Public Service Company of New Mexico PFD 4.58% (PNMXO) 10-Q 2007 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
Commission	Name of Registrants, State of Incorporation,	I.R.S. Employer
File Number	Address and Telephone Number	Identification No.
001-32462	PNM Resources, Inc.	85-0468296
	(A New Mexico Corporation)
	Alvarado Square
	Albuquerque, New Mexico  87158
	(505) 241-2700
001-06986	Public Service Company of New Mexico	85-0019030
	(A New Mexico Corporation)
	Alvarado Square
	Albuquerque, New Mexico  87158
	(505) 241-2700
002-97230	Texas-New Mexico Power Company	75-0204070
	(A Texas Corporation)
	4100 International Plaza,
	P.O. Box 2943
	Fort Worth, Texas  76113
	(817) 731-0099

Indicate by check mark whether PNM Resources, Inc. (“PNMR”) and Public Service Company of New Mexico (“PNM”) (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) have been subject to such filing requirements for the past 90 days.  YES   ü    NO     

Indicate by check mark whether Texas-New Mexico Power Company (“TNMP”) (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  YES         NO   ü     (NOTE:  As a voluntary filer, not subject to the filing requirements, TNMP filed all reports under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months.)

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

Large accelerated filer  ü Accelerated filer       Non-accelerated filer     

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

Large accelerated filer      Accelerated filer      Non-accelerated filer  ü

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

As of November 1, 2007, 76,777,076 shares of common stock, no par value per share, of PNMR were outstanding.

The total number of shares of common stock of PNM outstanding as of November 1, 2007 was 39,117,799 all held by PNMR (and none held by non-affiliates).

The total number of shares of common stock of TNMP outstanding as of November 1, 2007 was 6,358 all held indirectly by PNMR (and none held by non-affiliates).

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

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

ii

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

INDEX

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

iii

GLOSSARY

Definitions:
Afton	Afton Generating Station
AG	New Mexico Attorney General
ALJ	Administrative Law Judge
Altura	Altura Power L.P.
APS	Arizona Public Service Company
Avistar	Avistar, Inc.
BART	Best Available Retrofit Technology
Board	Board of Directors of PNMR
BTU	British Thermal Unit
Cal PX	California Power Exchange
Cal ISO	California Independent System Operator
Cascade	Cascade Investment, L.L.C.
Constellation	Constellation Energy Commodities Group, Inc.
CTC	Competition Transition Charge
Decatherm	Million BTUs
EaR	Earnings at Risk
ECJV	ECJV Holdings, LLC
EEI	Edison Electric Institute
EIP	Eastern Interconnection Project
EITF	Emerging Issues Task Force
EnergyCo	EnergyCo, LLC, a joint venture between PNMR and ECJV
EPA	United States Environmental Protection Agency
ERCOT	Electric Reliability Council of Texas
ESPP	Employee Stock Purchase Plan
FASB	Financial Accounting Standards Board
FCPSP	First Choice Power Special Purpose, L.P.
FERC	Federal Energy Regulatory Commission
FIN	FASB Interpretation Number
FIP	Federal Implementation Plan
First Choice	First Choice Power, L. P. and Subsidiaries
Four Corners	Four Corners Power Plant
GAAP	Generally Accepted Accounting Principles in the United States of America
GWh	Gigawatt hours
ISO	Independent System Operator
MD&A	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Moody’s	Moody’s Investor Services, Inc.
MW	Megawatt
Navajo Acts	Navajo Nation Air Pollution Prevention and Control Act, the Navajo Nation Safe Drinking Water Act, and the          Navajo Nation Pesticide Act

1

NDT	Nuclear Decommissioning Trusts for PVNGS
Ninth Circuit	United States Court of Appeals for the Ninth Circuit
NMED	New Mexico Environment Department
NMPRC	New Mexico Public Regulation Commission
NOPR	Notice of Proposed Rulemaking
NRC	United States Nuclear Regulatory Commission
NSPS	New Source Performance Standards
NSR	New Source Review
OASIS	Open Access Same Time Information System
OATT	Open Access Transmission Tariff
O&M	Operations and Maintenance
PCRBs	Pollution Control Revenue Bonds
PGAC	Purchased Gas Adjustment Clause
PG&E	Pacific Gas and Electric Co.
PNM	Public Service Company of New Mexico and Subsidiary
PNM Facility	PNM’s $400 Million Unsecured Revolving Credit Facility
PNMR	PNM Resources, Inc. and Subsidiaries
PNMR Facility	PNMR’s $600 Million Unsecured Revolving Credit Facility
PPA	Power Purchase Agreement
PSA	Power Supply Agreement
PSD	Prevention of Significant Deterioration
PUCT	Public Utility Commission of Texas
PVNGS	Palo Verde Nuclear Generating Station
REC	Renewable Energy Certificates
REP	Retail Electricity Provider
RMC	Risk Management Committee
RTO	Regional Transmission Organization
SDG&E	San Diego Gas and Electric Company
SEC	United States Securities and Exchange Commission
SFAS	FASB Statement of Financial Accounting Standards
SJCC	San Juan Coal Company
SJGS	San Juan Generating Station
SOAH	State Office of Administrative Hearings
S&P	Standard and Poors Ratings Services
TECA	Texas Electric Choice Act
TNMP	Texas-New Mexico Power Company and Subsidiaries
TNP	TNP Enterprises, Inc. and Subsidiaries
Throughput	Volumes of gas delivered, whether or not owned
Twin Oaks	Assets of Twin Oaks Power, L.P. and Twin Oaks Power III, L.P.
VaR	Value at Risk

2

Accounting Pronouncements (as amended):
EITF 03-11	EITF Issue No. 03-11 “Reporting Realized Gains and Losses on Derivative Instruments that are Subject to FASB Statement         No. 133 and Not Held for Trading Purposes”
EITF 03-13	EITF Issue No. 03-13 “Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to        Report Discontinued Operations“
FIN 46R	FIN 46R “Consolidation of Variable Interest Entities an Interpretation of ARB No. 51”
FIN 48	FIN No. 48 “Accounting for Uncertainty in Income Taxes”
SFAS 5	SFAS No. 5 “Accounting for Contingencies”
SFAS 57	SFAS No. 57 “Related Party Disclosures”
SFAS 71	SFAS No. 71 “Accounting for Effects of Certain Types of Regulation”
SFAS 112	SFAS No. 112 “Employers’ Accounting for Postemployment Benefits – an amendment of FASB Statements No. 5 and 43”
SFAS 128	SFAS No. 128 “Earnings per Share”
SFAS 133	SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities”
SFAS 141	SFAS No. 141 “Business Combinations”
SFAS 144	SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”
SFAS 149	SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”
SFAS 154	SFAS No. 154 “Accounting Changes and Error Corrections”

3

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PNM RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
				(As Restated,						(As Restated,
				See Note 16)						See Note 16)
	(In thousands, except per share amounts)
Operating Revenues:
Electric	$	569,566		$	580,967		$	1,511,749		$	1,506,786
Gas		59,537			69,001			351,162			345,346
Other		334			197			708			503
Total operating revenues		629,437			650,165			1,863,619			1,852,635
Operating Expenses:
Cost of energy sold		408,981			366,688			1,144,034			1,099,160
Administrative and general		69,256			69,599			204,803			201,215
Energy production costs		57,669			38,813			157,749			120,762
Depreciation and amortization		36,714			39,899			116,851			112,182
Transmission and distribution costs		20,858			19,723			65,619			60,087
Taxes other than income taxes		14,263			18,382			51,886			53,607
Total operating expenses		607,741			553,104			1,740,942			1,647,013
Operating income		21,696			97,061			122,677			205,622
Other Income and Deductions:
Interest income		10,053			9,902			27,882			28,969
Gains (losses) on investments held by NDT		3,897			(166	)		6,898			1,888
Other income		1,686			1,333			5,613			4,368
Equity in net earnings of EnergyCo		10,556			-			12,166			-
Carrying charges on regulatory assets		-			2,038			-			6,015
Other deductions		(2,056	)		(1,519	)		(8,572	)		(5,532	)
Net other income and deductions		24,136			11,588			43,987			35,708
Interest Charges:
Interest on long-term debt		25,167			24,108			67,910			70,906
Other interest charges		10,088			16,063			35,084			34,326
Total interest charges		35,255			40,171			102,994			105,232
Earnings before Income Taxes		10,577			68,478			63,670			136,098
Income Taxes (see Note 15)		2,073			24,826			4,997			50,198
Preferred Stock Dividend Requirements of Subsidiary		132			132			396			396
Net Earnings	$	8,372		$	43,520		$	58,277		$	85,504
Net Earnings per Common Share (see Note 5):
Basic	$	0.11		$	0.62		$	0.76		$	1.24
Diluted	$	0.11		$	0.62		$	0.75		$	1.23
Dividends Declared per Common Share	$	0.23		$	0.22		$	0.69		$	0.66

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

4

PNM RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30,		December 31,
	2007		2006
	(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	16,739	$	123,419
Special deposits		1,295		5,146
Accounts receivable, net of allowance for uncollectible accounts of $7,542 and $6,899		180,954		168,126
Unbilled revenues		94,920		116,878
Other receivables		96,174		73,744
Inventories		57,597		63,329
Regulatory assets		20,576		17,507
Derivative instruments		54,521		59,312
Income taxes receivable		42,965		65,210
Other current assets		51,483		63,414
Total current assets		617,224		756,085
Other Property and Investments:
Investment in PVNGS lessor notes		192,568		257,659
Equity investment in EnergyCo		261,657		-
Investments held by NDT		138,999		123,143
Other investments		52,038		46,577
Non-utility assets, net of accumulated depreciation of $1,433 and $1,365		7,056		7,565
Total other property and investments		652,318		434,944
Utility Plant:
Electric plant in service		3,758,831		4,263,068
Gas plant in service		756,352		721,168
Common plant in service and plant held for future use		126,718		157,064
		4,641,901		5,141,300
Less accumulated depreciation and amortization		1,689,373		1,639,156
		2,952,528		3,502,144
Construction work in progress		367,710		230,871
Nuclear fuel, net of accumulated amortization of $18,806 and $14,008		53,659		28,844
Net utility plant		3,373,897		3,761,859
Deferred Charges and Other Assets:
Regulatory assets		542,295		553,564
Pension asset		10,817		8,853
Goodwill		495,664		495,738
Other intangible assets, net of accumulated amortization of $3,035 and $2,052		76,219		102,202
Derivative instruments		27,990		39,886
Other deferred charges		52,045		77,703
Total deferred charges and other assets		1,205,030		1,277,946
	$	5,848,469	$	6,230,834

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

5

PNM RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30,		December 31,
	2007		2006
	(In thousands, except share information)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Short-term debt	$	648,684	$	764,345
Current installments of long-term debt		448,935		3,298
Accounts payable		169,790		214,229
Accrued interest and taxes		62,026		98,789
Regulatory liabilities		15,709		1,172
Derivative instruments		69,112		68,575
Other current liabilities		131,188		225,653
Total current liabilities		1,545,444		1,376,061
Long-term Debt		1,233,563		1,765,907
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		574,314		586,283
Accumulated deferred investment tax credits		27,678		30,236
Regulatory liabilities		396,216		389,330
Asset retirement obligations		65,100		61,338
Accrued pension liability and postretirement benefit cost		129,577		134,799
Derivative instruments		30,912		14,581
Other deferred credits		127,428		155,860
Total deferred credits and other liabilities		1,351,225		1,372,427
Total liabilities		4,130,232		4,514,395
Commitments and Contingencies (See Note 9)
Cumulative Preferred Stock of Subsidiary
without mandatory redemption requirements ($100 stated value, 10,000,000 shares authorized:
issued and outstanding 115,293 shares)		11,529		11,529
Common Stockholders’ Equity:
Common stock outstanding (no par value, 120,000,000 shares authorized: issued
and outstanding 76,770,266 and 76,648,472 shares)		1,041,111		1,040,451
Accumulated other comprehensive income, net of income tax		23,075		28,909
Retained earnings		642,522		635,550
Total common stockholders’ equity		1,706,708		1,704,910
	$	5,848,469	$	6,230,834

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

6

PNM RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 30,
	2007			2006
				(As Restated,
				See Note 16)
	(In thousands)
Cash Flows From Operating Activities:
Net earnings	$	58,277		$	85,504
Adjustments to reconcile net earnings to net cash flows from operating activities:
Depreciation and amortization		141,220			131,543
Allowance for equity funds used during construction		(1,201	)		(499	)
Deferred income tax expense (benefit)		4,769			(624	)
Equity in net earnings of EnergyCo		(12,166	)		-
Net unrealized losses on derivatives		15,618			4,485
Realized gains on investments held by NDT		(6,898	)		(1,888	)
Realized loss on Altura contribution		3,637			-
Impairment loss on intangible assets		3,380			-
Impairment loss on utility plant		19,500			-
Carrying charges on regulatory assets and liabilities		(692	)		(7,267	)
Amortization of fair value of acquired Twin Oaks sales contract		(35,073	)		(48,720	)
Stock based compensation expense		6,115			6,648
Excess tax benefit from stock-based payment arrangements		(9	)		(2,050	)
Other, net		(3,089	)		(2,856	)
Changes in certain assets and liabilities:
Accounts receivable		(20,430	)		47,169
Unbilled revenues		21,958			23,790
Regulatory assets		(6,037	)		25,920
Other assets		20,373			(320	)
Accrued pension liability and postretirement benefit costs		(2,753	)		(4,381	)
Accounts payable		(40,340	)		(102,956	)
Accrued interest and taxes		(8,520	)		55,006
Deferred credits		(22,332	)		(10,524	)
Other liabilities		(8,331	)		(11,798	)
Net cash flows from operating activities		126,976			186,182
Cash Flows From Investing Activities:
Utility plant additions		(336,597	)		(195,493	)
Proceeds from sales of investments held by NDT		99,525			65,759
Purchases of investments held by NDT		(104,455	)		(66,578	)
Proceeds from sales of utility plant		25,041			-
Return of principal on PVNGS lessor notes		24,296			22,937
Investments in EnergyCo		(45,040	)		-
Distributions from EnergyCo		362,275			-
Net additions to restricted special deposits		(10,203	)		-
Twin Oaks acquisition		-			(481,058	)
Other, net		4,443			2,922
Net cash flows used from investing activities		19,285			(651,511	)

