂~~) from fossil fuel-fired generation facilities is a contributing factor.  The~~future.

In January 2007 the Company isbecame a founding member of the United States Climate Action Partnership (“USCAP”), a ~~group~~coalition of 35 businesses and ~~leading~~national environmental organizations calling on the federal government to ~~quickly~~ enact ~~strong~~ national legislation to ~~require significant reductions of greenhouse gas~~reduce GHG emissions ~~and that~~at the earliest practicable date. USCAP has issued a landmark set of principles and recommendations ~~to underscore the urgent need for~~outlining a policy framework onfor a national climate ~~change.~~change program.   As a member of USCAP, the Company believes that a mandatory, economy-wide federal cap and trade program, combined with other complementary state and federal policies, is the most cost effective and
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environmentally efficient means of slowing, stopping and reversing GHG emissions.    The Company intends to continue working with ~~this group~~USCAP and ~~with others in order~~the administration and Congress to ~~best~~advocate for federal action to address this challenging environmental 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.

Pursuant to New Mexico law, each utility must submit an integrated resource plan every three years to evaluate renewable energy, energy efficiency, load management, distributed generation and conventional supply-side resources on a consistent and comparable basis.  The integrated resource plan is required to take into consideration risk and uncertainty of fuel supply, price volatility and costs of anticipated environmental regulations when evaluating resources options to meet supply needs of the Company’s customers.  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~~September 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.

OnIn 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”~~“WCI”), to reduce ~~greenhouse gas~~GHG emissions from automobiles and certain industries, including utilities.  Since then, Utah, British Columbia and Manitoba, Montana, Ontario, and Quebec have joined as partners in the ~~Initiative.~~WCI.  The ~~Initiative~~WCI requires the states and provinces signing the accord to work together to set ~~emission goals~~a regional emissions goal within nine months and ~~determine~~develop a specific plan to meet ~~such goals~~the goal within eighteen months.  ~~The~~In August 2007 the WCI signors announced a regional GHG reduction goal of 15% below 2005 levels by 2020 for the participating states and provinces.  In July 2008, the WCI signors released a draft recommendation of the design elements for a regional cap and trade program for the seven participating states and these Canadian provinces with GHG reporting requirements to commence in 2010 and a cap and trading system to commence 2012.  Final recommendations on the design elements are expected to be issued by the end of September 2008.The Company continues to monitor the WCI and to assess the implications of these proposed requirements.

Several legislative initiatives are under consideration in Congress that would regulate GHG emissions as well.  These initiatives propose a number of requirements, ranging from reporting obligations to increased efficiency to a cap and trading system.  While it appears unlikely that legislation will be adopted in 2008, the Company expects legislation to be adopted in the near-term.  It is ~~monitoring~~unclear what the ~~impact of this Initiative.~~final legislation will require.

The Company expects the regulation of ~~greenhouse gas~~GHG emissions to have a material impact on its operations, but it is premature to attempt to quantify ~~its~~the possible costs and other implications of these impacts.

Other Matters

See Notes 9 and 10 herein and Notes 16, 17 and 18 in the 2007 Annual Reports on Form 10-K for a discussion of commitments and contingencies, rate and regulatory matters and environmental issues facing the Company.

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 ~~September~~June 30, ~~2007,~~2008, 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.~~2007.  The policies disclosed included the accounting for ~~revenue recognition,~~unbilled revenues, regulatory ~~assets and liabilities, asset impairment, goodwill~~accounting, impairments, decommissioning costs, derivatives, pension and other ~~intangible assets, purchase accounting, pension and~~ postretirement benefits, ~~decommissioning costs, financial instruments~~accounting for contingencies, income taxes, and market risk.

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MD&A FOR PNM

~~NEW ACCOUNTING STANDARDS~~RESULTS OF OPERATIONS

~~There have been no new accounting standards issued that materially affected PNMR,~~PNM’s continuing operations are presented in the PNM ~~or TNMP this period; however, see~~Electric segment and is identical to the segment presented above in Results of Operations for PNMR.  PNM’s discontinued operations are presented in the PNM Gas segment, which is identical to the total earnings from discontinued operations, net of income taxes, shown on the Condensed Consolidated Statements of Earnings for both PNM and PNMR.  See Note ~~15 for discussion of FIN 48 implementation.~~ 14.

MD&A FOR TNMP

RESULTS OF OPERATIONS

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

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

Statements made in this filing that relate to future events or PNMR’s, PNM’s, 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:

·   Conditions affecting the Company’s ability to access the financial markets, including actions by ratings agencies affecting the Company’s credit ratings, or EnergyCo’s access to additional debt financing following the utilization of its existing credit facility,
·   State and federal regulatory and legislative decisions and actions,
·   The risk that the closings of the pending sales of the PNM natural gas utility may not occur due to regulatory or other reasons,
·   The outcome of the decision to pursue strategic alternatives for First Choice and of not successfully implementing such alternatives,
·   The performance of generating units and transmission systems, including PVNGS, SJGS, Four Corners, and EnergyCo generating units, and transmission systems,
·
The risk that EnergyCo is unable to identify and implement profitable acquisitions, including development of the Cedar Bayou IV Generating Station, ~~and implementation of the acquisition of the Lyondell facility~~, 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 or 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,
·   Finalization of the goodwill impairment analysis for First Choice,
·   Collections experience,
·   Insurance coverage available for claims made in litigation,
·   Fluctuations in interest rates,
·   ~~Conditions affecting the 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,
·   The risk that PNM Electric may incur fuel and purchased power costs that exceed the cap allowed under its Emergency FPPAC,
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·   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,
·   Uncertainty regarding the ongoing validity of government programs for emission allowances,
·   Changes in the competitive environment in the electric and natural gas industries,
·   The ~~performance of generating units, including PVNGS, SJGS, Four Corners, and EnergyCo generating units, and transmission systems,~~
·   ~~The~~ ability to secure long-term power sales,

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·   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,
·   The risks associated with completion of generation, including pollution control equipment at SJGS, ~~the expansion of the Afton Generating Station,~~ and the EnergyCo Cedar Bayou IV 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, including pending appeals of PNM’s electric and gas rate cases and the Emergency FPPAC,
·   Changes in applicable accounting principles, and
·   The performance of state, regional, and national economies.

Any material changes to risk factors occurring after the filing of PNMR’s, PNM’s, or TNMP’s ~~2006~~2007 Annual Report on Form ~~10-K/A (Amendment No. 1)~~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.

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 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 on these activities.

