UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
þFORM 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 endedJune 30, 2007
For the quarterly period ended June 30, 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.  YESþü    NOo

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   oü     NOþ
(NOTE:(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 filerþ                    Accelerated filero                    Non-accelerated filero
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 filero                    Accelerated filero                    Non-accelerated filerþ
Large accelerated filer     
Accelerated filer     
Non-accelerated filer  ü

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

YESo NOþ
As of August 1, 2007, 76,726,8524, 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 August 1, 20074, 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 August 1, 20074, 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 represents separate filingsis separately filed by PNMR, PNM and TNMP.  Information contained herein relating to anany individual registrant is filed by thatsuch registrant on its own behalf.  PNMEach registrant makes no representationsrepresentation as to the information relating to PNMR and its subsidiariesthe other than PNM (and its subsidiary). TNMP makes no representations as to the information relating to PNMR and its subsidiaries other than TNMP (and its subsidiaries).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 PNMR and its subsidiarieseach other than PNM (and its subsidiary) or TNMP (and its subsidiaries), respectively,registrant are not incorporated by reference therein.



 


2


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

INDEX

Page No.

PART I.  FINANCIAL INFORMATION                                                                                                                                                                         0;                                                        4
ITEM 1.  FINANCIAL STATEMENTS (Unaudited)
PNM RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)                                                                                                                                               &# 160;       6
CONDENSED CONSOLIDATED BALANCE SHEETS                                           0;    7
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



3


GLOSSARY

i


GLOSSARY
Definitions:
AftonAfton Generating Station
ALJ AG New Mexico Attorney General
 ALJ Administrative Law Judge
AlturaAltura Power L.P.
APS APB Accounting Principles Board
 APS Arizona Public Service Company
AvistarAvistar, Inc.
BART Best Available Retrofit Technology
Board Board of Directors of PNMR
BTUBritish Thermal Unit
 CAIR  EPA’s Clean Air Interstate Rule
Cal PXCalifornia Power Exchange
Cal ISOCalifornia Independent System Operator
CascadeCascade Investment, L.L.C.
CompanyPNM Resources, Inc. and Subsidiaries
ConstellationConstellation Energy Commodities Group, Inc.
CTCContinentalContinental Energy Systems, LLC
CRHCCap Rock Holding Corporation, a subsidiary of Continental
CTCCompetition Transition Charge
DecathermMillion BTUs
EaR DeltaDelta-Person Limited Partnership
 EaREarnings at Risk
ECJVECJV Holdings, LLC
ECMTEnergyCo Marketing and Trading, LLC
EEIEdison Electric Institute
EIPEastern Interconnection Project
EITFEmerging Issues Task Force
EnergyCoEnergyCo, LLC, a joint venture betweenlimited liability corporation, owned 50% by each of PNMR and ECJV
EPAUnited States Environmental Protection Agency
ERCOT EPEEl Paso Electric
 ERCOTElectric Reliability Council of Texas
ESIElectric Service Identifier
ESPPEmployee Stock Purchase Plan
FASBFinancial Accounting Standards Board
FCPSPFirst Choice Power Special Purpose, L.P.
FERCFederal Energy Regulatory Commission
FINFASB Interpretation Number
FIPFederal Implementation Plan
 FSPFASB Staff Position
First ChoiceFirst Choice Power, L. P. and Subsidiaries
Four CornersFour Corners Power Plant
GAAP FPPACFuel and Purchased Power Adjustment Clause
 GAAPGenerally Accepted Accounting Principles in the United States of America
GWhGigawatt hours
ISOIndependent System Operator
Luna LIBORLondon Interbank Offered Rate
 LordsburghLordsburg Generating Station
 LunaLuna Energy Facility
MD&AManagement’s Discussion and Analysis of Financial Condition and Results of Operations
MMBTUsMillion BTUs
Moody’s Moody'sMoody’s Investor Services, Inc.
MWMegawatt
MWhMegawatt Hour
Navajo ActsNavajo Nation Air Pollution Prevention and Control Act, the Navajo Nation Safe Drinking Water Act, and the Navajo Nation Pesticide Act

1


 
Definitions:
NDTNuclear Decommissioning Trusts for PVNGS
Ninth CircuitUnited States Court of Appeals for the Ninth Circuit
NMED NMGCNew Mexico Gas Company, Inc., a subsidiary of Continental
 NMEDNew Mexico Environment Department
NMPRCNew Mexico Public Regulation Commission
NOPRNotice of Proposed Rulemaking
NSPS NOXNitrogen Oxides
 NOINotice of Inquiry
 NRCUnited States Nuclear Regulatory Commission
 NSPSNew Source Performance Standards
4

NSRNew Source Review
NYMEXNew York Mercantile Exchange
OATTOpen Access Transmission Tariff
O&MOperations and Maintenance
PCRBsPollution Control Revenue Bonds
PGACPurchased Gas Adjustment Clause
PG&EPacific Gas and Electric Co.
PNMPublic Service Company of New Mexico and SubsidiarySubsidiaries
PNM FacilityPNM’s $400 Million Unsecured Revolving Credit Facility
PNMRPNM Resources, Inc. and Subsidiaries
PNMR FacilityPNMR’s $600 Million Unsecured Revolving Credit Facility
PPAPower Purchase Agreement
PSA PRPPotential Responsible Party
 PSAPower Supply Agreement
PSDPrevention of Significant Deterioration
PUCTPublic Utility Commission of Texas
PVNGSPalo Verde Nuclear Generating Station
REC PyramidTri-State Pyramid Unit 4
 RECRenewable Energy Certificates
REPRetail Electricity Provider
RMCRisk Management Committee
RTORegional Transmission Organization
 SCESouthern Cal Edison Company
SDG&ESan Diego Gas and Electric Company
SECUnited States Securities and Exchange Commission
SFASFASB Statement of Financial Accounting Standards
SJCCSan Juan Coal Company
SJGSSan Juan Generating Station
SOAHState Office of Administrative Hearings
SOSulfur Dioxide
 SPSSouthwestern Public Service Company
 SRPSalt River Project
S&PStandard and Poors Ratings Services
TECATexas Electric Choice Act
TNMPTexas-New Mexico Power Company and Subsidiaries
TNP TNMP FacilityTNMP’s $200 Million Unsecured Revolving Credit Facility
 TNPTNP Enterprises, Inc. and Subsidiaries
Throughput Tri-StateVolumes of gas delivered, whether or not owned by the CompanyTri-State Generation and Transmission Association, Inc.
Twin OaksAssets of Twin Oaks Power, L.P. and Twin Oaks Power III, L.P.
VaR Valencia  Valencia Energy Facility
 VaR  
Value at Risk

2


Accounting Pronouncements (as amended):
Accounting Pronouncements (as amended and interpreted):
EITF 03-1102-3 
EITF Issue No. 03-11 02-3 Reporting Realized Gains and Losses onIssues Involved in Accounting for Derivative Instruments that are Subject to FASB Statement No. 133 and NotContracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities”
EITF 03-13FIN 46RFIN 46R “Consolidation of Variable Interest Entities an Interpretation of ARB No. 51
FSP FIN 39-1
EITF Issue No. 03-13FASB Staff Position FIN 39-1 –Applying the Conditions in Paragraph 42Amendment of FASB StatementInterpretation No. 144 in Determining Whether to Report Discontinued Operations
39”
FIN 48
SAB 108
FIN No. 48 “Accounting for Uncertainty in Income Taxes
SEC Staff Accounting Bulletin No. 108“Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”
SFAS 5
SFAS No. 5 “Accounting for Contingencies
SFAS 57
SFAS No. 57 “Related Party Disclosures
SFAS 71112
SFAS No. 71112Employers’ Accounting for EffectsPostemployment Benefits – an amendment of Certain Types of RegulationFASB 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.144No. 144Accounting for the Impairment or Disposal of Long-Lived Assets”
SFAS 149157 
SFAS No. 149157AmendmentFair Value Measurements”
SFAS 159SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement 133 onNo. 115
SFAS 161SFAS No. 161 “Disclosure about Derivative Instruments and Hedging Activities – an Amendment of FASB Statement No. 133
SFAS 154162  
SFAS No. 154162The Hierarchy of Generally Accepted Accounting Changes and Error Corrections
Principles”

3




5


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
PNM RESOURCES, INC. AND SUBSIDIARIES
(Unaudited)
                
 Three Months Ended June 30, Six Months Ended June 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 share information)        
Operating Revenues:
        
Electric $505,376 $477,603 $942,183 $925,819 $  580,243 $  505,400 $  944,645 $   942,234
Gas 75,136 68,869 291,620 276,345 
Other 169 197 379 306 67 169 167 379
         
Total operating revenues 580,681 546,669 1,234,182 1,202,470 580,310 505,569 944,812 942,613
                
 
Operating Expenses:
        
Cost of energy sold 356,533 306,500 735,053 732,472 
Cost of energy398,698 311,465 633,079 528,277
Administrative and general 64,341 66,311 135,547 131,616 59,392 50,600 106,754 108,927
Energy production costs 52,256 44,038 100,080 81,949 45,557 51,674 96,761 99,056
Impairment of goodwill and other intangible assets136,179 - 136,179 -
Regulatory disallowances- - 30,248 -
Depreciation and amortization 39,695 37,953 80,137 72,283 34,650 34,222 68,686 69,063
Transmission and distribution costs 22,194 21,314 44,761 40,364 15,110 14,953 28,486 29,608
Taxes other than income taxes 19,003 18,261 37,623 35,225 13,484 16,759 26,350 33,331
         
Total operating expenses 554,022 494,377 1,133,201 1,093,909 703,070 479,673 1,126,543 868,262
         
Operating income 26,659 52,292 100,981 108,561 
         
Operating income (loss)(122,760) 25,896 (181,731) 74,351
        
Other Income and Deductions:
        
Interest income 7,041 8,916 17,829 19,067 4,412 7,583 9,942 17,375
Gains on investments held by NDT 2,957 1,158 3,001 2,054 
Gains (losses) on investments held by NDT(677) 2,957 (4,382) 3,001
Other income 1,890 764 3,929 3,035 226 1,817 1,116 3,722
Equity in net earnings of EnergyCo 2,272  1,610  
Carrying charges on regulatory assets  2,004  3,977 
Equity in net earnings (loss) of EnergyCo(2,523) 2,272 (27,606) 1,610
Other deductions  (5,530)  (2,497)  (6,518)  (4,013)(3,199) (5,506) (7,081) (6,482)
         
Net other income and deductions 8,630 10,345 19,851 24,120 (1,761) 9,123 (28,011) 19,226
         
        
Interest Charges:
        
Interest on long-term debt 18,734 24,267 42,743 46,798 24,197 15,836 43,105 36,899
Other interest charges 11,158 12,231 24,996 18,263 7,823 11,158 16,750 24,996
         
Total interest charges 29,892 36,498 67,739 65,061 32,020 26,994 59,855 61,895
                
Earnings (Loss) before Income Taxes(156,541) 8,025 (269,597) 31,682
        
Earnings before Income Taxes
 5,397 26,139 53,093 67,620 
 
Income Taxes (Benefit) (See Note 15)
  (14,975) 10,024 2,923 25,372 
Income Taxes (Benefit)(10,425) (13,935) (52,477) (5,554)
        
Preferred Stock Dividend Requirements of Subsidiary
 132 132 264 264 132 132 264 264
                
Earnings (Loss) from Continuing Operations(146,248) 21,828 (217,384) 36,972
        
Net Earnings
 $20,240 $15,983 $49,906 $41,984 
Earnings (Loss) from Discontinued Operations, net of Income       
Taxes (Benefit) of $1,824, $(1,040), $15,479 and $8,4772,762 (1,588) 25,261 12,934
                
Net Earnings (Loss)$(143,486) $    20,240 $(192,123) $    49,906
        
Net Earnings per Common Share (see Note 5):
 
Earnings (Loss) from Continuing Operations per Common Share:       
Basic $0.26 $0.23 $0.65 $0.61 $     (1.79) $       0.28 $     (2.74) $       0.48
         
Diluted$     (1.79) $       0.28 $     (2.74) $       0.47
Net Earnings (Loss) per Common Share:       
Basic$     (1.76) $       0.26 $     (2.42) $       0.65
Diluted $0.26 $0.23 $0.64 $0.61 $     (1.76) $       0.26 $     (2.42) $       0.64
                
Dividends Declared per Common Share
 $0.23 $0.22 $0.46 $0.44 $    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.

4



6


PNM RESOURCES, INC. AND SUBSIDIARIES
(Unaudited)
        
 June 30, December 31,  June 30,  December 31, 
 2007 2006  2008  2007 
 (In thousands)  (In thousands) 
ASSETS
       
Current Assets:
       
Cash and cash equivalents $58,050 $123,419  $137,877  $17,763 
Special deposits 1,094 5,146  3,354  1,717 
Accounts receivable, net of allowance for uncollectible accounts of $6,436 and $6,899 137,951 168,126 
Accounts receivable, net of allowance for uncollectible accounts of $7,017 and $6,021 149,644  134,325 
Unbilled revenues 100,311 116,878  96,564  74,896 
Other receivables 99,091 73,744  66,816  90,002 
Inventories 58,963 63,329 
Materials, supplies, and fuel stock 44,330  41,312 
Regulatory assets 12,321 17,507  249  157 
Derivative instruments 91,600 59,312  245,613  49,257 
Income taxes receivable 50,960 65,210  46,818  39,189 
Current assets of discontinued operations 77,686  120,061 
Other current assets 73,667 63,414   71,134   37,198 
             
 
Total current assets 684,008 756,085   940,085   605,877 
     
         
Other Property and Investments:
         
Investment in PVNGS lessor notes 203,862 257,659  183,884  192,226 
Equity investment in EnergyCo 198,144   175,057  248,094 
Investments held by NDT 136,424 123,143  130,806  139,642 
Other investments 54,996 46,577  40,348  47,749 
Non-utility assets, net of accumulated depreciation of $1,291 and $1,365 7,084 7,565 
     
Non-utility property, net of accumulated depreciation of $1,946 and $1,570  9,876   6,968 
         
Total other property and investments 600,510 434,944   539,971   634,679 
             
 
Utility Plant:
         
Electric plant in service 3,743,584 4,263,068  4,240,902  3,920,071 
Gas plant in service 751,736 721,168 
Common plant in service and plant held for future use 123,616 157,064   141,619   128,119 
     
 4,618,936 5,141,300  4,382,521  4,048,190 
Less accumulated depreciation and amortization 1,662,465 1,639,156   1,502,790   1,464,625 
      2,879,731  2,583,565 
 2,956,471 3,502,144 
Construction work in progress 312,161 230,871  164,877  299,574 
Nuclear fuel, net of accumulated amortization of $20,353 and $14,008 35,263 28,844 
     
Nuclear fuel, net of accumulated amortization of $15,454 and $15,395  59,609   52,246 
         
Net utility plant 3,303,895 3,761,859   3,104,217   2,935,385 
     
         
Deferred Charges and Other Assets:
         
Regulatory assets 545,739 553,564  442,756  481,872 
Pension asset 10,163 8,853  21,965  17,778 
Goodwill 494,513 495,738  366,856  495,664 
Other intangible assets, net of accumulated amortization of $2,707 and $2,052 76,547 102,202 
Other intangible assets, net of accumulated amortization of $4,017 and $3,362 67,866  75,892 
Derivative instruments 27,548 39,886  39,363  45,694 
Non-current assets of discontinued operations 541,428  526,539 
Other deferred charges 50,030 77,703   62,286   52,756 
     
         
Total deferred charges and other assets 1,204,540 1,277,946   1,542,520   1,696,195 
      $6,126,793  $5,872,136 
 
 $5,792,953 $6,230,834 
     

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

5



7


PNM RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
        
 June 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 $559,670 $764,345  $426,651  $665,900 
Current installments of long-term debt 148,935 3,298  470,334  449,219 
Accounts payable 167,512 214,229  158,850  148,955 
Accrued interest and taxes 58,379 98,789  50,714  57,766 
Regulatory liabilities 17,577 1,172  4,885  - 
Derivative instruments 105,840 68,575  263,238  53,832 
Current liabilities of discontinued operations 42,722  96,003 
Other current liabilities 114,052 225,653   134,873   112,394 
     
         
Total current liabilities 1,171,965 1,376,061   1,552,267   1,584,069 
             
 
Long-term Debt
 1,531,850 1,765,907   1,517,007   1,231,859 
     
         
Deferred Credits and Other Liabilities:
         
Accumulated deferred income taxes 579,586 586,283  560,334  600,187 
Accumulated deferred investment tax credits 28,531 30,236  25,330  26,825 
Regulatory liabilities 392,570 389,330  337,471  332,372 
Asset retirement obligations 63,789 61,338  69,753  66,466 
Accrued pension liability and postretirement benefit cost 131,126 134,799  57,789  60,022 
Derivative instruments 19,632 14,581  40,769  55,206 
Non-current liabilities of discontinued operations 89,314  89,848 
Other deferred credits 135,797 155,860   164,278   121,342 
     
         
Total deferred credits and other liabilities 1,351,031 1,372,427   1,345,038   1,352,268 
             
 
Total liabilities 4,054,846 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 
     
Cumulative Preferred Stock of Subsidiary        
without mandatory redemption requirements ($100 stated value, 10,000,000 shares authorized:        
issued and outstanding 115,293 shares)  11,529   11,529 
         
Common Stockholders’ Equity:
         
Common stock outstanding (no par value, 120,000,000 shares authorized; issued and outstanding 76,719,731 and 76,648,472 shares) 1,039,530 1,040,451 
Accumulated other comprehensive income, net of income tax 17,599 28,909 
Common stock outstanding (no par value, 120,000,000 shares authorized: issued        
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 669,449 635,550   438,831   638,229 
     
         
Total common stockholders’ equity 1,726,578 1,704,910   1,700,952   1,692,411 
             
  $6,126,793  $5,872,136 
 $5,792,953 $6,230,834 
     

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

6




8


PNM RESOURCES, INC. AND SUBSIDIARIES
(Unaudited)
        
 Six Months Ended June 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 $49,906 $41,984 
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 97,093 79,651  79,991  97,093 
Allowance for equity funds used during construction  (876)  (73)
Amortization of prepayments on PVNGS firm-sales contracts (4,084) - 
Deferred income tax expense (benefit) 13,062  (7,920) (23,498) 13,062 
Equity in net earnings of EnergyCo  (1,610)  
Equity in net (earnings) loss of EnergyCo 27,606  (1,610)
Net unrealized losses on derivatives 7,940 1,864  5,174  7,940 
Realized gains on investments held by NDT  (3,001)  (2,054)
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  
Carrying charges on regulatory assets and liabilities  (513)  (4,922)
Impairment of goodwill and other intangible assets 136,179  3,380 
Amortization of fair value of acquired Twin Oaks sales contract  (35,073)  (16,878) -  (35,073)
Stock based compensation expense 5,250 5,513  2,431  5,250 
Excess tax benefit from stock-based payment arrangements  (8)  (908)
Regulatory disallowances 30,248  - 
Other, net  (561)  (9) (1,140) (1,958)
Changes in certain assets and liabilities:         
Accounts receivable 23,680 55,214 
Unbilled revenues 16,567 17,047 
Regulatory assets  (1,752) 20,878 
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  (2,792)  (7,819) (4,482) 1,701 
Accrued pension liability and postretirement benefit costs  (4,549)  (5,409)
Accounts payable  (42,325)  (88,716) (41,485) (42,325)
Accrued interest and taxes  (14,709) 35,402  (15,559) (14,709)
Deferred credits  (17,567)  (9,168)
Other current liabilities 32,953  (7,987)
Other liabilities  (7,987)  (2,234) 428  (22,116)
     
Net cash flows from operating activities 87,192 111,443   12,276   87,192 
     
         
Cash Flows From Investing Activities:
         
Utility plant additions  (213,070)  (128,568) (162,005) (213,070)
Proceeds from sales of investments held by NDT 62,697 45,534  77,047  62,697 
Purchases of investments held by NDT  (66,903)  (45,738) (77,650) (66,903)
Proceeds from sales of utility plant 25,041   1,184  25,041 
Return of principal on PVNGS lessor notes 11,953 11,297  10,986  11,953 
Change in restricted special deposits 3,696  (12,240)
Investments in EnergyCo  (2,540)   -  (2,540)
Distributions from EnergyCo 362,275   -  362,275 
Twin Oaks acquisition   (481,015)
Other, net  (6,977) 2,309   (3,332)  5,263 
     
Net cash flows from investing activities 172,476  (596,181)  (150,074)  172,476 
     

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

7




9


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

  Six Months Ended June 30,
  2008  2007
                (In thousands)
Cash Flows From Financing Activities:     
Short-term borrowings (repayments), net  (321,717)  (204,675) 
Long-term borrowings  452,750   20,000  
Redemption of long-term debt  (148,935)  (100,500) 
Issuance of common stock  249,547   2,127  
Proceeds from stock option exercise  86   10,773  
Purchase of common stock to satisfy stock awards  (1,245)  (17,693) 
Excess tax benefits (tax shortfall) from stock-based payment arrangements  (513)  8  
Dividends paid  (35,625)  (34,766) 
Payments received on PVNGS firm-sales contracts  73,173   -  
Other, net  (9,612)  (311) 
Net cash flows from financing activities  257,909   (325,037) 
          
Change in Cash and Cash Equivalents  120,111   (65,369) 
Cash and Cash Equivalents at Beginning of Period  17,791   123,419  
Cash and Cash Equivalents at End of Period $137,902  $58,050  
          
Supplemental Cash Flow Disclosures:         
Interest paid, net of capitalized interest $62,639  $58,323  
Income taxes paid (refunded), net $(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. 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.

8



10


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

   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, 200776,814,491 $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 stock9,531,589 242,427 - - 242,427
Common stock issued to ESPP44,621 519 - - 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, 200886,390,701 $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.

9




11


PNM RESOURCES, INC. AND SUBSIDIARIES
(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.