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

7

PNM RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 30,
	2007			2006
				(As Restated,
				See Note 16)
	(In thousands)
Cash Flows From Financing Activities:
Short-term borrowings (repayments), net		(115,661	)		506,900
Long-term borrowings		20,000			-
Redemption of long-term debt		(100,500	)		-
Issuance of common stock		3,309			40,847
Proceeds from stock option exercise		10,935			9,921
Purchase of common stock to satisfy stock awards		(18,078	)		(14,273	)
Excess tax benefits from stock-based payment arrangements		9			2,050
Dividends paid		(52,545	)		(44,472	)
Other, net		(410	)		(2,977	)
Net cash flows from financing activities		(252,941	)		497,996
Change in Cash and Cash Equivalents		(106,680	)		32,667
Cash and Cash Equivalents at Beginning of Period		123,419			68,199
Cash and Cash Equivalents at End of Period	$	16,739		$	100,866
Supplemental Cash Flow Disclosures:
Interest paid, net of capitalized interest	$	90,799		$	103,642
Income taxes paid (refunded), net	$	2,904		$	(620	)
Supplemental schedule of noncash investing and financing activities:
As of June 1, 2007, PNMR contributed its ownership of Altura to EnergyCo at a fair value of $549.6 million after an adjustment for working capital changes. See Note 11. In conjunction with the contribution, PNMR removed Altura’s assets and liabilities from its balance sheet as follows:
Current assets	$	22,529
Utility plant, net		575,906
Deferred charges		46,018
Total assets contributed		644,453
Current liabilities		63,268
Deferred credits and other liabilities		37,005
Total liabilities contributed		100,273
Other comprehensive income		(12,651	)
Total liabilities and OCI contributed		87,622
Net contribution to EnergyCo	$	556,831
Utility plant purchased through assumption of long-term debt that offsets a portion of investment in PVNGS lessor notes and is eliminated in consolidation. See Note 2.
	$	41,152

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

8

PNM RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
				(As Restated,						(As Restated,
				See Note 16)						See Note 16)
				(In thousands)
Net Earnings	$	8,372		$	43,520		$	58,277		$	85,504
Other Comprehensive Income:
Unrealized Gain (Loss) on Investment Securities:
Unrealized holding gains arising during
the period, net of income tax (expense)
of $(1,549) $(586), $(4,070) and $(7,567)		2,364			894			6,210			11,546
Reclassification adjustment for (gains) included in
net earnings, net of income tax expense
of $2,401, $48, $2,493 and $503		(3,664	)		(73	)		(3,804	)		(767	)
Fair Value Adjustment for Designated Cash Flow Hedges:
Change in fair market value, net of income tax expense
(benefit) of $(4,887), $(8,425), $6,079 and $(4,874)		7,414			12,589			(9,333	)		7,076
Reclassification adjustment for (gains) losses included in
net earnings, net of income tax expense (benefit)
of $482, $(3,822), $(653) and $3,442		(638	)		7,003			1,093			(5,021	)
Total Other Comprehensive Income (Loss)		5,476			20,413			(5,834	)		12,834
Total Comprehensive Income	$	13,848		$	63,933		$	52,443		$	98,338

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

9

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
				(As Restated,						(As Restated,
				See Note 16)						See Note 16)
	(In thousands)
Operating Revenues:
Electric	$	360,446		$	302,900		$	901,072		$	873,665
Gas		59,537			69,001			351,162			345,346
Total operating revenues		419,983			371,901			1,252,234			1,219,011
Operating Expenses:
Cost of energy sold		263,223			208,968			758,518			733,640
Administrative and general		46,887			43,750			134,136			125,397
Energy production costs		60,004			36,314			144,163			116,629
Depreciation and amortization		26,004			25,373			78,562			74,517
Transmission and distribution costs		16,388			14,858			51,273			45,081
Taxes other than income taxes		8,712			7,763			27,418			25,490
Total operating expenses		421,218			337,026			1,194,070			1,120,754
Operating income (loss)		(1,235	)		34,875			58,164			98,257
Other Income and Deductions:
Interest income		10,386			8,562			25,738			26,585
Gains (losses) on investments held by NDT		3,897			(166	)		6,898			1,888
Other income		1,193			1,030			3,420			2,508
Other deductions		(871	)		(667	)		(3,386	)		(3,023	)
Net other income and deductions		14,605			8,759			32,670			27,958
Interest Charges:
Interest on long-term debt		13,405			13,080			37,797			38,106
Other interest charges		3,485			1,945			10,824			5,237
Total interest charges		16,890			15,025			48,621			43,343
Earnings (Loss) before Income Taxes		(3,520	)		28,609			42,213			82,872
Income Taxes (Benefit)		(1,762	)		10,961			15,902			32,124
Net Earnings (Loss)	$	(1,758	)	$	17,648		$	26,311		$	50,748
Preferred Stock Dividend Requirements		132			132			396			396
Net Earnings (Loss) Available for Common Stock	$	(1,890	)	$	17,516		$	25,915		$	50,352

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

10

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30,		December 31,
	2007		2006
	(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	2,715	$	11,886
Special deposits		975		376
Accounts receivable, net of allowance for uncollectible accounts of $1,685 and $1,788		115,516		122,648
Unbilled revenues		42,766		81,166
Other receivables		81,966		62,040
Affiliate accounts receivable		44		8,905
Inventories		55,691		51,801
Regulatory assets		20,576		17,507
Derivative instruments		30,243		27,750
Income taxes receivable		-		13,222
Other current assets		34,758		51,231
Total current assets		385,250		448,532
Other Property and Investments:
Investment in PVNGS lessor notes		231,924		257,659
Investments held by NDT		138,999		123,143
Other investments		24,102		15,634
Non-utility property		976		966
Total other property and investments		396,001		397,402
Utility Plant:
Electric plant in service		2,900,446		2,742,795
Gas plant in service		756,352		721,168
Common plant in service and plant held for future use		18,237		72,806
		3,675,035		3,536,769
Less accumulated depreciation and amortization		1,391,895		1,279,349
		2,283,140		2,257,420
Construction work in progress		346,682		191,403
Nuclear fuel, net of accumulated amortization of $18,806 and $14,008		53,659		28,844
Net utility plant		2,683,481		2,477,667
Deferred Charges and Other Assets:
Regulatory assets		404,896		410,979
Derivative instruments		21,683		12,504
Goodwill		102,775		-
Other deferred charges		64,237		66,465
Total deferred charges and other assets		593,591		489,948
	$	4,058,323	$	3,813,549

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

11

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30,		December 31,
	2007		2006
	(In thousands, except share information)
LIABILITIES AND STOCKHOLDER’S EQUITY
Current Liabilities:
Short-term debt	$	285,584	$	251,300
Current installments of long-term debt		300,000		710
Accounts payable		96,734		138,577
Affiliate accounts payable		8,338		16,898
Accrued interest and taxes		60,251		41,340
Regulatory liabilities		15,709		1,172
Derivative instruments		44,159		43,096
Other current liabilities		62,665		81,552
Total current liabilities		873,440		574,645
Long-term Debt		705,654		987,205
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		380,257		368,256
Accumulated deferred investment tax credits		27,497		29,404
Regulatory liabilities		355,621		335,196
Asset retirement obligations		64,372		60,493
Accrued pension liability and postretirement benefit cost		124,532		129,595
Derivative instruments		24,868		14,100
Other deferred credits		101,099		112,990
Total deferred credits and liabilities		1,078,246		1,050,034
Total liabilities		2,657,340		2,611,884
Commitments and Contingencies (See Note 9)
Cumulative Preferred Stock
without mandatory redemption requirements ($100 stated value, 10,000,000 authorized:
issued and outstanding 115,293 shares)		11,529		11,529
Common Stockholder’s Equity:
Common stock outstanding (no par value, 40,000,000 shares authorized: issued
and outstanding 39,117,799 shares)		932,522		765,500
Accumulated other comprehensive income, net of income tax		14,502		8,761
Retained earnings		442,430		415,875
Total common stockholder’s equity		1,389,454		1,190,136
	$	4,058,323	$	3,813,549

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

12

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 30,
	2007			2006
				(As Restated,
				See Note 16)
	(In thousands)
Cash Flows From Operating Activities:
Net earnings	$	26,311		$	50,748
Adjustments to reconcile net earnings to net cash flows from operating activities:
Depreciation and amortization		100,224			88,659
Allowance for equity funds used during construction		(1,077	)		(348	)
Deferred income tax (benefit)		(14,695	)		(15,760	)
Net unrealized losses on derivatives		14,943			1,305
Realized gains on investments held by NDT		(6,898	)		(1,888	)
Carrying charges on regulatory assets and liabilities		(692	)		(2,597	)
Impairment loss on utility plant		19,500			-
Other, net		(1,746	)		(3,677	)
Changes in certain assets and liabilities, net of amounts acquired:
Accounts receivable		16,962			74,126
Unbilled revenues		41,931			35,591
Regulatory assets		(6,037	)		25,944
Other assets		27,254			(9,226	)
Accrued pension liability and postretirement benefit costs		(2,538	)		(4,456	)
Accounts payable		(44,666	)		(102,307	)
Accrued interest and taxes		29,575			44,147
Deferred credits		(19,774	)		(6,456	)
Other liabilities		(18,228	)		(29,645	)
Net cash flows from operating activities		160,349			144,160
Cash Flows From Investing Activities:
Utility plant additions		(260,250	)		(150,896	)
Proceeds from sales of investments held by NDT		99,525			65,759
Purchases of investments held by NDT		(104,455	)		(66,578	)
Proceeds from sales of utility plant		25,041			-
Return of principal on PVNGS lessor notes		24,296			22,937
Net additions to restricted special deposits		(10,203	)		-
Other, net		1,653			6,815
Net cash flows from investing activities		(224,393	)		(121,963	)

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

13

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 30,
	2007			2006
				(As Restated,
				See Note 16)
	(In thousands)
Cash Flows From Financing Activities:
Short-term borrowings (repayments), net		35,310			(31,926	)
Long-term borrowings		20,000			-
Dividends paid		(396	)		(396	)
Other, net		(41	)		87
Net cash flows from financing activities		54,873			(32,235	)
Change in Cash and Cash Equivalents		(9,171	)		(10,038	)
Cash and Cash Equivalents at Beginning of Period		11,886			12,690
Cash and Cash Equivalents at End of Period	$	2,715		$	2,652
Supplemental Cash Flow Disclosures:
Interest paid, net of capitalized interest	$	49,839		$	47,307
Income taxes paid, net	$	-		$	455
Supplemental schedule of noncash investing and financing activities:
As of January 1, 2007, TNMP transferred its New Mexico operational assets and liabilities to PNMR through a redemption of TNMP’s common stock. PNMR contemporaneously contributed the TNMP New Mexico operational assets and liabilities to PNM. (See Note 14).
Current assets	$	15,444
Other property and investments		10
Utility plant, net		96,468
Goodwill		102,775
Deferred charges		1,377
Total assets transferred from TNMP		216,074
Current liabilities		17,313
Long-term debt		1,065
Deferred credits and other liabilities		30,673
Total liabilities transferred from TNMP		49,051
Net assets transferred – increase in common stockholder’s equity	$	167,023

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

14

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
				(As Restated,						(As Restated,
				See Note 16)						See Note 16)
				(In thousands)
Net Earnings (Loss) Available for Common Stock	$	(1,890	)	$	17,516		$	25,915		$	50,352
Other Comprehensive Income (Loss):
Unrealized Gain (Loss) on Investment Securities:
Unrealized holding gains arising during
the period, net of income tax (expense)
of $(1,549), $(586), $(4,070) and $(7,567)		2,364			894			6,210			11,546
Reclassification adjustment for (gains) included in
net earnings, net of income tax expense
of $2,401, $48, $2,493 and $503		(3,664	)		(73	)		(3,804	)		(767	)
Fair Value Adjustment for Designated Cash Flow Hedges:
Change in fair market value, net of income tax expense
(benefit) of $(903), $566, $(1,886) and $6,195		1,378			(864	)		2,877			(9,453	)
Reclassification adjustment for (gains) losses included in
net earnings, net of income tax expense (benefit)
of $826, $334, $(300) and $4,138		(1,261	)		(510	)		458			(6,314	)
Total Other Comprehensive Income (Loss)		(1,183	)		(553	)		5,741			(4,988	)
Total Comprehensive Income (Loss)	$	(3,073	)	$	16,963		$	31,656		$	45,364

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

15

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
	(In thousands)
Electric Operating Revenues:	$	52,680		$	43,728		$	137,144		$	118,972
Operating Expenses:
Cost of energy sold		7,544			7,050			21,936			20,644
Administrative and general		6,024			7,451			22,288			24,512
Depreciation and amortization		7,082			6,422			21,123			18,934
Transmission and distribution costs		4,465			3,547			14,332			11,755
Taxes other than income taxes		6,503			6,455			16,741			17,127
Total operating expenses		31,618			30,925			96,420			92,972
Operating income		21,062			12,803			40,724			26,000
Other Income and Deductions:
Interest income		25			296			888			632
Other income		397			281			1,444			534
Carrying charges on regulatory assets		-			2,038			-			6,015
Other deductions		(25	)		(17	)		(99	)		(60	)
Net other income and deductions		397			2,598			2,233			7,121
Interest Charges:
Interest on long-term debt		4,890			6,433			17,475			19,297
Other interest charges		878			852			2,242			2,484
Total interest charges		5,768			7,285			19,717			21,781
Earnings before Income Taxes		15,691			8,116			23,240			11,340
Income Taxes		5,463			2,645			7,840			3,975
Net Earnings from Continuing Operations		10,228			5,471			15,400			7,365
Discontinued Operations, net of income tax
expense of $0, $250, $0 and $1,237		-			519			-			2,617
Net Earnings	$	10,228		$	5,990		$	15,400		$	9,982

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

16

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30,		December 31,
	2007		2006
	(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	54	$	2,542
Special deposits		50		-
Accounts receivable, net of allowance for uncollectible accounts of $0 and $31		10,653		10,317
Unbilled revenues		4,368		6,000
Other receivables		5,023		1,515
Affiliate accounts receivable		10,833		-
Inventories		1,662		1,509
Federal income tax receivable		32,053		40,473
Other current assets		581		944
Total current assets		65,277		63,300
Other Property and Investments:
Other investments		555		511
Non-utility property, net of accumulated depreciation of $0 and $3		2,111		2,120
Total other property and investments		2,666		2,631
Utility Plant:
Electric plant in service		775,622		925,538
Common plant in service and plant held for future use		488		589
		776,110		926,127
Less accumulated depreciation and amortization		269,183		326,404
		506,927		599,723
Construction work in progress		13,953		13,799
Net utility plant		520,880		613,522
Deferred Charges and Other Assets:
Regulatory assets		137,399		142,585
Goodwill		261,121		363,764
Pension asset		10,817		8,853
Other deferred charges		6,349		9,205
Total deferred charges and other assets		415,686		524,407
	$	1,004,509	$	1,203,860