The RMC also proposes risk limits, such as VaR and EaR, to the Finance Committee.  The Finance Committee ultimately sets the 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
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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 derivative accounting and related rules for energy contracts, the Company accounts for its various derivative instruments for the purchase and sale of energy ~~differently~~ based on the Company’s intent.  Energy contracts that meet the definition of a derivative under SFAS 133 and do not qualify for the normal sales and purchases 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 cash flow hedge under SFAS 133, fair value changes are recognized on the balance sheet with a corresponding entry in other comprehensive income to the extent ~~effective.  Hedges~~the transaction is an effective hedge.  The amounts in accumulated other comprehensive income are recognized in results of operations when the hedged transaction ~~settles.~~settles and impacts earnings.  Derivatives that meet the normal sales and purchases exception within SFAS 133 are not marked to market but rather recorded in results of operations when the underlying transaction settles.  The contracts recorded at fair value that do not qualify for hedge accounting are classified as trading transactions or economic hedges.  Trading transactions are defined as derivative instruments ~~used~~that are either speculative and expose the Company to ~~take advantage of existing~~ market ~~opportunities.~~risk or transactions that lock in margin with no forward market risk and are not economic hedges.  Economic hedges are defined as derivative instruments, including long-term power agreements, used to hedge generation assets, ~~and~~ purchase power ~~costs.~~costs, and customer load requirements.

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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~~PNM Wholesale’s~~PNM’s unregulated operations, including long-term contracts and short-term sales, are managed primarily through a net asset-backed marketing strategy, whereby ~~PNM Wholesale’s~~PNM’s aggregate net open forward contract position is covered by its forecasted excess generation ~~capabilities.  PNMR~~capabilities or market purchases.  PNM 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 all or a portion of the net open contract position were required to be covered as a result of the aforementioned unexpected situations, commitments would have to be met through market purchases.  Additionally, PNM’s regulated generation capacity is inadequate to meet retail load requirements during certain peak times and PNM must rely on market purchases to meet these requirements.  As such, ~~PNMR~~except to the extent costs are recoverable through the Emergency FPPAC, PNM 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 generation capabilities.2008, PNM ended speculative trading.

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 First Choice customers are negotiated with each customer.  As a result, changes in 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,~~supply retail operations.  As discussed in the results of operations for 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~~2008 First Choice is ~~not mitigated by First Choice's retail operations.~~exiting speculative trading.

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GAAP defines ~~the~~ fair value ~~of a financial instrument~~ as the ~~amount at which the instrument could~~price that would be ~~exchanged~~received to sell an asset or paid to transfer a liability in ~~a current~~an orderly transaction between ~~willing parties, other than in a forced sale or liquidation.~~market participants at the measurement date.  Fair value is based on current market quotes as available and are supplemented by modeling techniques and assumptions made by the Company to the extent quoted market prices or volatilities are not available.  Generally, market data to value these instruments is available for up to five years for gas swaps and electricity contracts and up to 18 months for options. The remaining periods are referred to as the illiquid period and are valued using internally developed pricing data.  The Company regularly assesses the validity and availability of pricing data for the illiquid period of its derivative transactions.  Although management uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique.
The Company has entered into a limited number of derivative energy contracts with terms that extend through 15 years.  Observable market data is not available for the illiquid period of these contracts.  In the third quarter of 2007, the Company refined the modeling technique used to value the impacts of the illiquid periods and the utilization of net present value in fair valuing its portfolio.  In the second quarter of 2007, PNM implemented new market price curve models and assumptions.  The cumulative effect of these changes in valuation is accounted for as a change in accounting estimate under SFAS 154.  The effect of the change in estimate was a decrease to net earnings for PNMR and PNM of $1.3 million and $2.5 million for the three and nine months ended September 30, 2007, which is $0.02 and $0.03 per dilutive share for PNMR

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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.

September 30, 2007
June 30, 2008
(In thousands)
Trading

Economic
Hedges

Total

Trading

Economic
Hedges

Total
(In thousands)
Mark-to-market energy contracts:
Current asset $ 25,856 $ 24,936 $ 50,792 $ 180,866 $ 43,660 $ 224,526
Long-term asset 6,278 19,686 25,964 31,252 7,380 38,632
Total mark-to-market assets 32,134 44,622 76,756 212,118 51,040 263,158
Current liability (26,431 ) (31,607 ) (58,038 ) (216,886 ) (28,542 ) (245,428 )
Long-term liability (5,999 ) (24,871 ) (30,870 ) (30,647 ) (185 ) (30,832 )
Total mark-to-market liabilities (32,430 ) (56,478 ) (88,908 ) (247,533 ) (28,727 ) (276,260 )

Net fair value of mark-to-market energy contracts $ (296 ) $ (11,856 ) $ (12,152 ) $ (35,415 ) $ 22,313 $ (13,102 )

December 31, 2006
December 31, 2007
(In thousands)
Trading

Economic
Hedges

Total

Trading

Economic
Hedges

Total
(In thousands)
Mark-to-market energy contracts:
Current asset $ 22,442 $ 21,238 $ 43,680 $ 32,451 $ 15,060 $ 47,511
Long-term asset 391 10,591 10,982 8,335 37,359 45,694
Total mark-to-market assets 22,833 31,829 54,662 40,786 52,419 93,205
Current liability (21,425 ) (20,595 ) (42,020 ) (34,753 ) (17,991 ) (52,744 )
Long-term liability (482 ) (8,694 ) (9,176 ) (7,610 ) (47,564 ) (55,174 )
Total mark-to-market liabilities (21,907 ) (29,289 ) (51,196 ) (42,363 ) (65,555 ) (107,918 )

Net fair value of mark-to-market energy contracts $ 926 $ 2,540 $ 3,466 $ (1,577 ) $ (13,136 ) $ (14,713 )

~~The mark-to-market energy transactions represent net liabilities at September 30, 2007 and net assets at December 31, 2006 after~~PNMR has elected not to offset the fair value amounts of derivative instruments under master netting ~~all applicable open purchase and sale contracts.~~arrangements or with the cash collateral associated with its derivative positions as elected under FSP FIN 39-1.

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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:

September 30, 2007
June 30, 2008

Trading

Economic
Hedges

Total

Trading

Economic
Hedges

Total

(In thousands) (In thousands)
Sources of fair value gain (loss):
Fair value at beginning of year $ 926 $ 2,540 $ 3,466 $ (1,577 ) $ (13,136 ) $ (14,713 )
Adoption of SFAS 157 - 17,253 17,253
Adjusted beginning fair value (1,577 ) 4,117 2,540
Amount realized on contracts delivered during period 6,683 6,270 12,953 (21,756 ) 7,519 (14,237 )
Changes in valuation techniques 301 (4,410 ) (4,109 )
Changes in fair value (8,206 ) (16,256 ) (24,462 ) (2,046 ) 10,726 8,680
Net change recorded as mark-to-market (23,802 ) 18,245 (5,557 )

Unearned/prepaid option premiums (10,036 ) (49 ) (10,085 )

Net fair value at end of period $ (296 ) $ (11,856 ) $ (12,152 ) $ (35,415 ) $ 22,313 $ (13,102 )

Net unrealized loss for the period $ (1,222 ) $ (14,396 ) $ (15,618 )

September 30, 2006

June 30, 2007
Mark-to-market instruments

Trading

Economic
Hedges

Total

Trading

Economic
Hedges

Total

(In thousands) (In thousands)
Sources of fair value gain (loss):
Fair value at beginning of year $ 2,270 $ 2,258 $ 4,528 $ 925 $ 2,541 $ 3,466
Amount realized on contracts delivered during period (7,390 ) 120 (7,270 ) 3,458 (635 ) 2,823
Changes in fair value 4,420 (1,635 ) 2,785 (6,503 ) (4,260 ) (10,763 )
Net change recorded as mark-to-market (3,045 ) (4,895 ) (7,940 )