12


PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
(Unaudited)
                Three Months Ended June 30, Six Months Ended June 30,
 Three Months Ended June 30, Six Months Ended June 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 $300,307 $259,298 $540,632 $570,765 
Gas 75,136 68,869 291,620 276,345 
         
Total operating revenues 375,443 328,167 832,252 847,110 
         
Electric Operating Revenues$  386,058 $  300,331 $  638,723 $  540,683
        
Operating Expenses:
        
Cost of energy sold 230,414 185,410 495,295 524,672 
Cost of energy247,589 185,346 383,284 288,519
Administrative and general 42,866 40,520 87,248 81,648 31,409 29,125 58,236 60,628
Energy production costs 43,330 42,404 84,159 80,315 47,974 42,748 101,556 83,135
Impairment of goodwill51,143 - 51,143 -
Regulatory disallowances- - 30,248 -
Depreciation and amortization 26,202 24,289 52,558 49,144 20,896 20,729 41,866 41,484
Transmission and distribution costs 17,244 15,916 34,885 30,223 9,598 10,003 18,505 19,732
Taxes other than income taxes 10,021 8,414 18,707 17,727 7,086 7,777 14,105 14,415
         
Total operating expenses 370,077 316,953 772,852 783,729 415,695 295,728 698,943 507,913
         
Operating income 5,366 11,214 59,400 63,381 
         
Operating income (loss)(29,637) 4,603 (60,220) 32,770
        
Other Income and Deductions:
        
Interest income 6,650 8,670 15,352 18,023 4,878 7,192 10,969 14,898
Gains on investments held by NDT 2,957 1,158 3,001 2,054 
Gains (losses) on investments held by NDT(677) 2,957 (4,382) 3,001
Other income 1,072 547 2,227 1,479 (392) 999 156 2,020
Other deductions  (1,907)  (1,504)  (2,516)  (2,355)(1,116) (1,883) (3,430) (2,480)
         
Net other income and deductions 8,772 8,871 18,064 19,201 2,693 9,265 3,313 17,439
         
        
Interest Charges:
        
Interest on long-term debt 11,956 13,167 24,393 25,026 14,766 9,058 25,296 18,549
Other interest charges 3,683 1,732 7,338 3,293 2,857 3,683 6,430 7,338
         
Total interest charges 15,639 14,899 31,731 28,319 17,623 12,741 31,726 25,887
         
        
Earnings (Loss) before Income Taxes
  (1,501) 5,186 45,733 54,263 (44,567) 1,127 (88,633) 24,322
        
Income Taxes (Benefit)
  (690) 2,190 17,664 21,163 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 $8,4772,762 (1,588) 25,261 12,934
                
Net Earnings (Loss)
  (811) 2,996 28,069 33,100 (44,246) (811) (48,724) 28,069
        
Preferred Stock Dividend Requirements
 132 132 264 264 
         
Preferred Stock Dividends Requirements132 132 264 264
        
Net Earnings (Loss) Available for Common Stock
 $(943) $2,864 $27,805 $32,836 $  (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.

10



13


PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
(Unaudited)
        
 June 30, December 31,  June 30,  December 31, 
 2007 2006  2008  2007 
 (In thousands)  (In thousands) 
ASSETS
       
Current Assets:
       
Cash and cash equivalents $1,430 $11,886  $44,499  $4,303 
Special deposits 774 376  3,034  1,397 
Accounts receivable, net of allowance for uncollectible accounts of $1,571 and $1,788 107,545 122,648 
Accounts receivable, net of allowance for uncollectible accounts of $1,061 and $729 88,365  78,094 
Unbilled revenues 45,339 81,166  38,280  32,039 
Other receivables 79,619 62,040  53,703  79,842 
Affiliate accounts receivable 1,166 8,905  -  271 
Inventories 57,052 51,801 
Materials, supplies, and fuel stock 42,925  39,771 
Regulatory assets 12,321 17,507  249  157 
Income taxes receivable  13,222 
Derivative instruments 38,459 27,750  30,653  14,859 
Current assets of discontinued operations 77,686  120,061 
Other current assets 54,515 51,231   43,169   28,926 
             
 
Total current assets 398,220 448,532   422,563   399,720 
     
         
Other Property and Investments:
         
Investment in PVNGS lessor notes 245,014 257,659  217,902  231,582 
Investments held by NDT 136,424 123,143  130,806  139,642 
Other investments 26,510 15,634  15,424  20,733 
Non-utility property 976 966   976   976 
             
 
Total other property and investments 408,924 397,402   365,108   392,933 
     
         
Utility Plant:
         
Electric plant in service 2,890,200 2,742,795  3,359,109  3,055,953 
Gas plant in service 751,736 721,168 
Common plant in service and plant held for future use 18,237 72,806   17,400   18,237 
     
 3,660,173 3,536,769  3,376,509  3,074,190 
Less accumulated depreciation and amortization 1,373,124 1,279,349   1,178,193   1,157,775 
      2,198,316  1,916,415 
 2,287,049 2,257,420 
Construction work in progress 294,565 191,403  131,326  259,386 
Nuclear fuel, net of accumulated amortization of $20,353 and $14,008 35,263 28,844 
     
Nuclear fuel, net of accumulated amortization of $15,454 and $15,395  59,609   52,246 
         
Net utility plant 2,616,877 2,477,667   2,389,251   2,228,047 
             
 
Deferred Charges and Other Assets:
         
Regulatory assets 406,299 410,979  314,438  348,719 
Pension asset 5,777  2,859 
Derivative instruments 19,837 12,504  6,961  37,359 
Goodwill 102,601   51,632  102,775 
Non-current assets of discontinued operations 541,428  526,539 
Other deferred charges 65,304 66,465   71,941   64,449 
     
         
Total deferred charges and other assets 594,041 489,948   992,177   1,082,700 
      $4,169,099  $4,103,400 
 
 $4,018,062 $3,813,549 
     

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

11




14


PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
        
 June 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 $242,070 $251,300  $86,651  $321,000 
Current installments of long-term debt 299,991  299,969 
Accounts payable 81,556 138,577  72,200  72,864 
Affiliate accounts payable 14,958 16,898  16,202  19,948 
Accrued interest and taxes 47,650 41,340  36,010  26,385 
Regulatory liabilities 17,577 1,172  4,885  - 
Derivative instruments 55,735 43,096  38,727  17,896 
Current liability of discontinued operations 42,722  96,003 
Other current liabilities 69,166 82,262   89,068   59,468 
             
 
Total current liabilties 528,712 574,645 
     
Total current liabilities  686,456   913,533 
         
Long-term Debt
 1,005,639 987,205   1,055,709   705,701 
     
         
Deferred Credits and Other Liabilities:
         
Accumulated deferred income taxes 394,973 368,256  402,650  409,430 
Accumulated deferred investment tax credits 28,207 29,404  25,234  26,634 
Regulatory liabilities 351,578 335,196  289,857  285,782 
Asset retirement obligations 63,076 60,493  68,981  65,725 
Accrued pension liability and postretirement benefit cost 126,187 129,595  54,037  56,101 
Derivative instruments 11,560 14,100  10,122  47,597 
Non-current liabilities of discontinued operations 89,314  89,848 
Other deferred credits 104,073 112,990   138,322   98,295 
     
         
Total deferred credits and liabilities 1,079,654 1,050,034   1,078,517   1,079,412 
             
 
Total liabilities 2,614,005 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 
     
Cumulative Preferred Stock        
without mandatory redemption requirements ($100 stated value, 10,000,000 authorized:        
issued and outstanding 115,293 shares)  11,529   11,529 
         
Common Stockholder’s Equity:
         
Common stock outstanding (no par value, 40,000,000 shares authorized; issued and outstanding 39,117,799 shares) 932,522 765,500 
Accumulated other comprehensive income, net of income tax 15,685 8,761 
Common stock outstanding (no par value, 40,000,000 shares authorized: issued        
and outstanding 39,117,799 shares) 932,523  932,523 
Accumulated other comprehensive income (loss), net of income tax (10,191) 7,580 
Retained earnings 444,321 415,875   414,556   453,122 
     
         
Total common stockholder’s equity 1,392,528 1,190,136   1,336,888   1,393,225 
             
  $4,169,099  $4,103,400 
 $4,018,062 $3,813,549 
     

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

12




15


PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
(Unaudited)
        
 Six Months Ended June 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 $28,069 $33,100 
Adjustments to reconcile net earnings to net 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 66,320 58,311  49,662  66,320 
Allowance for equity funds used during construction  (755) 1 
Deferred income tax (benefit)  (138)  (15,059)
Net unrealized losses on derivatives 10,896 1,967 
Realized gains on investments held by NDT  (3,001)  (2,054)
Carrying charges on regulatory assets and liabilities  (513)  (1,829)
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 80  (4,075) (368) (1,188)
Changes in certain assets and liabilities, net of amounts acquired:         
Accounts receivable 25,047 69,659 
Unbilled revenues 39,358 35,646 
Regulatory assets  (1,253) 22,960 
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 8,718  (16,075) (1,208) 456 
Accrued pension liability and postretirement benefit costs  (2,822)  (2,869)
Accounts payable  (59,844)  (100,340) (50,553) (59,844)
Accrued interest and taxes 16,975 33,560  9,124  16,975 
Deferred credits  (17,398)  (8,661)
Other current liabilities (6,240) (5,076)
Other liabilities  (5,077)  (3,713)  (1,252)  (20,221)
     
Net cash flows from operating activities 104,662 100,529   53,922   104,662 
     
         
Cash Flows From Investing Activities:
         
Utility plant additions  (149,648)  (100,008) (134,187) (149,648)
Proceeds from sales of investments held by NDT 62,697 45,534 
Purchases of investments held by NDT  (66,903)  (45,738)
Proceeds from sales of NDT investments 77,047  62,697 
Purchases of NDT investments (77,650) (66,903)
Proceeds from sales of utility plant 25,041   837  25,041 
Return of principal on PVNGS lessor notes 11,953 11,297  12,645  11,953 
Change in restricted special deposits 3,696  (12,240)
Other, net  (10,774) 6,601   1,703   1,466 
     
Net cash flows from investing activities  (127,634)  (82,314)  (115,909)  (127,634)
     

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

13




16


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

  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.

14




17


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  Six Months Ended 
  June 30,  June 30, 
  2007  2006  2007  2006 
     (As Restated,     (As Restated, 
     See Note 16)     See Note 16) 
  (In thousands) 
                 
Net Earnings (Loss) Available for Common Stock
 $(943) $2,864  $27,805  $32,836 
             
                 
Other Comprehensive Income (Loss):
                
                 
Unrealized gain (loss) on investment securities:
                
Unrealized holding gains (losses) arising during the period, net of income tax (expense) benefit of $(2,230), $154, $(3,486) and $(6,953)  3,403   (236)  5,320   10,610 
Reclassification adjustment for (gains) included in net earnings, net of income tax expense of $787, $606, $1,058 and $427  (1,201)  (924)  (1,614)  (652)
                 
Fair value adjustment for designated cash flow hedges:
                
Change in fair market value, net of income tax (benefit) of $(723), $606, $(1,511) and $6,563  1,103   (926)  2,305   (10,015)
Reclassification adjustment for (gains) losses included in net earnings, net of income tax (expense) benefit of $236, $3, $(599) and $2,869  (361)  (4)  913   (4,378)
             
                 
Total Other Comprehensive Income (Loss)
  2,944   (2,090)  6,924   (4,435)
             
                 
Total Comprehensive Income
 $2,001  $774  $34,729  $28,401 
             

     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.

15




TEXAS-NEW
18


PUBLIC SERVICE COMPANY OF NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
(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.

19


TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
(Unaudited)
                
 Three Months Ended June 30, Six Months Ended June 30, 
 2007 2006 2007 2006  Three Months Ended June 30,  Six Months Ended June 30, 
 (In thousands)  2008  2007  2008  2007 
  (In thousands) 
Electric Operating Revenues
 $43,536 $39,696 $84,464 $75,244  $47,118  $43,536  $89,346  $84,464 
                         
 
Operating Expenses:
                 
Cost of energy sold 7,221 7,145 14,392 13,594 
Cost of energy 7,935  7,221  15,747  14,392 
Administrative and general 7,361 7,848 16,263 17,061  7,074  7,361  13,645  16,263 
Impairment of goodwill 34,456  -  34,456  - 
Depreciation and amortization 7,041 6,337 14,041 12,512  8,777  7,041  17,136  14,041 
Transmission and distribution costs 4,945 4,463 9,868 8,208  5,508  4,945  9,972  9,868 
Taxes other than income taxes 5,413 5,482 10,238 10,672 
         
Taxes, other than income taxes  4,931   5,413   9,370   10,238 
Total operating expenses 31,981 31,275 64,802 62,047   68,681   31,981   100,326   64,802 
         
Operating income 11,555 8,421 19,662 13,197 
         
Operating income (loss)  (21,563)  11,555   (10,980)  19,662 
                 
Other Income and Deductions:
                 
Interest income 776 81 864 336  4  776  5  864 
Other income 770 85 1,046 253  606  770  1,020  1,046 
Carrying charges on regulatory assets  2,004  3,977 
Other deductions  (46)  (20)  (73)  (43)  (10)  (46)  (28)  (73)
         
Net other income and deductions 1,500 2,150 1,837 4,523   600   1,500   997   1,837 
         
                 
Interest Charges:
                 
Interest on long-term debt 6,153 6,432 12,585 12,864  2,801  6,153  7,209  12,585 
Other interest charges 718 829 1,364 1,632   1,564   718   2,145   1,364 
Net interest charges  4,365   6,871   9,354   13,949 
                         
Total interest charges 6,871 7,261 13,949 14,496 
Earnings (Loss) Before Income Taxes (25,328) 6,184  (19,337) 7,550 
                         
Income Taxes  3,425   1,950   5,686   2,378 
                 
Earnings before Income Taxes
 6,184 3,310 7,550 3,224 
 
Income taxes
 1,950 2,101 2,378 1,330 
         
 
Net Earnings from Continuing Operations
 4,234 1,209 5,172 1,894 
 
Discontinued Operations, net of income tax expense (benefit) of $0, $(16), $0 and $987
  1,627  2,098 
         
 
Net Earnings
 $4,234 $2,836 $5,172 $3,992 
         
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.

16




20


TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
(Unaudited)
        
 June 30, December 31,  June 30,  December 31, 
 2007 2006  2008  2007 
 (In thousands)  (In thousands) 
ASSETS
       
Current Assets:
       
Cash and cash equivalents $34 $2,542  $73  $187 
Special deposits 50   50  50 
Accounts receivable, net of allowance for uncollectible accounts of $0 and $31 8,757 10,317 
Accounts receivable, net of allowance for uncollectible accounts of $94 and $0 12,076  8,789 
Unbilled revenues 3,018 6,000  5,321  4,392 
Other receivables 8,386  1,063 
Affiliate accounts receivable 7,680   1,017  8,005 
Other receivables 5,483 1,515 
Inventories 1,670 1,509 
Federal income tax receivable 38,018 40,473 
Materials and supplies 1,419  1,425 
Income taxes receivable -  881 
Other current assets 803 944   1,820   501 
     
         
Total current assets 65,513 63,300   30,162   25,293 
             
 
Other Property and Investments:
         
Other investments 554 511  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 2,665 2,631   2,665   2,665 
     
         
Utility Plant:
         
Electric plant in service 770,630 925,538  799,030  781,355 
Common plant in service and plant held for future use 488 589   488   488 
      799,518  781,843 
 771,118 926,127 
Less accumulated depreciation and amortization 264,203 326,404   283,243   274,128 
     
 506,915 599,723  516,275  507,715 
Construction work in progress 10,242 13,799   23,985   22,493 
             
 
Net utility plant 517,157 613,522   540,260   530,208 
             
 
Deferred Charges and Other Assets:
         
Stranded costs 87,962 89,949 
Carrying charges on stranded costs 40,652 41,584 
Other regulatory assets 10,826 11,052 
Regulatory assets 128,318  133,154 
Goodwill 260,144 363,764  226,665  261,121 
Pension asset 10,163 8,853  16,188  14,919 
Other deferred charges 6,919 9,205   5,621   5,432 
             
 
Total deferred charges and other assets 416,666 524,407   376,792   414,626 
             
  $949,879  $972,792 
 $1,002,001 $1,203,860 
     

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

17




21


TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
        
 June 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 — affiliate $27,200 $ 
Short-term debt $150,000  $- 
Short-term debt – affiliate 2,100  3,404 
Current installments of long-term debt 148,935 2,523  167,650  148,882 
Accounts payable 3,001 11,332  6,179  5,666 
Affiliate accounts payable 4,303 15,673  3,525  3,456 
Accrued interest and taxes 15,900 23,110  35,871  35,204 
Other current liabilities 3,646 7,579   3,553   1,785 
             
 
Total current liabilties 202,985 60,217 
     
Total current liabilities  368,878   198,397 
         
Long-term Debt
 167,451 420,546   -   167,609 
     
         
Deferred Credits and Other Liabilities:
         
Accumulated deferred income taxes 126,164 145,641  117,658  120,274 
Accumulated deferred investment tax credits 324 832  96  191 
Regulatory liabilities 40,992 54,134  47,614  46,590 
Asset retirement obligations 690  662 
Accrued pension liability and postretirement benefit cost 4,939 5,203  3,752  3,922 
Other deferred credits 2,916 2,668   2,766   1,699 
             
 
Total deferred credit and other liabilities 175,335 208,478 
     
Total deferred credits and other liabilities  172,576   173,338 
         
Total liabilities 545,771 689,241   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 
Common stock outstanding ($10 par value, 12,000,000 shares authorized:        
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 28,284 21,149 
     
Retained earnings (deficit)  (19,782)  5,241 
         
Total common stockholder’s equity 456,230 514,619   408,425   433,448 
             
  $949,879  $972,792 
 $1,002,001 $1,203,860 
     

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

18




22


TEXAS-NEW MEXICO POWER COMPANY
AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
(Unaudited)
        
 Six Months Ended June 30,  Six Months Ended June 30, 
 2007 2006  2008  2007 
 (In thousands)  (In thousands) 
Cash Flows From Operating Activities:
       
Net earnings $5,172 $3,992 
Adjustments to reconcile net earnings to net cash flows from operating activities: 
Net earnings (loss) $(25,023) $5,172 
Adjustments to reconcile net earnings (loss) to        
net cash flows from operating activities:        
Depreciation and amortization 13,873 16,386  19,072  15,724 
Rate case amortization 1,851  
Allowance for equity funds used during construction  (121)  (74)
Impairment of goodwill 34,456  - 
Deferred income tax expense (benefit)  (2,205)  (438) (2,712) (2,205)
Carrying charges on deferred stranded costs   (3,978)
Interest on retail competition transition obligation  885 
Other, net  (572)  (1,035) (1,254) (693)
Changes in certain assets and liabilities:         
Accounts receivable  (8,137) 2,154 
Unbilled revenues  (549)  (2,497)
Accounts receivable and unbilled revenues (4,310) (8,686)
Materials and supplies 5  (292)
Other current assets 59  (549)
Other assets  (1,156) 1,792  (668) (315)
Accrued pension liability and postretirement benefit costs  (554)  
Accounts payable  (5,508)  (307) 514  (5,508)
Accrued interest and taxes  (2,422)  (2,838) 1,614  (2,422)
Change in affiliate accounts  (11,435) 9,046 
Other current liabilities 1,456  (12,895)
Other liabilities  (1,445)  (1,805) 305  (539)
     
Net cash flows from operating activities  (13,208) 21,283  23,514  (13,208)
             
 
Cash Flows From Investing Activities:
 
Cash Flows From Investing Activities -        
Utility plant additions  (17,249)  (18,930)  (22,464)  (17,249)
Other, net  69 
     
Net cash flows from investing activities  (17,249)  (18,861)
     

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

19




23


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

  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.

20




24


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)
                 
  Three Months Ended  Six Months Ended 
  June 30,  June 30, 
  2007  2006  2007  2006 
  (In thousands) 
                 
Net Earnings and Total Comprehensive Income
 $4,234  $2,836  $5,172  $3,992 
             

        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 

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

21




25


TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
(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.



26


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

(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 whichthat are necessary to present fairly the consolidated financial position at June 30, 20072008 and December 31, 2006,2007, the consolidated results of operations and comprehensive income for the three months and six months ended June 30, 20072008 and 20062007 and the consolidated statements of cash flows for the six months ended June 30, 20072008 and 2006.2007.  The preparation of financial statements in conformity with generally accepted accounting principles in the United StatesGAAP 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 20062007 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 servicesservices’ 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 20062007 Condensed Consolidated Financial Statements and Notes thereto have been reclassified to conform to the 20072008 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 incomeactions 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 deductionsAugust 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.

27

22



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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


(2)  Acquisitions and Dispositions

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 obligatesobligated Altura to sell power through September 2007 at which time the second contract beginsbegan 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, which runs through September 30, 2007, $94.9a 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. As of May 31, 2007, the Company had amortized $105.9 million, including $20.0 million during the three months ended March 31, 2007 and $15.0 million during the period from April 1, 2007 through May 31, 2007. For the second contract, which begins October 1, 2007, $29.6 million was recorded in other deferred creditsfor the second contract.  During the three months and no amortization has been recorded.
The Twin Oaks purchase agreement also includes 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 during the quartersix months ended June 30, 2007, PNMR amortized $20.0 million and determined that the asset was impaired, resulting in a pre-tax loss of $3.4$35.0 million which was recorded in energy production costs.
On June 29, 2007, a wholly-owned subsidiary of PNMR purchased 100% of a trust, which owns a 2.27% undivided interest, representing 29.8 MW, in PVNGS Unit 2 and a 0.76% undivided interest in certain PVNGS common facilities, as well as a lease under which such facilities are leased to PNM. The beneficial interest in the trust was purchased for $44.0 million in cash and the assumption of $41.2 million in long-term debt payable to PVNGS Capital Trust. This long-term debt offsets a portion of the investment in PVNGS lessor notes and is eliminated in PNMR’s consolidated financial statements. The funds for the purchase were provided by PNMR. The lease remains in effectfirst contract and this transaction has no impact on PNM’s consolidated financial statements.nothing for the second contract.
(3) Segment Information
(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 followingA reconciliation of the segment presentation for operating segments reflects normal operations. Unusualto 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 includedassess 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 is presented as previously reported and does not reflect this transfer.below includes recasting prior period information to be consistent with the new methodology.

23


28

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
REGULATED OPERATIONS

PNM Electric

PNM Electric is a regulatedincludes the retail electric utility operations of PNM that are subject to traditional rate regulation by the NMPRC.  PNM Electric provides integrated electricity services that include the generation, transmission and distribution of electricity for retail electric customers in New Mexico andas well as the sale of transmission to third partiesparties.  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 Wholesale remains the sole electricity supplier for the transferred operations.
PNM Gas
PNM Gas is a regulated utility that

PNM Gas 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.

24


  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 includesentered into an agreement to sell its gas operations on January 12, 2008.  PNM WholesaleGas is reported as discontinued operations in the accompanying financial statements and Altura and consists of the generation and sale of electricity into the wholesale market. PNM Wholesale sells the unused capacity of PNM’s jurisdictional assets as well as the capacity of PNM’s wholesale plants excluded from retail rates. Although the FERC has jurisdiction over the rates of PNM Wholesale, it is included in unregulated operations because PNM Wholesale is not subject to traditional rate of return regulation. Twin Oaks is included in the consolidatedsegment information presented below.  Financial information regarding PNM Gas is presented in Note 14.

Altura

The Altura segment includes the results of operations for PNMRTwin Oaks from the date of its acquisition by PNMR on April 18, 2006 through May 31, 2007, at which time Altura was contributeduntil its contribution to EnergyCo.EnergyCo as of June 1, 2007. See NotesNote 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 andaccounting. EnergyCo’s revenues and expenses are not included in PNMR’s consolidated results of operationsrevenues and expenses or the following tables.  See Notes 2 and 11.