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

17

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30,		December 31,
	2007		2006
	(In thousands, except share information)
LIABILITIES AND STOCKHOLDER’S EQUITY
Current Liabilities:
Short-term debt – affiliate	$	18,500	$	-
Current installments of long-term debt		148,935		2,523
Accounts payable		2,831		11,332
Affiliate accounts payable		1,552		15,673
Accrued interest and taxes		21,006		23,110
Other current liabilities		3,933		7,579
Total current liabilities		196,757		60,217
Long-term Debt		167,503		420,546
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		125,258		145,641
Accumulated deferred investment tax credits		181		832
Regulatory liabilities		40,595		54,134
Asset retirement obligations		651		686
Accrued pension liability and postretirement benefit cost		5,044		5,203
Other deferred credits		2,062		1,982
Total deferred credits and other liabilities		173,791		208,478
Total liabilities		538,051		689,241
Commitments and Contingencies (See Note 9)
Common Stockholder’s Equity:
Common stock outstanding ($10 par value, 12,000,000 shares authorized:
issued and outstanding 6,358 and 9,615 shares)		64		96
Paid-in-capital		427,320		492,812
Accumulated other comprehensive income, net of income tax		562		562
Retained earnings		38,512		21,149
Total common stockholder’s equity		466,458		514,619
	$	1,004,509	$	1,203,860

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

18

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 30,
	2007			2006
	(In thousands)
Cash Flows From Operating Activities:
Net earnings	$	15,400		$	9,982
Adjustments to reconcile net earnings to net cash flows from operating activities:
Depreciation and amortization		20,991			24,733
Rate case amortization		2,777			-
Allowance for equity funds used during construction		(124	)		(151	)
Deferred income tax expense (benefit)		(3,253	)		(536	)
Carrying charges on deferred stranded costs		-			(6,015	)
Interest on retail competition transition obligation		-			1,345
Other, net		(1,108	)		(1,445	)
Changes in certain assets and liabilities:
Accounts receivable		(10,033	)		1,619
Unbilled revenues		(1,899	)		(1,100	)
Other assets		(892	)		1,665
Accrued pension liability and postretirement benefit costs		(216	)		(498	)
Accounts payable		(5,679	)		(1,765	)
Accrued interest and taxes		7,554			6,259
Change in affiliate accounts		(17,338	)		14,513
Other liabilities		(1,081	)		(1,591	)
Net cash flows from operating activities		5,099			47,015
Cash Flows From Investing Activities:
Utility plant additions		(26,837	)		(29,301	)
Other, net		-			66
Net cash flows from investing activities		(26,837	)		(29,235	)

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

19

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 30,
	2007			2006
	(In thousands)
Cash Flows From Financing Activities:
Short-term debt - affiliate		18,500			-
Redemption of long-term debt		(100,500	)		-
Equity contribution by parent		101,249			-
Other, net		1			115
Net cash flows from financing activities		19,250			115
Change in Cash and Cash Equivalents		(2,488	)		17,895
Cash and Cash Equivalents at Beginning of Period		2,542			16,228
Cash and Cash Equivalents at End of Period	$	54		$	34,123
Supplemental Cash Flow Disclosures:
Interest paid, net of capitalized interest	$	19,693		$	17,962
Income taxes paid, net	$	-		$	-
Supplemental schedule of noncash investing and financing activities:
As of January 1, 2007, TNMP transferred its New Mexico operational assets and liabilities to PNMR through a redemption of TNMP’s common stock. PNMR contemporaneously contributed the TNMP New Mexico operational assets and liabilities to PNM. (See Note 14).
Current assets	$	15,444
Other property and investments		10
Utility plant, net		96,468
Goodwill		102,775
Deferred charges		1,377
Total assets transferred to PNM		216,074
Current liabilities		17,313
Long-term debt		1,065
Deferred credits and other liabilities		30,673
Total liabilities transferred to PNM		49,051
Net assets transferred – common stock redeemed	$	167,023

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

20

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2007	2006	2007	2006
		(In thousands)
Net Earnings and Total Comprehensive Income	$                            10,228	$                       5,990	$                    15,400	$                      9,982

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

21

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1)       Significant Accounting Policies and Responsibility for Financial Statements

Financial Statement Preparation

In the opinion of management, the accompanying unaudited interim Condensed Consolidated Financial Statements reflect all normal and recurring accruals and adjustments that are necessary to present fairly the consolidated financial position at September 30, 2007 and December 31, 2006, the consolidated results of operations and comprehensive income for the three months and nine months ended September 30, 2007 and 2006 and the consolidated statements of cash flows for the nine months ended September 30, 2007 and 2006.  The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could ultimately differ from those estimated.  The results of operations presented in the accompanying Condensed Consolidated Financial Statements are not necessarily representative of operations for an entire year.

These Condensed Consolidated Financial Statements are unaudited, and certain information and note disclosures normally included in the annual Consolidated Financial Statements have been condensed or omitted, as permitted under the applicable rules and regulations.  Readers of these financial statements should refer to PNMR’s, PNM’s and TNMP’s audited Consolidated Financial Statements and Notes thereto that are included in their respective 2006 Annual Reports on Form 10-K/A (Amendment No. 1).

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.  PNMR shared services administrative and general expenses, which represent costs that are primarily driven by corporate level activities, are allocated to the business segments.  Other significant intercompany transactions between PNMR, PNM, and TNMP include energy purchases and sales, transmission and distribution services, 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 Condensed Consolidated Financial Statements include disclosures for PNMR, PNM, and TNMP.  For discussion purposes, this report will use the term “Company” when discussing matters of common applicability to PNMR, PNM and TNMP.  Discussions regarding only PNMR, PNM or TNMP will be indicated as such.  Certain amounts in the 2006 Condensed Consolidated Financial Statements and Notes thereto have been reclassified to conform to the 2007 financial statement presentation.  Income taxes, which previously had been separated between operating expense and other income and deductions in the Condensed Consolidated Statements of Earnings, is being presented on a combined basis.  In addition, certain sections on the Condensed Consolidated Balance Sheets have been rearranged in the current presentation.

At December 31, 2006, certain income tax receivables and payables were shown on a net basis.  In 2007, these income tax receivables and payables are shown gross on the Condensed Consolidated Balance Sheet.  For comparability, the December 31, 2006 balances have been reclassified resulting in income tax receivables and payables each being increased by $65.2 million for PNMR, $13.2 million for PNM, and $4.1 million for TNMP.

22

 

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(2) Acquisitions, Impairments, and Disposition

On April 18, 2006, PNMR’s wholly owned subsidiary, Altura, purchased the Twin Oaks business, which included the 305 MW coal-fired Twin Oaks power plant located 150 miles south of Dallas, Texas.  Effective June 1, 2007, PNMR contributed Altura, including the Twin Oaks business, to EnergyCo.  See Note 11.  The results of Twin Oaks operations have been included in the Consolidated Financial Statements of PNMR from April 18, 2006 through May 31, 2007.  Beginning June 1, 2007, the Twin Oaks operations are included in EnergyCo, which is accounted for by PNMR using the equity method.

As part of the acquisition of Twin Oaks, PNMR determined the fair value of two contractual obligations to sell power.  The first contract obligated Altura to sell power through September 2007 at which time the second contract began and extends for three years.  In comparing the pricing terms of the contractual obligations against the forward price of electricity in the relevant market at the acquisition date, PNMR concluded that the contracts were below market.  In accordance with SFAS 141, the contracts were recorded at fair value to be amortized as an increase in operating revenue over the contract periods.  The amortization matches the difference between the forward price curve and the contractual obligations for each month in accordance with the contract as of the acquisition date.  For the first contract, $94.9 million was recorded in other current liabilities and $52.4 million was recorded in other deferred credits for a contract total of $147.3 million. For the second contract, $29.6 million was recorded in other deferred credits.  As of May 31, 2007, PNMR had amortized $105.9 million for the first contract and nothing for the second contract.

The Twin Oaks purchase agreement also included the development rights for a possible 600-megawatt expansion of the plant, which PNMR classified as an intangible asset with a value of $25 million at the date of acquisition.  PNMR reassessed this valuation as of April 1, 2007 and determined that the asset was impaired, resulting in a pre-tax loss of $3.4 million, which was recorded in second quarter energy production costs.

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

On June 29, 2007, a wholly-owned subsidiary of PNMR purchased 100% of a trust that owns a 2.27% undivided interest, representing 29.8 MW, in PVNGS Unit 2 and a 0.76% undivided interest in certain PVNGS common facilities, as well as a lease under which such facilities are leased to PNM.  The beneficial interest in the trust was purchased for $44.0 million in cash and the assumption of $41.2 million in long-term debt payable to PVNGS Capital Trust.  This long-term debt offsets a portion of the investment in PVNGS lessor notes and is eliminated in PNMR’s consolidated financial statements.  The funds for the purchase were provided by PNMR.  The lease remains in effect and this transaction has no impact on PNM’s consolidated financial statements.

23

            

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3) Segment Information

The following segment presentation is based on the methodology that management uses for making operating decisions and assessing performance of its various business activities.  The following presentation for operating segments reflects normal operations.  Unusual and non-recurring items are included 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.  The 2006 segment information does not reflect this transfer.

REGULATED OPERATIONS

PNM Electric

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

TNMP Electric

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

Through December 31, 2006, TNMP provided integrated electric services that included the transmission, distribution, and sale of electricity to its New Mexico customers as well as transmission to third parties and to PNM.  Effective January 1, 2007, TNMP’s New Mexico operations were transferred to PNM.

PNM Gas

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

24

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

UNREGULATED OPERATIONS

Wholesale

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

EnergyCo

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

25

 

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

CORPORATE AND OTHER

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

Adjustments related to EITF 03-11 are included in Corporate and Other.  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 and PNM, as restated, by operating segment. Explanations for footnotes (a) through (g) follow the tables.

26

      

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 September 30, 2007:
Operating revenues	$	203,083		$	31,405		$	59,537		$	204,125		$	177,694		$	(46,407	)	(a)	$	629,437
Intersegment revenues		2,931			21,275			-			-			-			(24,206	)			-
Total revenues		206,014			52,680			59,537			204,125			177,694			(70,613	)			629,437
Cost of energy		67,771			7,544			33,958			211,162			159,179			(70,633	)	(a)		408,981
Intersegment energy transfer		21,928			-			-			(21,928	)		-			-				-
Gross margin		116,315			45,136			25,579			14,891			18,515			20				220,456
Operating expenses		70,816			16,695			23,775			13,764			13,583			23,413		(f)		162,046
Depreciation and amortization		16,448			7,081			5,869			3,054			470			3,792				36,714
Operating income (loss)		29,051			21,360			(4,065	)		(1,927	)		4,462			(27,185	)			21,696
Interest income		8,330			24			(91	)		1,750			489			(449	)			10,053
Equity in net earnings of EnergyCo		-			-			-			-			-			10,556				10,556
Other income (deductions)		2,308			372			92			1,682			99			(1,158	)			3,395
Net interest charges		(9,001	)		(5,768	)		(3,729	)		(3,544	)		(638	)		(12,575	)			(35,255	)
Segment earnings before income taxes		30,688			15,988			(7,793	)		(2,039	)		4,412			(30,811	)			10,445
Income taxes (benefit)		12,149			5,576			(3,085	)		(807	)		1,667			(13,427	)	(f)		2,073
Segment net earnings (loss)	$	18,539		$	10,412		$	(4,708	)	$	(1,232	)	$	2,745		$	(17,384	)		$	8,372
Nine Months Ended September 30, 2007:
Operating revenues	$	540,702		$	82,046		$	351,162		$	515,689		$	463,214		$	(89,194	)	(a)	$	1,863,619
Intersegment revenues		6,565			55,098			92			17,048			78			(78,881	)			-
Total revenues		547,267			137,144			351,254			532,737			463,292			(168,075	)			1,863,619
Cost of energy		200,154			21,936			240,766			453,148			395,858			(167,828	)	(a)		1,144,034
Intersegment energy transfer		19,898			-			-			(19,898	)		-			-				-
Gross margin		327,215			115,208			110,488			99,487			67,434			(247	)			719,585
Operating expenses		217,029			53,064			75,308			58,690			41,701			34,265		(b,f)		480,057
Depreciation and amortization		49,220			21,122			18,114			17,000			1,411			9,984				116,851
Operating income (loss)		60,966			41,022			17,066			23,797			24,322			(44,496	)			122,677
Interest income		20,101			888			362			4,486			1,506			539				27,882
Equity in net earnings of EnergyCo		-			-			-			-			-			12,166				12,166
Other income (deductions)		3,490			1,345			265			2,977			66			(4,600	)			3,543
Net interest charges		(28,187	)		(19,717	)		(9,683	)		(19,261	)		(1,814	)		(24,332	)			(102,994	)
Segment earnings before income taxes		56,370			23,538			8,010			11,999			24,080			(60,723	)			63,274
Income taxes (benefit)		22,317			7,954			3,171			4,750			9,086			(42,281	)	(b,c,f)		4,997
Segment net earnings (loss)	$	34,053		$	15,584		$	4,839		$	7,249		$	14,994		$	(18,442	)		$	58,277
At September 30, 2007:
Total assets	$	2,488,262		$	988,470		$	657,067		$	369,085		$	369,817		$	975,768			$	5,848,469
Goodwill	$	102,775		$	261,121		$	-		$	-		$	131,768		$	-			$	495,664

27

           