Net fair value at end of period $ (700 ) $ 743 $ 43 $ (2,120 ) $ (2,354 ) $ (4,474 )

Net unrealized loss for the period $ (2,970 ) $ (1,515 ) $ (4,485 )

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 and option models:

Fair Value of mark-to-market instruments at ~~September~~June 30, ~~2007~~2008

Less than
Less than

1 year

1-3 Years

4+ Years

Total
1 year 1-3 Years 4+ Years Total
(In thousands) (In thousands)
Trading $ (575 ) $ 30 $ 249 $ (296 ) $ (36,020 ) $ 605 $ - $ (35,415 )
Economic hedges (6,671 ) 2,195 (7,380 ) (11,856 ) 15,118 2,620 4,575 22,313
Total $ (7,246 ) $ 2,225 $ (7,131 ) $ (12,152 ) $ (20,902 ) $ 3,225 $ 4,575 $ (13,102 )

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

Nine Months Ended
Six Months Ended

September 30,
June 30,

2007

2006
2008 2007
Type of Derivative

Hedge Instruments
Hedge Instruments
(In thousands) (In thousands)
Change in fair value of energy contracts $ (31,970 ) $ 27,354 $ (27,670 ) $ (34,223 )
Change in fair value of gas fixed for float swaps 4,924 (24,649 )
Change in fair value of swaps and futures 8,467 6,228
Change in the fair value of options (193 ) 607 12,648 30
Change in regulatory assets for gas off-system sales - 135
Net change in fair value $ (27,239 ) $ 3,447 $ (6,555 ) $ (27,965 )

As of June 30, 2008, PNMR had $19.9 million of net derivative assets and liabilities measured using Level 3 inputs (as defined in SFAS 157).  The fair value of these net Level 3 transactions is 17% of PNMR’s total fair value net asset and liability positions.  At January 1, 2008, PNM held $15.7 million of Level 3 net derivative assets relating to PNM Electric wholesale contracts, which were sold in June 2008 for a $1.6 million loss.  For the six months ended June 30, 2008, changes in PNMR’s Level 3 transactions were primarily related to the $15.7 million sale of PNM’s wholesale contracts and $16.2 million unrealized gains included in earnings.  Substantially all Level 3 unrealized gains will settle out in 2008.

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~~PNM 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.  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~~PNM’s forward position for the next eighteen months.  ~~The Company~~PNM 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.

PNM ~~Wholesale~~ measures VaR for all transactions that are not directly asset related and have economic risk.  For the ~~three~~six months ended ~~September~~June 30, ~~2007,~~2008, the average VaR amount for these transactions was ~~$1.3~~$0.7 million with high and low VaR amounts for the period of ~~$2.8~~$1.4 million and ~~$0.2~~$0.4 million.  The VaR amount for these transactions at ~~September~~June 30, ~~2007~~2008 was ~~$0.2~~$1.3 million.  For the ~~three~~six months ended ~~September~~June 30, ~~2006,~~2007, the average VaR amount for these transactions was ~~$1.5~~$4.1 million with high and low VaR amounts for the period of ~~$4.6~~$6.4 million and ~~$0.5~~$1.8 million.  The total VaR amount for these transactions at ~~September~~June 30, ~~2006~~2007 was ~~$1.7~~$1.8 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 certain 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~~Choice uses a held-to-maturity VaR calculation ~~reports~~to approximate EaR. The calculation utilizes the ~~possible losses against forecasted earnings for its~~same Monte Carlo simulation approach described above at a 95% confidence level and includes the retail load and supply ~~portfolio.  This calculation is based on First Choice’s~~portfolios as well as all speculative trades. Management believes the VaR results are a reasonable approximation of the potential variability of earnings against 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%.earnings.  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
95
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.

~~100~~

For the ~~nine~~six months ended ~~September~~June 30, ~~2007,~~2008, the average EaR amount was ~~$14.9~~$22.2 million, with high and low EaR amounts for the period of ~~$27.1~~$44.3 million and ~~$5.7~~$12.6 million.  The total EaR amount at ~~September~~June 30, ~~2007~~2008 was ~~$18.8~~$15.3 million.  For the ~~nine~~six months ended ~~September~~June 30, ~~2006,~~2007, the average EaR amount for these transactions was ~~$9.9~~$14.0 million, with high and low EaR amounts for the period of ~~$15.1~~$20.5 million and ~~$4.7~~$5.7 million.  The total EaR amount for these transactions at ~~September~~June 30, ~~2006~~2007 was ~~$14.9~~$7.3 million.

In addition, First 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 approach as the EaR measure; however, the VaR measure is intended to capture the effects of changes in market prices over a ~~10 day~~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 ~~$1.3~~$4.6 million at ~~September~~June 30, 2008.  For the six months ended June 30, 2008, the high, low and average mark-to-market VaR amounts were $12.1 million, $1.6 million and $5.9 million.  The VaR amount for these transactions was $4.5 million at June 30, 2007.  For the ~~nine~~six months ended ~~September~~June 30, 2007, the high, low and average mark-to-market VaR amounts were $6.2 million, ~~$1.3~~$2.1 million and $3.9 million.  The VaR amount for these transactions was $3.6 million at September 30, 2006.  For the nine months ended September 30, 2006, the high, low and average mark-to-market VaR amounts were $5.8 million, $1.7 million and $3.0$4.1 million.

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~~3-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 ~~$0.8~~less than $0.1 million at ~~September~~June 30, 2008.  For the six months ended June 30, 2008, the high, low and average mark-to-market VaR amounts were $3.5 million, less than $0.1 million and $1.0 million.  The VaR amount for these transactions was $1.8 million at June 30, 2007.  For the ~~nine~~six months ended ~~September~~June 30, 2007, the high, low and average mark-to-market VaR amounts were $4.4 million, ~~$0.1~~$0.7 million and ~~$1.6 million.  The VaR amount for these transactions was~~ $2.0 ~~million at September 30, 2006.  For the nine months ended September 30, 2006, the high, low and average mark-to-market VaR amounts were $2.0 million, $0.5 million and $1.0~~ million.

The Company's risk measures are regularly monitored by the Company'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.  As discussed in Results of Operations, First Choice experienced speculative pre-tax trading losses of $47.1 million in the first quarter of 2008. These transactions triggered exceedences of the EaR limit and the 10-day VaR limit. These occurrences resulted in numerous meetings between the RMC and First Choice management and ultimately the decision to exit the basis transactions and further  speculative trading.

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.

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~~PNMR’s credit exposure as of ~~September~~June 30, ~~2007.~~2008.  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~~PNMR may have.