25



29

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND 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 areServices 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.also reflects activities of the PNMR holding company, including earnings (loss) of EnergyCo and interest expense on PNMR short-term and long-term debt.
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.
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 business segment. Explanations for footnotes (a) through (e) follow the tables.TNMP.

26



30

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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

27

  PNM  TNMP  First  Corporate    
2008 Electric  Electric  Choice  and Other  Consolidated 
        (In thousands)       
Three Months Ended June 30, 2008:               
Operating revenues $      386,034  $    32,209  $      162,224  $     (157) $580,310 
Intersegment revenues  24   14,909   -   (14,933)  - 
Total revenues  386,058   47,118   162,224   (15,090)  580,310 
Cost of energy  247,589   7,935   158,082   (14,908)  398,698 
Gross margin  138,469   39,183   4,142   (182)  181,612 
Operating expenses  147,210   51,969   72,803   (2,260)  269,722 
Depreciation and amortization  20,896   8,777   579   4,398   34,650 
Operating income (loss)  (29,637)  (21,563)  (69,240)  (2,320)  (122,760)
                     
Interest income  4,878   4   393   (863)  4,412 
Equity in net earnings (loss) of EnergyCo  -   -   -   (2,523)  (2,523)
Other income (deductions)  (2,185)  596   (7)  (2,054)  (3,650)
Net interest charges  (17,623)  (4,365)  (320)  (9,712)  (32,020)
                     
Segment earnings (loss) before income taxes  (44,567)  (25,328)  (69,174)  (17,472)  (156,541)
                     
Income taxes (benefit)  2,441   3,425   (8,755)  (7,536)  (10,425)
Preferred stock dividend requirements  132   -   -   -   132 
                     
Segment net earnings (loss) from continuing operations $    (47,140) $(28,753) $(60,419) $(9,936) $(146,248)
                     
Six Months Ended June 30, 2008:                    
Operating revenues $638,673  $60,027  $246,393  $(281) $944,812 
Intersegment revenues  50   29,319   -   (29,369)  - 
Total revenues  638,723   89,346   246,393   (29,650)  944,812 
Cost of energy  383,284   15,747   263,351   (29,303)  633,079 
Gross margin  255,439   73,599   (16,958)  (347)  311,733 
Operating expenses  273,793   67,443   88,258   (4,716)  424,778 
Depreciation and amortization  41,866   17,136   1,049   8,635   68,686 
Operating income (loss)  (60,220)  (10,980)  (106,265)  (4,266)  (181,731)
                     
Interest income  10,969   5   870   (1,902)  9,942 
Equity in net earnings (loss) of EnergyCo  -   -   -   (27,606)  (27,606)
Other income (deductions)  (7,656)  992   (72)  (3,611)  (10,347)
Net interest charges  (31,726)  (9,354)  (614)  (18,161)  (59,855)
                     
Segment earnings (loss) before income taxes  (88,633)  (19,337)  (106,081)  (55,546)  (269,597)
                     
Income taxes (benefit)  (14,648)  5,686   (21,597)  (21,918)  (52,477)
Preferred stock dividend requirements  264   -   -   -   264 
                     
Segment net earnings (loss) from continuing operations $(74,249) $(25,023) $(84,484) $(33,628) $(217,384)
                     
At June 30, 2008:                    
Total assets* $3,549,985  $949,879  $544,531  $463,284  $5,507,679 
Goodwill $51,632  $226,665  $88,559  $-  $366,856 



*  Excludes total assets of PNM Gas discontinued operations of $619,114.
31

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

28

  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.
32

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

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

29


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

30


PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
TNMP SEGMENT INFORMATION
TNMP operates in only one reportable segment; therefore tabular presentation of segment data is not presented.
Footnote explanations for the above tables are as follows:
(4)  (a)Reflects EITF 03-11 impact of $26.5 millionEnergy Related Derivative Contracts and $6.6 million for the three months ended June 30, 2007 and 2006 and $43.2 million and $11.4 million for the six months ended June 30, 2007 and 2006.
(b)For the three months and six months ended June 30, 2007, includes EnergyCo formation costs of $3.0 million and $4.2 million, impairment loss on Twin Oaks intangible assets of $3.4 million and $3.4 million, and a loss related to the contribution of Altura to EnergyCo of $3.6 million and $3.6 million (all included in operating expenses) and an income tax benefit of $4.0 million and $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 six months ended June 30, 2006, includes TNP and Twin Oaks acquisition integration costs of $1.8 million and $2.8 million and an income tax benefit of $0.7 million and $1.1 million in income taxes.Fair Value Disclosures
(4) 
Energy Related Derivative Contracts
OVERVIEW
TheOverview

Under derivative accounting and related rules for energy contracts, the Company may enter into agreementsaccounts for its various derivative instruments for the purchase and sale or purchase of energy based on the Company’s intent.   Energy contracts that do not qualify for the normal sales and purchases exception are recorded at fair value.   Note 8 of Notes to Consolidated Financial Statements in the 2007 Annual Reports on Form 10-K contains information regarding energy related derivative instruments, including options andcontracts.  See Note 7 for additional information regarding interest rate swaps, to manage risks related to changes in natural gas prices and electric prices and to take advantage of existing market opportunities. At the inception of any such transactionwhich 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. SFAS 133 requires that certain derivative instruments, whichtransaction and the Company classifies as mark-to-market instruments and hedge instruments, be carried at fair value inmethods utilized to assess the Condensed Consolidated Balance Sheets. Note 8effectiveness of Notes to Consolidated Financial Statements in the 2006 Annual Reports on Form 10-K/A (Amendment No. 1) contains information regarding energy related derivative contracts. See Note 7 for additional information regarding interest rate swaps.
hedges.  Changes in the fair value of mark-to-marketcontracts qualifying for cash flow hedge accounting are included in accumulated other comprehensive income to the extent effective.  Ineffectiveness gains and losses were immaterial for the 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 June 30, 2008, after-tax gains of less than $0.1 million for PNMR and 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 will vary due to future changes in market prices.  As of June 30, 2008, the maximum length of time over which the Company is hedging its exposure to the variability in future cash flows is through December 31, 2010.

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 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 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 sold. Changes inenergy.

Fair value is based on current market quotes as available and is supplemented by modeling techniques and assumptions made by the fair value of hedge instruments are included in accumulated other comprehensive income, except for amounts relatedCompany to the PGAC thatextent quoted market prices or volatilities are recoverable from or refundablenot available.  Generally, market data to customers, whichvalue 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 included in regulatory assets and liabilities on the Condensed Consolidated Balance Sheets. Amounts duereferred to or from counterparties for energy related derivative contracts are shown as derivative contracts on the Condensed Consolidated Balance Sheets.
Gains or losses related to hedge instruments are reclassified from accumulated other comprehensive income when the hedged transaction settles and impacts earnings. The amounts shown as current assets and current liabilities relate to contracts that will be settled in the next twelve months.

31


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)
GAAP defines the fair value of a financial instrument as the amount at whichilliquid period and are valued using internally developed pricing data.  The Company regularly assesses the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation.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.

Effective January 1, 2008, the Company adopted SFAS 157, SFAS 159, and FSP FIN 39-1. SFAS 157 defines fair value, establishes a framework for measuring fair value under GAAP, and enhances disclosures about fair value measurements. Fair value is based on current market quotes to the extent they are available and applicable to the Company’s financial instruments, supplemented by modeling techniques and assumptions made by the Company. The market prices used to fair value the Company’s energy portfolio are based on closing exchange prices and over-the-counter quotations.
Valuation of certain derivative instruments requires the use of models and assumptions. At June 30, 2007, PNM implemented new market price curve models and assumptions. This change in valuation is a change in accounting estimatedefined under SFAS 154. The effect of157 as the change in estimate wasexchange price that would be received for an asset or paid to transfer a decrease in net earnings for PNMR and PNM of $1.2 million, which is $0.015 per share for PNMR. Fluctuating commodity prices on open positions prevent the Company from predicting with certainty the future impact of the change in estimate.
PNM recognized an ineffectiveness loss on its fair value hedge of $0.9 millionliability (an exit price) in the six months ended June 30, 2007, which is includedprincipal or most advantageous market for the asset or liability in operating revenues. Ineffectivenessan orderly transaction between market participants on the measurement date.  FSP 157-2 delayed the effective date of SFAS 157 for certain cash flow hedges was immaterial during the six months ended June 30, 2007.nonfinancial assets and nonfinancial liabilities measured on a nonrecurring basis, primarily

32


33

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



34

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:
                 
  June 30,  December 31,  June 30,  December 31, 
  2007  2006  2007  2006 
Type of Derivative Mark-to-Market Instruments  Hedge Instruments 
  (In thousands) 
Current Assets
                
Energy contracts $26,686  $17,773  $1,489  $7,208 
Gas fixed-for-float swaps and futures  56,341   21,875   2,778   4,655 
Options  4,294   4,032   12    
PGAC portion of options, swaps and hedges        6,831   16,748 
             
Total current assets  87,321   43,680   11,110   28,611 
             
                 
Deferred Charges
                
Energy contracts  4,335   2,666      26,991 
Gas fixed-for-float swaps  17,521   7,288   2,943   1,872 
Options  2,749   1,028       
PGAC portion of options, swaps and hedges           3,337 
             
Total deferred charges  24,605   10,982   2,943   32,200 
             
                 
Total Assets
  111,926   54,662   14,053   60,811 
             
                 
Current Liabilities
                
Energy contracts  (37,286)  (16,499)      
Gas fixed-for-float swaps  (51,499)  (21,518)  (1,339)  (6,845)
Options  (10,035)  (4,003)  (91)  (109)
PGAC portion of options, swaps and hedges        (6,831)  (16,748)
             
Total current liabilities  (98,820)  (42,020)  (8,261)  (23,702)
             
                 
Long-term Liabilities
                
Energy contracts  (9,499)  (7,472)  (1,666)  (154)
Gas fixed-for-float swaps  (4,183)  (862)  (387)  (1,915)
Options  (3,898)  (842)      
PGAC portion of options, swaps and hedges           (3,337)
             
Total long-term liabilities  (17,580)  (9,176)  (2,053)  (5,406)
             
                 
Total Liabilities
  (116,400)  (51,196)  (10,314)  (29,108)
             
                 
Net Total Assets and Liabilities
 $(4,474) $3,466  $3,739  $31,703 
             

33

  June 30,  December 31,  June 30,  December 31, 
  2008  2007  2008  2007 
Type of Derivative Mark-to-Market Instruments  Hedge Instruments 
     (In thousands)    
Current Assets            
Energy contracts $92,621  $14,486  $-  $864 
Swaps and futures  85,341   25,653   8,111   524 
Options  46,564   7,372   12,976   358 
Total current assets  224,526   47,511   21,087   1,746 
                 
Deferred Charges                
Energy contracts  18,964   14,133   -   - 
Swaps and futures  19,668   26,898   731   - 
Options  -   4,663   -   - 
Total deferred charges  38,632   45,694   731   - 
                 
Total Assets  263,158   93,205   21,818   1,746 
                 
Current Liabilities                
Energy contracts  (145,464)  (19,842)  (16,911)  - 
Swaps and futures  (65,827)  (25,308)  (899)  (1,058)
Options  (34,137)  (7,594)  -   (30)
Total current liabilities  (245,428)  (52,744)  (17,810)  (1,088)
                 
Long-term Liabilities      -       - 
Energy contracts  (14,017)  (42,009)  (9,895)  - 
Swaps and futures  (16,815)  (4,465)  (42)  (32)
Options  -   (8,700)  -   - 
Total long-term liabilities  (30,832)  (55,174)  (9,937)  (32)
                 
Total Liabilities  (276,260)  (107,918)  (27,747)  (1,120)
                 
Net Total Assets and Liabilities $(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.


35

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


PNM

PNM’s commodity derivative instruments are summarized as follows:
                 
  June 30,  December 31,  June 30,  December 31, 
  2007  2006  2007  2006 
Type of Derivative Mark-to-Market Instruments  Hedge Instruments 
  (In thousands) 
Current Assets
                
Energy contracts $13,803  $16,374  $1,489  $1,057 
Gas fixed-for-float swaps  17,908   1,950   2,755   1,615 
Options  2,505   2,986       
PGAC portion of options, swaps and hedges        6,831   16,748 
             
Total current assets  34,216   21,310   11,075   19,420 
             
                 
Deferred Charges
                
Energy contracts  372   2,666       
Gas fixed-for-float swaps  14,108   7,101   2,943   1,872 
Options  2,414   825       
PGAC portion of options, swaps and hedges           3,337 
             
Total deferred charges  16,894   10,592   2,943   5,209 
             
                 
Total Assets
  51,110   31,902   14,018   24,629 
             
                 
Current Liabilities
                
Energy contracts  (15,552)  (10,928)      
Gas fixed-for-float swaps  (28,653)  (6,440)  (231)  (2,872)
Options  (5,709)  (3,255)      
PGAC portion of options, swaps and hedges        (6,831)  (16,748)
             
Total current liabilities  (49,914)  (20,623)  (7,062)  (19,620)
             
                 
Long-term Liabilities
                
Energy contracts  (4,865)  (7,472)  (1,666)  (154)
Gas fixed-for-float swaps  (877)  (421)  (387)  (1,915)
Options  (3,765)  (801)      
PGAC portion of options, swaps and hedges           (3,337)
             
Total long-term liabilities  (9,507)  (8,694)  (2,053)  (5,406)
             
                 
Total Liabilities
  (59,421)  (29,317)  (9,115)  (25,026)
             
                 
Net Total Assets and Total Liabilities
 $(8,311) $2,585  $4,903  $(397)
             

34

  June 30,  December 31,  June 30,  December 31, 
  2008  2007  2008  2007 
Type of Derivative Mark-to-Market Instruments  Hedge Instruments 
     (In thousands)    
Current Assets            
Energy contracts $620  $2,587  $-  $864 
Swaps and futures  13,276   6,650   4,031   422 
Options  12,726   4,336   -   - 
Total current assets  26,622   13,573   4,031   1,286 
                 
Deferred Charges                
Energy contracts  954   9,443   -   - 
Swaps and futures  6,007   23,253   -   - 
Options  -   4,663   -   - 
Total deferred charges  6,961   37,359   -   - 
                 
Total Assets  33,583   50,932   4,031   1,286 
                 
Current Liabilities                
Energy contracts  (6,251)  (6,872)  (16,911)  - 
Swaps and futures  (14,723)  (6,037)  (842)  (868)
Options  -   (4,119)  -   - 
Total current liabilities  (20,974)  (17,028)  (17,753)  (868)
                 
Long-term Liabilities                
Energy contracts  (185)  (38,172)  (9,895)  - 
Swaps and futures  -   (693)  (42)  (32)
Options  -   (8,700)  -   - 
Total long-term liabilities  (185)  (47,565)  (9,937)  (32)
                 
Total Liabilities  (21,159)  (64,593)  (27,690)  (900)
                 
Net Total Assets and Total Liabilities $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.

36

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(5) Earnings Per Share
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.

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 
                 

37

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:
38

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, 
  2007  2006  2007  2006 
     (As     (As 
     Restated,     Restated, 
     See note 16)     See note 16) 
  (In thousands, except per share amounts) 
                 
Net Earnings
 $20,240  $15,983  $49,906  $41,984 
             
                 
Average Number of Common Shares Outstanding
  76,695   68,852   76,677   68,819 
Dilutive effect of common stock equivalents (a):
                
Stock options and restricted stock  659   520   680   492 
Equity-linked units  1,439   61   1,089   38 
             
Average Common and Common Equivalent Shares
  78,793   69,433   78,446   69,349 
             
                 
Net Earnings per Share of Common Stock:
                
Basic $0.26  $0.23  $0.65  $0.61 
             
Diluted $0.26  $0.23  $0.64  $0.61 
             
 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 operations2,762 (1,588) 25,261 12,934
Net Earnings (Loss)$ (143,486) $ 20,240 $ (192,123) $  49,906
        
Average Number of Common Shares Outstanding81,698 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 Outstanding81,698 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 operations0.03 (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 operations0.03 (0.02) 0.32 0.17
Net Earnings (Loss)$  (1.76) $    0.26 $    (2.42) $     0.64
(a)Excludes the effect of average anti-dilutive common stock equivalents related to out-of-the-money stock options of zero and 661,855 for the three months and zero and 736,869 for the six months ended June 30, 2007 and 2006, respectively.

35



39

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(6) Stock-Based Compensation
(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 20062007 Annual Reports on Form 10-K/A (Amendment No. 1).10-K.

Stock Options

The following table represents stock option activity for the six months ended 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 762,400 $30.50  554,261   11.91       
Exercised  (431,065) $20.45  (5,001)  16.13       
Forfeited  (19,837) $27.18   (50,803)  25.57       
                 
 
Outstanding at end of period 3,311,104 $23.24 $15,063 7.35   3,763,355  $21.54  $(36,010)  7.34 
   
                 
Options exercisable at end of period 1,898,008 $19.73 $15,292 6.08   2,634,551  $22.00  $(26,432)  5.84 
                   
 
Options available for future grant 2,477,194   1,942,024             
   

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

36

Options for PNMR Common Stock 2008  2007 
  
(In thousands,
except per share amounts)
 
       
Weighted-average grant date fair value per share of options granted $1.39  $4.70 
Total intrinsic value of options exercised during the period $15  $4,847 




40

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Restricted Stock

The following table summarizes nonvested restricted stock activity for the six months ended 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 102,400 $28.78  125,250  $11.56 
Vested  (69,551) $23.35  (79,656) $25.70 
   
Forfeited  (5,005) $26.44 
         
Nonvested at end of period 194,618 $26.09   210,339  $17.54 
   

The total fair value of shares of restricted stock that vested during the six months ended June 30, 20072008 was $1.6$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)  Financing
(7) Capitalization
Information concerning financing activities is contained in Note 6 of Notes to Consolidated Financial Statements in the 20062007 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 bridgebank loan agreement for temporary financing of Twin Oaks. See Note 2. On April 17, 2007, PNMR repaid the balance due on the bridge loan. To facilitate the repayment, PNMRwith two banks.  TNMP borrowed $250.5$150 million under this agreement on April 9, 2008 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.

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 which amount hasfor 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 repaid as ofno borrowings under the TNMP Facility.

At June 30, 2007.
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:
         
  June 30,  December 31, 
Short-term Debt 2007  2006 
  (In thousands) 
         
PNM        
Commercial paper $188,370  $251,300 
Revolving credit facility  47,300    
Local lines of credit  6,400    
       
   242,070   251,300 
         
PNMR        
Commercial paper  317,600   263,550 
Bridge loan     249,495 
       
         
  $559,670  $764,345 
       
 June 30, December 31, 
Short-term Debt2008 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 loan150,000 - 
Revolving credit facility- - 
Total TNMP150,000 - 
PNMR    
Commercial paper- - 
Revolving credit facility190,000 343,500 
Local lines of credit- 1,400 
Total PNMR190,000     344,900
Total PNM, TNMP and PNMR
    340,000 665,900 
Valencia86,651 - 
     
 $  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 August 1, 2007,4, 2008, PNMR, PNM, and PNMTNMP had $221.7$252.8 million, $380.7 million, and $141.8$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 June 30, 2007, TNMP had outstanding borrowings of $27.2 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 SJGS. PNMR is obligated to pay amounts equal to the principal and interest on the PCRBs.credit.  In addition, PNM issued $20.0had availability of $150 million of senior unsecured notes to secureunder the Term Loan Agreement and guarantee$100 million under the PCRBs. Both the PCRBs and the senior unsecured notes mature in 2037 and bear interestReimbursement 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 June 30, 2007, PNM had received $7.6August 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 offor PNM and, PNMR and the amount remaining in the trust is included in other investments since it is restrictedon a consolidated basis, $1,082.0 million for the acquisition of items that will be included in utility plant.PNMR.  At August 4, 2008, PNMR,

38


43

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Effective June 15, 2007,
PNM, and TNMP redeemed $100.0had cash balances of $54.8 million, of its 6.125% Senior Notes Due 2008 at a redemption price of 100.50% of the principal amount redeemed, plus accrued interest. To facilitate the redemption, PNMR made a cash contribution, recorded as equity, of $101.2$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 liabilityan asset position of approximately $3.5$0.8 million at June 30, 2007,2008, with a corresponding reductionaddition 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 PNMPNMR Direct Plan and an equity distribution agreement.  The equity distribution agreement is currently suspended.  For the six months ended June 30, 2007,2008, PNMR sold a combined total of 47,049128,177 shares of its common stock through the PNMR Direct Plan and the equity distribution agreement for net proceeds of $1.4$1.8 million.  PNMR also issued 24,21044,621 shares of its common stock for $0.7$0.5 million through its ESPP during the six months ended June 30, 2007.2008.
(8) Pension and Other Postretirement Benefit Plans
(8)  Pension and Other Postretirement Benefit Plans

PNMR and its subsidiaries (other than TNP, TNMP and First Choice) have amaintain qualified defined benefit pension plan, a planplans, postretirement benefit plans providing medical and dental benefits, to eligible retirees, and an executive retirement programprograms (“PNM Plans” and “TNMP Plans”).  PNMR is legally obligatedmaintains the legal obligation for the benefits owed to participants under the PNM Plans. 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. these plans.

Readers should refer to Note 12 of Notes to the Consolidated Financial Statements in the 20062007 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 June 30, 
          Other Postretirement  Executive Retirement 
  Pension Plan  Benefits  Program 
  2007  2006  2007  2006  2007  2006 
  (In thousands) 
                         
Components of Net Periodic
                        
Benefit Cost (Income)
                        
Service cost $36  $126  $632  $678  $14  $14 
Interest cost  7,953   7,710   1,928   1,842   272   264 
Expected long-term return on assets  (10,195)  (10,139)  (1,464)  (1,355)      
Amortization of net loss  972   1,210   1,461   1,670   24   25 
Amortization of prior service cost  79   79   (1,422)  (1,422)  3   3 
                   
Net periodic benefit cost (income)
 $(1,155) $(1,014) $1,135  $1,413  $313  $306 
                   

                        
 Six Months Ended June 30, 
 Other Postretirement Executive Retirement  Three Months Ended June 30, 
 Pension Plan Benefits 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 $72 $252 $1,264 $1,356 $28 $28  $-  $36  $178  $632  $14  $14 
Interest cost 15,906 15,420 3,856 3,684 544 527   8,317  7,953  2,086  1,928  284  272 
Expected long-term return on assets  (20,389)  (20,277)  (2,927)  (2,709)     (10,336) (10,195) (1,532) (1,464) -  - 
Amortization of net loss 1,944 2,420 2,922 3,340 46 50   481  972  1,204  1,461  13  24 
Amortization of prior service cost 158 158  (2,844)  (2,844) 6 6   79   79   (1,422)  (1,422)  3   3 
             
Net periodic benefit cost (income)
 $(2,309) $(2,027) $2,271 $2,827 $624 $611  $(1,459) $(1,155) $514  $1,135  $314  $313 
             
For the three months ended June 30, 2007 and 2006,

44

PNM contributed $1.5 million and $3.1 million, respectively, to trusts for other postretirement benefits. For the six months ended June 30, 2007 and 2006, PNM contributed $3.1 million and $3.1 million, respectively, to trusts for other postretirement benefits. PNM expects to make contributions totaling $6.0 million during 2007 to trusts for other postretirement benefits. 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)




  Six Months Ended June 30, 
  Pension Plan  Other Postretirement Benefits  Executive Retirement Program 
  2008  2007  2008  2007  2008  2007 
        (In thousands)       
                   
Components of Net Periodic                  
Benefit Cost (Income)                  
Service cost $-  $72  $356  $1,264  $28  $28 
Interest cost  16,634   15,906   4,172   3,856   568   544 
Expected long-term return on assets  (20,672)  (20,389)  (3,064)  (2,927)  -   - 
Amortization of net loss  962   1,944   2,408   2,922   26   46 
Amortization of prior service cost  158    158   (2,844)  (2,844)  6   6 
Net periodic benefit cost (income) $(2,918) $(2,309) $1,028  $2,271  $628  $624 

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 plansprogram, 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.