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

PNMR SEGMENT INFORMATION

	Regulated									Unregulated
	PNM			TNMP									First			Corporate
2006	Electric (d)			Electric (d)			PNM Gas			Wholesale			Choice			and Other				Consolidated
							(In thousands)
Three Months Ended September 30, 2006:
Operating revenues	$	159,301		$	50,961		$	69,001		$	193,150		$	186,972		$	(9,220	)	(a)	$	650,165
Intersegment revenues		2,414			19,280			245			11,551			-			(33,490	)			-
Total revenues		161,715			70,241			69,246			204,701			186,972			(42,710	)			650,165
Cost of energy		55,271			27,987			43,889			135,986			146,337			(42,782	)	(a)		366,688
Intersegment energy transfer		(5,861	)		-			-			5,861			-			-				-
Gross margin		112,305			42,254			25,357			62,854			40,635			72				283,477
Operating expenses		66,808			20,877			25,546			15,150			17,307			829		(e)		146,517
Depreciation and amortization		15,241			7,899			6,007			7,894			510			2,348				39,899
Operating income (loss)		30,256			13,478			(6,196	)		39,810			22,818			(3,105	)			97,061
Interest income		6,380			296			668			1,346			877			335				9,902
Other income (deductions)		224			2,406			79			(45	)		(57	)		(1,053	)			1,554
Net interest charges		(9,037	)		(7,294	)		(3,115	)		(12,226	)		(166	)		(8,333	)			(40,171	)
Segment earnings before income taxes		27,823			8,886			(8,564	)		28,885			23,472			(12,156	)			68,346
Income taxes (benefit)		11,015			2,896			(3,391	)		11,436			8,358			(5,488	)	(e)		24,826
Segment net earnings (loss)	$	16,808		$	5,990		$	(5,173	)	$	17,449		$	15,114		$	(6,668	)		$	43,520
Nine Months Ended September 30, 2006:
Operating revenues	$	439,977		$	141,367		$	345,346		$	499,281		$	446,962		$	(20,298	)	(a)	$	1,852,635
Intersegment revenues		6,852			53,015			386			39,402			-			(99,655	)			-
Total revenues		446,829			194,382			345,732			538,683			446,962			(119,953	)			1,852,635
Cost of energy		144,053			77,810			243,748			398,732			354,745			(119,928	)	(a)		1,099,160
Intersegment energy transfer		(2,515	)		-			-			2,515			-			-				-
Gross margin		305,291			116,572			101,984			137,436			92,217			(25	)			753,475
Operating expenses		201,174			63,366			76,516			45,315			45,852			3,448		(e)		435,671
Depreciation and amortization		44,529			23,462			17,921			18,210			1,518			6,542				112,182
Operating income (loss)		59,588			29,744			7,547			73,911			44,847			(10,015	)			205,622
Interest income		19,517			632			2,401			3,948			1,385			1,086				28,969
Other income (deductions)		638			6,632			169			991			(292	)		(1,795	)			6,343
Net interest charges		(26,580	)		(21,792	)		(9,203	)		(25,559	)		(638	)		(21,460	)			(105,232	)
Segment earnings before income taxes		53,163			15,216			914			53,291			45,302			(32,184	)			135,702
Income taxes (benefit)		21,047			5,221			362			21,109			16,118			(13,659	)	(e)		50,198
Segment net earnings (loss)	$	32,116		$	9,995		$	552		$	32,182		$	29,184		$	(18,525	)		$	85,504
At September 30, 2006:
Total assets	$	1,992,550		$	1,151,141		$	631,729		$	1,086,354		$	405,997		$	575,615			$	5,843,386
Goodwill	$	-		$	363,763		$	-		$	-		$	131,678		$	-			$	495,441

28

              

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

PNM SEGMENT INFORMATION

	PNM			PNM			PNM
2007	Electric (d)			Gas			Wholesale			Other				Consolidated
							(In thousands)
Three Months Ended September 30, 2007:
Operating revenues	$	203,083		$	59,537		$	204,125		$	(46,762	)	(a)	$	419,983
Intersegment revenues		2,931		$	-			-			(2,931	)			-
Total revenues		206,014			59,537			204,125			(49,693	)			419,983
Cost of energy		67,771			33,958			211,162			(49,668	)	(a)		263,223
Intersegment energy transfer		21,928			-			(21,928	)		-				-
Gross margin		116,315			25,579			14,891			(25	)			156,760
Operating expenses		70,816			23,775			13,764			23,636		(g)		131,991
Depreciation and amortization		16,448			5,869			3,054			633				26,004
Operating income (loss)		29,051			(4,065	)		(1,927	)		(24,294	)			(1,235	)
Interest income		8,330			(91	)		1,750			397				10,386
Other income (deductions)		2,308			92			1,682			5				4,087
Net interest charges		(9,001	)		(3,729	)		(3,544	)		(616	)			(16,890	)
Segment earnings before income taxes		30,688			(7,793	)		(2,039	)		(24,508	)			(3,652	)
Income taxes (benefit)		12,149			(3,085	)		(807	)		(10,019	)	(g)		(1,762	)
Segment net earnings (loss)	$	18,539		$	(4,708	)	$	(1,232	)	$	(14,489	)		$	(1,890	)
Nine Months Ended September 30, 2007:
Operating revenues	$	540,702		$	351,162		$	450,294		$	(89,924	)	(a)	$	1,252,234
Intersegment revenues		6,565			92			17,048			(23,705	)			-
Total revenues		547,267			351,254			467,342			(113,629	)			1,252,234
Cost of energy		200,154			240,766			431,084			(113,486	)	(a)		758,518
Intersegment energy transfer		19,898			-			(19,898	)		-				-
Gross margin		327,215			110,488			56,156			(143	)			493,716
Operating expenses		217,029			75,308			41,365			23,288		(g)		356,990
Depreciation and amortization		49,220			18,114			9,316			1,912				78,562
Operating income (loss)		60,966			17,066			5,475			(25,343	)			58,164
Interest income		20,101			362			4,339			936				25,738
Other income (deductions)		3,490			265			2,978			(197	)			6,536
Net interest charges		(28,187	)		(9,683	)		(10,738	)		(13	)			(48,621	)
Segment earnings before income taxes		56,370			8,010			2,054			(24,617	)			41,817
Income taxes (benefit)		22,317			3,171			813			(10,399	)	(g)		15,902
Segment net earnings (loss)	$	34,053		$	4,839		$	1,241		$	(14,218	)		$	25,915
At September 30, 2007:
Total assets	$	2,506,777		$	663,831		$	369,085		$	518,630			$	4,058,323
Goodwill	$	102,775		$	-		$	-		$	-			$	102,775

29

      

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

PNM SEGMENT INFORMATION

	PNM			PNM			PNM
2006	Electric (d)			Gas			Wholesale			Other				Consolidated
							(In thousands)
Three Months Ended September 30, 2006:
Operating revenues	$	159,301		$	69,001		$	141,340		$	(9,418	)	(a)	$	360,224
Intersegment revenues		2,414			245			11,551			(2,533	)			11,677
Total revenues		161,715			69,246			152,891			(11,951	)			371,901
Cost of energy		55,271			43,889			121,730			(11,922	)	(a)		208,968
Intersegment energy transfer		(5,861	)		-			5,861			-				-
Gross margin		112,305			25,357			25,300			(29	)			162,933
Operating expenses		66,808			25,546			10,573			(242	)			102,685
Depreciation and amortization		15,241			6,007			3,408			717				25,373
Operating income (loss)		30,256			(6,196	)		11,319			(504	)			34,875
Interest income		6,380			668			1,268			246				8,562
Other income (deductions)		224			79			(44	)		(195	)			64
Net interest charges		(9,037	)		(3,115	)		(4,020	)		1,148				(15,024	)
Segment earnings before income taxes		27,823			(8,564	)		8,523			695				28,477
Income taxes (benefit)		11,015			(3,391	)		3,374			(37	)			10,961
Segment net earnings (loss)	$	16,808		$	(5,173	)	$	5,149		$	732			$	17,516
Nine Months Ended September 30, 2006:
Operating revenues	$	439,977		$	345,346		$	414,714		$	(20,801	)	(a)	$	1,179,236
Intersegment revenues		6,852			386			39,402			(6,865	)		$	39,775
Total revenues		446,829			345,732			454,116			(27,666	)			1,219,011
Cost of energy		144,053			243,748			373,363			(27,524	)	(a)		733,640
Intersegment energy transfer		(2,515	)		-			2,515			-				-
Gross margin		305,291			101,984			78,238			(142	)			485,371
Operating expenses		201,174			76,516			37,285			(2,378	)			312,597
Depreciation and amortization		44,529			17,921			9,760			2,307				74,517
Operating income (loss)		59,588			7,547			31,193			(71	)			98,257
Interest income		19,517			2,401			3,823			844				26,585
Other income (deductions)		638			169			977			(807	)			977
Net interest charges		(26,580	)		(9,203	)		(11,683	)		4,123				(43,343	)
Segment earnings before income taxes		53,163			914			24,310			4,089				82,476
Income taxes		21,047			362			9,624			1,091				32,124
Segment net earnings	$	32,116		$	552		$	14,686		$	2,998			$	50,352
At September 30, 2006:
Total assets	$	2,008,424		$	631,729		$	392,788		$	461,802			$	3,494,743

30

             

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

TNMP SEGMENT INFORMATION

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

Footnote explanations for the above tables are as follows:

(a)   Reflects EITF 03-11 impact of $46.8 million and $9.4 million for the three months ended September 30, 2007 and 2006 and $89.9 million and $20.8 million for the nine months ended September 30, 2007 and 2006.

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

(c)   Includes an income tax benefit of $16.0 million for the settlement with the IRS on previously unrecognized income tax benefits.  See Note 15.

(d)   Operations and assets, including goodwill, transferred from TNMP Electric to PNM Electric on January 1, 2007 are included in PNM Electric and excluded from TNMP Electric in 2007, and excluded from PNM Electric and included in TNMP Electric in 2006.

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

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

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

(4) Energy Related Derivative Contracts

OVERVIEW

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

For derivative transactions meeting the definition of a cash flow or fair value hedge, the Company documents the relationships between the hedging instruments and the items being hedged.  This documentation includes the strategy that supports executing the specific transaction and the methods utilized to assess the effectiveness of the hedges.

31

             

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The contracts recorded at fair value that do not qualify or are not designated for hedge accounting are classified as trading transactions or economic hedges.  Trading transactions are defined as derivative instruments used to take advantage of existing market opportunities.  Changes in the fair value of trading transactions are reflected on a net basis in operating revenues.  Economic hedges are defined as derivative instruments, including long-term power agreements, used to hedge generation assets and purchase power costs.  Changes in the fair value of economic hedges are reflected in results of operations, with changes related to sales contracts included in operating revenues and changes related to purchase contracts included in cost of energy.   Changes in the fair value of contracts qualifying for cash flow hedge accounting are included in accumulated other comprehensive income, except for amounts related to the PGAC that are recoverable from or refundable to customers, which are included in regulatory assets and liabilities on the Condensed Consolidated Balance Sheets.  Amounts due to or from counterparties for energy related derivative contracts are shown as derivative contracts on the Condensed Consolidated Balance Sheets.  The amounts shown as current assets and current liabilities relate to contracts that will be settled in the next twelve months.  Gains or losses related to cash flow hedge instruments are reclassified from accumulated other comprehensive income when the hedged transaction settles and impacts earnings.  Based on market prices at September 30, 2007, gains of $2.5 million for PNMR and $3.1 million for PNM would be reclassified from other comprehensive income into earnings during the next twelve months. However, the actual amount reclassified into earnings could vary due to future changes in market prices.  As of September 30, 2007, the maximum length of time over which the Company is hedging its exposure to the variability in future cash flows is through September 2008.

GAAP defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation.  Fair value is based on current market quotes as available and are supplemented by modeling techniques and assumptions made by the Company to the extent quoted market prices or volatilities are not available.  Generally, market data to value these instruments is available for up to five years for gas swaps and electricity contracts and up to 18 months for options.  The remaining periods are referred to as the illiquid period and are valued using internally developed pricing data.  The Company regularly assesses the validity and availability of pricing data for the illiquid period of its derivative transactions.  Although management uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique.

The Company has entered into a limited number of derivative energy contracts with terms that extend through 15 years.  Observable market data is not available for the illiquid period of these contracts..  In the third quarter of 2007, the Company refined the modeling technique used to value the impacts of the illiquid periods and the utilization of net present value in fair valuing its portfolio.  In the second quarter of 2007, PNM implemented new market price curve models and assumptions.  The cumulative effect of these changes in valuation is accounted for as a change in accounting estimate under SFAS 154.  The effect of the change in estimate was a decrease to net earnings for PNMR and PNM of $1.3 million and $2.5 million for the three and nine months ended September 30, 2007, which is $0.02 and $0.03 per diluted share for PNMR.

PNM recognized an ineffectiveness loss on its fair value hedge of $0.9 million in the nine months ended September 30, 2007, which is included in operating revenues.  Ineffectiveness for certain cash flow hedges was immaterial during the nine months ended September 30, 2007.

32

            

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

PNMR

PNMR’s commodity derivative instruments are summarized as follows:

	September 30,			December 31,			September 30,			December 31,
	2007			2006			2007			2006
Type of Derivative	Mark-to-Market Instruments						Hedge Instruments
				(In thousands)
Current Assets
Energy contracts	$	14,568		$	17,773		$	2,075		$	7,208
Gas fixed-for-float swaps and futures		33,251			21,875			1,483			4,655
Options		2,973			4,032			160			-
PGAC portion of options, swaps and hedges		-			-			10,449			16,748
Total current assets		50,792			43,680			14,167			28,611
Deferred Charges
Energy contracts		4,123			2,666			-			26,991
Gas fixed-for-float swaps		16,790			7,288			2,026			1,872
Options		5,051			1,028			-			-
PGAC portion of options, swaps and hedges		-			-						3,337
Total deferred charges		25,964			10,982			2,026			32,200
Total Assets		76,756			54,662			16,193			60,811
Current Liabilities
Energy contracts		(15,237	)		(16,499	)		-			-
Gas fixed-for-float swaps		(35,062	)		(21,518	)		(777	)		(6,845	)
Options		(7,124	)		(4,003	)		(462	)		(109	)
Regulatory liabilities for gas off-system
sales, fixed-for-float swaps and forward
physical trades		(615	)		-			-			-
PGAC portion of options, swaps and hedges		-			-			(10,449	)		(16,748	)
Total current liabilities		(58,038	)		(42,020	)		(11,688	)		(23,702	)
Long-term Liabilities
Energy contracts		(7,944	)		(7,472	)		-			(154	)
Gas fixed-for-float swaps		(3,253	)		(862	)		(41	)		(1,915	)
Options		(19,673	)		(842	)		-			-
PGAC portion of options, swaps and hedges		-			-			-			(3,337	)
Total long-term liabilities		(30,870	)		(9,176	)		(41	)		(5,406	)
Total Liabilities		(88,908	)		(51,196	)		(11,729	)		(29,108	)
Net Total Assets and Liabilities	$	(12,152	)	$	3,466		$	4,464		$	31,703

33

      

   PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

PNM

PNM’s commodity derivative instruments are summarized as follows:

	September 30,			December 31,			September 30,			December 31,
	2007			2006			2007			2006
Type of Derivative	Mark-to-Market Instruments						Hedge Instruments
				(In thousands)
Current Assets
Energy contracts	$	12,388		$	16,374		$	2,075		$	1,057
Gas fixed-for-float swaps		12,173			1,950			1,418			1,615
Options		2,178			2,986			-			-
PGAC portion of options, swaps and hedges		-			-			10,449			16,748
Total current assets		26,739			21,310			13,942			19,420
Deferred Charges
Energy contracts		552			2,666			-			-
Gas fixed-for-float swaps		14,271			7,101			2,026			1,872
Options		4,835			825			-			-
PGAC portion of options, swaps and hedges		-			-			-			3,337
Total deferred charges		19,658			10,592			2,026			5,209
Total Assets		46,397			31,902			15,968			24,629
Current Liabilities
Energy contracts		(10,030	)		(10,928	)		-			-
Gas fixed-for-float swaps		(17,998	)		(6,440	)		(397	)		(2,872	)
Options		(5,285	)		(3,255	)		-			-
Regulatory liabilities for gas off-system
sales, fixed-for-float swaps and forward
physical trades		(615	)		-			-			-
PGAC portion of options, swaps and hedges		-			-			(10,449	)		(16,748	)
Total current liabilities		(33,928	)		(20,623	)		(10,846	)		(19,620	)
Long-term Liabilities
Energy contracts		(4,272	)		(7,472	)		-			(154	)
Gas fixed-for-float swaps		(960	)		(421	)		(41	)		(1,915	)
Options		(19,595	)		(801	)		-			-
PGAC portion of options, swaps and hedges					-			-			(3,337	)
Total long-term liabilities		(24,827	)		(8,694	)		(41	)		(5,406	)
Total Liabilities		(58,755	)		(29,317	)		(10,887	)		(25,026	)
Net Total Assets and Total Liabilities	$	(12,358	)	$	2,585		$	5,081		$	(397	)