96

PNMR
~~101~~

~~PNM Wholesale~~
Schedule of Credit Risk Exposure
~~September~~June 30, ~~2007~~2008

Net
Net

(b)

Number

Exposure
(b) Number Exposure

Net

of

of
Net of of

Credit

Counter

Counter-
Credit Counter Counter-

Risk

-parties

parties
Risk -parties parties
Rating (a)

Exposure

>10%

>10%
Exposure >10% >10%
(Dollars in thousands) (Dollars in thousands)

External ratings:
Investment grade $ 151,891 2 $ 51,277 $ 195,757 2 $ 134,351
Non-investment grade 17,044 - - 350 - -
Split 849 - -
Split Rating 2,090 - -
Internal ratings:
Investment grade 104 - - 1,298 - -
Non-investment grade 7,676 - - 2,484 - -
Total $ 177,564 $ 51,277 $ 201,979 $ 134,351

(a)
The Ratingincluded in “Investment Grade” is for counterparties with a minimum S&P rating of BBB- or Moody'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 Risk Exposure is the net credit exposure 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.

~~102~~

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

~~PNM Wholesale~~
PNMR
~~Maturity of Credit Risk Exposure~~
Maturity of Credit Risk Exposure
~~September~~June 30, ~~2007~~2008

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)

External ratings:
Investment grade $ 133,153 $ 17,282 $ 1,456 $ 151,891 $ 180,776 $ 11,309 $ 3,672 $ 195,757
Non-investment grade 17,044 - - 17,044 350 - - 350
Split 849 - - 849 2,090 - - 2,090
Internal ratings:
Investment grade 104 - - 104 1,298 - - 1,298
Non-investment grade 7,676 - - 7,676 2,484 - - 2,484
Total $ 158,826 $ 17,282 $ 1,456 $ 177,564 $ 186,998 $ 11,309 $ 3,672 $ 201,979

The Company provides for losses due to market and credit risk.  Credit risk for ~~PNM Wholesale's~~PNMR's largest counterparty as of ~~September~~June 30, ~~2007~~2008 and December 31, ~~2006~~2007 was ~~$30.0~~$97.4 million and ~~$29.7~~$77.2 million.

97

Interest Rate Risk

~~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~~The remarketing of First Choice.  The Constellation power supply agreement established FCPSP, a bankruptcy remote special purpose entity, to hold all of First Choice'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 September 30, 2007, FCPSP was in an unfavorable mark-to-market position with Constellation.  The Constellation power supply agreement 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's credit exposure to other counterparties at September 30, 2007 was $6.7 million and the time period of these exposures extends through 2010.

First Choice’s retail bad debt expense for the nine months ended September 30, 2007 was $11.8 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 begin on November 7, 2008.  The maturity date may be ~~remarketed~~extended in ~~2008.  If~~ the remarketing ~~is successful,~~and the interest rate ~~on the debt may change~~will be reset to a ~~rate selected by the~~level designed to achieve a successful remarketing ~~agent, and the maturity~~ of the ~~debt may be extended to a date selected by PNMR.~~notes. 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. The credit ratings of PNMR’s debt were recently downgraded and there has been an overall deterioration of the credit markets in general. Although there can be no assurance, PNMR ~~expects that~~believes the remarketing ~~of the debt~~ will be successful.

PNMR has long-term debt which subjects it to the risk of loss associated with movements in market interest rates.  The majority of PNMR’s long-term debt is fixed-rate debt, and therefore, does not expose PNMR’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 ~~1.3%~~2.0%, if interest rates were to decline by 50 basis points from their levels at ~~September~~June 30, ~~2007.~~2008.  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.

~~103~~
During the three and nine months ended September 30, 2007, PNM contributed cash of approximately $1.5 million and $4.6 million to the trust for other post retirement benefits. For the three and nine months ended September 30, 2007, PNM made no contributions and $4.9 million to the NDT.  PNM made no contributions to the trusts for the pension or executive retirement plans.  The securities held by ~~these~~PNM in the NDT and in trusts for pension and other post-employment benefits had an estimated fair value of ~~$722.0~~$657.5 million at ~~September~~June 30, ~~2007,~~2008, of which ~~approximately 24.4%~~26.6% 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 ~~September~~June 30, ~~2007,~~2008, the decrease in the fair value of the fixed-rate securities would be ~~approximately 3.6%~~3.3%, or ~~$6.3~~$5.7 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.

During the three and nine months ended September 30, 2007, TNMP contributed $0.1 million and $0.4 million to the trust for other postretirement benefits for plan year 2007.  TNMP made no contributions to the trust for its pension plan.  The securities held by ~~the~~TNMP in trusts for pension and other post-employment benefits had an estimated fair value of ~~$92.5~~$81.2 million at ~~September~~June 30, ~~2007,~~2008, of which ~~approximately 23.1%~~21.0% 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 ~~September~~June 30, ~~2007,~~2008, the decrease in the fair value of the fixed-rate securities would be ~~approximately 4.1%~~4.0%, or ~~$0.9~~$0.7 million.  TNMP, therefore, is at risk for shortfalls in its funding of its obligations due to investment losses.  TNMP 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 NDT and trusts established ~~to fund~~for PNM’s ~~share of the decommissioning costs of PVNGS and~~ pension and ~~other postretirement~~post-employment benefits hold certain equity securities at ~~September~~June 30, ~~2007.~~2008.  These equity securities also expose ~~the Company~~PNM to losses in fair value.  ~~Approximately 60.8%~~Equity securities comprised 56.3% of the securities held by the various trusts ~~were equity securities~~ as of ~~September~~June 30, ~~2007.  Similar to the debt securities held for funding decommissioning and certain pension and other postretirement costs,~~2008.  PNM does not recover or earn a return through rates on any losses or gains on these equity securities.

The trusts established ~~to fund~~for TNMP’s pension and ~~other postretirement~~post-employment benefits hold certain equity ~~securities at September 30, 2007.~~securities.  These equity securities also expose ~~the Company~~TNMP to losses in fair value.  ~~Approximately 53.3%~~Equity securities comprised 50.7% of the securities held by the ~~various~~ trusts ~~were equity securities~~ as of ~~September~~June 30, ~~2007.~~2008.  TNMP does not recover or earn a return through rates on any losses or gains on these equity securities.

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 funds. 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 performance of the 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 have readily determinable fair value.

~~104~~
98

ITEM 4.  CONTROLS AND PROCEDURES

PNMR

Disclosure of controls and 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 third quarter of 2007:~~

·
Implemented a new system to assist with complex billing calculations for large industrial customers at TNMP to record billing activities for Texas market ERCOT electronic data interchange transactions and modified the related business process controls.

·   Implemented a new system that will support FCP’s trading activities by providing an end-to-end flow of deal information from deal capture through scheduling into settlements and posting in the general ledger and redesigned the related business process controls.

·   Outsourced FCP’s retail electric provider function to assist with streamlining FCP’s processes and improve upon recording and collecting revenue and receivables for FCP’s mass market and commercial customers and redesigned the related business process controls.

·   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.

~~System Upgrade~~

·   Upgraded an integrated system for inventory management, purchasing, warehousing, and work flow management, except for TNMP.  The upgrade will also enhance internal monitoring and reporting for balance/reconciliation of interface processing and clearly define allowable criteria for when disbursement authorization is required.

~~Except as described above, there~~There have been no ~~other~~ changes in PNMR’s internal controls over financial reporting for the quarter ended ~~September~~June 30, ~~2007,~~2008, that have materially affected, or are reasonably likely to materially affect, PNMR’s internal control over financial reporting.