40


PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
2008.
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 June 30, 
          Other Postretirement  Executive Retirement 
  Pension Plan  Benefits  Program 
  2007  2006  2007  2006  2007  2006 
  (In thousands) 
                         
Components of Net Periodic
                        
Benefit Cost (Income)
                        
Service cost $  $  $98  $106  $  $ 
Interest cost  1,057   1,085   165   178   19   19 
Expected long-term return on assets  (1,710)  (1,754)  (114)  (114)      
Amortization of net gain  (2)     (39)         
Amortization of prior service cost        15   15       
                   
Net Periodic Benefit Cost (Income)
 $(655) $(669) $125  $185  $19  $19 
                   

                        
 Six Months Ended June 30, 
 Other Postretirement Executive Retirement 
 Pension Plan Benefits Program  Three Months Ended June 30, 
 2007 2006 2007 2006 2007 2006  Pension Plan  Other Postretirement Benefits  Executive Retirement Program 
 (In thousands)  2008  2007  2008  2007  2008  2007 
        (In thousands)       
Components of Net Periodic
                   
Benefit Cost (Income)
                   
Service cost $ $ $196 $212 $ $  $-  $-  $71  $98  $-  $- 
Interest cost 2,114 2,170 330 355 38 38   1,061  1,057  179  165  19  19 
Expected long-term return on assets  (3,420)  (3,508)  (228)  (228)     (1,659) (1,710) (122) (114) -  - 
Amortization of net gain  (4)   (78)      (36) (2) (68) (39) -  - 
Amortization of prior service cost   30 30     -   -   15   15   -   - 
             
Net Periodic Benefit Cost (Income)
 $(1,310) $(1,338) $250 $369 $38 $38  $(634) $(655) $75  $125  $19  $19 
             
For the three and six months ended June 30, 2007, TNMP contributed $0.3 million for the other postretirement benefits. For the three and six months ended June 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.

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)



  Six Months Ended June 30, 
  Pension Plan  Other Postretirement Benefits  Executive Retirement Program 
  2008  2007  2008  2007  2008  2007 
        (In thousands)       
Components of Net Periodic                  
Benefit Cost (Income)                  
Service cost $-  $-  $142  $196  $-  $- 
Interest cost  2,122   2,114   358   330   38   38 
Expected long-term return on assets  (3,318)  (3,420)  (244)  (228)  -   - 
Amortization of net gain  (72)  (4)  (136)  (78)  -   - 
Amortization of prior service cost  -   -   30   30   -   - 
Net Periodic Benefit Cost (Income) $(1,268) $(1,310) $150  $250  $38  $38 

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 plansprogram, 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
2008.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(9) Commitments and Contingencies
(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
PNMCommitments and Contingencies Related to the Environment

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, theThe 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 annual renewable energy portfolio report and 2007 renewable energy procurement plan. In its procurement plan, PNM stated that it would continue to procure renewable energy and RECs from wind and solar photovoltaic facilities and to capitalize the costs for recovery in its next rate case in accordance with a stipulation approved by the NMPRC in 2003. The procurement plan requested the NMPRC to amend PNM’s solar photovoltaic program to eliminate the annual ceiling on new customer subscriptions, to approve the procurement of renewable energy and RECs from a biomass facility under a 20-year PPA beginning in 2009 and to authorize recovery of the costs of procurement under the PPA, including costs related to imputed debt. The NMPRC issuedhas 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

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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 particulateparticulates be done for each of the four units at SJGS.  The CompanyPNM 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.
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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 Fourth U.S. Circuit Court of Appeals for the Fourth Circuit ruling in favor of Duke Energy CorpCorporation with respect to the hourly emission increase test being the appropriate method for calculating an emissions increase for PSD purposes.  On April 2, 2007, the U.S. Supreme Court issued its decision.  In a unanimous decision, the U.S. Supreme Court vacated the decision of the Fourth U.S. Circuit Court of Appeals and remanded for further proceedings consistent with the U.S. Supreme Court’s opinion. The decision precludes the use of an increase in the maximum hourly emission rate for determining an emissions increase for PSD purposes.  The decision did not eliminate the NSR exclusion for routine maintenance, repair, or replacement, nor did it preclude the EPA from promulgating a regulation allowing an emission increase test for PSD purposes to be based on an increase in the maximum hourly emission rate.  The EPA has announced that it will proceed with revision of the NSR rules to specify that only activities that increase an emitting unit’s hourly rate of emissions 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 Decreea consent decree of May 10, 2005.  As a result, PNM filed petitions with the United StatesU.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 Decreeconsent 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 Courtstipulated order entered by the Stipulated Ordercourt approving the settlement on December 27, 2006. The settlement does not require any additional material expenditures with respect to the implementation of the Consent Decree. Counsel for Plaintiffs has submitted statements to PNM for payment of attorneys fees and costs incurred with respect to post-decree administration and disputes. The parties have settled the fee request for a nominal amount.

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The Consent Decreeconsent 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.  ForAs of June 30, 2008, PNM’s share of the years 2005total amount of stipulated penalties is $3.2 million of which $3.0 million had been deposited into the escrow account and 2006, PNM has placed $1.2 million into escrow as potential stipulated penalties.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,
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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.

Four Corners Federal Implementation Plan Litigation
In September 1999,
On April 30, 2007, the EPA proposedadopted 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 the Four Corners. On September 12, 2006, the EPA proposed a revised FIP to establish air quality standards at Four Corners.
APS, the Four Corners operator, intervened in the proceeding as a defendant in order to protect the interests of the participants. The Sierra Club and the EPA reached a settlement over the timing of the issuance of the FIP and a Consent Decree was lodged with the Court on December 13, 2006 and notice of the lodging of the Consent Decree was published in the March 15, 2007 Federal Register. Under the terms of the proposed Consent Decree, the EPA, on April 30, 2007, issued the final FIP for Four Corners.  The FIP essentially federalizes the requirements contained in the New Mexico State Implementation Plan, which Four Corners has historically followed.  In the case of sulfur dioxide, the FIP includes an emission limit that Four Corners has achieved following a successful program to determine if additional reductions could be made with the existing controls. The FIP also includes a requirement to control fugitivemaintain and enhance dust within 18 months after the FIP becomes effective. APS filed a Petition for Review onsuppression methods.  On July 2, 2007, APS, the plant operator, filed a petition for review in the United States CircuitU.S. 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 onhas intervened in this action.  On July 6, 2007, challenging whether the FIP compliesSierra Club and other parties filed a petition for review with the requirements ofsame court challenging the FIP’s compliance with the Clean Air Act. TheAct and APS has intervened in their action.  In APS’ lawsuit, APS challenges two key provisions of the FIP:  a 20% opacity limit on certain fugitive dust emissions, which the EPA filed a motion to remand and vacate in early December 2007, and a 20% stack opacity limit on Units 4 and 5.  Briefing in this case is now complete and oral argument occurred in May 2008.  APS anticipates that the court will issue its opinion before the end of 2008.  Although the Company is unable to determinecannot predict the impactoutcome or the timing of these matters, on its results of operations and financial position.

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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 tobelieve that they will have a material adverse effectimpact on itsthe 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 PNM’sthe site of the former Santa Fe Generating Station site to determine the source of the contamination pursuant to a 1992 settlement agreement between PNM and the NMED.

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

PNM has been verbally informed that the Superfund Oversight Section of the NMED is conducting an investigation into the chlorinated solvent contamination in the vicinity of the site of the former Santa Fe Generating Station site.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 participatingwill 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 bysurface impoundments and landfill.  The NODA allows additional data and information to be collected and could cause EPA to consider rulemaking forrevisit 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.

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
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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 VerdePVNGS 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’sPVNGS’ 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 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 Palo Verde’sPVNGS’ 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 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 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 procedure.  On March 31, 2008, APS submitted to the NRC a revision to its improvement plan to address issues raised by the NRC in its inspection report.  The NRC will continue to provide increased oversight at PVNGS until the facility demonstrates sustained performance improvement.  APS continues to implement its plan to improve PVNGS’s performance.

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On November 9, 2006, APS notified the NRC that a senior reactor operator at PVNGS had attempted to cover up a mistaken entry the operator had made in a PVNGS operations verification log. The senior reactor operator resigned shortly thereafter. By letter dated July 12, 2007, the NRC notified APS that, based upon the results of its investigation of the matter, the NRC is considering an escalated enforcement action against PVNGS due to the willfulness of the senior reactor operator’s actions. The NRC noted in its letter that the safety significance of the matter was very low. In accordance with NRC procedures, APS has requested alternative dispute resolutioncooperate fully with the NRC in an attempt to resolvethroughout this issue. PNM cannot predict the outcome of this matter.

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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 approximately $101.0 million. The retrospective assessment is subject to an annual limit of $15.0 million per reactor per incident. Based upon PNM’s 10.2% interest in the three PVNGS units, PNM’s maximum potential assessment per incident for all three units is approximately $31.0 million, with an annual payment limitation of approximately $4.6 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.  TheIn 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.
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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 relatingof these in relation to the Company are summarized below.

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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
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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 United StatesU.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 outtime-out period to allow parties the opportunity to assess the recent court decisions and the potential for settlement of cases.  In October 2006, theThe Ninth Circuit extendedhas 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 JuneAugust 2007, the Ninth Circuit further extended the time-out period for settlement discussions to continue until August 13,November 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
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PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 Ninth Circuit, which is still pending.Circuit.  As a participant in the proceedings before the FERC, PNM is also participatingparticipated in the appeal proceedings.  Oral argument in the case was held in January 2007.  In August 2007, the Ninth Circuit issued its decision on January 8,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.

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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 finalultimate outcome of this proceeding.
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PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

California Power Exchange and Pacific Gas and Electric Bankruptcies

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

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

In 2002, the California Attorney General filed a complaint with the FERC against numerous sellers, including PNM, regarding prices for wholesale electric sales into the Cal ISO and Cal PX markets and to the California Department of Water Resources. In 2002, the FERC entered an order denying the California Attorney General’s request to initiate a refund proceeding, but directed sellers, including PNM, to comply with additional reporting requirements with regard to certain wholesale power transactions. The California Attorney General filed a petition for review in the Ninth Circuit. The Ninth Circuit issued a decision 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 United StatesU.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.  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 disposition of the 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 beenwere filed in
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PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

the case by the parties, butand oral argument has not yet been scheduled. The Company cannot predictwas 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 requiredand 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 InquiryNOI 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

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PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 before890-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 preparecompleted 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.  In June 2007, FERC held a technical conference regarding transmission planning proposals, including the WestConnect proposal, in which PNM participated. PNM will continue making the required compliance filings. PNMfilings and will participate in FERC’s technical conference onconferences regarding Order 890 reliability standards. The Company cannot predict what impact the final rule will have on its operations.
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 covers the period from January 2004 to the present and will examine the Company’s compliance with the FERC standards of conduct and OASIS requirements, compliance of the Company’s transmission 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 United States District Court for the District of Wyoming issued an order granting the motion and dismissing some of the defendants, including the Company. The relator has appealed to the U.S. Court of Appeals for the Tenth Circuit.
The Company has 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.

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PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 Eventremediable event of Defaultdefault letter to the biomass project owner.  The operator has declared a force majeure over failure to obtain an 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.   The project owner’s application was initially denied, 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
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PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 18, 2007,23, 2008, the owner advised PNM sent a letterthat it disputed the basis for the termination.  PNM is unable to predict the operator conditionally accepting the noticeoutcome of force majeure. The operator is required to remedy the condition within 180 days of the notice dated May 25, 2007. A hearing is scheduled for August 20, 2007 on the owner’s appeal of the denial of the air permit.this matter.
Valencia Energy Facility
Valencia
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, ownbuilt, owns and operateoperates the facility while PNM will be the sole purchaser of the electricity generated. The total projected construction cost forValencia facility began commercial operation on May 30, 2008.  For financial accounting purposes PNM consolidates the facility is from $100 million to $105 million. The termplant under FIN 46R since it absorbs the majority of the power purchase agreement is for 20 years beginning June 1, 2008, withvariability in the full outputcash flows 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). The Company is evaluating the accounting treatment of this PPA.plant.  See Note 16.
On May 31, 2007, the office of the New Mexico Attorney GeneralAG and the Utility Staffstaff of the NMPRC filed a Petition For Formal Reviewpetition for formal review requesting the NMPRC to investigate the power purchase agreementPPA and related transactions relating to the Valencia Energy Facility to determine, among other things, whether the transactions are prudent, appropriate and consistent with NMPRC rules, and to establish the ratemaking treatment of the power purchase agreement.PPA.  On June 21, 2007, the NMPRC ordered PNM to respond to the Petitionpetition so that the NMPRC could ascertain PNM’s position on the matters raised before proceeding further with processing the Petition.petition.  In its Response,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 Staffstaff’s and Attorney General’sAG’s request for determination of the ratemaking treatment for the agreement.  To date,On November 6, 2007, the NMPRC has taken no further action onissued an order, which appointed a hearing examiner and directed her to consider the petition.issues raised in the petition and the response, including whether 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.
(10) Regulatory and Rate Matters
PNMR
(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 thea Texas district court, in Austin, Texas.court.  TNMP and FCPFirst Choice have intervened and will defend the PUCT’s Final Order approving the NUS.

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First Choice Request for ERCOT Alternative Dispute Resolution

On June 30, 2008, First Choice filed a request for alternative dispute resolution with ERCOT alleging that ERCOT incorrectly applied its protocols with respect to congestion management during the first quarter of 2008.  First Choice requests that ERCOT resolve the dispute by restating certain elements of its first quarter 2008
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PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Energy Agreement
In 2003,congestion management data and by refunding to First Choice and Constellation executed a power supply agreement that resultedallegedly overstated congestion management charges.  The amount at issue in Constellation being the primary supplier of power for First Choice’s customers throughclaim can only be determined by running ERCOT market models with corrected inputs but First Choice believes that the endamount is significant.  ERCOT protocols provide that ERCOT will notify potentially impacted market participants and subsequently consider the merits of 2006. Additionally, Constellation has agreedFirst Choice’s allegations.  The Company is unable to supply power in certain transactions underpredict the agreement beyond the date when that commitment expired.outcome of this matter.
In 2004, FCPSP, a bankruptcy remote entity, was created pursuant to the agreement with Constellation to hold all customer contracts previously held by First Choice. Constellation received a lien against the assets of FCPSP to cover the settlement exposure and the mark-to-market exposure rather than requiring FCPSP to post alternate collateral for the purchase of power supply. In addition, FCPSP is restricted by covenants that limit the size of FCPSP’s unhedged market positions and require that sales by FCPSP retain a positive retail margin. The agreement does not, however, permit Constellation to demand additional collateral irrespective of its credit exposure under the agreement. If, however, a change in electricity or gas forward prices increases Constellation’s credit exposure to FCPSP beyond a limit based on Constellation’s liens in cash and accounts receivable, Constellation will have no obligation to supply additional power to customers of FCPSP unless FCPSP provides letters of credit or other collateral acceptable to Constellation, and FCPSP will be constrained in its ability to sign up additional customers until that credit shortfall is corrected. The existing pricing mechanism under the Constellation power supply agreement expired on December 31, 2006. In addition, Constellation has agreed to supply power in certain transactions under the PSA beyond the date when that commitment expired. The obligations of Constellation to act as a qualified scheduling entity continue until the expiration of the agreement on December 31, 2007.
FCPSP may terminate the agreement upon 30 days prior written notice to Constellation for any reason, but the agreement and all liens securing the agreement remain in effect with respect to transactions entered into prior to the termination until both parties have fulfilled all of their obligations with respect to such transactions or such transactions have been terminated for default or reasons related to regulatory changes.PNM
PNM
Gas Rate Case

On May 30, 2006, PNM filed a general gas rate case that asked the NMPRC to approve an increase in the service fees charged to its 481,000 natural gas customers. The proposal would increasecustomers, 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 chargecustomers, 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 Appealappeals with the New Mexico Supreme 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.  The Supreme Court on July 27, 2007 and has until August 27, 2007scheduled oral argument for September 16, 2008.  PNM is unable to file which components will be appealed.

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PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
predict the outcome of these appeals.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 application requests an annual increase in electric service revenues of $68.9 million effective January 1, 2008, an increase of approximately 12.3% over test period revenues. The request iswas designed to provide PNM’s electric utility an opportunity to earn a 10.75% return on equity.  The application also requestsrequested authorization to implement a Fuel and Purchased Power Adjustment ClauseFPPAC 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 April 24, 2008, the NMPRC issued a final order in the 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 initially suspended operationalso 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 proposedcosts previously deferred on PNM’s balance sheet will be recoverable through future rates charged to 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 $10.6 million for deferred REC costs.  PNM 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 the RECs to the New Mexico Supreme Court.  The AG has moved to intervene.  To the extent PNM is successful in demonstrating these costs are recoverable through future rate proceedings, the costs will be restored to PNM’s balance sheet. The Company is unable to predict the outcome of this matter.

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 through Decemberin 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, 2007, but subsequently extended2008.  PNM filed timely responses to these motions.  The NMPRC denied the suspension through February 21,motions for rehearing on July 8, 2008.  A hearingAppeals from the final order may be filed within 30 days from the last date on which a rehearing motion is scheduleddenied.  The Albuquerque Bernalillo County Water Utility Authority filed an appeal on August 1, 2008.  PNM is unable to begin October 1, 2007. A recommended decision ofpredict if other appeals will be filed or the hearing examiner is due by December 31, 2007.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 under three contracts, and continues to do so under the remaining contracts.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 Electric Coop 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 unbundledunbundle 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 itscertain 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 Staffstaff 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 Staffstaff each filed reply comments contending that opposition to the limited settlement was without merit.  The Settlement Judge and the Administrative Law JudgeALJ 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 Electric Coop complaint case initial decision was on the docket for consideration by the FERC.  SPS and Golden Spread Electric Coop filed a motion to delay the FERC action on the initial decision to provide additional opportunity for the parties to reach settlement.  PNM filed its opposition to the motion requesting the FERC to proceed to issue an order on the initial decision.  Then theHowever, FERC removed the Golden Spread item from its agenda.  PNM cannot predict ifIn September 2007, FERC open meeting agenda again indicated the settlement will be approvedGolden Spread complaint case initial decision was on the docket for consideration by the FERC or what the outcome of the fuel cost adjustment clause proceeding at the FERC will be.FERC.  SPS and Golden Spread

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
TNMP
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 the 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 end of 2008.

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 this proceeding at 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.

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 andTexas.  On January 31, 2008, the Court tookof 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 costCTC 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 interestcarrying 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 interesta
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 20th20, 2007 open meeting, the PUCT unanimously rejected the proposed order regarding the calculation of TNMP’s on-going interestcarrying cost rate for the CTC. The PUCT approved the 8.31% interest rate proposed by TNMP and the PUCT Staff.staff.  The PUCT will issueissued a signed final order and then TNMP will be required to makemade a compliance filing to implementput 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 competition transition chargeCTC 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 competition transition chargeCTC and its rate case expenses on December 1, 2006.  In January 2007, this proceeding was appealed by various Texas cities to the district court in Austin, Texas.  TNMP and First Choice have intervened and will defend the PUCT’s Final Order in this proceeding.
(11) EnergyCo Joint Venture
(11)  EnergyCo

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.  In February 2007, EnergyCo formed ECMT as a subsidiary that is expectedSee Note 22 of the Notes to perform future marketing and trading activity for the joint venture. To fund startup expenses of EnergyCo, both members contributed $2.5 million to EnergyCoConsolidated Financial Statements in the three months ended March 31, 2007.

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PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
On June 1, 2007 PNMR contributed its ownership of Altura to EnergyCo at fair value of $549.6 million (after the working capital adjustment described below), ECJV made a cash contribution to EnergyCo equal to 50% of the fair value amount, and EnergyCo distributed that cash to PNMR. PNMR accounted for this transaction by (1) removing the assets and liabilities transferred to EnergyCo from its consolidated financial statements; (2) recording an additional investment in EnergyCo for an amount equal to 50% of the net carrying value of the Altura assets and liabilities transferred, reflecting that 50% of the items transferred are in effect still owned by PNMR; and (3) reflecting in results of operations the difference between the cash received and 50% of the net carrying value of the items transferred that in effect were sold to ECJV, which resulted in a pre-tax loss of $3.6 million being reflected in energy production costs. As provided under the contribution agreement, subsequent to June 1, 2007, an adjustment to the contribution amounts was made for changes in components of working capital between the date for which fair value was determined and closing. The result of this adjustment is a payment by PNMR of $2.1 million.
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 borrowed $181 million of long-term debt under this facility. From this borrowing, $87.5 million was distributed to each of PNMR and ECJV.
Effective August 1, 2007, EnergyCo completed the acquisition of the CoGen Lyondell Power Generation Facility (now known as Altura Cogen, LLC), a 614 MW natural gas-fired cogeneration plant, located near Houston, Texas. The purchase price of approximately $467.5 million was funded through cash contributions of $42.5 million from each of PNMR and ECJV and the remaining amount was financed through borrowings under EnergyCo’s credit facility.
On August 2, 2007, PNMR announced that EnergyCo has agreed with NRG Energy, Inc. to jointly develop a 550 MW combined-cycle natural gas unit at the existing NRG Cedar Bayou Generating Station near Houston. EnergyCo anticipates the construction of the project will be completed in the summer of 2009, at which time 275 MW of electricity will be available for sale by EnergyCo. EnergyCo expects to fund its portion of the Cedar Bayou construction with borrowings under its existing credit facility. Once the project is complete, EnergyCo expects to arrange permanent financing of an appropriate mix of debt and equity. PNMR does not anticipate making significant capital contributions to EnergyCo in connection with this project.
Other than as described above,Form 10-K.  PNMR has no commitments or guarantees with respect to EnergyCo.