34

              

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(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				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
	(In thousands, except per share amounts)
Net Earnings	$	8,372	$	43,520	$	58,277	$	85,504
Average Number of Common Shares Outstanding		76,736		69,726		76,697		69,125
Dilutive effect of common stock equivalents (a):
Stock options and restricted stock		422		691		594		565
Equity-linked units		403		344		860		94
Average Common and Common Equivalent
Shares		77,561		70,761		78,151		69,784
Net Earnings per Share of Common Stock:
Basic	$	0.11	$	0.62	$	0.76	$	1.24
Diluted	$	0.11	$	0.62	$	0.75	$	1.23

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

35

        

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(6) Stock-Based Compensation

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

Stock Options

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

								Weighted-
				Weighted-		Aggregate		Average
				Average		Intrinsic		Remaining
				Exercise		Value		Contract Life
Options for PNMR Common Stock	Shares			Price		(In thousands)		(Years)
Outstanding at beginning of period		2,999,606		$	21.02
Granted		766,400			30.47
Exercised		(431,965	)		20.44
Forfeited		(28,707	)		27.34
Outstanding at end of period		3,305,334		$	23.25	$	99		7.36
Options exercisable at end of period		1,936,269		$	19.97	$	6,409		6.16
Options available for future grant		2,478,829

The following table provides additional information concerning stock option activity for the nine months ended September 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	$	4,854	$	5,691

36

      

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Restricted Stock

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

				Weighted-
				Average
Nonvested Restricted				Grant-Date
PNMR Common Stock	Shares			Fair Value
Nonvested at beginning of period		161,769		$	24.55
Granted		106,400		$	28.79
Vested		(93,554	)	$	24.20
Forfeited		(765	)	$	26.34
Nonvested at end of period		173,850		$	26.13

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

37

      

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(7) Capitalization

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

Short-term Debt

PNMR and PNM have revolving credit facilities for borrowings up to $600 million and $400 million, respectively, that primarily expire in 2012 and local lines of credit amounting to $15 million and $13.5 million, respectively.  PNMR and PNM also have commercial paper programs under which they may issue up to $400 million and $300 million of commercial paper, respectively.  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 entered into a short-term bridge loan agreement for temporary financing of Twin Oaks.  See Note 2. On April 17, 2007, PNMR repaid the balance due on the bridge loan.

Short-term debt outstanding consists of:

	September 30,		December 31,
Short-term Debt	2007		2006
	(In thousands)
PNM
Commercial paper	$	70,584	$	251,300
Revolving credit facility		215,000		-
		285,584		251,300
PNMR
Commercial paper		65,000		263,550
Revolving credit facility		298,000		-
Local lines of credit		100		-
Bridge loan		-		249,495
	$	648,684	$	764,345

At November 1, 2007, PNMR and PNM had $188.2 million and $129.7 million of availability under their respective revolving credit facilities and local lines of credit, including reductions of availability due to outstanding letters of credit and amounts outstanding under the commercial paper programs.

As of September 30, 2007, TNMP had outstanding borrowings of $18.5 million from PNMR under its intercompany loan agreement.

Long-term Debt

On June 26, 2007, the City of Farmington, New Mexico issued $20.0 million of its PCRBs to finance or reimburse PNM for expenditures incurred in connection with pollution control equipment at the SJGS.  PNMR is obligated to pay amounts equal to the principal and interest on the PCRBs.  In addition, PNM issued $20.0 million of senior unsecured notes to secure and guarantee the PCRBs. Both the PCRBs and the senior unsecured notes mature in 2037 and bear interest at 5.15%. The proceeds from the PCRBs were placed directly in trust with an independent trustee. As PNM incurs qualified expenditures, it receives reimbursement from the trustee. In the event PNM does not incur qualified expenditures at least equal to the proceeds of the PCRBs, the amount remaining in the trust must be used by the trustee to redeem a portion of the PCRBs.  As of September 30, 2007, PNM had received $9.8 million from the trust. The senior unsecured notes are included in long-term debt in the Condensed Consolidated Balance Sheets of PNM and PNMR and the amount remaining in the trust is a restricted special deposit and included in other investments since it is restricted for the acquisition of items that will be included in utility plant.

38

      

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Effective June 15, 2007, TNMP redeemed $100.0 million of its 6.125% Senior Notes Due 2008 at a redemption price of 100.5% of the principal amount redeemed, plus accrued interest. To facilitate the redemption, PNMR made a cash contribution, recorded as equity, of $101.2 million to TNP, which then made an equity contribution to TNMP in the same amount.

PNMR has entered into three fixed-to-floating interest rate swaps with an aggregate notional principal amount of $150.0 million.  The swaps are accounted for as fair-value hedges with a liability position of approximately $1.8 million at September 30, 2007, with a corresponding reduction of long-term debt.

Stockholders’ Equity

PNMR offers new shares of PNMR common stock through the PNM Direct Plan and an equity distribution agreement.  For the nine months ended September 30, 2007, PNMR sold a combined total of 80,216 shares of its common stock through the PNMR Direct Plan and the equity distribution agreement for net proceeds of $2.2 million.  PNMR also issued 41,578 shares of its common stock for $1.1 million through its ESPP during the nine months ended September 30, 2007.

(8) Pension and Other Postretirement Benefit Plans

PNMR and its subsidiaries (other than TNP, TNMP and First Choice) have a qualified defined benefit pension plan, a plan providing medical and dental benefits to eligible retirees, and an executive retirement program (“PNM Plans”).  PNMR is the sponsor of the PNM Plans and is legally obligated for the benefits owed to participants under them.  TNP, TNMP and First Choice have a qualified defined benefit pension plan, a plan providing medical and death benefits to eligible retirees and an executive retirement program (“TNMP Plans”).  Benefits were frozen in 1997 for the PNM pension plan and 2005 for the TNMP pension plan.  The TNMP retiree medical plan has been merged into the PNMR retiree medical plan although they continue to be accounted for and funded separately.Readers should refer to Note 12 of Notes to the Consolidated Financial Statements in the 2006 Annual Reports on Form 10-K/A (Amendment No. 1) for additional information on these plans.

39

 

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

PNM Plans

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

	Three Months Ended September 30,
	Pension Plan						Other Postretirement Benefits						Executive Retirement 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

	Nine Months Ended September 30,
	Pension Plan						Other Postretirement Benefits						Executive Retirement Program
	2007			2006			2007			2006			2007		2006
							(In thousands)
Components of Net Periodic
Benefit Cost (Income)
Service cost	$	108		$	378		$	1,897		$	2,035		$	42	$	42
Interest cost		23,858			23,131			5,784			5,525			816		791
Expected long-term return on assets		(30,585	)		(30,417	)		(4,393	)		(4,064	)		-		-
Amortization of net loss		2,917			3,630			4,382			5,010			70		74
Amortization of prior service cost		238			238			(4,265	)		(4,265	)		10		10
Net periodic benefit cost (income)	$	(3,464	)	$	(3,040	)	$	3,405		$	4,241		$	938	$	917

For the three months ended September 30, 2007 and 2006, PNM contributed $1.5 million and $1.5 million, respectively, to trusts for other postretirement benefits.  For the nine months ended September 30, 2007 and 2006, PNM contributed $4.6 million and $4.6 million, respectively, to trusts for other postretirement benefits.  PNM expects to make contributions totaling $6.0 million during 2007 to trusts for other postretirement benefits.  PNM does not anticipate making any contributions to the pension or executive retirement plans during 2007.

40

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

TNMP Plans

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

	Three Months Ended September 30,
	Pension Plan						Other Postretirement Benefits						Executive Retirement 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		-			-			(39	)		-			-		-
Amortization of prior service cost		(2	)		-			15			15			-		-
Net Periodic Benefit Cost (Income)	$	(655	)	$	(669	)	$	125		$	185		$	19	$	19

	Nine Months Ended September 30,
	Pension Plan						Other Postretirement Benefits						Executive Retirement Program
	2007			2006			2007			2006			2007		2006
							(In thousands)
Components of Net Periodic
Benefit Cost (Income)
Service cost	$	-		$	-		$	295		$	318		$	-	$	-
Interest cost		3,171			3,254			496			533			57		57
Expected long-term return on assets		(5,130	)		(5,263	)		(342	)		(342	)		-		-
Amortization of net gain		(5	)		-			(117	)		-			-		-
Amortization of prior service cost		-			-			45			45			-		-
Net Periodic Benefit Cost (Income)	$	(1,964	)	$	(2,009	)	$	377		$	554		$	57	$	57

For the three and nine months ended September 30, 2007, TNMP contributed $0.1 million and $0.4 million, respectively, to trusts for other postretirement benefits.  For the three and nine months ended September 30, 2006, TNMP made no contributions to trusts for other postretirement benefits.  TNMP expects to make contributions totaling $0.5 million during 2007 to trusts for other postretirement benefits.  TNMP does not anticipate making any contributions to the pension or executive retirement plans during 2007.

41

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

    

(9) Commitments and Contingencies

OVERVIEW

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

COMMITMENTS AND CONTINGENCIES RELATED TO THE ENVIRONMENT

PNM

Renewable Portfolio Standard

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

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

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

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(Unaudited)

The Clean Air Act

Regional Haze

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

New Source Review Rules

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

Citizen Suit Under the Clean Air Act

PNM reached an impasse with the Grand Canyon Trust and Sierra Club (“Plaintiffs”) and with the NMED with respect to certain matters under the Consent Decree of May 10, 2005.  As a result, PNM filed petitions with the U.S. District Court for the District of New Mexico on October 6 and 12, 2006, seeking a determination that PNM had complied with the Consent Decree with respect to the matters at issue.  The controversies related to PNM’s reports on NOX controls and demisters at SJGS.  PNM reached an agreement with the Plaintiffs and the NMED concerning these issues which was set forth in a Stipulated Order.  The Court entered the Stipulated Order approving the settlement on December 27, 2006.  The settlement does not require any additional material expenditures with respect to the implementation of the Consent Decree.  Counsel for Plaintiffs has submitted statements to PNM for payment of legal 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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(Unaudited)

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

The Consent Decree includes a provision whereby stipulated penalties are assessed for non-compliance with specified emissions limits.  Stipulated penalty amounts are placed in escrow on a quarterly basis pending review of SJGS’s emissions performance for each quarter.  PNM has placed $1.0 million into escrow as potential stipulated penalties.  By letter dated March 20, 2007, the NMED and Plaintiffs requested information concerning PNM’s calculation of potential stipulated penalty amounts and the amounts held in escrow.  PNM 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, 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.

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(Unaudited)

Four Corners Federal Implementation Plan Litigation

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

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

The Court consolidated the APS and Sierra Club petitions on August 10, 2007.  On September 17, 2007, the EPA filed a motion for limited voluntary remand of the record and to vacate the briefing schedule and stay the proceedings during the time period of the remand to give the EPA time to provide additional technical justification for the FIP limits.  In particular, the EPA asked the court for an opportunity to provide a full explanation in response to APS’ position during the FIP rulemaking that Units 4 and 5 could not continuously attain the opacity standard even when no malfunction of the equipment was occurring and to address APS’ request for an allowance for exceedences of the opacity standard up to 0.2 percent of the time for each reporting period.  APS filed its response in opposition to EPA’s motion to remand the record on October 1, 2007, and on October 12, 2007, the Court denied EPA’s motion to remand.  APS believes the proper remedy for an agency’s failure to justify a rule or respond adequately to comments in the rulemaking process is to vacate the rule, not to remand the record.  The Company is unable to determine the impact of these matters on its results of operations and financial position.

In addition, on August 21, 2006, the EPA proposed a FIP to implement “minor New Source Review” on Tribal reservations.  The FIP, if finalized, would apply to Four Corners and would require preconstruction review and permitting of plant projects that meet specified criteria.  PNM does not currently expect this FIP to have a material adverse effect on its financial position, results of operations, cash flows or liquidity.

Santa Fe Generating Station

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

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Coal Combustion Waste Disposal

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

NRC Matters

In October 2006, the NRC conducted an inspection of the PVNGS emergency diesel generators after a Palo Verde Unit 3 generator started but did not provide electrical output during routine inspections on July 25 and September 22, 2006.  On February 22, 2007, the NRC issued a “white” finding (low to moderate safety significance) for this matter.  Under the NRC’s Action Matrix, this finding, coupled with a previous NRC “yellow” finding relating to a 2004 matter involving PVNGS’s safety injection systems, resulted in PVNGS Unit 3 being placed in the “multiple/repetitive degraded cornerstone” column of the NRC’s Action Matrix (“Column 4”), which has resulted in an enhanced NRC inspection regimen.  Although only PVNGS Unit 3 is in NRC’s Column 4, in order to adequately assess the need for improvements, APS management has been conducting site-wide assessments of equipment and operations.  Preliminary work in support of the NRC’s enhanced inspection regimen took place throughout the summer of 2007.  On June 21, 2007, the NRC issued a confirmatory action letter confirming APS’ commitments, as operator, regarding specific actions APS will take to improve PVNGS’s 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.  APS expects to be informed of the NRC’s inspection findings in late December 2007 or January 2008.  APS continues to cooperate fully with the NRC throughout this process.  Following receipt of the inspection findings and APS’ revisions to improvement plans to address the inspection findings, the NRC is expected to issue a revised confirmatory action letter in the first quarter of 2008. The Company is unable to predict the outcome of this matter or any potential impact on PVNGS operating costs.