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 meets the requirements of SEC Regulation 13A, Rule 13a-15(e) and Rule 15d-15(e).

~~105~~
Changes in internal controls

~~System Upgrade~~

·
Upgraded an integrated system for inventory management, purchasing, warehousing, and work flow management.  The upgrade will also enhance internal monitoring and reporting for balance/reconciliation of interface processing and clearly define allowable criteria for when disbursement authorization is required.

~~Except as described above, there~~There have been no ~~other~~ changes in PNM’s internal controls over financial reporting for the quarter ended ~~September~~June 30, ~~2007,~~2008, that have materially affected, or are reasonably likely to materially affect, PNM’s internal control over financial reporting.

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 third quarter of 2007:~~

·    Implemented a new system to assist with complex billing calculations for large industrial customers at TNMP to record billing activities for Texas market ERCOT electronic data interchange transactions and modified the related business process controls.

~~Except as described above, there~~There have been no ~~other~~ changes in TNMP’s internal controls over financial reporting for the quarter ended ~~September~~June 30, ~~2007,~~2008, that have materially affected, or are reasonably likely to materially affect, TNMP’s internal control over financial reporting.

~~106~~
99

PART II – OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

~~See~~On June 24, 2008, NMED issued an Administrative Compliance Order against PNM for alleged violations of the New Mexico Radiation Protection Act.  The Compliance Order assesses a penalty of $121,170 against PNM for four violations relating to the disposal of instruments containing radioactive materials, including failure to perform and document physical inventory every six months to account for radioactive materials, failure to assure secure storage of radioactive material upon removal from service, failure to review radiation protection program content and implementation at least annually, and failure to use NMED-authorized persons to dispose of licensed material.  The Compliance Order requires PNM to correct all violations cited within 30 days of receipt of the Order and to pay the penalty within 45 days of receipt of the Order.  PNM implemented changes necessary to come into compliance with the Order and submitted a certification of compliance to NMED on July 21, 2008.  Compliance included payment of the full penalty.

In addition, 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
·   Santa Fe Generating Station
·   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
·   Gila River Indian Reservation Superfund Site

ITEM 1A.  RISK FACTORS

Any failure to meet our debt obligations could harm our business, financial condition and results of operations.
As of August 4, 2008, the Company had consolidated short-term debt outstanding of $385.0 million.  In addition, as of August 4, 2008, PNMR’s subsidiaries had scheduled maturities of long-term debt aggregating $467.7 million due prior to August 4, 2009, consisting of PNM’s $300.0 million aggregate principal amount of 4.4% senior unsecured notes due September 15, 2008 and TNMP’s $167.7 million aggregate principal amount of 6.25% senior unsecured notes due January 15, 2009.
PNMR has $100.0 million aggregate principal amount of 5.1% senior unsecured notes due August 1, 2010.  PNMR is obligated to remarket these notes beginning November 7, 2008, and if PNMR cannot remarket the notes, the holder of the notes has the right to put the notes to us on November 16, 2008 to satisfy its obligations under the related purchase contracts to purchase PNMR equity securities from us and we will not receive the $100 million of cash we would have otherwise received for the issuance PNMR equity securities.
The Company is exploring financial alternatives to meet these obligations and currently believes that internal cash generation, credit arrangements, and access to the public and private capital markets will provide sufficient resources to meet capital requirements and retire or refinance the debt described above 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 current liquidity arrangements.
The credit ratings for the debt of PNMR, PNM, and TNMP were recently downgraded.  In some instances our credit ratings are below investment grade.  There has also been an overall deterioration of the credit markets in general.  If our cash flow and capital resources are insufficient to fund our debt obligations, we may be forced to sell assets, seek additional equity or debt capital or restructure our debt.  In addition, any failure to make scheduled payments of interest and principal on our outstanding indebtedness would likely result in a further reduction of our credit rating, which could harm our ability to incur additional indebtedness on acceptable terms and would result in an increase in the interest rates applicable under our credit facilities.  Our cash flow and capital resources may be insufficient to pay interest and principal on our debt in the future, including payments on the notes.  If that should
100
occur, our capital raising or debt restructuring measures may be unsuccessful or inadequate to meet our scheduled debt service obligations, which could cause us to default on our obligations and further impair our liquidity.
Except as stated above, 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, 2007.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Annual Meeting
~~107~~
The Annual Meeting of Shareholders of PNMR was held on May 28, 2008.  The matters voted on at the meeting and the results were as follows:

The election of the following nominees to serve as directors until the Annual Meeting of Shareholders in 2009:

Director Votes For Votes Withheld
    Adelmo E. Archuleta
62,921,454 7,719,581
    Julie A. Dobson
62,917,821 7,723,214
    Woody L. Hunt
62,913,088 7,727,947
    R.R. Nordhaus
62,885,999 7,755,036
    M. T. Pacheco
62,897,640 7,743,395
    R. M. Price
62,759,301 7,881,734
    B. S. Reitz
62,899,789 7,741,246
    Jeffry E. Sterba
62,747,156 7,893,879
    Joan B. Woodard
62,912,562 7,728,473

The approval of an amendment to the PNM Resources, Inc. Employee Stock Purchase Plan:

Votes For Votes Against Abstentions
57,970,301 705,790 828,575

The approval of the selection of Deloitte & Touche LLP as independent auditors for the fiscal year ending December 31, 2008:

Votes For Votes Against Abstentions
70,167,757 231,682 241,596

101

ITEM 6.  EXHIBITS

10.1** PNMR ~~Third Amendment to the~~ PNM Resources, ~~Executive Savings~~Inc. 2008 Officer Incentive Plan ~~II executed June 4, 2007~~

10.2** PNMR ~~Fifth Amendment to the PNM Resources Non-Union Severance Pay Plan executed on March 12, 2007~~
10.3** ~~PNMR~~ PNM Resources, Inc. ~~Non-Union Severance Pay Plan effective August 1, 2007~~
10.4** ~~PNMR~~ ~~Amended and Restated Retention Bonus Agreement~~Performance Cash Program for ~~Jeffry E. Sterba executed September 7, 2007~~
10.5** ~~PNMR~~ ~~Second Amendment to~~ the ~~PNM Resources Officer Life Insurance Plan executed April 15, 2007~~
10.6** ~~PNMR~~ ~~Agreement dated August 16, 2007 between PNM Resources and Public Policy Strategy Group LLC for consulting services performed by William J. Real~~Utilities President

12.1 PNMR Ratio of Earnings to Fixed Charges

12.2 PNM Ratio of Earnings to Fixed Charges

12.3 PNM Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends

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

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

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

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

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

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

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

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

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

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

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

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

** Designates each management contract or compensatory plan or arrangement required to be identified.

~~108~~
102

SIGNATURE

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

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

Date:   ~~November 8, 2007~~August 14, 2008 /s/ Thomas G. Sategna
Thomas G. Sategna
Vice President and Corporate Controller
(Officer duly authorized to sign this report)

~~109~~
103

	September 30,		December 31,
Short-term Debt	2007		2006
	(In thousands)