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PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Summarized financial information for EnergyCo is as follows:
         
  Three Months  Six Months 
  Ended  Ended 
  June 30, 2007 
  (In thousands) 
         
Operating revenues $14,366  $14,366 
Operating expenses  10,990   12,314 
       
Net earnings $3,376  $2,052 
       
         
50 percent of net earnings $1,688  $1,026 
Amortization of basis difference in EnergyCo  584   584 
       
PNMR equity in net earnings of EnergyCo $2,272  $1,610 
       

     
  As of June 30, 
  2007 
  (In thousands) 
     
Current assets $38,074 
Deferred assets  52,537 
Net utility plant  573,508 
    
Total assets  664,119 
    
     
Current liabilities  55,877 
Long-term liabilities  210,440 
    
Total liabilities  266,317 
    
     
Owners’ equity $397,802 
    
     
50 percent of owners’ equity $198,901 
Less unamortized PNMR basis difference in EnergyCo  757 
    
PNMR equity investment in EnergyCo $198,144 
    
Results of Operations

57



  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.


62

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(12) Related Party Transactions
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 20062007 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  Six Months Ended 
  June 30,  June 30, 
  2007  2006  2007  2006 
  (In thousands) 
Electricity, transmission and related services billings:                
PNM to TNMP $  $12,677  $126  $27,909 
TNMP to PNMR  16,873   17,880   33,386   33,167 
                 
Shared services billings from PNMR to:                
PNM  23,697   30,759   49,595   62,376 
TNMP  4,587   8,948   10,117   18,288 
                 
Services billings from PNMR to EnergyCo  2,344      3,414    
                 
Income tax sharing payments from:                
PNM to PNMR $  $  $  $ 
TNMP to PNMR            

58

  Three Months Ended  Six Months Ended 
  June 30,  June 30, 
  2008  2007  2008  2007 
  (In thousands) 
Transmission, distribution and related services billings:            
PNM to TNMP $-  $-  $-  $126 
TNMP to PNMR  14,909   16,873   29,319   33,386 
                 
Shared services billings from PNMR to:                
PNM* $23,544  $23,697  $46,411  $49,595 
TNMP  5,038   4,587   9,815   10,117 
                 
Services billings from PNMR to EnergyCo $4,749  $2,344  $7,224  $3,414 
                 
Income tax sharing payments from:                
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.

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

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


(13)  New Accounting Pronouncements

Note 21 of Notes to Consolidated Financial Statements in the 20062007 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 concerningderivative 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 adoptionrequirements of FIN 48 as ofSFAS 161 and will implement the required disclosures no later than January 1, 2007.2009.
(14) Discontinued Operations
In connection withSFAS 162 – The Hierarchy of Generally Accepted Accounting Principles

The current GAAP hierarchy, as set forth in the acquisitionAmerican Institute of TNP and its principal subsidiaries, TNMP and First Choice, the NMPRC stipulated that all TNMP’s New Mexico operations would transferCertified Public Accountants Statement on Auditing Standards No. 69, has been criticized because (1) it is directed to the ownershipauditor rather than the entity, (2) it is complex, and (3) it ranks FASB Statements of PNM.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 transfer took place on January 1, 2007 when TNMP transferredstatement 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

As discussed in Note 2, PNM entered into an agreement to sell its New Mexico operationalgas operations, which comprise the PNM Gas segment.  Under GAAP, the assets and liabilities of PNM Gas are considered to PNMR through redemptionbe 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 contributedoperations are excluded from continuing operations and presented as discontinued operations on the TNMP New Mexico operational assets and liabilitiesstatements 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 TNMPno depreciation is required to be reportedrecorded 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 June 30, 2006. Due to the fact the net assets were distributed to TNMP’s parent, PNMR, the assets and liabilities were considered “held and used” up until the date of transfer and, according to SFAS 144, are not classified as “held for sale” within TNMP’s Consolidated Balance Sheet at December 31, 2006. No gain or loss or impairments were recognized on the disposition due to the fact the transfer was among entities under common control. Furthermore, the TNMP New Mexico operations are subject to traditional rate of return regulation. Subsequent to the transfer, the NMPRC regulates these operations in the same manner as prior to the transfer. Under SFAS 71, the assets and liabilities were recorded by PNM at TNMP’s carrying amounts, which represent their fair value within the regulatory environment.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:
65
         
  Three Months  Six Months 
  Ended  Ended 
  June 30, 2006 
  (In thousands) 
         
Operating revenues $21,760  $48,897 
Operating expenses and other income  20,149   45,812 
       
Earnings from discontinued operations before income tax  1,611   3,085 
Income tax expense  (16)  987 
       
Earnings from discontinued operations $1,627  $2,098 
       

59


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes the TNMP New Mexico assets and liabilities transferred to PNM:

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

(15) Income Taxes
  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 
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. PNMR has received notice that its agreement with the IRS regarding substantially all of the unrecognized tax benefits has been returned from the Joint Committee on Taxation with no changes and the issue is considered settled. As a result, PNMR has recognized approximately $16.0 million of income tax benefit in June 2007. Including this benefit, PNMR’s effective tax rates were (277.5)% and 5.5% for the three and six months ended June 30, 2007. Without this non-recurring benefit, PNMR’s effective tax rates would have been 19.7% and 35.7% for the three and six months ended June 30, 2007.Financial Position
During the three months ended June 30, 2007, PNMR established a liability of $13.9 million for additional unrecognized tax benefits, which was offset by deferred income taxes and had no effect on earnings. At June 30, 2007, PNMR had $16.0 million of unrecognized tax benefits, PNM had $3.5 million of unrecognized tax expense, and TNMP had no unrecognized tax benefits. While it cannot be assured, it is anticipated that approximately $.5 million of unrecognized tax expense of PNMR and $3.3 million of unrecognized tax expense of PNM will be reversed by June 30, 2008. The Company is unable to make reasonably reliable estimates of the period of cash settlement of the remaining unrecognized tax benefits and expenses.

60

  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 




66

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Estimated interest income related
    PNM’s cost-of-gas revenues collected from sales-service customers are recovered in accordance with NMPRC regulations through the PGAC and represent a pass-through of the cost of natural gas to refunds expected to be receivedthe 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 included in Other Income and estimated interest expense and penalties are included in Interest Expense in the Condensed Consolidated Statements of Operations. Interest income under FIN 48compensated for the six months ended June 30, 2007 was $0.1 milliontime 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 PNMR. Due tothese instruments are deferred and recovered through the settlement discussed above, during for the three months ended June 30, 2007, PNMR reversed interest expense of $4.8 million previously recorded.PGAC with no income statement effect.  At June 30, 2008, PNM Gas had $1.7 million of current assets and current liabilities related to these instruments.  At December 31, 2007, PNMRPNM Gas had accumulated accrued interest receivable$7.1 million of $4.3 millioncurrent assets and accumulated accrued interest payablecurrent liabilities related to these instruments.  At June 30, 2008, PNM Gas derivatives were valued using Level 2 and Level 3 inputs as defined in SFAS 157.

(15)  Business Improvement Plan
As discussed in Note 24 of $2.1 million; PNM had accumulated interest receivablethe 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 $0.3 millionits operations and accumulated interest payablea benchmarking analysis to similar-sized utilities.  The Company is now in the process of $0.1 million;implementing a series of initiatives designed to manage future operational costs, maintain financial strength and TNMP had accumulated interest receivable of $4.0 million.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 fileshas 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 federal consolidatedliability has been incurred 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 2001-2004 are currently under federal income tax examination. Additionally, the reporting years 2003-2006 are currently under Texas franchise tax examination. Based onamount can be reasonably estimated.  At June 30, 2008, the Company assessed the status of the business improvement plan process and the process involved in finalizing these examinations, it is not possible to estimate the impact, if any, upon the Company’s previously recorded uncertain tax positions.
(16) Restatement
Subsequent to the issuance of the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006, the management of PNMR and PNM determined that the deferred gains related to certain sale-leaseback transactions had not been amortized over the correct period.
In 1985 and 1986, PNM entered into 11 separate transactions through which it sold all of its interest in Units 1 and 2 of the PVNGS and related common facilities to institutional investors. At the same time, PNM entered into agreements to lease back the facilitiespositions that were sold. These transactions resulted in gains, which in accordance with GAAP were deferred and amortized over the livesprobable of the leases, approximately 30 years.
In 1990, the New Mexico Public Service Commission (“NMPSC”), the predecessor to the NMPRC, ordered that the portion of the gain on the sale-leasebacks attributable to PNM’s New Mexico customers was to reduce electric rates over 15 years. Accordingly, under GAAP, the amortization period for the portion of the gain on the sale-leasebacks remainingbeing eliminated as determined at that time and attributable to New Mexico customers should have been changed to match the rate-making treatment, which would have resulted in that portion of the gain being completely amortized by 2001. However, PNM continued to amortize the gain over the lives of the leases for financial reporting purposes, which was longer than the 15 years determined by the NMPSC. The portion of the gain not attributable to PNM’s New Mexico customers was not affected by the NMPSC order and has continued to be amortized over the lives of the leases in accordance with GAAP.
In connection with the above, PNMR and PNM have restated the Condensed Consolidated Statements of Earnings, Condensed Consolidated Statements of Cash Flows and Condensed Consolidated Statements of Comprehensive Income (Loss) fortime.  During the three months and six months ended June 30, 2006 included herein2008, the Company recorded pre-tax severance benefits payable of $0.3 million and $0.5 million and other costs, primarily consulting fees, related to the business improvement plan of $1.2 million 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.

(16)  Variable Interest Entities

Information regarding the Company’s assessment of potential variable interest entities is contained in Note 9 of Notes to the Condensed 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 suchthe 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 as appropriate. This restatement does not impactof energy demand in summer (less than 18% of the Condensed Consolidated Financial Statementstime on an annual basis).

PNM has evaluated the accounting treatment of TNMP.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

61


67

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following is a summary
statements of PNM although PNM has no legal ownership interest or voting control of the corrections described above: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.
PNMR
                 
  Three Months Ended June 30, 2006  Six Months Ended June 30, 2006 
  As Previously      As Previously    
  Reported  As Restated  Reported  As Restated 
  (In thousands, except per share amounts)  (In thousands, except per share amounts) 
                 
Consolidated Statements of Earnings
                
Energy production costs $43,714  $44,038  $81,301  $81,949 
Net earnings*  16,307   15,983   42,632   41,984 
Net earnings per share                
Basic  0.24   0.23   0.62   0.61 
Diluted  0.23   0.23   0.61   0.61 
                 
Consolidated Statements of Cash Flows
                
Deferred credits**          (9,816)  (9,168)
                 
Consolidated Statements of Comprehensive Income (Loss)
                
Total comprehensive income  13,740   13,416   35,053   34,405 
Summarized financial information for Valencia is as follows:

Results of Operations
*Net earnings also appears in the Consolidated Statements of Cash Flows and Consolidated Statements of Comprehensive Income (Loss)May 30, 2008 to
 
**Deferred credits was combined into other liabilities in the June 30, 2006 Form 10-Q, as originally filed
PNM
                 
  Three Months Ended June 30, 2006  Six Months Ended June 30, 2006 
  As Previously      As Previously    
  Reported  As Restated  Reported  As Restated 
  (In thousands)  (In thousands) 
                 
Consolidated Statements of Earnings
                
Energy production costs $42,080  $42,404  $79,667  $80,315 
Net earnings*  3,320   2,996   33,748   33,100 
Net earnings available for common stock**  3,188   2,864   33,484   32,836 
                 
Consolidated Statements of Cash Flows
                
Deferred credits***          (9,309)  (8,661)
                 
Consolidated Statements of Comprehensive Income (Loss)
                
Total comprehensive income  1,098   774   29,049   28,401 
*Net earnings also appears in the Consolidated Statements of Cash Flows2008
  (In thousands)
**
 
Net earnings available for common stock also appears in the Consolidated Statements of Comprehensive Operating revenues  $                             1,416
 Operating expenses                                   190
 Interest expense                                       225
    Income (Loss)attributable to minority interest     $                             1,001
Financial Position
 June 30, 2008
  (In thousands)
*** 
Deferred credits was combined into other Current assets     $                            1,472
 Net property, plant and equipment                             90,041
    Total assets                                 91,513
 Short-term debt                             86,651
 Other current liabilities in the June 30, 2006 Form 10-Q, as originally filed                               5,016
    Total liabilities                             91,667
 Owner' equity - minority interest $                             (154)

62


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
ITEM 2. MANAGEMENT’S DISCUSSION
68

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONSSTATEMENTS
(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.
    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 
             
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations for PNMR is presented on a combined basis, including certain information applicable to PNM and TNMP.  The MD&A for PNM and TNMP only includes a narrative analysis of results of operationsis 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 effectFOR 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 restatementseparation 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.
MD&A FOR PNMR
BUSINESS AND STRATEGY
Overview
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 positionedunable 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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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 merchant utility, operating asrehearing 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.

PNM expects to fileregulated energy service provider and a competitive wholesale and retail electricity service provider. The Company is engagedgeneral 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 salethird quarter of 2009.  The general rate increase will seek recovery of increased capital spending and marketingO&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.

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 electricityproposed rates is the normal course of action and results in the regulated electric and competitive wholesale energy marketplaces. In addition, through First Choice, PNMR ismatter being referred to a retail electric providercontested hearing.  TNMP's last general rate case was filed in Texas under legislation that established retail competition. PNM also provides natural gas services on both a sales and transportation basis. PNM and TNMP are under the jurisdiction of the FERC. PNM is under the jurisdiction of the NMPRC while TNMP operates under the jurisdiction of the PUCT in Texas.March 2000, with rates effective January 1, 2002.
PNMR, primarily through
EnergyCo

EnergyCo intends to enhance and diversify its presence in the southwest region through the acquisition or development of quality generation assets, including renewable or clean technology resources, to serve the Company’s retail and wholesale load while maintaining diversity of fuel mix. PNMR also plans to increase long-term sales contracts in tandem with increases in its generation capacity. 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 venturewas 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 linesactivities will consist of:

·  Competitive retail energy sales;sales
·  Development, operationownership, and ownershipactive management of diverse generation assets; andfleet
·  Wholesale marketing and trading to optimize its assets.capture the extrinsic value of the generating fleet
·  Multi-year hedging program to minimize price volatility and 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 valuecontribution amount and EnergyCo distributed that cash to PNMR.  EnergyCo has entered into a bank financing arrangement under which it borrowed $181 million on a long-term basis from which it distributed $87.5 million to each of PNMRcredit facility for working capital and ECJV. PNMR utilized amounts distributed from EnergyCo to reduce debt. Subsequent to June 30,other corporate purposes.  In August 2007, EnergyCo completed the acquisition of one electric generating plantAltura Cogen and announced plans to co-develop another generating unit.
TNMP Asset Transferthe Cedar Bayou IV Generating Station, substantial portions of which are financed through EnergyCo’s credit facility.  In addition to PNM
In connection with the acquisition of TNP, the NMPRC approved a stipulation that called for the integration of TNMP’s New Mexicopurchasing energy-related assets, into PNM. The asset transfer occurred as of January 1, 2007 at which time the transferred New MexicoEnergyCo 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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Business Improvement Plan
The Company has undertaken a business improvement process that includes a comprehensive cost structure analysis of its operations became reportable underand a benchmarking analysis to similar-sized utilities.  The Company is now in the PNM Electric segment rather than TNMP Electric.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 operating costs.  The utility-related process enhancements are designed to improve business functions.  For the three months and six months ended June 30, 2008, PNMR recorded pre-tax expense of $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.

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RESULTS OF OPERATIONS

Executive Summary

A summary of PNMR’s net earnings (loss) is as follows:
                 
  Three Months Ended June 30,  Six Months Ended June 30, 
  2007  2006  2007  2006 
  (In thousands, except per share amounts) 
                 
Net earnings $20,240  $15,983  $49,906  $41,984 
Average common and common equivalent shares  78,793   69,433   78,446   69,349 
Net earnings per diluted share $0.26  $0.23  $0.64  $0.61 

  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 causescomponents 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 benefit for a settlement with the IRS regarding previously unrecognized tax benefits; increased plant performance at SJGS and PVNGS, offset by decreased performance at Four Corners; increases due to regulated load growth and weather impacts; changes in First Choice earnings excluding mark-to-market impacts;(loss) from continuing and discontinued operations is included in the segment information below. The changes in Wholesale marketing activity; mark-to-market losses; higher coal costs; non-recurring costs related to Twin Oaks and EnergyCo for the costs of forming EnergyCo, the loss due to the impairment of intangible assets, and the loss on the contribution of Altura to EnergyCo; and higher financing costs. The after-tax impacts of these items on net earnings in 2007 compared to 2006 are as follows:
         
  Three Months Ended  Six Months Ended 
  June 30, 2007  June 30, 2007 
  (In millions) 
After-tax impacts
        
IRS settlement $16.0  $16.0 
Plant performance  7.2   10.9 
Regulated load growth and weather  1.0   7.3 
First Choice (excluding mark-to-market)  (5.7)  2.4 
Wholesale marketing activity  0.2   (6.3)
Mark-to-market  (8.6)  (9.3)
Coal costs  (2.6)  (4.8)
Twin Oaks and EnergyCo  (6.0)  (6.8)
Financing  (0.8)  (3.5)
Other  3.6   2.0 
       
Net change in net earnings $4.3  $7.9 
       

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The increase in the number of common and common equivalent shares isare primarily due to new issuancesshares of PNMR common stock issued in 2006May 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 increaseimpairment.  After-tax impairment losses totaling $140.7 million were recorded in the dilutive effectthree 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 are to 2006 information as previously reported and have not been adjusted to reflect the transfer of TNMP’s New Mexico operations that are discussed above. See Note 3 for more information on 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 “DisclosureDisclosure Regarding Forward Looking Statements”Statements in this Item 2 and to Part II, Item 1A. “RiskRisk 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 June 30, Six Months Ended June 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 $171.1 $146.3 $24.8 17.0 $341.3 $285.1 $56.2 19.7  $386.1  $300.3  $85.8  28.6  $638.7  $540.7  $98.0  18.1 
Cost of energy 65.9 43.3 22.6 52.1 132.4 88.8 43.6 49.1   247.6   185.3   62.3  33.6   383.3   288.5   94.8  32.9 
Intersegment energy transfer 3.6 8.5  (4.9)  (57.4)  (2.0) 3.3  (5.3)  (160.7)
                 
Gross margin 101.6 94.5 7.1 7.5 210.9 193.0 17.9 9.3  138.5  115.0  23.5  20.4  255.4  252.2  3.2  1.3 
Operating expenses 73.5 66.9 6.6 10.0 146.2 134.4 11.8 8.8  147.2  89.7  57.5  64.1  273.8  177.9  95.9  53.9 
Depreciation and amortization 16.4 14.3 2.1 14.5 32.8 29.3 3.5 11.9   20.9   20.7   0.2  1.0   41.9   41.5   0.4  1.0 
Operating income (loss) (29.6) 4.6  (34.2) (743.5) (60.2) 32.8  (93.0) (283.5)
                                                 
Operating income $11.7 $13.3 $(1.6)  (12.3) $31.9 $29.3 $2.6 8.8 
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 June 30, 2007  Six Months Ended June 30, 2007 
  Total  Gross  Operating  Total  Gross  Operating 
  Revenues  Margin  Income  Revenues  Margin  Income 
  (In millions)  (In millions) 
Transfer of assets from TNMP $21.8  $6.3  $1.6  $48.9  $12.7  $3.0 
Weather  (3.1)  (1.6)  (1.6)  (0.2)  (0.1)  (0.1)
Customer/load growth  6.1   1.9   1.9   6.9   3.0   3.0 
Plant performance     4.9   4.4      8.1   6.7 
Coal costs     (3.6)  (3.6)     (6.8)  (6.8)
General operational increases        (1.7)        (2.5)
Other     (0.8)  (2.6)  0.6   1.0   (0.7)
                   
Total increase (decrease) $24.8  $7.1  $(1.6) $56.2  $17.9  $2.6 
                   

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  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)




The following table shows PNM Electric operating revenues by customer class, including intersegment revenues and average number of customers:
                                
 Three Months Ended June 30, Six Months Ended June 30,  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 $58.4 $52.0 $6.4 12.3 $126.2 $107.4 $18.8 17.6  $66.6  $58.4  $8.2  14.0  $137.8  $126.2  $11.6  9.2 
Commercial 73.1 65.6 7.5 11.5 137.8 122.7 15.1 12.4   81.7   73.1  8.6  11.8   149.2   137.8   11.4  8.3 
Industrial 25.8 15.6 10.2 65.4 49.2 30.3 18.9 62.3   25.4   25.8  (0.4) (1.6)  51.1   49.2   1.9  3.9 
Transmission 8.0 7.2 0.8 11.6 16.9 14.2 2.7 18.6   6.2   6.5  (0.3) (4.6)  11.5   13.1   (1.6) (12.2)
Other 5.8 5.9  (0.1)  (3.2) 11.2 10.5 0.7 4.9 
                 
 $171.1 $146.3 $24.8 17.0 $341.3 $285.1 $56.2 19.7 
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 
                  $386.1  $300.3  $85.8   28.6  $638.7  $540.7  $98.0   18.1 
Average customers (thousands) 488.1 428.6 59.5 13.9 487.6 427.3 60.3 14.1   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 June 30,  Six Months Ended June 30, 
  2007  2006  Change  %  2007  2006  Change  % 
  (Gigawatt hours)     (Gigawatt hours) 
Residential  704.9   647.4   57.5   8.9   1,525.6   1,335.9   189.7   14.2 
Commercial  992.6   929.2   63.4   6.8   1,869.5   1,732.9   136.6   7.9 
Industrial  494.2   332.6   161.6   48.6   964.5   646.6   317.9   49.2 
Other  63.4   71.6   (8.2)  (11.4)  119.8   126.4   (6.6)  (5.3)
                         
   2,255.1   1,980.8   274.3   13.9   4,479.4   3,841.8   637.6   16.6 
                         

Effective January
  Three Months Ended June 30,  Six Months Ended June 30, 
  2008  2007  Change  %  2008  2007  Change  % 
  (Gigawatt hours) 
Residential  718.2   704.9   13.3   1.9   1,575.9   1,525.6   50.3   3.3 
Commercial  1,016.2   992.6   23.6   2.4   1,926.6   1,869.5   57.1   3.1 
Industrial  410.4   494.2   (83.8)  (17.0)  852.2   964.5   (112.3)  (11.6)
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)
   4,078.9   4,173.1   (94.2)  (2.3)  8,081.8   8,107.8   (26.0)  (0.3)

On May 1, 2007, TNMP’s New Mexico operations were transferred2008, 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 which increased PNM Electric’s sales volumes, average customers,Electric to recover an additional $58
74

to $62 million of actual fuel and income statement line items. Information concerningpurchased power costs annually above amounts collected through base rates.  See Note 10.  Implementation of the TNMP New Mexico operations includedbase rate increase resulted in the TNMP Electric segmenta $9.2 million increase to revenues and gross margin in 2006 is as follows:
         
  Three Months Ended  Six Months Ended 
  June 30, 2006  June 30, 2006 
  (Dollars in millions) 
Total revenues $21.8  $48.9 
Cost of energy  15.5   36.2 
       
Gross margin  6.3   12.7 
Operating Expenses  3.2   6.6 
Depreciation and amortization  1.5   3.1 
       
Operating income $1.6  $3.0 
       
         
Sales volumes (GWhs)  308.4   590.7 
Average customers (thousands)  49.6   49.6 

67


The following discussion of results will exclude variances due to the transfer of New Mexico operations from TNMP on January 1, 2007, that are shown above.
During the second quarter of 2007, cooler temperatures2008.  The Emergency FPPAC resulted in decreased sales volume, as cooling degree-days decreased 31.4% froma $2.3 million increase to revenues and gross margin in the second quarter of 2006. Year-to-date 2007, the impact of weather is minimal, as reduced usage in the second quarter was offset by increased usage during the heating season in the early part of the year. During both the second quarter of 2007 and year-to-date 2007, an increase in average customer counts and load growth resulted in increases in sales volumes and operating revenues.
Higher coal costs at SJGS and Four Corners have decreased gross margin and operating income for the second quarter and year-to-date 2007.
During the second quarter of 2007, improved performance over the prior year at PVNGS resulted in a $6.7 million increase to gross margin. However, O&M costs related to outages at jurisdictional units (Units 1 and 2) increased by $1.6 million during the second quarter of 2007. Improved performance at SJGS over the prior year increased gross margin by $1.6 million for the second quarter and also decreased O&M costs by $1.9 million. Decreased performance at Four Corners2008 when compared to the second quarter of 2006 resulted2007, reflecting the net amount of fuel and purchased power costs used to serve retail loads that were recovered in addition to amounts recovered through base rates.