On November 9, 2006, APS notified the NRC that a senior reactor operator at PVNGS had attempted to cover up a mistaken entry the operator had made in a PVNGS operations verification log.  The senior reactor operator resigned shortly thereafter.  By letter dated July 12, 2007, the NRC notified APS that, based upon the results of its investigation of the matter, the NRC is considering an escalated enforcement action against PVNGS due to the willfulness of the senior reactor operator’s actions.  The NRC noted in its letter that the safety significance of the matter was very low.  The NRC also offered to resolve the potential escalated enforcement action through alternative dispute resolution, which APS elected to do.  As a result, a settlement was reached under which APS agreed to take a number of corrective actions, including specified training for certain PVNGS personnel and follow up reporting to the NRC.  As a result of these commitments, the NRC agreed not to pursue any further enforcement action in connection with this matter.  The agreement between APS and the NRC became effective upon the NRC’s issuance of a confirmatory order, dated October 19, 2007.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

OTHER COMMITMENTS AND CONTINGENCIES

PNM

PVNGS Liability and Insurance Matters

The PVNGS participants have financial protection for public liability resulting from nuclear energy hazards to the full limit of liability under federal law.  This potential liability is covered by primary liability insurance provided by commercial insurance carriers in the amount of $300.0 million and the balance by an industry-wide retrospective assessment program.  If losses at any nuclear power plant covered by the programs exceed the primary liability insurance limit, PNM could be assessed retrospective adjustments.  The maximum assessment per reactor under the program for each nuclear incident is $100.6 million.  The retrospective assessment is subject to an annual limit of $15.0 million per reactor per incident.  Based upon PNM’s 10.2% interest in the three PVNGS units, PNM’s maximum potential assessment per incident for all three units is $30.8 million, with an annual payment limitation of $4.6 million. If the funds provided by this retrospective assessment program prove to be insufficient, Congress could impose revenue-raising measures on the nuclear industry to pay claims.

San Juan River Adjudication

In 1975, the State of New Mexico filed an action entitled “State of New Mexico v. United States, et al.”, in the District Court of San Juan County, New Mexico, to adjudicate all water rights in the San Juan River Stream System.  The Company was made a defendant in the litigation in 1976. ��The action is expected to adjudicate water rights used at Four Corners and at SJGS.  In 2005, the Navajo Nation and various parties announced a settlement of the Nation’s reserved surface water rights.  Congressional legislation as well as other approvals will be required to implement the settlement.  The Company cannot determine the effect, if any, of any water rights adjudication on the present arrangements for water at SJGS and Four Corners.  It is PNM’s understanding that final resolution of the case cannot be expected for several years. PNM is unable to predict the ultimate outcome of this matter.

Conflicts at San Juan Mine Involving Oil and Gas Leaseholders

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

Western United States Wholesale Power Market

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

California Refund Proceeding

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

As previously reported, there have been a number of additional appeals pending before the U.S. Court of Appeals for the Ninth Circuit with regard to FERC’s orders issued in the various California market refund dockets and PNM has participated in various appeals as one of the members of the Competitive Sellers Group.  The Ninth Circuit has held a number of mediation conferences in these, and the multiple other appeals pending before it, to assess the opportunities for settlement, in which PNM has participated.  The Ninth Circuit issued an order declaring a 45-day time out period to allow parties the opportunity to assess the recent court decisions and the potential for settlement of cases.  In October 2006, the Ninth Circuit extended the time out period in several of the cases.  In September 2006, a mediation conference was convened at the California Public Utilities Commission to assess the potential settlement of the refund proceedings.  The conference was attended by, among others, PNM, the other buyers and sellers, FERC personnel, a settlement judge and mediator from the Ninth Circuit, and a former FERC ALJ (whose help was enlisted by the Ninth Circuit) to aid in the mediation process.  Representatives of PNM continue to attend and participate in the mediation and case management sessions being hosted by the Ninth Circuit.  By notice issued in January 2007, the parties to the appeals were advised that the former FERC ALJ will no longer participate in the mediation efforts.  In August 2007, the Ninth Circuit further extended the time-out period for settlement discussions to continue until November 16, 2007.  The Company cannot predict the ultimate outcome of FERC proceedings that may result from the decisions in these appeals, or whether PNM will be ultimately directed to make any additional future refunds as the result of these court decisions, or whether settlement will be reached in the case.

Pacific Northwest Refund Proceeding

Puget Sound Energy, Inc. filed a complaint at the FERC alleging that spot market prices in the Pacific Northwest wholesale electric market were unjust and unreasonable.  In 2003, the FERC issued an order recommending that no refunds should be ordered.  Several parties in the proceeding filed requests for rehearing and the FERC denied rehearing and reaffirmed its prior ruling that refunds were not appropriate for spot market sales in the Pacific Northwest during the first half of 2001.  The Port of Seattle then filed an appeal of the FERC’s order denying rehearing in the Ninth Circuit.  As a participant in the proceedings before the FERC, PNM  also participated in the appeal proceedings.  Oral argument in the case was held on January 8, 2007.  In August 2007, the Ninth Circuit issued its decision on appeal and determined that FERC erred in excluding certain purchases in the Pacific Northwest spot markets from consideration in the Pacific Northwest refund proceeding, and that FERC should have taken into account evidence of manipulation in the California spot markets that was presented after the original evidentiary proceeding.  The court remanded the case to FERC to reconsider its decision to deny refunds, in light of the evidence of market manipulation and the various recent Ninth Circuit decisions, but did not require FERC to order refunds.  In September 2007, the Ninth Circuit extended the time period for filing petitions for rehearing on their decision until November 16, 2007.  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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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, PNM entered into a settlement of certain matters outside the scope of the docket related to historic parking and lending transactions, under which PNM agreed not to provide parking and lending services prospectively without first meeting certain requirements agreed to with the FERC staff.  Additionally, PNM agreed to pay $1.0 million in settlement to the FERC to obtain satisfaction of all issues related to any potential liability stemming from the provision of parking and lending services historically.  In July 2005, the FERC issued its order granting the staff’s motion to dismiss PNM from the Gaming Partnerships docket.  In its order, the FERC found that PNM did not engage in prohibited gaming practices as defined in the FERC’s Gaming Partnership Order and also approved the settlement on the parking and lending services.  The FERC also denied the California parties’ request to keep the docket open as to PNM and terminated the PNM docket.  Subsequently, the California parties filed their petition for rehearing at the FERC objecting to the FERC’s dismissal of PNM from the Gaming Partnership investigation and objecting to the settlement reached with the FERC staff.  The petition for rehearing is pending before FERC and PNM cannot predict the ultimate outcome of the rehearing petition.  In August 2005, Enron, the final of the original 13 PNM customers, entered into a settlement agreement with the FERC staff, the California parties and others that was contested by several parties.  In November 2005, the FERC issued an order approving the joint offer of settlement.  Various parties have either objected to the settlement or otherwise sought efforts to stay or overturn FERC’s order.  In January 2007, the Enron matter went to hearing on certain contested matters.  In June 2007, the FERC administrative law judge issued its initial decision, which has no impact on PNM.  The parties will now have the opportunity to file exceptions before the matter goes to FERC. PNM cannot predict the final outcome of this proceeding.

California Power Exchange and Pacific Gas and Electric Bankruptcies

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

California Attorney General Complaint

In 2002, the California Attorney General filed a complaint with the FERC against numerous sellers, including PNM, regarding prices for wholesale electric sales into the Cal ISO and Cal PX markets and to the California Department of Water Resources. In 2002, the FERC entered an order denying the California Attorney General’s request to initiate a refund proceeding, but directed sellers, including PNM, to comply with additional reporting requirements with regard to certain wholesale power transactions. The California Attorney General filed a petition for review in the Ninth Circuit. The Ninth Circuit issued a decision upholding the FERC’s authority to establish the market-based rate framework under the Federal Power Act, but held that the FERC violated its administrative discretion by declining to investigate whether it should order refunds from sellers who failed to provide transaction-specific reports to the FERC as required by its rules. The Ninth Circuit determined that the FERC has the authority to order refunds for these transactions if it elects to do so and remanded the case back to the FERC for further proceedings, including a determination as to whether additional refunds are appropriate. In December 2006, PNM joined a group of sellers in filing a petition for writ of certiorari in the U.S. Supreme Court challenging the decision by the Ninth Circuit.  On June 18, 2007, the U.S. Supreme Court denied the Petition for Certiorari filed by various competitive sellers, including PNM.  The parties to the appeal are now awaiting disposition of the case back to 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 April 2006, the Federal District Court issued its decision denying the California Attorney General’s motion to remand the case back to the state court, and granted PNM’s and PowerEx’s motions to dismiss the case.  The California Attorney General has appealed the case to the Ninth Circuit.  Briefs have been filed in the case by the parties, but oral argument has not yet been scheduled.  The Company cannot predict the final outcome of this litigation nor whether PNM will be required to make refunds or pay damages under these claims.

Regional Transmission Issues

Transmission Services

In July 2005, the FERC issued an order terminating its proceeding on standard market design, stating that since issuance of the standard market design notice of proposed rulemaking, the electric industry has made significant progress in the development of voluntary RTOs and ISOs. In September 2005, the FERC issued a Notice of Inquiry on Preventing Undue Discrimination and Preference in Transmission Services seeking information from the industry regarding the provisions of the OATT for possible revision in a future rulemaking.  On May 18, 2006, FERC issued a NOPR to reform its pro forma OATT.  FERC emphasized that its purpose for the NOPR was not to create new market structures, redesign approved RTO or ISO markets, require transmission owners to divest control over transmission, impinge on state jurisdiction, or weaken the protection of native load customers.  Core OATT elements were retained, including comparability requirements, protection of native load, state’s jurisdiction over bundled retail load, functional unbundling to address undue discrimination, and reciprocity.  PNM and TNMP have filed Comments and Supplemental Comments in this proceeding.  In February 2007, FERC issued Order 890 setting out the new OATT rule, which became effective in May 2007.  Order 890 addressed several elements of transmission service, including:  (1) requiring greater consistency and transparency in calculating available transfer capacity for transmission; (2) requiring transparent transmission planning and customer access to transmission plans; (3) reform of rollover rights; and (4) clarification of various ambiguities in transmission rights under the new OATT.   Order 890 also required numerous compliance filings to be made by transmission providers.  Order 890 also attempted to clarify certain elements of transmission service utilized for network generation resources, but still left uncertain the transmission used for such resources that pre-dated transmission open access.  PNM filed a petition for rehearing seeking clarification of this issue in regards to one such generation resource that PNM has under contract.  Numerous other entities also filed petitions for rehearing and/or clarification.  Additionally, a number of entities, including EEI, have requested extensions of time for making several of the compliance filings due under the order issued in the NOPR.  Order 890 is still pending before the FERC.  The Company is awaiting FERC action on rehearing requests.  The Company’s transmission group has been working to prepare the numerous FERC compliance filings required by Order 890.  On May 30, 2007, the Company posted its initial compliance filing and its transmission planning proposal on its website.  PNM will continue making the required compliance filings and will participate in FERC’s technical conferences regarding Order 890 reliability standards.  The Company cannot predict what impact the final rule will have on its operations.

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PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

FERC Office of Market Oversight and Investigations

In November 2005, PNM received notice that the FERC Division of Operational Audits of the Office of Enforcement formerly known as the Office of Market Oversight and Investigations would perform a compliance audit of the Company.  The audit covered the period from January 2004 to the present and examined the Company’s compliance with the FERC standards of conduct and OASIS requirements, compliance of the Company’s transmission practices with the FERC regulations and applicable OATT, and compliance of PNM’s wholesale electricity marketing operation with its market-based rate tariff.  This audit is part of a series of routine, mandatory audits of all of the utilities under FERC oversight, focused on compliance with the FERC’s rules and regulations.  Similar audits have been conducted of other regional utilities.

On May 29, 2007, PNM received the FERC’s draft final report.  PNM reviewed the draft report and requested several corrections, which FERC agreed to make.  The draft report identified three areas of non-compliance related to Standards of Conduct and OATT requirements:  (1) Marketing’s access to non-public transmission information citing three examples; (2) off-OASIS communications and exercise of discretion regarding scheduling transmission; and (3) failing to make postings when shared services employees shared facilities with marketing.  PNM sent a written response to staff’s draft report indicating it did not identify matters within the draft audit report that required PNM to formally contest the audit findings.  PNM also indicated its plan to implement the FERC staff’s recommendations.  In June 2007, PNM received the final audit letter from the FERC’s audit staff mirroring the draft audit report as revised.  PNM made its compliance filing in July 2007, and will make periodic reports every quarter thereafter per the staff’s recommendation.  There were no significant findings in the final audit report and PNM has no further action required in this matter.

Natural Gas Royalties Qui Tam Litigation

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

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

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PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Biomass Project

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

The biomass project owner filed an application in August 2007 for a renewable energy production tax credit in connection with the project.   Production tax credit to all applicants is limited to two million megawatt hours per year.  The project owner’s application was denied on September 27, 2007, on grounds that the owner had not demonstrated the project was a qualifying facility for the credit because it had not shown there was a sufficient amount of wood fuel under contract.  The project owner filed an appeal of that decision on October 10, 2007.  The Company is unable to predict the outcome of this matter.

Valencia Energy Facility

On April 18, 2007, PNM entered into a power purchase agreement to purchase all of the electric capacity and energy from the Valencia Energy Facility, a proposed natural gas-fired power plant to be constructed near Albuquerque, New Mexico.  A third-party will build, own and operate the facility while PNM will be the sole purchaser of the electricity generated. The total projected construction cost for the facility is from $100 million to $105 million. The term of the power purchase agreement is for 20 years beginning June 1, 2008, with the full output of the plant estimated up to an average of 148 MW.  PNM will have the option to purchase and own up to 50% of the plant after it reaches commercial operation.  PNM estimates that the plant will typically operate during peak periods of energy demand in summer (less than 18% of the time on an annual basis).  PNM has evaluated the accounting treatment of this PPA and concluded that until the plant reaches commercial operation there are no impacts on PNM since it has no financial risks.  However, after commercial operation is achieved, PNM will consolidate the plant under FIN 46R since it will absorb the majority of the variability in the cash flows of the plant.

On May 31, 2007, the office of the AG and the staff of the NMPRC filed a Petition For Formal Review requesting the NMPRC to investigate the PPA and related transactions relating to the Valencia Energy Facility to determine, among other things, whether the transactions are prudent, appropriate and consistent with NMPRC rules, and to establish the ratemaking treatment of the PPA.  On June 21, 2007, the NMPRC ordered PNM to respond to the Petition so that the NMPRC could ascertain PNM’s position on the matters raised before proceeding further with processing the Petition.  In its response, filed July 11, 2007, PNM described the terms of the agreement and process used to select this resource, stated that an investigation was not warranted and joined in the staff’s and AG’s request for determination of the ratemaking treatment for the agreement.  On November 6, 2007, the NMPRC issued an order, which appointed a hearing examiner and directed her to consider the issues raised in the petition and the response, including whether PNM's 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.