PNM
Commercial paper	$	70,584	$	251,300
Revolving credit facility		215,000		-
		285,584		251,300
PNMR
Commercial paper		65,000		263,550
Revolving credit facility		298,000		-
Local lines of credit		100		-
Bridge loan		-		249,495

	$	648,684	$	764,345

	Three Months Ended September 30,																Three Months Ended June 30,
	Pension Plan						Other Postretirement Benefits						Executive Retirement Program				Pension Plan						Other Postretirement Benefits						Executive Retirement Program
	2007			2006			2007			2006			2007		2006		2008			2007			2008			2007			2008		2007
							(In thousands)																(In thousands)

Components of Net Periodic
Benefit Cost (Income)
Service cost	$	36		$	126		$	632		$	678		$	14	$	14	$	-		$	36		$	178		$	632		$	14	$	14
Interest cost		7,953			7,710			1,928			1,842			272		264		8,317			7,953			2,086			1,928			284		272
Expected long-term return on assets		(10,195	)		(10,139	)		(1,464	)		(1,355	)		-		-		(10,336	)		(10,195	)		(1,532	)		(1,464	)		-		-
Amortization of net loss		972			1,210			1,461			1,670			24		25		481			972			1,204			1,461			13		24
Amortization of prior service cost		79			79			(1,422	)		(1,422	)		3		3		79			79			(1,422	)		(1,422	)		3		3
Net periodic benefit cost (income)	$	(1,155	)	$	(1,014	)	$	1,135		$	1,413		$	313	$	306	$	(1,459	)	$	(1,155	)	$	514		$	1,135		$	314	$	313

	Nine Months Ended September 30,																Six Months Ended June 30,
	Pension Plan						Other Postretirement Benefits						Executive Retirement Program				Pension Plan						Other Postretirement Benefits						Executive Retirement Program
	2007			2006			2007			2006			2007		2006		2008			2007			2008			2007			2008		2007
							(In thousands)																(In thousands)

Components of Net Periodic
Benefit Cost (Income)
Service cost	$	108		$	378		$	1,897		$	2,035		$	42	$	42	$	-		$	72		$	356		$	1,264		$	28	$	28
Interest cost		23,858			23,131			5,784			5,525			816		791		16,634			15,906			4,172			3,856			568		544
Expected long-term return on assets		(30,585	)		(30,417	)		(4,393	)		(4,064	)		-		-		(20,672	)		(20,389	)		(3,064	)		(2,927	)		-		-
Amortization of net loss		2,917			3,630			4,382			5,010			70		74		962			1,944			2,408			2,922			26		46
Amortization of prior service cost		238			238			(4,265	)		(4,265	)		10		10		158			158			(2,844	)		(2,844	)		6		6
Net periodic benefit cost (income)	$	(3,464	)	$	(3,040	)	$	3,405		$	4,241		$	938	$	917	$	(2,918	)	$	(2,309	)	$	1,028		$	2,271		$	628	$	624

	Three Months		Nine Months
	Ended		Ended
	September 30, 2007
	(In thousands)

Revenues	$	100,463	$	114,828
Expenses and other income		81,249		93,563
Earnings before income taxes		19,214		21,265
Income taxes⁽¹⁾		399		399
Net earnings	$	18,815	$	20,866

50 percent of net earnings	$	9,408	$	10,433
Plus amortization of basis difference in EnergyCo		1,148		1,733
PNMR equity in net earnings of EnergyCo	$	10,556	$	12,166

	As of September 30, 2007
	(In thousands)

Current assets	$	92,417
Net utility plant		833,607
Deferred assets		331,129
Total assets		1,257,153

Current liabilities		85,329
Long-term debt		622,778
Other long-term liabilities		26,506
Total liabilities		734,613

Owners’ equity	$	522,540

50 percent of owners’ equity	$	261,270
Unamortized PNMR basis difference in EnergyCo		387
PNMR equity investment in EnergyCo	$	261,657

	June 30, 2008		December 31, 2007
	(In thousands)

Current assets	$	247,095	$	119,255
Net property, plant and equipment		898,642		853,492
Deferred assets		254,130		297,197
Total assets		1,399,867		1,269,944

Current liabilities		288,556		88,812
Long-term debt		700,778		650,778
Other long-term liabilities		60,869		34,344
Total liabilities		1,050,203		773,934

Owners’ equity	$	349,664	$	496,010

50 percent of owners’ equity	$	174,832	$	248,005
Unamortized PNMR basis difference in EnergyCo		225		89
PNMR equity investment in EnergyCo	$	175,057	$	248,094

	January 1,
	2007
	(In thousands)
Current assets	$	15,444
Other property and investments		10
Utility plant, net		96,468
Goodwill		102,775
Deferred charges		1,377
Total assets transferred to PNM		216,074

Current liabilities		17,313
Long-term debt		1,065
Deferred credits and other liabilities		30,673
Total liabilities transferred to PNM		49,051

Net assets transferred between entities	$	167,023

	Three Months Ended September 30, 2006				Nine Months Ended September 30, 2006
	As Previously Reported		As Restated		As Previously Reported			As Restated
	(In thousands, except per share amounts)				(In thousands, except per share amounts)
Consolidated Statements of Earnings
Energy production costs	$	38,489	$	38,813	$	119,790		$	120,762
Net earnings*		43,844		43,520		86,476			85,504
Net earnings per share
Basic		0.63		0.62		1.25			1.24
Diluted		0.62		0.62		1.24			1.23

Consolidated Statements of Cash Flows
Deferred credits						(11,496	)		(10,524	)

Consolidated Statements of Comprehensive Income (Loss)
Total comprehensive income		64,257		63,933		99,310			98,338

* Net earnings also appears in the Consolidated Statements of Cash Flows and Consolidated Statements of Comprehensive Income (Loss)

	May 30, 2008 to
	June 30, 2008
	(In thousands)

Operating revenues	$ 1,416
Operating expenses	190
Interest expense	225
Income attributable to minority interest	$ 1,001

	Balance		Balance
	before		after
	Impairment		Impairment		Impairment
Goodwill:
First Choice	$	131,768	$	88,559	$	43,209
PNM		102,775		51,632		51,143
TNMP		261,121		226,665		34,456
Total PNMR	$	495,664	$	366,856		128,808

Other intangible assets - First Choice trade name	$	68,774	$	61,403		7,371

Total impairment					$	136,179

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
	(In thousands, except per share amounts)

Net earnings	$	8,372	$	43,520	$	58,277	$	85,504
Average common and common
equivalent shares		77,561		70,761		78,151		69,784
Net earnings per diluted share	$	0.11	$	0.62	$	0.75	$	1.23