An increase in the average retail customer count, combined with higher per-customer usage among residential and commercial customers, was partially offset by a $3.4 million decreasereduction in sales volumes due to the reduced 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 regulated power plants increased system sales revenues, gross margin and segment earnings.  During the first quarter of 2008, planned outages at SJGS Unit 3 and Four Corners Unit 5, along with the extension of a $0.8 million increase toplanned 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 first and second quarters of 2008, O&M costs.costs related to regulated plant performance increased as a result of an increase in the maintenance work performed during the outages, the addition of Afton and an increase in costs for labor, materials and supplies.
Year-to-date 2007 compared to 2006, PVNGS performance resulted
A decrease in a $12.4 million increase tothe sales of SO2 allowances reduced revenues, gross margin and a $1.3 millionsegment 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 O&M costs. SJGS performance resultedtrading margins primarily driven by losses recognized in a $0.4 million increase tothe second quarter of 2007.

A gain on the sale of the merchant portfolio in 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 $0.9 million decreasesignificant portion of the wholesale activity portfolio of PNM Electric and include several long-term sales and purchase power agreements.  See Note 4.

Changes in net unrealized mark-to-market gains and losses on economic hedges were driven by increased gas and electric price movements during the first and second quarters of 2008 compared to O&M costs. Decreased Four Corners performance resulted in a $4.7 million decrease to gross marginthe first and a $1.0 million increase to O&M costs.second quarters of 2007.
For the second quarter and year-to-date 2007, increases in general operational expenses
Operational costs include costs for materials and supplies, self-insurance, depreciation, advertising, and interest as well as shared services, employee labor, pension and benefitbenefits.  Increased costs in the second quarter, 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 compensation, as well as cost savings resulting from the business improvement plan.

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.

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75


TNMP Electric

The table below summarizes the operating results for TNMP Electric:
                                
 Three Months Ended June 30, Six Months Ended June 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 $43.5 $61.5 $(18.0)  (29.2) $84.5 $124.1 $(39.6)  (32.0) $47.1  $43.5  $3.6  8.3  $89.3  $84.5  $4.8  5.7 
Cost of energy 7.2 22.7  (15.5)  (68.1) 14.4 49.8  (35.4)  (71.1)  7.9   7.2   0.7  9.7   15.7   14.4   1.3  9.0 
                 
Gross margin 36.3 38.8  (2.5)  (6.4) 70.1 74.3  (4.2)  (5.7) 39.2  36.3  2.9  8.0  73.6  70.1  3.5  5.0 
Operating expenses 17.7 21.0  (3.3)  (15.5) 36.4 42.4  (6.0)  (14.4) 52.0  17.7  34.3  193.8  67.4  36.4  31.0  85.2 
Depreciation and amortization 7.0 7.8  (0.8)  (10.1) 14.0 15.6  (1.6)  (9.8)  8.8   7.0   1.8  25.7   17.1   14.0   3.1  22.1 
                 
Operating income $11.6 $10.0 $1.6 15.4 $19.7 $16.3 $3.4 20.9 
                 
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 June 30, 2007  Six Months Ended June 30, 2007 
  Total  Gross  Operating  Total  Gross  Operating 
  Revenues  Margin  Income  Revenues  Margin  Income 
  (In millions)  (In millions) 
Transfer of assets to PNM $(21.8) $(6.3) $(1.6) $(48.9) $(12.7) $(3.0)
Weather  (1.8)  (1.8)  (1.8)  (0.4)  (0.4)  (0.4)
Customer/load growth  0.6   0.6   0.6   1.5   1.5   1.5 
PUCT order  4.1   4.1   3.1   7.9   7.9   6.0 
Transmission prices  0.3   0.3   0.3   0.7       
Other  0.6   0.6   1.0   (0.4)  (0.5)  (0.7)
                   
Total increase (decrease) $(18.0) $(2.5) $1.6  $(39.6) $(4.2) $3.4 
                   

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  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 June 30, Six Months Ended June 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 $15.6 $20.7 $(5.1)  (24.3) $30.4 $39.9 $(9.5)  (23.9) $17.8  $15.6  $2.2  14.1  $33.1  $30.4  $2.7  8.9 
Commercial 17.7 21.9  (4.2)  (18.9) 33.7 42.5  (8.8)  (20.7)  18.8  17.7  1.1  6.2   35.5  33.7  1.8  5.3 
Industrial 1.8 9.3  (7.5)  (80.9) 3.5 22.7  (19.2)  (84.4)  3.3  1.8  1.5  83.3   6.5  3.5  3.0  85.7 
Other 8.4 9.6  (1.2)  (12.5) 16.9 19.0  (2.1)  (11.7)  7.2   8.4   (1.2) (14.3)  14.2   16.9   (2.7) (16.0)
                  $47.1  $43.5  $3.6   8.3  $89.3  $84.5  $4.8   5.7 
 $43.5 $61.5 $(18.0)  (29.2) $84.5 $124.1 $(39.6)  (32.0)
                 
Average customers
(thousands)(2)
 225.3 272.2  (46.9)  (17.2) 225.3 271.7  (46.4)  (17.1)
                 
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 to be consistent with the current year presentation.
(2)  Under TECA, customers of TNMP Electric in Texas have the ability to choose First Choice or any other REP to provide energy.  The average customers reported above include 130,762(in thousands) 119.5 and 146,549138.9 and customers of TNMP Electric for the three months ended June 30, 2008 and 2007 and 2006121.9 and 133,235 and 147,782141.4 customers for the six months ended June 30, 20072008 and 20062007 who have chosen First Choice as their REP.  These customers are also included in the First Choice segment.

70



76

The following table shows TNMP Electric GWh sales by customer class:
                                
 Three Months Ended June 30, Six Months Ended June 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 579.9 710.4  (130.5)  (18.4) 1,118.3 1,238.3  (120.0)  (9.7)  637.4   579.9  57.5  9.9   1,175.9   1,118.3   57.6  5.2 
Commercial 563.7 774.4  (210.7)  (27.2) 1,022.9 1,255.0  (232.1)  (18.5)  587.2   563.7  23.5  4.2   1,060.9   1,022.9   38.0  3.7 
Industrial 473.9 462.0 11.9 2.6 881.2 1,018.1  (136.9)  (13.4)  516.6   473.9  42.7  9.0   1,059.7   881.2   178.5  20.3 
Other 23.9 31.8  (7.9)  (24.4) 48.1 60.7  (12.6)  (20.7)  26.3   23.9   2.4  10.0   52.8   48.1   4.7  9.8 
                   1,767.5   1,641.4   126.1   7.7   3,349.3   3,070.5   278.8   9.1 
 1,641.4 1,978.6  (337.2)  (17.0) 3,070.5 3,572.1  (501.6)  (14.0)
                 

(1)  The GWh sales reported above include 487.3433.0 and 635.1487.3 GWhs for the three months ended June 30, 2008 and 2007 and 2006828.0 and 960.3 and 1,110.0 GWhs for the six months ended June 30, 20072008 and 20062007 used by customers of TNMP Electric, respectively, who have chosen First Choice as their REP.  These GWhs are also included below in the First Choice segment.
(2)The customer class sales have been reclassified to be consistent with current year presentation.
Effective January 1, 2007, TNMP’s New Mexico operations were transferred to PNM. As a result, TNMP Electric’s sales volumes,
Increases in the average customers,customer count and income statement line items for Electric above have decreased as set forth under PNM Electric above. The following discussion of results will exclude variances due to the transfer of New Mexico operations to PNM on January 1, 2007.
During the second quarter of 2007, coolerwarmer temperatures resulted in decreased sales volume, as cooling degree-days decreased 20.4% from the second quarter of 2006. The reduced usage 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.

Credits from synergy savings related to the acquisition of TNMP operations by PNMR were returned to 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.

Second quarter 2008 segment earnings also benefited from lower interest charges resulting from the cooler weather was mostly offset by increased usage during the heating seasona $100 million long-term debt reduction in the early part of the year. During both the second quarter of 2007 and year-to-date 2007, an increase in average customer counts has resulted in increases in sales volumes and operating revenues.
The PUCT issued a signed order on November 2, 2006 related to the stranded costs incurred by TNMP as partrefinancing of the deregulation$148.9 million of the Texas energy market and the associated carrying charges. The details of this order are discussed in the TNMP 2006 Annual Report on Form 10-K/A (Amendment No. 1). This PUCT order resulted in a net increase to revenue of $4.1 milliondebt in the second quarter of 2007 that2008.

An impairment of goodwill amounting to $34.5 million was partially offset by an increaserecorded in amortization expensethe three months ended June 30, 2008 as a result of $0.9 million. Year-to-date, a $7.9 million net increasethe annual impairment assessment (See Note 17).

Operational costs include costs for materials and supplies, self-insurance, depreciation and advertising, as well as shared services, employee labor, pension and benefits.  Increased building maintenance and shared service costs in revenues related to the same PUCT order was partially offset by an increase in amortization expense of $1.9 million.
Increased transmission prices caused an increase in revenues in both the second quarter of 2007 and year-to-date 2007. In the second quarter, this increase to revenues also had a favorable impact on operating income. Year-to-date, the increase in revenues was completelywere more than offset by an increasedecreases in transmission costs paid to other utilities.incentive-based compensation in the first quarter and savings resulting from the business improvement plan.

71



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 June 30, Six Months Ended June 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 $75.2 $69.0 $6.2 9.0 $291.7 $276.5 $15.2 5.5  $95.6  $75.1  $20.5  27.3  $316.0  $291.6  $24.4  8.4 
Cost of energy 45.1 42.2 2.9 6.9 206.8 199.9 6.9 3.5   64.9   45.1   19.8  43.9   225.7   206.8   18.9  9.1 
                 
Gross margin 30.1 26.8 3.3 12.3 84.9 76.6 8.3 10.8  30.7  30.0  0.7  2.3  90.3  84.8  5.5  6.5 
Operating expenses 25.9 25.9  0.2 51.6 51.0 0.6 1.1  23.0  23.8  (0.8) (3.4) 44.4  47.1  (2.7) (5.7)
Depreciation and amortization 6.1 6.0 0.1 1.2 12.2 11.9 0.3 2.8   -   5.5   (5.5) (100.0)  -   11.1   (11.1) (100.0)
                 
Operating income $(1.9) $(5.1) $3.2 62.7 $21.1 $13.7 $7.4 53.8  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 June 30, 2007  Six Months Ended June 30, 2007 
  Total  Gross  Operating  Total  Gross  Operating 
  Revenues  Margin  Income  Revenues  Margin  Income 
  (In millions)  (In millions) 
Gas prices $3.5  $  $  $(16.9) $  $ 
Weather  8.5   1.9   1.9   32.2   6.0   6.0 
Customer growth/usage  (2.2)  (0.2)  (0.2)  6.2   1.3   1.3 
Mark-to-market gains  0.7   0.7   0.7   0.5   0.5   0.5 
Off-system activities  (4.7)  0.3   0.3   (7.0)  0.1   0.1 
Other  0.4   0.6   0.5   0.2   0.4   (0.5)
                   
Total increase (decrease) $6.2  $3.3  $3.2  $15.2  $8.3  $7.4 
                   

72

  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 June 30, Six Months Ended June 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 $48.4 $38.5 $9.9 25.7 $200.7 $180.2 $20.5 11.4  $59.2  $48.4  $10.8  22.3  $215.7  $200.7  $15.0  7.5 
Commercial 15.5 13.4 2.1 15.7 60.6 57.4 3.2 5.7   19.1  15.5  3.6  23.2   63.9  60.6   3.3  5.4 
Industrial 0.4 1.5  (1.1)  (70.7) 1.0 2.3  (1.3)  (54.4)  1.3  0.4  0.9  225.0   2.1  1.0   1.1  110.0 
Transportation(1)
 3.4 2.8 0.6 19.2 8.4 7.5 0.9 12.0   3.7  3.4  0.3  8.8   9.8  8.4   1.4  16.7 
Other 7.5 12.8  (5.3)  (41.1) 21.0 29.1  (8.1)  (28.4)  12.3   7.4   4.9  66.2   24.5   20.9   3.6  17.2 
                  $95.6  $75.1  $20.5   27.3  $316.0  $291.6  $24.4   8.4 
 $75.2 $69.0 $6.2 9.0 $291.7 $276.5 $15.2 5.5 
                 
Average customers (thousands) 490.5 480.5 10.0 2.1 491.2 480.6 10.6 2.2   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 June 30, Six Months Ended June 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 3,827 3,058 769 25.1 17,771 15,020 2,751 18.3   3,747.6   3,826.8  (79.2) (2.1)  18,035.1   17,770.9  264.2  1.5 
Commercial 1,515 1,391 124 8.9 6,149 5,557 592 10.7   1,477.1   1,515.0  (37.9) (2.5)  6,071.2   6,149.5  (78.3) (1.3)
Industrial 50 195  (145)  (74.4) 113 267  (154)  (57.7)  136.0   50.1  85.9  171.5   227.9   113.2  114.7  101.3 
Transportation(1)
 10,149 9,371 778 8.3 20,949 20,402 547 2.7   9,192.8   10,149.2  (956.4) (9.4)  20,569.3   20,948.9  (379.6) (1.8)
Other 500 1,501  (1,001)  (66.7) 1,826 3,067  (1,241)  (40.5)  957.4   499.5   457.9  91.7   1,990.1   1,825.0   165.1  9.0 
                   15,510.9   16,040.6   (529.7)  (3.3)  46,893.6   46,807.5   86.1   0.2 
 16,041 15,516 525 3.4 46,808 44,313 2,495 5.6 
                 

(1)  Customer-owned gas.

73


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.

78

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. Changes in gas prices resulted in a $3.5 million increase in total revenues during the second quarter and a $16.9 million decrease year-to-date 2007. On May 30, 2006, PNM filed for an increase in base gas service rates of $22.6 million.

On June 29, 2007, the NMPRC unanimously approved an increase in annual revenues of approximately $9 million for PNM Gas, which included a 9.53% return on equity.  PNM filed a NoticeSee Note 10.  Implementation of Appeal with the New Mexico Supreme Court on July 27, 2007this rate increase resulted in an increase to revenues and has until August 27, 2007 to file which components will be appealed.gross margin in 2008.
Cooler weather throughout the year
Customer growth resulted in increased operating revenues and operating incomegross margin.  This was partially offset by weather impacts, as temperatures across the service area were colder than normal levels early in the year, particularly in January, but were milder than temperatures experienced during the first quarter of 2007.

Revenues from off-system activity increased during the first and second quarters due to increased gas prices, which were largely offset by increases in costs for boththe transactions.  In the second quarter of 2007 and year-to-date 2007. The year-to-date impact was much larger as cooler weather in the heating season2008, increased activity resulted in higher sales volumes in the first quarter of 2007. Year-to-date heating degree-days increased 19.2%.
During the second quarter of 2007, an overall increase in the number of average customers was more than offset by a shift to more lower usage customers. The year-to-date impact of the shift in customers was more than offset by the overall increase in customers and reduced customer conservation.
Both the second quarter of 2007 and year-to-date 2007 saw increased revenue and operating income as a result of mark-to-market gains, which did not occur in 2006.
Reduced off-system activity decreased revenues, but has slightly positive impact to margin and operating income, as the decreases in revenues were more than offset by the decreases in costs for the transactions.

74


Unregulated Operations
Wholesale
The table below summarizes the operating results for Wholesale:
                                 
  Three Months Ended June 30,  Six Months Ended June 30, 
  2007  2006  Change  %  2007  2006  Change  % 
  (In millions)     (In millions) 
Total operating revenues $194.1  $154.5  $39.6   25.6  $328.6  $334.0  $(5.4)  (1.6)
Cost of energy  165.6   119.9   45.7   38.2   242.0   262.7   (20.7)  (7.9)
Intersegment energy transfer  (3.5)  (8.5)  5.0   57.4   2.0   (3.3)  5.3   160.7 
                         
Gross margin  32.0   43.1   (11.1)  (25.7)  84.6   74.6   10.0   13.4 
Operating expenses  19.2   18.3   0.9   4.6   45.0   30.2   14.8   48.9 
Depreciation and amortization  6.2   7.2   (1.0)  (13.5)  13.9   10.3   3.6   35.2 
                         
Operating income $6.6  $17.6  $(11.0)  (62.3) $25.7  $34.1  $(8.4)  (24.6)
                         
The table below summarizes the significant changes to operating revenues, gross margin and operating income:
                         
  Three Months Ended June 30, 2007  Six Months Ended June 30, 2007 
  Total  Gross  Operating  Total  Gross  Operating 
  Revenues  Margin  Income  Revenues  Margin  Income 
  (In millions)  (In millions) 
Twin Oaks $(4.2) $(2.9) $(3.6) $32.6  $21.7  $4.1 
Mark-to-market gains (losses)  9.7   (13.3)  (13.3)  (17.5)  (9.7)  (9.7)
Marketing activity  30.5   0.3   0.3   (25.7)  (10.4)  (10.4)
Plant performance  3.6   5.8   7.5   5.1   9.3   11.3 
Coal costs     (0.6)  (0.6)     (1.1)  (1.1)
General operational increases        0.1         (1.1)
Other     (0.4)  (1.4)  0.1   0.2   (1.5)
                   
Total increase (decrease) $39.6  $(11.1) $(11.0) $(5.4) $10.0  $(8.4)
                   

75


The following table shows Wholesale operating revenues by type of sale, including intersegment revenues, and average number of customers:
                                 
  Three Months Ended June 30,  Six Months Ended June 30, 
  2007  2006  Change  %  2007  2006  Change  % 
  (In millions)     (In millions) 
Long-term sales $77.5  $73.9  $3.6   4.8  $153.0  $105.2  $47.8   45.5 
Short-term sales  116.6   80.6   36.0   44.7   175.6   228.8   (53.2)  (23.2)
                         
  $194.1  $154.5  $39.6   25.6  $328.6  $334.0  $(5.4)  (1.6)
                         
The following table shows Wholesale GWh sales by type:
                                 
  Three Months Ended June 30,  Six Months Ended June 30, 
  2007  2006  Change  %  2007  2006  Change  % 
  (Gigawatt hours)     (Gigawatt hours) 
Long-term sales  1,184.4   1,102.4   82.0   7.4   2,346.6   1,680.9   665.7   39.6 
Short-term sales  1,700.4   1,569.1   131.3   8.4   3,140.8   3,789.9   (649.1)  (17.1)
                         
   2,884.8   2,671.5   213.3   8.0   5,487.4   5,470.8   16.6   0.3 
                         
The Twin Oaks power plant was included in the Wholesale segment from the time it was purchased on April 18, 2006 through May 31, 2007 when it was contributed to EnergyCo. The Wholesale segment income statement includes Twin Oaks during this period as shown in the following table:
                                 
  For the Period          For the Period    
  April 1-  April 18 -          January 1-  April 18 -    
  May 31,  June 30,          May 31,  June 30,    
  2007  2006  Change  %  2007  2006  Change  % 
  (Dollars in millions)     (Dollars in millions) 
Total operating revenues $28.6  $32.8  $(4.2)  (12.7) $65.4  $32.8  $32.6   99.6 
Cost of energy  9.9   11.2   (1.3)  (10.9)  22.1   11.2   10.9   98.6 
                         
Gross margin  18.7   21.6   (2.9)  (13.6)  43.3   21.6   21.7   100.2 
Operating expenses  5.0   3.4   1.6   46.8   17.3   3.4   13.9   401.9 
Depreciation and amortization  3.1   4.0   (0.9)  (22.4)  7.7   4.0   3.7   93.9 
                         
Operating income $10.6  $14.2  $(3.6)  (25.8) $18.3  $14.2  $4.1   28.8 
                         
Sales Volumes (GWhs)  427.9   492.4   (64.5)  (13.1)  915.9   492.4   423.5   86.0 
                         

76


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 mark-to-market positions had a positive impact on revenue for the second quarter of 2007, driven by an increase in short-term revenues of $18.6 million; however, this increase was more than offset by increased costs, which resulted in decreases to both gross margin and operating income. Mark-to-market changes also decreased year-to-date gross margin and operating income, as lower revenues were partially offset by lower costs.
Wholesale marketing activity, which includes long-term contract growth, sales of SO2 credits, as well as other activities, increased revenue for the second quarter of 2007, but the increase in revenue was almost completely offset by an increase in costs associated with these activities, resulting in a slight increase to gross margin, and operating income. Operating income year-to-date was decreased by marketing activity primarilywhich more than offset the slight decrease experienced in the first quarter due to the absence of market opportunities that allowed for the forward sale of first quarter 2006 excess resources.reduced activity.
During the second quarter of 2007, improved performance over the prior year at PVNGS resulted in a $7.3 million increase to gross margin and a $1.5 million decrease to O&M costs. Improved performance at SJGS over the prior year increased gross margin by $1.7 million for the second quarter, but increased O&M
Operational costs by $0.1 million. Decreased performance at Four Corners compared to the second quarter of 2006 resulted in a $3.2 million decrease to gross margin and a $0.3 million decrease to O&M costs.
Year-to-date 2007 compared to 2006, PVNGS performance resulted in an $11.9 million increase to gross margin and a $2.0 million decrease in O&M costs. SJGS performance resulted in a $1.2 million increase to gross margin and a $0.1 million decrease to O&M costs. Decreased Four Corners performance resulted in a $3.7 million decrease to gross margin and a $0.2 million increase to O&M costs.
Increased coal costs at SJGS and Four Corners have decreased gross margin and operating income for both the second quarter and year-to-date 2007.
For the second 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.benefits.  Decreases in these costs in 2008 represent decreases in incentive-based compensation, as well as cost savings resulting from the business improvement plan.