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PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(10) Regulatory and Rate Matters

PNMR

Price-to-Beat Base Rate Reset

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

Energy Agreement

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

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

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

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PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

PNM

Gas Rate Case

On May 30, 2006, PNM filed a general gas rate case that asked the NMPRC to approve an increase in the service fees charged to its 481,000 natural gas customers.  The proposal would increase the set monthly fee, the charge tied to monthly usage, and miscellaneous on-demand service fees.  Those fees are separate from the cost of gas charged to customers.  The monthly cost of gas charge would not be affected by the fee increase.  The petition 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 filed a Notice of Appeal with the New Mexico Supreme Court on July 27, 2007.  The AG filed his Notice of Appeal on July 31, 2007.  The AG’s appeal seeks reversal of the NMPRC decision on one issue – weather normalization.  PNM’s appeal seeks reversal of the NMPRC determination of the required return on equity and on four cost-of-service accounting issues.  If PNM’s appeal is successful in all respects and the AG’s appeal is unsuccessful, PNM’s authorized annual revenue would increase by about $10 million.    If PNM’s appeal is unsuccessful in all respects and the AG’s appeal is upheld, PNM’s annual revenues would decrease by $6.8 million.  Initial briefs are due to be filed November 20, 2007.  PNM is unable to predict the outcome of these appeals.

Electric Rate Case

On February 21, 2007, PNM filed a general electric rate case requesting the NMPRC to approve an increase in service fees to all of PNM’s retail customers except those formerly served by TNMP.  The request is designed to provide PNM’s electric utility an opportunity to earn a 10.75% return on equity.  The application also requests authorization to implement a Fuel and Purchased Power Adjustment Clause through which changes in the cost of fuel and purchased power, above or below the costs included in base rates, will be passed through to customers on a monthly basis.  On September 6, 2007, the NMPRC extended the suspension of PNM’s proposed rates to May 7, 2008 and directed PNM to file supplemental testimony and exhibits to correct certain errors in PNM’s February 21, 2007 filing that PNM had brought to the NMPRC’s attention. The required supplemental testimony and exhibits were filed on September 10, 2007.  As supplemented by this filing, PNM’s rate application requests an increase in electric revenues of $82.4 million, an increase of 14.8% over test period revenue.  The NMPRC staff, the AG, and other intervenors have filed testimony and recommendations regarding PNM's rate application that propose substantial reductions to PNM's proposed rates.  These parties also stated their opposition to PNM's proposal to implement a Fuel and Purchased Power Adjustment Clause.  PNM is preparing rebuttal testimony to refute the positions of these parties and further support its position.  A hearing is scheduled to begin December 5, 2007.  A recommended decision of the hearing examiner is due by February 28, 2008.  PNM is unable to predict the outcome of the rate proceeding.

NMPRC Inquiry on Fuel and Purchased Power Adjustment Clauses

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

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PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Complaint Against Southwestern Public Service Company

In September 2005, PNM filed a complaint under the Federal Power Act against SPS. PNM believes that through its fuel cost adjustment clause, SPS has been overcharging PNM for deliveries of energy. PNM requested that the FERC investigate these charges for the period 2001 through 2004, and going forward. PNM had previously intervened in the Golden Spread Electric Coop complaint case against SPS for the same matter. The hearing was held in that case and in May 2006, the ALJ issued an initial decision in that proceeding recommending that SPS make refunds to customers, including PNM, for misapplication of charges in its fuel cost adjustment clause. The parties in that proceeding filed their exceptions to the initial decision, which has gone to the FERC for review. Fuel cost charges for 2005 and 2006 are being addressed as part of the finding in the Golden Spread fuel charge adjustment clause case pending before the FERC, in which PNM is an intervenor.  PNM’s complaint also alleges that SPS’ demand charge rates for interruptible power sales are excessive and requested that the FERC set a refund effective date of September 13, 2005 for these rates. Settlement conferences were held before a FERC settlement judge throughout the first quarter of 2006. Upon the failure of the parties to reach a settlement, the judge recommended the case proceed to hearing.

Additionally, in November 2005, SPS filed an electric rate case proposing to unbundle and raise rates charged to customers effective July 2006. PNM intervened in the case and objected to the proposed rate increase. In September 2006, PNM and SPS filed a settlement agreement at FERC in which PNM settled its issues in the complaint proceeding, as well as its concerns with SPS’ proposed rate increases in the SPS rate case.  On October 10, 2006, interested parties and FERC Trial Staff filed comments on the proposed settlement.  Only one party opposed the settlement, which was supported or not opposed by the remaining active parties and the FERC Trial Staff.  On October 19, 2006, PNM, SPS and FERC Trial Staff each filed reply comments contending that opposition was without merit.  The Settlement Judge and the ALJ have certified the contested partial settlement and sent it to the FERC for final approval.  The settlement must be approved by the FERC before it may be effective.  The settlement has no impact on the initial decision of the ALJ in the fuel cost adjustment clause case or the pending petitions for rehearing in that docket.

In July 2007, the FERC open meeting agenda indicated the Golden Spread complaint case initial decision was on the docket for consideration by the FERC.  SPS and Golden Spread Electric Coop filed a motion to delay the FERC action on the initial decision to provide additional opportunity for the parties to reach settlement.  PNM filed its opposition to the motion requesting the FERC to proceed to issue an order on the initial decision.  However, FERC removed the Golden Spread item from its agenda.  In September 2007, the FERC open meeting agenda again indicated the Golden Spread complaint case initial decision was on the docket for consideration by the FERC.  SPS and Golden Spread 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.  PNM cannot predict if the settlement will be approved by the FERC or what the outcome of the fuel cost adjustment clause proceeding at the FERC will be.

TNMP

TNMP Competitive Transition Charge True-Up Proceeding

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

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PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In July 2005, the PUCT issued a final order confirming the calculation of carrying costs and the amount of stranded costs allowed for recovery. TNMP and other parties appealed the July PUCT order. On July 24, 2006, the district court in Austin, Texas affirmed the PUCT order. TNMP has appealed that decision to the Texas Third Court of Appeals in Austin, Texas and has filed its briefs.  Oral argument occurred May 9, 2007 and the Court took the matter under advisement.

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

The PUCT approved an amendment to the true-up rule at its June 29, 2006 open meeting. The amendment will result in a lower interest rate that TNMP is allowed to collect on the unsecuritized true-up balance through a stranded cost. The PUCT concluded that the correct rate at which a utility should accrue carrying costs through a stranded cost is the weighted average of an adjusted form of its marginal cost of debt and its unadjusted historical cost of debt, with the weighting based on the utility’s most recently authorized capital structure.  The new rate will affect TNMP by lowering the previously approved carrying cost rate of 10.93%. This change in carrying charges will affect the rates set in TNMP’s stranded cost filing. The rule went into effect on July 20, 2006, and TNMP has made its compliance filing.  Because the PUCT staff disagreed with TNMP’s calculation of the interest rate, the matter was referred to SOAH for a hearing on the merits. The parties filed and submitted testimony.  Initial briefs were filed on April 6, 2007 with reply briefs filed on April 16, 2007.  On June 18, 2007, the ALJ issued a proposed order approving an interest rate of 8.06%. As this calculation differs from TNMP’s methodology and result, TNMP filed exceptions on July 2, 2007.  At the July 20, 2007 open meeting, the PUCT unanimously rejected the proposed order regarding the calculation of TNMP's on-going interest rate for the CTC. The PUCT approved the 8.31% interest rate proposed by TNMP and the PUCT staff.  The PUCT will issue a signed final order and then TNMP will be required to make a compliance filing to implement new rates.

60-Day Rate Review

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

(11) EnergyCo Joint Venture

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

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

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PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

On June 1, 2007, PNMR contributed its ownership of Altura to EnergyCo at fair value of $549.6 million (after the working capital adjustment described below). ECJV made a cash contribution to EnergyCo equal to 50% of the fair value amount, and EnergyCo distributed that cash to PNMR.  PNMR accounted for this transaction by (1) removing the assets and liabilities transferred to EnergyCo from its consolidated financial statements; (2) recording an additional investment in EnergyCo for an amount equal to 50% of the net carrying value of the Altura assets and liabilities transferred, reflecting that 50% of the items transferred are in effect still owned by PNMR; and (3) reflecting in results of operations the difference between the cash received and 50% of the net carrying value of the items transferred that in effect were sold to ECJV, which resulted in a pre-tax loss of $3.6 million being reflected in energy production costs.  As provided under the contribution agreement, subsequent to June 1, 2007, an adjustment to the contribution amounts was made for changes in components of working capital between the date for which fair value was determined and closing.  The result of this adjustment was a payment by PNMR of $2.1 million.

EnergyCo has entered into a bank financing arrangement with a term of five years, which includes a revolving line of credit.  This facility also provides for bank letters of credit to be issued as credit support for certain contractual arrangements entered into by EnergyCo.  Cascade has guaranteed EnergyCo’s obligations on this facility and, to secure EnergyCo’s obligation to reimburse Cascade for any payments made under the guaranty, has a first lien on all assets of EnergyCo and its subsidiaries.  In June 2007, EnergyCo distributed $87.5 million to each of PNMR and ECJV from a long-term borrowing under this facility.

Effective August 1, 2007, EnergyCo completed the acquisition of the CoGen Lyondell Power Generation Facility (now known as Altura Cogen, LLC), a 614 MW natural gas-fired cogeneration plant, located near Houston, Texas.  The purchase price of approximately $467.5 million was funded through cash contributions of $42.5 million from each of PNMR and ECJV and the remaining amount was financed through borrowings under EnergyCo’s credit facility.

On August 2, 2007, PNMR announced that EnergyCo has agreed with NRG Energy, Inc. to jointly develop a 550 MW combined-cycle natural gas unit at the existing NRG Cedar Bayou Generating Station near Houston.  EnergyCo anticipates the construction of the project will be completed in the summer of 2009, at which time 275 MW of electricity will be available for sale by EnergyCo.  EnergyCo expects to fund its portion of the Cedar Bayou construction with borrowings under its existing credit facility. Once the project is complete, EnergyCo expects to arrange permanent financing of an appropriate mix of debt and equity.  PNMR does not anticipate making significant capital contributions to EnergyCo in connection with this project.

PNMR has no commitments or guarantees with respect to EnergyCo.

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PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Summarized financial information for EnergyCo is as follows:

	Three Months		Nine Months
	Ended		Ended
	September 30, 2007
	(In thousands)
Revenues	$	100,463	$	114,828
Expenses and other income		81,249		93,563
Earnings before income taxes		19,214		21,265
Income taxes(1)		399		399
Net earnings	$	18,815	$	20,866
50 percent of net earnings	$	9,408	$	10,433
Plus amortization of basis difference in EnergyCo		1,148		1,733
PNMR equity in net earnings of EnergyCo	$	10,556	$	12,166

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

	As of September 30, 2007
	(In thousands)
Current assets	$	92,417
Net utility plant		833,607
Deferred assets		331,129
Total assets		1,257,153
Current liabilities		85,329
Long-term debt		622,778
Other long-term liabilities		26,506
Total liabilities		734,613
Owners’ equity	$	522,540
50 percent of owners’ equity	$	261,270
Unamortized PNMR basis difference in EnergyCo		387
PNMR equity investment in EnergyCo	$	261,657

58

  

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(12) Related Party Transactions

PNMR, PNM, TNMP, and EnergyCo are considered related parties as defined in SFAS 57.  PNMR Services Company provides corporate services to PNMR, its subsidiaries, and EnergyCo.  Additional information concerning the Company’s related party transactions is contained in Note 20 of the Notes to Consolidated Financial Statements in the 2006 Annual Reports on Form 10-K/A (Amendment No. 1).

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
			(In thousands)
Electricity, transmission and related services billings:
PNM to TNMP	$	-	$	11,208	$	126	$	39,117
TNMP to PNMR		21,057		19,378		55,444		52,545
Shared services billings from PNMR to:
PNM		21,350		31,366		70,945		93,742
TNMP		3,888		6,809		14,006		25,097
Services billings from PNMR to EnergyCo		4,580		-		7,994		-
Income tax sharing payments from:
PNM to PNMR	$	-	$	-	$	-	$	-
TNMP to PNMR		-		-		-		-

59

  

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(13) New Accounting Pronouncements

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

(14) Discontinued Operations

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

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

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

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

	Three Months		Nine Months
	Ended		Ended
	September 30, 2006
	(In thousands)
Operating revenues	$	26,513	$	75,411
Operating expenses and other income		25,744		71,557
Earnings from discontinued operations before income tax		769		3,854
Income tax expense		250		1,237
Earnings from discontinued operations	$	519	$	2,617

60

  

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

	January 1,
	2007
	(In thousands)
Current assets	$	15,444
Other property and investments		10
Utility plant, net		96,468
Goodwill		102,775
Deferred charges		1,377
Total assets transferred to PNM		216,074
Current liabilities		17,313
Long-term debt		1,065
Deferred credits and other liabilities		30,673
Total liabilities transferred to PNM		49,051
Net assets transferred between entities	$	167,023

(15)           Income Taxes

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

The Company adopted the provisions of FIN 48 on January 1, 2007.  As a result of the implementation of FIN 48, PNMR established a liability under FIN 48 of $33.9 million, reduced its previously recorded tax liabilities by $39.9 million, increased the January 1, 2007 balance of retained earnings by $1.6 million, increased interest payable by $3.2 million, and decreased goodwill by $1.2 million.  PNM established an asset under FIN 48 of $3.6 million, reduced its previously recorded tax liabilities by $3.6 million, increased the January 1, 2007 balance of retained earnings by $0.6 million, and increased interest receivable by $0.6 million.  TNMP established no liability under FIN 48, recorded interest receivable of $3.3 million, increased the January 1, 2007 balance of retained earnings by $2.0 million, and decreased goodwill by $1.3 million.

As of January 1, 2007 under FIN 48, PNMR had $33.9 million of unrecognized tax benefits, all of which would affect the effective tax rate if recognized; PNM had $3.6 million of unrecognized tax expense, none of which would affect the effective tax rate if recognized; and TNMP had no unrecognized tax benefits.  As a result of settlements with the IRS, PNMR has recognized approximately $16.0 million of income tax benefit in June 2007.  Including this benefit, PNMR’s effective tax rate was 7.8% for the nine months ended September 30, 2007.  Without this non-recurring benefit, PNMR’s effective tax rate would have been 33.0% for the nine months ended September 30, 2007.

During the nine months ended September 30, 2007, PNMR established a liability of $15.2 million for additional unrecognized tax benefits, which was offset by deferred income taxes and had no effect on earnings.  At September 30, 2007, PNMR had $17.3 million of unrecognized tax benefits, PNM had $3.5 million of unrecognized tax expense, and TNMP had no unrecognized tax benefits.  While it cannot be assured, it is anticipated that approximately $0.5 million of unrecognized tax expense of PNMR and $3.3 million of unrecognized tax expense of PNM will be reversed by September 30, 2008.  The Company is unable to make reasonably reliable estimates of the period of cash settlement of the remaining unrecognized tax benefits and expenses.