	Three Months Ended September 30, 2007			Nine Months Ended September 30, 2007
	(In millions)
After-tax impacts
IRS settlement	$	-		$	16.0
Afton impairment		(11.8	)		(11.8	)
Business improvement plan		(7.6	)		(7.6	)
Gain on sale of turbine		1.7			1.7
Plant performance		(6.6	)		5.2
PNM Gas growth and weather		(0.5	)		4.2
TNMP growth and weather		1.7			2.5
PNM Electric/Wholesale growth and weather		0.8			(3.3	)
First Choice (excluding net unrealized mark-to-market)		(12.4	)		(12.5	)
Net unrealized mark-to-market		(2.8	)		(9.9	)
Coal costs		(1.4	)		(6.2	)
Twin Oaks and EnergyCo		(4.6	)		(9.6	)
Financing		(0.7	)		(3.7	)
PUCT order / carrying charges		1.7			3.9
Realized gains on NDT		2.5			3.0
Gas rate increase		0.9			0.9
Other		4.0			-
Change in net earnings	$	(35.1	)	$	(27.2	)

	Three Months Ended September 30, 2007									Nine Months Ended September 30, 2007
	Total			Gross			Operating			Total		Gross			Operating
	Revenues			Margin			Income			Revenues		Margin			Income
	(In millions)									(In millions)
Transfer of assets from TNMP	$	26.5		$	5.6		$	0.7		$	75.4	$	18.2		$	3.7
Weather		6.4			2.7			2.7			6.2		2.6			2.6
Customer/load growth		11.5			2.6			2.6			18.4		6.2			6.2
Plant performance		-			(4.6	)		(6.5	)		-		3.5			0.9
Coal costs		-			(2.0	)		(2.0	)		-		(8.8	)		(8.8	)
General operational increases		-			-			1.2			-		-			(2.7	)
Other		(0.1	)		(0.3	)		0.1			0.5		0.2			(0.5	)
Total increase (decrease)	$	44.3		$	4.0		$	(1.2	)	$	100.5	$	21.9		$	1.4

	Three Months Ended June 30, 2008												Six Months Ended June 30, 2008
							Earnings (Loss)												Earnings (Loss)
							Before			Segment									Before			Segment
	Total			Gross			Income			Earnings			Total			Gross			Income			Earnings
	Revenues			Margin			Taxes			(Loss)			Revenues			Margin			Taxes			(Loss)
	(In millions)
Increased rate recovery including emergency FPPAC	$	11.5		$	11.5		$	11.5		$	6.9		$	11.5		$	11.5		$	11.5		$	6.9
Regulated sales growth		1.8			1.0			1.0			0.6			7.6			2.3			2.3			1.4
Generation and purchased power cost increases		-			(0.7	)		(0.7	)		(0.4	)		-			(9.3	)		(9.3	)		(5.6	)
Regulated plant availability		24.7			8.3			5.7			3.4			9.3			(13.3	)		(28.2	)		(17.0	)
Sales of SO2 allowances		(13.1	)		(13.1	)		(13.1	)		(7.9	)		(13.2	)		(13.2	)		(13.2	)		(8.0	)
Unregulated margins		(1.3	)		0.6			0.6			0.4			29.5			2.8			2.8			1.7
Gain on sale of merchant portfolio		2.9			2.9			2.9			1.8			5.1			5.1			5.1			3.1
Net unrealized economic hedges		54.9			12.2			12.2			7.4			41.2			17.4			17.4			10.5
Operational costs		-			-			(4.8	)		(2.9	)		-			-			(2.2	)		(1.3	)
NDT		-			-			(2.6	)		(1.6	)		-			-			(7.2	)		(4.3	)
Regulatory disallowances		-			-			-			-			-			-			(30.2	)		(18.2	)
Impairment of goodwill		-			-			(51.1	)		(51.1	)		-			-			(51.1	)		(51.1	)
Other		4.4			0.8			(7.3	)		(4.3	)		7.0			(0.1	)		(10.6	)		(7.2	)
Total increase (decrease)	$	85.8		$	23.5		$	(45.7	)	$	(47.7	)	$	98.0		$	3.2		$	(112.9	)	$	(89.1	)

	Three Months Ended September 30, 2006		Nine Months Ended September 30, 2006
	(Dollars in millions)
Total revenues	$	26.5	$	75.4
Cost of energy		20.9		57.2
Gross margin		5.6		18.2
Operating expenses		3.4		10.0
Depreciation and amortization		1.5		4.5
Operating income	$	0.7	$	3.7

Sales volumes (GWhs)		293.4		848.1
Average customers (thousands)		49.6		49.6

	For the Period		For the Period
	July 1 – September 30		January 1 – May 31,		April 18 – September 30
	2006		2007		2006		Change
	(Dollars in millions)		(Dollars in millions)
Total operating revenues	$	51.8	$	65.4	$	84.6	$	(19.2	)
Cost of energy		14.2		22.1		25.4		(3.3	)
Gross margin		37.6		43.3		59.2		(15.9	)
Operating expenses		4.6		17.3		8.0		9.3
Depreciation and amortization		4.5		7.7		8.5		(0.8	)
Operating income	$	28.5	$	18.3	$	42.7	$	(24.4	)
Sales Volumes (GWhs)		618.6		915.9		1,111.0		(195.1	)

	For the Period
	July 1 - September 30, 2007			June 1 - September 30, 2007
	(In thousands)

Operating revenue	$	100,463		$	114,828
Cost of energy		56,419			60,979
Gross margin		44,044			53,849
Operating expenses		12,279			15,046
Depreciation and amortization		5,790			7,318
Operating income		25,975			31,485
Other income and (deductions)		217			241
Net interest expense		(6,978	)		(7,796	)
Earnings before income taxes		19,214			23,930
Income taxes ⁽¹⁾		399			399
Net earnings	$	18,815		$	23,531

50 percent of net earnings	$	9,408		$	11,765
Amortization of basis difference in EnergyCo		1,148			1,733
PNMR equity in net earnings of EnergyCo	$	10,556		$	13,498

	PNM		PNMR		PNMR
	Separate		Separate		Consolidated		PNMR	PNM	TNMP	PNMR
			(In millions)				Separate	Separate	Separate	Consolidated
								(In millions)
Financing Capacity:
Revolving credit facility	$	400.0	$	600.0	$	1,000.0	$ 600.0	$ 400.0	$ 200.0	$ 1,200.0
Local lines of credit		13.5		15.0		28.5	10.0	8.5	-	18.5
Delayed draw term loan facility							-	150.0	-	150.0
Letter of credit facility							-	100.0	-	100.0
Term loan credit facility							-	-	150.0	150.0
Total financing capacity	$	413.5	$	615.0	$	1,028.5	$ 610.0	$ 658.5	$ 350.0	$ 1,618.5

Commercial paper program maximum	$	300.0	$	400.0	$	700.0	$ 400.0	$ 300.0	$ -	$ 700.0

Amounts outstanding as of November 1, 2007:
Amounts outstanding as of August 4, 2008:
Commercial paper program	$	-	$	60.2	$	60.2	$ -	$ -	$ -	$ -
Revolving credit facility		275.0		330.0		605.0	235.0	-	-	235.0
Local lines of credit		5.7		-		5.7	-	-	-	-
Delayed draw term loan facility							-	-	-	-
Term loan credit facility							-	-	150.0	150.0
Total short-term debt outstanding		280.7		390.2		670.9	235.0	-	150.0	385.0

Letters of credit		3.1		36.6		39.7	122.2	27.8	1.5	151.5

Total short term-debt and letters of credit	$	283.8	$	426.8	$	710.6	$ 357.2	$ 27.8	$ 151.5	$ 536.5