77



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 June 30, Six Months Ended June 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 $150.0 $154.9 $(4.9)  (3.1) $285.6 $260.0 $25.6 9.8  $162.2  $150.0  $12.2  8.1  $246.4  $285.6  $(39.2) (13.7)
Cost of energy 125.8 118.1 7.7 6.6 236.7 208.4 28.3 13.6   158.1 �� 125.9   32.2  25.6   263.4   236.7   26.7  11.3 
                 
Gross margin 24.2 36.8  (12.6)  (34.4) 48.9 51.6  (2.7)  (5.2) 4.1  24.2  (20.1) (83.1) (17.0) 48.9  (65.9) (134.8)
Operating expenses 13.0 15.3  (2.3)  (15.7) 28.1 28.6  (0.5)  (1.5) 72.8  13.0  59.8  460.0  88.3  28.1  60.2  214.2 
Depreciation and amortization 0.5 0.5   (7.8) 0.9 1.0  (0.1)  (6.6)  0.6   0.5   0.1  20.0   1.0   0.9   0.1  11.1 
                 
Operating income $10.7 $21.0 $(10.3)  (48.8) $19.9 $22.0 $(2.1)  (9.8)
                 
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 June 30, 2007  Six Months Ended June 30, 2007 
  Total  Gross  Operating  Total  Gross  Operating 
  Revenues  Margin  Income  Revenues  Margin  Income 
  (In millions)  (In millions) 
Weather $(10.2) $(3.0) $(3.0) $(4.2) $(1.0) $(1.0)
Customer mix/price  6.7   (8.8)  (7.7)  34.3   2.8   4.8 
Mark-to-market positions  (2.1)  (1.6)  (1.6)  (5.8)  (5.8)  (5.8)
Bad debt expense        (1.7)        (1.9)
Incentive-based compensation        1.9         0.7 
Other operating expenses        1.4         (0.2)
Other  0.7   0.8   0.4   1.3   1.3   1.3 
                   
Total increase (decrease) $(4.9) $(12.6) $(10.3) $25.6  $(2.7) $(2.1)
                   

78

  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 averageactual number of customers:
                                
 Three Months Ended June 30, Six Months Ended June 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 $88.4 $89.2 $(0.8)  (0.8) $174.0 $148.8 $25.2 16.9  $109.7  $88.4  $21.3  24.1  186.4  $174.0  $12.4  7.1 
Mass-market 18.0 23.7  (5.7)  (24.3) 34.1 42.5  (8.4)  (19.8) 13.7  18.0  (4.3) (23.9) 29.6  34.3  (4.7) (13.7)
Mid-market 37.8 33.9 3.9 11.7 68.4 53.3 15.1 28.2  37.8  38.1  (0.3) (0.8) 73.4  69.0  4.4  6.4 
Mark-to-market(4)
 1.7 3.8  (2.1)  (55.1)  (0.3) 5.5  (5.8)  (104.7)
Trading gains (losses) (1.9) (1.9) -  -  (49.0) (1.7) (47.3) 2,782.4 
Other 4.1 4.3  (0.2)  (5.8) 9.4 9.9  (0.5)  (4.1)  2.9   7.4   (4.5) (60.8)  6.0   10.0  (4.0) (40.0)
                  $162.2  $150.0  $12.2   8.1  $246.4  $285.6  $(39.2)  (13.7)
 $150.0 $154.9 $(4.9)  (3.1) $285.6 $260.0 $25.6 9.8 
                 
Actual customers
(thousands)(2,3)
 249.5 230.1 19.4 8.4 249.5 230.1 19.4 8.4 
                 
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)(2)  Due to the competitive nature of First Choice’s business, actual customer count at June 30 is presented in the table above as a more representative business indicator than the average customers that are shown in the table for TNMP customers.
(4)Includes financial gas trading.

79



The following table shows First Choice GWh electric sales by customer class:
                                
 Three Months Ended June 30, Six Months Ended June 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 638.0 636.7 1.3 0.2 1,252.9 1,064.2 188.7 17.7   709.1   638.0  71.1  11.1   1,272.8   1,252.9  19.9  1.6 
Mass-market 110.8 160.6  (49.8)  (31.0) 210.7 281.6  (70.9)  (25.2)  68.2   111.1  (42.9) (38.6)  163.0   211.4  (48.4) (22.9)
Mid-market 329.7 308.4 21.3 6.9 589.6 486.1 103.5 21.3   304.5   332.0  (27.5) (8.3)  583.3   595.6  (12.3) (2.1)
Other 8.0 13.6  (5.6)  (41.6) 17.2 26.6  (9.4)  (35.3)  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)
 1,086.5 1,119.3  (32.8)  (2.9) 2,070.4 1,858.5 211.9 11.4 
                 


(1)  See note above in the TNMP Electric segment discussion about the impact of TECA.
(2)The customer class sales have been reclassified to be consistent with current year presentation.
Cooler weather throughout 2007
A shift in the customer mix to include lower margin customers resulted in lower sales volumesa decrease to gross margin and reduced operating incomesegment earnings for both the second quarter and year-to-date 2008.  An increase in the average retail sales price over 2007 levels, largely related to higher purchased power costs, resulted in increased sales revenues. However, these higher power costs resulted in a decrease in the average retail margin.  Average market clearing prices
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 within ERCOT have increased 115 percent since December of 2007.  The cooler weather had a large impactA 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 as cooling degree-days2008 and a gain year-to-date represent unrealized fair value estimates related to forward energy contracts and are down 20.4% comparednot necessarily indicative of the amounts that will be realized upon settlement.

For the six months ended June 30, a decrease in trading margins from a $1.7 million loss in 2007 to a $49.0 million loss in 2008 resulted in 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 deteriorate, First Choice decided to end any further speculative trading.  In the second quarter of 2006.2008, First Choice incurred a $1.9 million loss to close out remaining speculative positions.  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.
For
Impairments of goodwill of $43.2 million and the secondFirst 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, an overall increase in customers2008.  However, a preliminary estimate of the goodwill impairment has been recorded based on the calculations performed to date and increased sales prices increased revenues, but were more than offsetmay be revised, as allowed by an increase in purchase pricesGAAP.

Other operational costs include costs for customer acquisition and a shift in the mix of overall customers to include more lower margin customers, resultingservice, as well as shared services, employee labor, pension, and benefits.  Increased operational costs including higher bad debt expense resulted in a decrease to gross margin and operating income. Year-to-date 2007, the increase in sales prices was greater than the increase in purchase prices, resulting in an increase to margin and operating income. However, the increase in total customers was more than offset by the shift in the mix of customers to lower margin customers.
A mark-to-market gain of $1.7 million during the second quarter of 2007, and a loss of $0.3 million year-to-date, compared to gains of $3.3 million and $5.5 million for the second quarter and year-to-date 2006 resulted in reduced income compared to last year.
Bad debt expense has increased in 2007, primarily in the second quarter, compared to 2006, resulting in a decrease to operating income. A reduction in incentive-based compensation as a result of lower than projectedsegment earnings in 2007 has decreased operating expenses for both the second quarter and year-to-date 2007. Other2008.  Unfavorable operating expensescosts were reduced for the second quarter and year-to-date 2007 by the outsourcing of customer service operations. Year-to-date 2007, these savings were offsetdriven largely by an increase in marketing expenses to support growth in the business.

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EnergyCo
Upon the contribution of Altura to EnergyCo, EnergyCo became a separate segment for PNMR effective June 1, 2007. Subsequent to June 30, 2007, EnergyCo completed the acquisition of one electric generating plant and announced plans to co-develop an additional generating unit. See Notes 2 and 11. PNMR accounts for its investment in EnergyCo using the equity method of accounting. A summary of EnergyCo’s results of operations for the month of June 2007 isbad debt expense as follows:
     
  For the 
  Period of June 1 
  - June 30, 2007 
  (In thousands) 
     
Operating revenue $14,366 
Cost of energy  4,561 
    
Gross margin  9,805 
Operating expenses  2,767 
Depreciation and amortization  1,528 
    
Operating income  5,510 
Other income  24 
Net interest charges  (818)
    
Net earnings $4,716 
    
     
50 percent of net earnings $2,358 
Amortization of basis difference in EnergyCo  584 
    
PNMR equity in net earnings of EnergyCo $2,942 
    
Corporate and Other
Operating revenues decreased along with an offsetting decrease in cost of energy for both the second quarter and year-to-date was a result of residual billing system conversion issues.

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 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 made at the corporate level for transactionsof revenue and expense between PNM ElectricTNMP and TNMP’s New Mexico operations that are no longer necessary as these assets were transferred to PNM Electric on January 1, 2007.
Operating expenses increased $5.9 million for the second quarter ofFirst Choice.  In 2007, and $8.2 million year-to-date 2007. These increases were primarily driven byPNMR incurred costs associated with the formation of the EnergyCo joint venture, an impairment loss on intangible assets, and theas 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 $10.0 million forequity in earnings of EnergyCo is shown below.  As part of the second quarterbusiness improvement plan to reduce costs and $11.2 million year-to-date 2007. Costsimprove processes in
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future years, costs to achieve these savings such as severances and consulting charges were also decreased by depreciation costs that were allocated throughincurred in 2008.  Increased financing charges in 2008 resulted from remarketing of the corporate allocation driven by the constructiondebt component of equity-linked units at a new data centerhigher interest rate and additional shared service software and an increase in legal reserves for year-to-date 2007. These costs werelong-term debt, as well as higher short-term borrowings partially offset by costs in 2006 related to TNPlower short-term interest rates. ��In 2007, the Corporate and Twin Oaks acquisition integration costs of $1.8 million for the second quarter and $2.8 million year-to-date, costs that were allocated to EnergyCo in 2007, which did not exist in 2006, and the absence of severance and other costs in 2006 related to the TNP acquisition of $0.8 million for the second quarter and $1.0 million year-to-date.
Depreciation expense increased primarily due to an increase in asset base as a result of new software implementation and completion of a data center for shared services. These expenses were allocated to the business segments through the corporate allocation.

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PNMR Consolidated
Interest income decreased in 2007 primarily due to lower interest income of $1.0 million for the second quarter and $1.3 million year-to-date resulting from lower PGAC balances, as well as lower interest income of $0.5 million for the second quarter and $1.1 million year-to-date earned on the PVNGS lessor notes due to lower principal balances, which were partially offset by increased interest income of $0.3 million for the second quarter and $0.5 million year-to-date from higher cash balances at First Choice.
Other income and deductions decreased in 2007 primarily due to the decrease of $2.0 million for the second quarter and $4.0 million year-to-date 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 ordered by the PUCT, as discussed in the TNMP Electric segment. Other income and deductions also decreased as a result of the amortization of $2.5 million for the second quarter and year-to-date for a wind energy investment in other deductions. These decreases were partially offset by increased realized gains on investments held by the NDT.
PNMR’s consolidated interest charges decreased primarily due to interest effects of the settlement with the IRSsegment includes favorable tax decisions regarding previously unrecognized tax benefits, (See Note 15), which reduced interest expense by $5.5 million for the second quarter and year-to-date, and increased capitalized interest on construction of Afton and AFUDC on the SJGS environmental project of $1.4 million for the second quarter and $1.9 million year-to-date. These decreases were partially offset by increased interest of $2.5 million for the second quarter and $6.1 million year-to-date on short-term borrowings, increased interest expense of $1.0 million year-to-date related to the refinancing of PCRBs, and interest expense onincluding a wind energy investment that began in late 2006. The bridge loan associated with the Altura purchase of Twin Oaks decreased interest expense for the quarter but increased expense for the year, as that loan was outstanding for only one-half of a month during the second quarter of 2007 compared to two and one-half months of the same period of 2006, but for three and one-half months of 2007 year-to-date, compared to two and one-half months for the same period of 2006.
PNMR’s consolidated income tax expense decreased primarily as a result of the settlement with the IRS regarding previously unrecognized tax benefits (See Note 15), whichthat had a $16.0 million non-recurring impact on income taxestaxes.

EnergyCo

The table below summarizes the operating results for bothEnergyCo:

  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 second quarter and year-to-dateresults of 2007. In addition, 2007operation of EnergyCo on an earnings before interest, income taxes, were reduceddepreciation, 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 six months ended June 30, 2007 were (277.5%)2008.  Amortization for out of market contracts will continue through the expiration of each contract, the latest of which is 2010 for Altura and 5.5%, respectively, compared2021 for Altura Cogen.  In addition, cost of energy includes $1.2 million and $5.3 million of amortization related to 38.3% and 37.5%emission allowances acquired in the transactions for the three months and six months ended June 30, 2006. Excluding2008.  The amortizations for emission allowances are recorded as the non-recurringallowances are used in plant operations, sold or expire.

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.  Following this ruling, the trading markets for emissions allowances have deteriorated, which could impact the future carrying amount of EnergyCo’s inventory of emission allowances.

EnergyCo intends to income taxeshave 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 IRS settlement,three months ended June 30, 2008 primarily include the effective tax ratesoperations 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, 2007 would have been 19.7%2008, the basis difference adjustment detailed above of $0.2 million and 35.7%. PNMR’s effective tax rates$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 and six months ended June 30, 2007 were also impacted by a reduction in2008, has written off the effective rate applicabledevelopment rights as an impairment of intangible assets amounting to non-operating income primarily due to the impacts of tax credits from a wind energy investment.$21.8 million.

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LIQUIDITY AND CAPITAL RESOURCES

Statements of Cash Flows

The changes in PNMR’s cash flows for the six months ended June 30, 20072008 compared to 20062007 are summarized as follows:
            
 Six Months Ended June 30,  Six Months Ended June 30, 
 2007 2006 Variance  2008  2007  Change 
 (In millions)    (In millions)   
          
Net cash flows from operating activities $87.2 $111.5 $(24.3) $12.3  $87.2  $(74.9)
Net cash flows from investing activities 172.4  (596.2) 768.6   (150.1)  172.4   (322.5)
Net cash flows from financing activities  (325.0) 490.4  (815.4)  257.9   (325.0)  582.9 
       
Net change in cash and cash equivalents $(65.4) $5.7 $(71.1) $120.1  $(65.4) $185.5 
       

The change in PNMR’s cash flows from operating activities reflects lower earnings after adjustments to reconcile to cash flows from operations due primarily to results of operations at First Choice and PNM Electric as discussed in Results of Operations. The decrease in operating cash flows is a result of PNM’s higher load growthpartially offset by settlements in 2007 offset by higher coal costs, lower plant performance,of 2006 TNMP liabilities to REPs related to retail competition in Texas as ordered under TECA and lower wholesale activity. In addition, First Choice Power had higher customer growth and pricing offset by changespayments in customer mix. There were also higher2007 of 2006 incentive based compensation payoutsaccruals.

The change in 2007 and higher interest charges that were a result of higher short-term borrowings in 2007. 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.
PNMR had net positive cash flows from investing activities for the six months ended June 30, 2007 primarily due to cashreflects net distributions to PNMR from EnergyCo (See Note 11) andin 2007 related to the proceeds from the salescontribution of utility plant, whereas in 2006 PNMR had netAltura, partially offset by less cash outflows for the acquisition of Twin Oaks. In addition, PNMR incurred increased expendituresused at PNM for utility plant additions includingin 2008 compared to 2007 when the purchaseexpansion of assets underlying a portion of PVNGS leased by PNM (See Note 2).the Afton plant and corporate software upgrades impacted cash flows.

The change in PNMR’s cash flows forfrom financing activities forreflects higher long-term borrowings partially offset by the six months ended June 30, 2007 is primarily driven byrepayment 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, thenew short-term borrowings at TNMP. The issuance of PCRBscommon stock by PNM, and a decreasePNMR 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 financingfund 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 June 30, 2008, for total capital requirements for 20072008 are $485.8$414.4 million, including construction expenditures of $414.8$356.6 million.  Total capital requirements for the years 2007-20112008-2012 are projected to be $2,426.8$1,983.6 million, including construction expenditures of $1,990.7$1,741.4 million.  This projection includes $56.0 million for 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.
The Company continues
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 look for appropriately priced generation acquisition and expansion opportunities to support retail electric load growth, forredeem the continued expansionremaining $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 contract business, and to supplement its natural transmission positiondebt in the southwesternform 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 western United States.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 halfsix 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 ofDuring the Twin Oaks acquisition. On April 17, 2007, PNMR repaid the remaining principal balance of $249.5 million under the bridge loan at its maturity through a borrowing of $250.5 million under the PNMR Facility, PNMR’s $600.0 million revolving credit facility, which amount has been repaid.

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As discussed in Note 7 to Condensed Consolidated Financial Statements, TNMP redeemed $100 million of its senior unsecured notes using funds from PNMR and PNMRsix months ended June 30, 2008, PNM also received $7.6$3.7 million from the initial drawdraws under its $20 million of PCRBspollution control revenue bonds issued by the City of Farmington, New Mexico during the six months ended June 30, 2007. As discussed in Note 11, PNMR received cash distributions from EnergyCo aggregating $362.3 million during this same period. PNMR and Mexico.

PNM have an aggregate of $631.4has $300.0 million of commercial paper outstanding as of August 1, 2007. PNMR, including its subsidiaries, alsosenior unsecured notes that mature in September 2008, TNMP has $616.6$167.7 million in senior unsecured notes that mature in January 2009, and $347.3PNMR has $100.0 million in the debt component of its privately held equity-linked units (which include athat 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 comecomes due through 2011, of which $148.9prior to 2016, except for $13.2 million in unsecured notesthat is due within the next twelve months.in installments through 2013.

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 possibilitiesadditional funding will occurbe
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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 $347.3for cash, $100.0 million of PNMR equity securitiescommon or preferred stock in November 2008.  The equity-linked units also provide that, prior to settlement of those purchase obligations, the debt componentcomponents 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 extendedwould continue to dates selected by PNMR andmature 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 effectPNMR instead of these terms is that, if the remarketing is successful, PNMR would receive $347.3 million inpaying cash for itsthe 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 expectsbelieves 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 tothat may be received from the issuance of equity securities during the settlement of PNMR’s privately held equity-linked units, described abovethe 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 2007-20112008-2012 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 currentlyhad short-term debt outstanding of $385.0 million.  In addition, the Company has no specific plans or commitments for additional permanent financing, itscheduled 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.
Liquidity
PNMR’sLiquidity

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.

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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 August 1, 20074, 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 August 1, 2007: 
Amounts outstanding as of August 4, 2008:       
Commercial paper program $268.6 $362.8 $631.4 $                - $                 - $               - $               -
Revolving credit facility    235.0 - - 235.0
Local lines of credit    - - - -
       
Delayed draw term loan facility- - - -
Term loan credit facility- - 150.0 150.0
Total short-term debt outstanding 268.6 362.8 631.4 235.0 - 150.0 385.0
        
Letters of credit 3.1 30.5 33.6 122.2 27.8 1.5 151.5
              
 
Total short term-debt and letters of credit $271.7 $393.3 $665.0 $         357.2 $           27.8 $       151.5 $        536.5
              
 
Remaining availability as of August 1, 2007 $141.8 $221.7 $363.5 
       
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 June 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. ThisSEC for common stock and in April 2008, PNMR filed a new automatically effective shelf registration statement for debt securities.  These new registration statementstatements can be amended at any time to include additional securities of PNMR.  As a result, thisthese new shelf registration statement hasstatements have unlimited availability, subject to certain restrictions and limitations.
Pursuant to the terms of the PNM Direct Plan,
PNMR began offeringoffers 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 intoDirect 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, 20072008 through August 1, 2007,4, 2008, PNMR had sold a combined total of 54,170137,738 shares of its common stock through the PNMR Direct Plan and the equity distribution agreement for net proceeds of $1.6$1.9 million.

In April 2008, PNM hasfiled a universalnew 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 June 30, 2007,August 4, 2008, PNM had approximately $200.0$600.0 million of remaining unissued securities registered under itsthis 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 and wholesale markets. Financing flexibility is enhanced by providing a high percentage of total capital requirements from internal sources and having the ability, if necessary, to issue long-term securities and to obtain short-term credit.

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On April 16, 2007, Moody’s changed18, 2008, S&P lowered the credit outlook ofratings 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 consideredagain lowered the outlook ofcredit 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 dateposting 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 June 30, 2007,August 4, 2008, ratings on the Company’s securities were as follows:

 PNMR PNM TNMP
      
S&P     
Senior unsecured notesBBB-BB- BBBBB+ BBBBB+
Commercial paperA3B-2 A3B-2*
Preferred stock*B *
Moody’s     
Senior unsecured notesBaa3Ba2 Baa2Baa3 Baa3
Commercial paperP3NP P2P-3 *
Preferred stock* Ba1Ba2 *
*Not applicable

*  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 investmentequity securities.  The purchase contracts are forward transactions in EnergyCo is accounted for under the equity methodsecurities of accounting. Therefore, EnergyCo’s assets, liabilities, results of operations, and cash flowsPNMR 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 discussion7.  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 2006Current 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. 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 requiredThe 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 requirementsratings were to be triggered. The most significant consequences resulting from these contingent requirements are detailedrecently downgraded, which has resulted in increases in the discussion below.
The PNMR Facilityinterest 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 underto support certain agreements aggregating approximately $14.7 million.  Based on additional credit facilities entered into by PNM and TNMP in May 2008, the facility.
If a contingent requirement wereCompany believes its financing arrangements are sufficient to be triggered undermeet the PNM Facility resulting in an accelerationrequirements of the outstanding loans under the PNM Facility, a cross-default provision in the PVNGS leases could occur if the accelerated amount is not paid. If a cross-default provision is triggered, the lessors have the ability to accelerate their rights under the leases, including acceleration of all future lease payments.

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PNM’s standard purchase agreement for the 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.provisions.
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, 
PNMR 2007  2006 
         
Common equity  50.5%  48.9%
Preferred stock of subsidiary  0.3%  0.3%
Long-term debt  49.2%  50.8%
       
Total capitalization  100.0%  100.0%
       

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

         
  June 30,  December 31, 
TNMP 2007  2006 
         
Common equity  59.1%  54.9%
Long-term debt  40.9%  45.1%
       
Total capitalization  100.0%  100.0%
       

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MD&A FOR PNM
  June 30,  December 31, 
  2008  2007 
PNMR      
Common equity  46.0%  50.0%
Preferred stock of subsidiary  0.3%  0.3%
Long-term debt  53.7%  49.7%
Total capitalization  100.0%  100.0%
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2007
COMPARED TO SIX MONTHS ENDED JUNE 30, 2006
PNM      
Common equity  49.5%  57.8%
Preferred stock  0.4%  0.5%
Long-term debt  50.1%  41.7%
Total capitalization  100.0%  100.0%
PNM’s segments are PNM Electric, PNM Gas and PNM Wholesale. The PNM Electric and PNM Gas segments are identical to the segments presented above for PNMR. The PNM Wholesale segment reported for PNM does not include Twin Oaks. See Notes 2 and 11. The results of operations of these segments are discussed further under “MD&A for PNMR — Results of Operations” above. The results of operations for Twin Oaks is set forth in a table under “MD&A for PNMR — Results of Operations — Unregulated Operations — Wholesale” above.
PNM’s net earnings for the six months ended June 30, 2007 were $28.1 million compared to $33.1 million for the six months ended June 30, 2006. The major causes of changes in net earnings were the decrease in gains from Wholesale marketing activity from 2006 as a result of the absence of market opportunities that allowed for the forward sale of the first quarter 2006 excess resources, mark-to-market losses, an increase in generation prices due to the increase of coal costs, an increase in general operating expenses, and increased financing costs. These decreases were partially offset by improved plant performance, primarily at PVNGS, increased load growth along with the effects of colder weather, primarily at PNM Gas, and the TNMP asset transfer to PNM Electric. The positive or (negative) after-tax impacts of these items on net earnings in 2007 compared to 2006 are as follows:
TNMP      
Common equity  70.9%  57.8%
Long-term debt  29.1%  42.2%
Total capitalization  100.0%  100.0%
     
  Six Months Ended 
  June 30, 2007 
  (In millions) 
After-tax Impacts
    
TNMP asset transfer $2.1 
Plant performance  10.9 
Mark-to-market  (5.5)
Coal costs  (4.8)
Wholesale marketing activity  (6.3)
Regulated load growth and weather  6.2 
General operational increases  (2.1)
Financing  (2.1)
Other  (3.4)
    
Net change
 $(5.0)
    

PNM’s consolidated income tax expense was $17.7 million for the six months ended June 30, 2007, compared to $21.2 million for the same period of 2006. PNM’s effective income tax rates for the six months ended June 30, 2007 and 2006 were 38.6% and 39.0%, respectively.

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

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OTHER ISSUES FACING THE COMPANY
See Notes 9 and 10 for a discussion
Climate Change Issues

The prospect of commitments and contingencies and rate and regulatory matters facing the Company.
Global Warming Issues
Global warming increasinglyfuture climate change regulations is a concernbecoming 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 existenceover the precise impacts, growing public concern over the potential effects of climate change and extent, scientific evidence suggestsincreased 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 CO2) from fossil fuel-fired generation facilities is a contributing factor. Thefuture.

In January 2007 the Company isbecame a founding member of the United States Climate Action Partnership (“USCAP”), a groupcoalition of 35 businesses and leadingnational environmental organizations calling on the federal government to quickly enact strong national legislation to require significant reductions of greenhouse gasreduce GHG emissions and thatat the earliest practicable date. USCAP has issued a landmark set of principles and recommendations to underscore the urgent need foroutlining 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 groupUSCAP and with others in orderthe administration and Congress to bestadvocate for federal action to address this challenging environmental issue.

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 Company believes that future governmentalintegrated resource plan is required to take into consideration risk and uncertainty of fuel supply, price volatility and costs of anticipated environmental regulations applicablewhen evaluating resources options to meet supply needs of 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.
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 JulySeptember 2008.  Reflecting the developing nature of this issue, the NMPRC order states that these prices may be changed in the future to account for additional information or changed circumstances.   The Company is required, however, to use these prices for planning purposes, and the prices may not reflect the costs that it ultimately will incur.
On
In 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 gasGHG 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 InitiativeWCI requires the states and provinces signing the accord to work together to set emission goalsa regional emissions goal within sixnine months and determinedevelop a specific plan to meet such goalsthe goal within eighteen months.  TheIn 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 monitoringunclear what the impact of this Initiative.final legislation will require.

The Company expects the regulation of greenhouse gasGHG emissions to have a material impact on its operations, but it is premature to attempt to quantify itsthe 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 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, goodwillaccounting, impairments, decommissioning costs, derivatives, pension and other intangible assets, purchase accounting, pension and postretirement benefits, decommissioning costs, financial instrumentsaccounting for contingencies, income taxes, and market risk.

NEW ACCOUNTING STANDARDS
There have been no new accounting standards issued that materially affected PNMR,
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MD&A FOR PNM or

RESULTS OF OPERATIONS

PNM’s continuing operations are presented in the PNM 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 14.

MD&A FOR TNMP this period; however, see Note 15

RESULTS OF OPERATIONS

TNMP operates in only one reportable segment, TNMP Electric, as presented above in Results of Operations for discussion of FIN 48 implementation.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 the contribution of assets to EnergyCo by PNMR may not be implemented as expected, or that PNMR and ECJV will not agree to make additional capital contributions to EnergyCo,
·  The potential unavailability of cash from PNMR’s subsidiaries or EnergyCo due to regulatory, statutory 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,
·  The risk that the Company and its subsidiaries and EnergyCo may have to commit to substantial capital investments and additional operating costs to comply with new environmental control requirements including possible future requirements to address concerns about global climate change,

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·  The risks associated with completion of generation, including pollution control equipment at SJGS, 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 20062007 Annual Report on Form 10-K are disclosed in Item 1A, Risk Factors, in Part II of this Form 10-Q.

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

SECURITIES ACT DISCLAIMER

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

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company uses derivative instruments to manage risk as it relates to changes in natural gas and electric prices and changes in interest rates. The Company also uses certain derivative instruments for wholesale power marketing and natural gas transactions in order to take advantage of favorable price movements and market timing activities in these power markets. The following additional information is provided.
PNMR controls the scope of its various forms of risk through a comprehensive set of policies and procedures and oversight by senior level management and the 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 the derivative accounting rules and the related accounting rules for energy contracts, the Company accounts for its various derivative instruments for the purchase and sale of energy differently based on the contract terms.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. Hedgesthe 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 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.  Economic hedges are defined as derivative instruments, including long-term power agreements, used to hedge generation assets, purchase power 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’sPNM’s unregulated operations, including long-term contracts and short-term sales, are managed primarily through a net asset-backed marketing strategy, whereby PNM Wholesale’sPNM’s aggregate net open forward contract position is covered by its forecasted excess generation capabilities. PNMRcapabilities 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, PNMRexcept 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 transactionsin 2008 First Choice is exiting speculative trading.

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GAAP defines fair value as the price that would be received to take advantage of opportunities that present themselvessell an asset or paid to transfer a liability in an orderly transaction between market participants at the ordinary course of business. These positions are subject to market risk that is not mitigated by First Choice’s retail operations.
The market prices used tomeasurement date.  Fair value PNMR energy contracts are based on available market data, including index prices and broker quotations. These valuations can be limited by the availability of market data. When market data is unavailable or is insufficient to develop reliable pricing, the Company utilizes internally developed pricing data. Generally, the fair market value of energy contracts is based on actively quoted prices, except for options, which incorporate actively quoted prices into an option valuation model. As a result,current market quotes as available and are supplemented by modeling techniques and assumptions made by the Company records liquidity reserves onto 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 for the unrealized market gains and losses in this illiquid period. Generally, the liquid period on which the Company’s valuations are based is up to 18 months for option type contractsoptions.  The remaining periods are referred to as the illiquid period and from three to five years for gas and electric commodities.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 and adjuststransactions.  Although management uses its liquidity reserves accordingly.best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique.

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.
         
  June 30,  December 31, 
  2007  2006 
  (In thousands) 
Mark-to-market energy contracts:        
Current asset $87,321  $43,680 
Long-term asset  24,605   10,982 
       
Total mark-to-market assets  111,926   54,662 
       
Current liability  (98,820)  (42,020)
Long-term liability  (17,580)  (9,176)
       
Total mark-to-market liabilities  (116,400)  (51,196)
       
Net fair value of mark-to-market energy contracts $(4,474) $3,466 
       

The mark-to-market energy transactions represent net liabilities at June 30, 2007 and net assets at December 31, 2006 after
  June 30, 2008 
  
Trading
  
Economic
Hedges
  
Total
 
  (In thousands) 
Mark-to-market energy contracts:         
Current asset $180,866  $43,660  $224,526 
Long-term asset  31,252   7,380   38,632 
Total mark-to-market assets  212,118   51,040   263,158 
Current liability  (216,886)  (28,542)  (245,428)
Long-term liability  (30,647)  (185)  (30,832)
Total mark-to-market liabilities  (247,533)  (28,727)  (276,260)
             
Net fair value of mark-to-market energy contracts $(35,415) $22,313  $(13,102)

  December 31, 2007 
  
Trading
  
Economic
Hedges
  
Total
 
  (In thousands) 
Mark-to-market energy contracts:         
Current asset $32,451  $15,060  $47,511 
Long-term asset  8,335   37,359   45,694 
Total mark-to-market assets  40,786   52,419   93,205 
Current liability  (34,753)  (17,991)  (52,744)
Long-term liability  (7,610)  (47,564)  (55,174)
Total mark-to-market liabilities  (42,363)  (65,555)  (107,918)
             
Net fair value of mark-to-market energy contracts $(1,577) $(13,136) $(14,713)

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:
        
 Six Months Ended 
 June 30, 
 2007 2006  June 30, 2008 
 Mark-to-Market Instruments  
Trading
  
Economic
Hedges
  
Total
 
 (In thousands)  (In thousands) 
Sources of fair value gain (loss):          
Fair value at beginning of year $3,466 $4,528  $(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 2,823  (4,108) (21,756) 7,519  (14,237)
Changes in fair value  (10,763) 2,244   (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 $(4,474) $2,664  $(35,415) $22,313  $(13,102)
     
Net change recorded as mark-to-market $(7,940) $(1,864)
     


  
June 30, 2007
Mark-to-market instruments
 
  
Trading
  
Economic
Hedges
  
Total
 
  (In thousands) 
Sources of fair value gain (loss):         
Fair value at beginning of year $925  $2,541  $3,466 
Amount realized on contracts delivered during period  3,458   (635)  2,823 
Changes in fair value  (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 $(2,120) $(2,354) $(4,474)

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.:models:

Fair Value of mark-to-market instruments at June 30, 20072008
                 
  Less than          
  1 year  1-3 Years  4+ Years  Total 
  (In thousands) 
Net fair value at end of period $(11,499) $1,809  $5,216  $(4,474)

  Less than          
  1 year  1-3 Years  4+ Years  Total 
     (In thousands)    
Trading $(36,020) $605  $-  $(35,415)
Economic hedges  15,118   2,620   4,575   22,313 
Total $(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:
         
  Six Months Ended 
  June 30, 
  2007  2006 
Type of Derivative Hedge Instruments 
  (In thousands) 
Change in fair value of energy contracts $(34,223) $(988)
Change in fair value of gas fixed for float swaps  6,228   (19,694)
Change in the fair value of options  30   (7,703)
       
Net change in fair value $(27,965) $(28,385)
       

  Six Months Ended 
  June 30, 
  2008  2007 
Type of Derivative Hedge Instruments 
  (In thousands) 
Change in fair value of energy contracts $(27,670) $(34,223)
Change in fair value of swaps and futures  8,467   6,228 
Change in the fair value of options  12,648   30 
Net change in fair value $(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 CompanyPNM 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’sPNM’s forward position for the next eighteen months.  The CompanyPNM uses a holding period of three days as the estimate of the length of time that will be needed to liquidate the positions.  The volatility and the correlation estimates measure the impact of adverse price movements both at an individual position level as well as at the total portfolio level.  The two-tailed confidence level established is 99%.  For example, if VaR is calculated at $10.0 million, it is estimated that in 990 out of 1000 market simulations the Company’s pre-tax gain or loss in liquidating the portfolio would not exceed $10.0 million in the three days that it would take to liquidate the portfolio.

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PNM Wholesale measures VaR for all transactions that are not directly asset related and have economic risk.  For the threesix months ended June 30, 2008, the average VaR amount for these transactions was $0.7 million with high and low VaR amounts for the period of $1.4 million and $0.4 million.  The VaR amount for these transactions at June 30, 2008 was $1.3 million.  For the six months ended June 30, 2007, the average VaR amount for these transactions was $4.1 million with high and low VaR amounts for the period of $6.4 million and $1.8 million, respectively.million.  The total VaR amount for these transactions at June 30, 2007 was $1.8 million. For the six months ended June 30, 2006, the average VaR amount for these transactions was $0.9 million, with high and low VaR amounts for the period of $1.9 million and $0.5 million, respectively. The total VaR amount for these transactions at June 30, 2006 was $1.6 million.

First Choice measures the market risk of its activities using an EaR calculation to maintain PNMR’s total exposure within management-prescribed limits.  Because of its obligation to serve customers, First Choice must take 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 EaRChoice uses a held-to-maturity VaR calculation reportsto approximate EaR. The calculation utilizes the possible losses against forecasted earnings for itssame 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’sportfolios 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
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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.

For the six months ended June 30, 2008, the average EaR amount was $22.2 million, with high and low EaR amounts for the period of $44.3 million and $12.6 million.  The total EaR amount at June 30, 2008 was $15.3 million.  For the six months ended June 30, 2007, the average EaR amount for these transactions was $14.0 million, with high and low EaR amounts for the period of $20.5 million and $5.7 million, respectively. The total EaR amount at June 30, 2007 was $7.3 million. For the six months ended June 30, 2006, the average EaR amount for these transactions was $9.1 million, with high and low EaR amounts for the period of $11.9 million and $6.8 million, respectively.  The total EaR amount for these transactions at June 30, 20062007 was $9.8$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 day10-day holding period.  This holding period is considered appropriate given the nature of First Choice’s supply portfolio and the constraints faced by First Choice in the ERCOT market.  The calculation utilizes the same Monte Carlo simulation approach described above at a 95% confidence level.  The VaR amount for these transactions was $4.6 million at 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 six months ended June 30, 2007, the high, low and average mark-to-market VaR amounts were $6.2 million, $2.1 million and $4.1 million, respectively. The VaR amount for these transactions was $2.8 million at June 30, 2006. For the six months ended June 30, 2006, the high, low and average mark-to-market VaR amounts were $4.3 million, $2.1 million and $3.1 million, respectively.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-day3-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 less than $0.1 million at 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 six months ended June 30, 2007, the high, low and average mark-to-market VaR amounts were $4.4 million, $0.7 million and $2.0 million, respectively. The VaR amount for these transactions was $0.9 million at June 30, 2006. For the six months ended June 30, 2006, the high, low and average mark-to-market VaR amounts were $1.2 million, $0.3 million and $0.7 million, respectively.million.

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The Company’sCompany's risk measures are regularly monitored by the Company’sCompany's RMC.  The RMC has put in place procedures to ensure that increases in risk measures that exceed the prescribed limits are reviewed and, if deemed necessary, acted upon to reduce exposures.  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’sPNMR’s credit exposure as of 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 WholesalePNMR may have.

PNM Wholesale
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PNMR
Schedule of Credit Risk Exposure
June 30, 20072008
            
 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 $85,365 3 $51,863  $195,757   2  $134,351 
Non-investment grade 986     350   -   - 
Split 25   
Split Rating  2,090   -   - 
Internal ratings:             
Investment grade      1,298   -   - 
Non-investment grade 917     2,484   -   - 
     
Total $87,293 $51,863  $201,979      $134,351 
     

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

 
(b)The Net Credit 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.

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The following table provides an indication of the maturity of credit risk by credit ratings of the counterparties.
PNM Wholesale
Maturity of Credit Risk Exposure
PNMR
Maturity of Credit Risk Exposure
June 30, 20072008
                
 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 $51,001 $30,527 $3,837 $85,365  $180,776  $11,309  $3,672  $195,757 
Non-investment grade 986   986   350   -   -   350 
Split 25   25   2,090   -   -   2,090 
Internal ratings:                 
Investment grade       1,298   -   -   1,298 
Non-investment grade 917   917   2,484   -   -   2,484 
         
Total $52,929 $30,527 $3,837 $87,293  $186,998  $11,309  $3,672  $201,979 
         

The Company provides for losses due to market and credit risk.  Credit risk for PNM Wholesale’sPNMR's largest counterparty as of June 30, 20072008 and December 31, 20062007 was $30.5$97.4 million and $29.7 million, respectively.$77.2 million.

First Choice
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First Choice is subject to credit risk from non-performance by its supply counterparties to the extent these contracts have a mark-to-market value in the favor of First Choice. The Constellation power supply agreement established FCPSP, a bankruptcy remote special purpose entity, to hold all of First Choice’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 June 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 June 30, 2007 was $12.0 million and the time period of these exposures extends through 2010.

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

The remarketing of 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 remarketedextended in 2008. If the remarketing is successful,and the interest rate on the debt may changewill be reset to a rate selected by thelevel 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 thatbelieves the remarketing of the debt will be successful.

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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 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.
During the three and six months ended June 30, 2007, PNM contributed $1.5 million and $3.1 million to the trust for other post retirement benefits and $0 million 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 all ofPNM in the NDT and in trusts for pension and other post-employment benefits had an estimated fair value of $711.6$657.5 million at June 30, 2007,2008, of which approximately 24.2%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 June 30, 2007,2008, the decrease in the fair value of the fixed-rate securities would be approximately 3.5%3.3%, or $6.1$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 six months ended June 30, 2007, TNMP contributed $0.3 million and $0.3 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 all of theTNMP in trusts for pension and other post-employment benefits had an estimated fair value of $91.5$81.2 million at June 30, 2007,2008, of which approximately 22.3%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 June 30, 2007,2008, the decrease in the fair value of the fixed-rate securities would be approximately 4.0%, or $0.8$0.7 million.  The CompanyTNMP, therefore, is at risk for shortfalls in its funding of its obligations due to investment losses.  The CompanyTNMP 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 fundfor PNM’s share of the decommissioning costs of PVNGS and pension and other postretirement benefits also hold certain equity securities at June 30, 2007. Approximately 61.3% of the securities held by the various PNM trusts were equity securities as of June 30, 2007. The trusts established to fund TNMP’s pension and other postretirementpost-employment benefits hold certain equity securities at June 30, 2007. Approximately 54.2%2008.  These equity securities also expose PNM to losses in fair value.  Equity securities comprised 56.3% of the securities held by the various trusts were equity securities as of June 30, 2007.2008.  PNM does not recover or earn a return through rates on any losses or gains on these equity securities.

The trusts established for TNMP’s pension and post-employment benefits hold certain equity securities.  These equity securities also expose the CompanyTNMP to losses in fair value.  Equity securities comprised 50.7% of the securities held by the trusts as of June 30, 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.

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ITEM 4.  CONTROLS AND PROCEDURES
PNMR
PNMR

Disclosure of controls and procedures.procedures

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

Changes in internal controls
The following material changes in internal controls occurred during the second quarter of 2007:
PNMR is currently designing and implementing monitoring controls for its equity investment in EnergyCo to ensure that PNMR maintains its compliance with Section 404 of the Sarbanes-Oxley Act of 2002. It is expected that this effort will continue through the end of 2007.
Except as described above, thereThere have been no other changes in PNMR’s internal controls over financial reporting for the quarter ended June 30, 2007,2008, that have materially affected, or are reasonably likely to materially affect, PNMR’s internal control over financial reporting.
PNM
PNM

Disclosure of controls and procedures

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

Changes in internal controls

There have been no changes in PNM’s internal controls over financial reporting for the quarter ended June 30, 2007,2008, that have materially affected, or are reasonably likely to materially affect, PNM’s internal control over financial reporting.

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TNMP
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

There have been no changes in TNMP’s internal controls over financial reporting for the quarter ended June 30, 2007,2008, that have materially affected, or are reasonably likely to materially affect, TNMP’s internal control over financial reporting.

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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
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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

The annual meetingAnnual Meeting of shareholdersShareholders of PNMR was held on May 22, 2007.28, 2008.  The matters voted on at the meeting and the results were as follows:

The election of the following nominees to serve as directors as follows:until the Annual Meeting of Shareholders in 2009:
        
 Votes Against or 
Director Votes For Withheld Votes ForVotes Withheld
Terms expiring in 2008: 
Adelmo E. Archuleta 64,181,150 6,204,301 62,921,4547,719,581
Julie A. Dobson 64,185,592 6,199,859 62,917,8217,723,214
Woody L. Hunt 64,182,949 6,202,502 62,913,0887,727,947
C. E. McMahen 63,784,715 6,600,736 
R.R. Nordhaus
62,885,9997,755,036
M. T. Pacheco 70,214,216 171,235 62,897,6407,743,395
R. M. Price 60,351,592 10,033,859 62,759,3017,881,734
B. S. Reitz 70,214,050 171,401 62,899,7897,741,246
Jeffry E. Sterba 66,802,203 3,583,248 62,747,1567,893,879
Joan B. Woodard 70,218,959 166,492 62,912,5627,728,473

The approval of an amendment to the PNM Resources, Inc. Employee Stock Purchase Plan:

Votes ForVotes AgainstAbstentions
57,970,301705,790828,575

The approval of the selection by the Company’s Board of Deloitte & Touche LLP as independent auditors for the fiscal year ending December 31, 2007, was voted on, as follows:2008:
     
Votes For Votes Against or Withheld Abstentions
70,231,908 99,434 54,109

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Votes ForVotes AgainstAbstentions
70,167,757231,682241,596



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ITEM 6.  EXHIBITS

10.1**PNMRPNM Resources, Inc. 2008 Officer Incentive Plan
   
2.110.2**PNMRContribution Agreement, dated as of June 1, 2007, among EnergyCo, LLC, PNM Resources, and ECJV Holdings, LLCInc. Performance Cash Program for the Utilities President
4.23PNMSeventh Supplemental Indenture, dated as of June 1, 2007, to Indenture dated as of March 11, 1998, between PNM and The Bank of New York Trust Company, N.A. (successor to JPMorgan Chase Bank), as Trustee
   
12.1PNMRRatio of Earnings to Fixed Charges
   
12.2PNMRatio of Earnings to Fixed Charges
  
12.212.3PNMRPNMRatio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
   
31.1PNMRChief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.2PNMRChief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.3PNMChief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.4PNMChief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.5TNMPChief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.6TNMPChief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
32.1PNMRChief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
32.2PNMRChief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
32.3PNMChief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
32.4PNMChief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
32.5TNMPChief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
32.6TNMPChief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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** Designates each management contract or compensatory plan or arrangement required to be identified.

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SIGNATURE

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

 
PNM RESOURCES, INC.
PUBLIC SERVICE COMPANY OF NEW MEXICO
TEXAS-NEW MEXICO POWER COMPANY
 (Registrants)
 
  
Date:   August 14, 20072008/s/ Thomas G. Sategna
 Thomas G. Sategna
 Thomas G. Sategna
Vice President and Corporate Controller
(Officer duly authorized to sign this report)

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