Remaining availability as of November 1, 2007	$	129.7	$	188.2	$	317.9
Remaining availability as of August 4, 2008							$ 252.8	$ 630.7	$ 198.5	$ 1,082.0
Cash balances as of August 4, 2008							$ 54.8	$ 54.4	$ -	$ 109.2

	PNMR	PNM	TNMP

S&P
Senior unsecured notes	~~BBB-~~BB-	~~BBB~~BB+	~~BBB~~BB+
Commercial paper	A3B-2	A3B-2	*
Preferred stock	*	B	*
Moody’s
Senior unsecured notes	~~Baa3~~Ba2	~~Baa2~~Baa3	Baa3
Commercial paper	P3NP	P2P-3	*
Preferred stock	*	~~Ba1~~Ba2	*

PNM

Common equity	57.7	%	54.4	%	49.5	%	57.8	%
Preferred stock	0.5	%	0.5	%	0.4	%	0.5	%
Long-term debt	41.8	%	45.1	%	50.1	%	41.7	%
Total capitalization	100.0	%	100.0	%	100.0	%	100.0	%

TNMP

Common equity	59.6	%	54.9	%	70.9	%	57.8	%
Long-term debt	40.4	%	45.1	%	29.1	%	42.2	%
Total capitalization	100.0	%	100.0	%	100.0	%	100.0	%

	December 31, 2006									December 31, 2007
	(In thousands)									Trading			Economic Hedges			Total
	Trading			Economic Hedges			Total			(In thousands)
Mark-to-market energy contracts:
Current asset	$	22,442		$	21,238		$	43,680		$	32,451		$	15,060		$	47,511
Long-term asset		391			10,591			10,982			8,335			37,359			45,694
Total mark-to-market assets		22,833			31,829			54,662			40,786			52,419			93,205
Current liability		(21,425	)		(20,595	)		(42,020	)		(34,753	)		(17,991	)		(52,744	)
Long-term liability		(482	)		(8,694	)		(9,176	)		(7,610	)		(47,564	)		(55,174	)
Total mark-to-market liabilities		(21,907	)		(29,289	)		(51,196	)		(42,363	)		(65,555	)		(107,918	)

Net fair value of mark-to-market energy contracts	$	926		$	2,540		$	3,466		$	(1,577	)	$	(13,136	)	$	(14,713	)

	September 30, 2006									June 30, 2007 Mark-to-market instruments
	Trading			Economic Hedges			Total			Trading			Economic Hedges			Total
	(In thousands)									(In thousands)
Sources of fair value gain (loss):
Fair value at beginning of year	$	2,270		$	2,258		$	4,528		$	925		$	2,541		$	3,466
Amount realized on contracts delivered during period		(7,390	)		120			(7,270	)		3,458			(635	)		2,823
Changes in fair value		4,420			(1,635	)		2,785			(6,503	)		(4,260	)		(10,763	)
Net change recorded as mark-to-market											(3,045	)		(4,895	)		(7,940	)

Net fair value at end of period	$	(700	)	$	743		$	43		$	(2,120	)	$	(2,354	)	$	(4,474	)

Net unrealized loss for the period	$	(2,970	)	$	(1,515	)	$	(4,485	)

	Less than											Less than
	1 year			1-3 Years		4+ Years			Total			1 year			1-3 Years		4+ Years		Total
				(In thousands)											(In thousands)
Trading	$	(575	)	$	30	$	249		$	(296	)	$	(36,020	)	$	605	$	-	$	(35,415	)
Economic hedges		(6,671	)		2,195		(7,380	)		(11,856	)		15,118			2,620		4,575		22,313
Total	$	(7,246	)	$	2,225	$	(7,131	)	$	(12,152	)	$	(20,902	)	$	3,225	$	4,575	$	(13,102	)

					Net						Net
	(b)		Number		Exposure		(b)		Number		Exposure
	Net		of		of		Net		of		of
	Credit		Counter		Counter-		Credit		Counter		Counter-
	Risk		-parties		parties		Risk		-parties		parties
Rating (a)	Exposure		>10%		>10%		Exposure		>10%		>10%
	(Dollars in thousands)						(Dollars in thousands)

External ratings:
Investment grade	$	151,891		2	$	51,277	$	195,757		2	$	134,351
Non-investment grade		17,044		-		-		350		-		-
Split		849		-		-
Split Rating								2,090		-		-
Internal ratings:
Investment grade		104		-		-		1,298		-		-
Non-investment grade		7,676		-		-		2,484		-		-
Total	$	177,564			$	51,277	$	201,979			$	134,351

					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)

External ratings:
Investment grade	$	133,153	$	17,282	$	1,456	$	151,891	$	180,776	$	11,309	$	3,672	$	195,757
Non-investment grade		17,044		-		-		17,044		350		-		-		350
Split		849		-		-		849		2,090		-		-		2,090
Internal ratings:
Investment grade		104		-		-		104		1,298		-		-		1,298
Non-investment grade		7,676		-		-		7,676		2,484		-		-		2,484
Total	$	158,826	$	17,282	$	1,456	$	177,564	$	186,998	$	11,309	$	3,672	$	201,979

Director	Votes For	Votes Withheld
Adelmo E. Archuleta	62,921,454	7,719,581
Julie A. Dobson	62,917,821	7,723,214
Woody L. Hunt	62,913,088	7,727,947
R.R. Nordhaus	62,885,999	7,755,036
M. T. Pacheco	62,897,640	7,743,395
R. M. Price	62,759,301	7,881,734
B. S. Reitz	62,899,789	7,741,246
Jeffry E. Sterba	62,747,156	7,893,879
Joan B. Woodard	62,912,562	7,728,473

10.1**	PNMR	~~Third Amendment to the~~ PNM Resources, ~~Executive Savings~~Inc. 2008 Officer Incentive Plan ~~II executed June 4, 2007~~

10.2**	PNMR	~~Fifth Amendment to the PNM Resources Non-Union Severance Pay Plan executed on March 12, 2007~~

10.3**	~~PNMR~~	PNM Resources, Inc. ~~Non-Union Severance Pay Plan effective August 1, 2007~~

10.4**	~~PNMR~~	~~Amended and Restated Retention Bonus Agreement~~Performance Cash Program for ~~Jeffry E. Sterba executed September 7, 2007~~

10.5**	~~PNMR~~	~~Second Amendment to~~ the ~~PNM Resources Officer Life Insurance Plan executed April 15, 2007~~

10.6**	~~PNMR~~	~~Agreement dated August 16, 2007 between PNM Resources and Public Policy Strategy Group LLC for consulting services performed by William J. Real~~Utilities President

12.1	PNMR	Ratio of Earnings to Fixed Charges

12.2	PNM	Ratio of Earnings to Fixed Charges

12.3	PNM	Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends

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

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

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

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

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

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

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

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

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

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

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

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

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


Date: ~~November 8, 2007~~August 14, 2008	/s/ Thomas G. Sategna
	Thomas G. Sategna
	Vice President and Corporate Controller
	(Officer duly authorized to sign this report)