61

  

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Estimated interest income related to refunds expected to be received is included in Other Income and estimated interest expense and penalties are included in Interest Expense in the Condensed Consolidated Statements of Operations.  Interest income under FIN 48 for the nine months ended September 30, 2007 was $2.7 million for PNMR.  Due to the settlement discussed above, during the nine months ended September 30, 2007, PNMR reversed interest expense of $4.8 million previously recorded.  At September 30, 2007, PNMR had accumulated accrued interest receivable of $6.8 million and accumulated accrued interest payable of $5.6 million; PNM had accumulated interest receivable of $2.8 million and accumulated interest payable of $0.9 million; and TNMP had accumulated interest receivable of $4.0 million.

The Company files a federal consolidated and several consolidated and separate state income tax returns.  The tax years prior to 2001 are closed to examination by either federal or state taxing authorities.  The years 2003-2004 are currently under federal income tax examination.  Based on the status and the process involved in finalizing these examinations, it is not possible to estimate the impact, if any, upon the Company’s previously recorded uncertain tax positions.

(16)     Restatement

Subsequent to the issuance of the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2006, the management of PNMR and PNM determined that the deferred gains related to certain sale-leaseback transactions had not been amortized over the correct period.

In 1985 and 1986, PNM entered into 11 separate transactions through which it sold all of its interest in Units 1 and 2 of the PVNGS and related common facilities to institutional investors.  At the same time, PNM entered into agreements to lease back the facilities that were sold.  These transactions resulted in gains, which in accordance with GAAP were deferred and amortized over the lives of the leases, approximately 30 years.

In 1990, the New Mexico Public Service Commission (“NMPSC”), the predecessor to the NMPRC, ordered that the portion of the gain on the sale-leasebacks attributable to PNM’s New Mexico customers was to reduce electric rates over 15 years.  Accordingly, under GAAP, the amortization period for the portion of the gain on the sale-leasebacks remaining at that time and attributable to New Mexico customers should have been changed to match the rate-making treatment, which would have resulted in that portion of the gain being completely amortized by 2001.  However, PNM continued to amortize the gain over the lives of the leases for financial reporting purposes, which was longer than the 15 years determined by the NMPSC.  The portion of the gain not attributable to PNM’s New Mexico customers was not affected by the NMPSC order and has continued to be amortized over the lives of the leases in accordance with GAAP.

In connection with the above, PNMR and PNM have restated the Condensed Consolidated Statements of Earnings, Condensed Consolidated Statements of Cash Flows and Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months and nine months ended September 30, 2006 included herein and the Notes to the Condensed Consolidated Financial Statements for such periods, as appropriate.  This restatement does not impact the Condensed Consolidated Financial Statements of TNMP.

The following is a summary of the corrections described above:

62

  

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

PNMR

	Three Months Ended September 30, 2006				Nine Months Ended September 30, 2006
	As Previously Reported		As Restated		As Previously Reported			As Restated
	(In thousands, except per share amounts)				(In thousands, except per share amounts)
Consolidated Statements of Earnings
Energy production costs	$	38,489	$	38,813	$	119,790		$	120,762
Net earnings*		43,844		43,520		86,476			85,504
Net earnings per share
Basic		0.63		0.62		1.25			1.24
Diluted		0.62		0.62		1.24			1.23
Consolidated Statements of Cash Flows
Deferred credits						(11,496	)		(10,524	)
Consolidated Statements of Comprehensive Income (Loss)
Total comprehensive income		64,257		63,933		99,310			98,338
* Net earnings also appears in the Consolidated Statements of Cash Flows and Consolidated Statements of Comprehensive Income (Loss)

PNM

	Three Months Ended September 30, 2006				Nine Months Ended September 30, 2006
	As Previously Reported		As Restated		As Previously Reported			As Restated
	(In thousands, except per share amounts)				(In thousands, except per share amounts)
Consolidated Statements of Earnings
Energy production costs	$	35,990	$	36,314	$	115,657		$	116,629
Net earnings*		17,972		17,648		51,720			50,748
Net earnings available for common stock**		17,840		17,516		51,324			50,352
Consolidated Statements of Cash Flows
Deferred credits						(7,428	)		(6,456	)
Consolidated Statements of Comprehensive Income (Loss)
Total comprehensive income		17,287		16,963		46,336			45,364
* Net earnings also appears in the Consolidated Statements of Cash Flows and Consolidated Statements of Comprehensive Income (Loss)
**Net earnings available for common stock also appears in the Consolidated Statements of Comprehensive Income (Loss)

63

  

PNM RESOURCES, INC. AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY

TEXAS-NEW MEXICO POWER COMPANYAND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(17) Business Improvement Plan

The Company has undertaken a business improvement process that includes a comprehensive cost structure analysis of its operations and a benchmarking analysis to similar-sized utilities.  The Company is now in the process of implementing a series of initiatives designed to manage future operational costs, maintain financial strength and strengthen its regulated utilities.   The multi-phase process includes a business improvement plan to streamline internal processes and reduce the Company’s work force.  The utility-related process enhancements are designed to improve and centralize business functions.

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

64

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations for PNMR is presented on a combined basis, including certain information applicable to PNM and TNMP.  The MD&A for PNM and TNMP only includes a narrative analysis of results of operations 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.  MD&A gives effect to the restatement discussed in Note 16.

MD&A FOR PNMR

BUSINESS AND STRATEGY

Overview

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

PNMR, primarily through EnergyCo, intends to enhance and diversify its presence in the southwest region through the acquisition or development of quality generation assets, including renewable or clean technology resources.  PNMR will continue a disciplined approach to any acquisition, to match acquisitions to demand and to hedge capacity with long-term contracts.

EnergyCo Joint Venture

The EnergyCo joint venture with ECJV is 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’s strategy for unregulated operations is focused on some of the nation’s growing power markets.  PNMR intends to capitalize on the growth opportunities in these markets through its participation and ownership in EnergyCo.  EnergyCo’s anticipated business lines will consist of:

·   Competitive retail energy sales;

·   Development, operation and ownership of diverse generation assets; and

·   Wholesale marketing and trading to optimize its assets.

On June 1, 2007, PNMR contributed its ownership of Altura to EnergyCo at fair value of $549.6 million, as adjusted to reflect changes in working capital.  ECJV made a cash contribution to EnergyCo equal to 50% of the fair value amount and EnergyCo distributed that cash to PNMR.  EnergyCo has entered into a bank financing arrangement.  During August 2007, EnergyCo completed the acquisition of one electric generating plant and announced plans to co-develop another generating unit, substantial portions of which are financed through EnergyCo’s credit facility.

65

TNMP Asset Transfer to PNM

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

Business Improvement Plan

The Company has undertaken a business improvement process that includes a comprehensive cost structure analysis of its operations and a benchmarking analysis to similar-sized utilities.  The Company is now in the process of implementing a series of initiatives designed to manage future operational costs, maintain financial strength and strengthen its regulated utilities.   The multi-phase process includes a business improvement plan to streamline internal processes and reduce the Company’s work force.  The utility-related process enhancements are designed to improve and centralize business functions.   At September 30, 2007, the Company recorded a pre-tax expense of $12.6 million for costs of the business improvement plan, primarily 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.

66

RESULTS OF OPERATIONS

Executive Summary

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
	(In thousands, except per share amounts)
Net earnings	$	8,372	$	43,520	$	58,277	$	85,504
Average common and common
equivalent shares		77,561		70,761		78,151		69,784
Net earnings per diluted share	$	0.11	$	0.62	$	0.75	$	1.23

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

	Three Months Ended September 30, 2007			Nine Months Ended September 30, 2007
	(In millions)
After-tax impacts
IRS settlement	$	-		$	16.0
Afton impairment		(11.8	)		(11.8	)
Business improvement plan		(7.6	)		(7.6	)
Gain on sale of turbine		1.7			1.7
Plant performance		(6.6	)		5.2
PNM Gas growth and weather		(0.5	)		4.2
TNMP growth and weather		1.7			2.5
PNM Electric/Wholesale growth and weather		0.8			(3.3	)
First Choice (excluding net unrealized mark-to-market)		(12.4	)		(12.5	)
Net unrealized mark-to-market		(2.8	)		(9.9	)
Coal costs		(1.4	)		(6.2	)
Twin Oaks and EnergyCo		(4.6	)		(9.6	)
Financing		(0.7	)		(3.7	)
PUCT order / carrying charges		1.7			3.9
Realized gains on NDT		2.5			3.0
Gas rate increase		0.9			0.9
Other		4.0			-
Change in net earnings	$	(35.1	)	$	(27.2	)

67

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

Segment Information

The following discussion is based on the segment methodology that PNMR’s management uses for making operating decisions and assessing performance of its various business activities.  Unusual and non-recurring items are included in the Corporate and Other segment.  References to 2006 amounts in the following discussion have not been adjusted to reflect the transfer of TNMP’s New Mexico operations that are discussed above.  See Note 3 for more information on PNMR’s operating segments.  Income taxes, interest charges, and non-operating items are discussed for PNMR in total.

The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto.  Trends and contingencies of a material nature are discussed to the extent known.  Refer also to “Disclosure Regarding Forward Looking Statements” in this Item 2 and to Part II, Item 1A. “Risk Factors.”

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

68

Regulated Operations

PNM Electric

The table below summarizes operating results for PNM Electric:

	Three Months Ended September 30,										Nine Months Ended September 30,
	2007		2006		Change			%			2007		2006		Change		%
	(In millions)										(In millions)
Total operating revenues	$	206.0	$	161.7	$	44.3			27.4		$	547.3	$	446.8	$	100.5		22.5
Cost of energy		89.7		49.4		40.3			81.6			220.1		141.5		78.6		55.5
Gross margin		116.3		112.3		4.0			3.6			327.2		305.3		21.9		7.2
Operating expenses		70.8		66.8		4.0			6.0			217.0		201.2		15.8		7.9
Depreciation and amortization		16.4		15.2		1.2			7.9			49.2		44.5		4.7		10.6
Operating income	$	29.1	$	30.3	$	(1.2	)		(4.0	)	$	61.0	$	59.6	$	1.4		2.3

The table below summarizes the significant changes to operating revenues, gross margin and operating income:

	Three Months Ended September 30, 2007									Nine Months Ended September 30, 2007
	Total			Gross			Operating			Total		Gross			Operating
	Revenues			Margin			Income			Revenues		Margin			Income
	(In millions)									(In millions)
Transfer of assets from TNMP	$	26.5		$	5.6		$	0.7		$	75.4	$	18.2		$	3.7
Weather		6.4			2.7			2.7			6.2		2.6			2.6
Customer/load growth		11.5			2.6			2.6			18.4		6.2			6.2
Plant performance		-			(4.6	)		(6.5	)		-		3.5			0.9
Coal costs		-			(2.0	)		(2.0	)		-		(8.8	)		(8.8	)
General operational increases		-			-			1.2			-		-			(2.7	)
Other		(0.1	)		(0.3	)		0.1			0.5		0.2			(0.5	)
Total increase (decrease)	$	44.3		$	4.0		$	(1.2	)	$	100.5	$	21.9		$	1.4

69

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

	Three Months Ended September 30,								Nine Months Ended September 30,
	2007		2006		Change		%		2007		2006		Change		%
	(In millions, except customers)								(In millions, except customers)
Residential	$	78.0	$	60.8	$	17.2		28.3	$	204.2	$	168.1	$	36.1		21.5
Commercial		85.7		70.9		14.8		20.9		223.6		193.6		30.0		15.5
Industrial		25.7		16.7		9.0		53.9		74.9		47.1		27.8		59.0
Transmission		10.1		7.7		2.4		31.2		27.0		21.9		5.1		23.3
Other		6.5		5.6		0.9		16.1		17.6		16.1		1.5		9.3
	$	206.0	$	161.7	$	44.3		27.4	$	547.3	$	446.8	$	100.5		22.5
Average customers (thousands)		490.0		431.5		58.5		13.6		488.3		428.6		59.7		13.9

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

	Three Months Ended September 30,								Nine Months Ended September 30,
	2007		2006		Change		%		2007		2006		Change		%
	(Gigawatt hours)								(Gigawatt hours)
Residential		945.9		756.4		189.5		25.1		2,471.5		2,092.3		379.2		18.1
Commercial		1,181.3		1,008.9		172.4		17.1		3,050.9		2,741.8		309.1		11.3
Industrial		488.6		353.4		135.2		38.3		1,453.1		1,000.0		453.1		45.3
Other		79.9		71.8		8.1		11.3		199.7		198.2		1.5		0.8
		2,695.7		2,190.5		505.2		23.1		7,175.2		6,032.3		1,142.9		18.9

Effective January 1, 2007, TNMP’s New Mexico operations were transferred to PNM, which increased PNM Electric’s sales volumes, average customers, and income statement line items.  Information concerning the TNMP New Mexico operations included in the TNMP Electric segment in 2006 is as follows:

	Three Months Ended September 30, 2006		Nine Months Ended September 30, 2006
	(Dollars in millions)
Total revenues	$	26.5	$	75.4
Cost of energy		20.9		57.2
Gross margin		5.6		18.2
Operating expenses		3.4		10.0
Depreciation and amortization		1.5		4.5
Operating income	$	0.7	$	3.7
Sales volumes (GWhs)		293.4		848.1
Average customers (thousands)		49.6		49.6

70

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 third quarter of 2007, warmer temperatures in New Mexico resulted in increased sales volume, as cooling degree-days increased 44.6% from the third quarter of 2006.  Year-to-date 2007, increased usage due to weather in the third quarter and also during the heating season was partially offset by reduced usage from milder temperatures in the second quarter. During both the third 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 third quarter and year-to-date 2007.

During the third quarter of 2007, reduced generation at SJGS from a planned outage, offset by slight improvements in PVNGS and Four Corners performance, resulted in a $4.6 million decrease to gross margin.  Additionally, O&M costs related to outages increased by $1.9 million during the third quarter of 2007.

Year-to-date 2007 compared to 2006, PVNGS performance resulted in a $11.2 million increase to gross margin and a $0.7 million increase in O&M costs.  SJGS performance resulted in a $3.0 million decrease to gross margin and a $1.0 million increase to O&M costs.  Decreased Four Corners performance resulted in a $4.7 million decrease to gross margin and a $0.9 million increase to O&M costs.

For the third quarter and year-to-date 2007, increases in general operational expenses include costs for materials and supplies, as well as shared services, employee labor, pension and benefit costs.  In the third quarter, these increases were offset by decreases in incentive-based and stock-based compensation.

71

TNMP Electric

The table below summarizes the operating results for TNMP Electric:

	Three Months Ended September 30,										Nine Months Ended September 30,
	2007		2006		Change			%			2007		2006		Change			%
Total operating revenues	$	52.7	$	70.2	$	(17.5	)		(24.9	)	$	137.1	$	194.4	$	(57.3	)		(29.5	)
Cost of energy		7.6		27.9		(20.3	)		(72.8	)		21.9		77.8		(55.9	)		(71.9	)
Gross margin		45.1		42.3		2.8			6.6			115.2		116.6		(1.4	)		(1.2	)
Operating expenses		16.6		20.9		(4.3	)		(20.6	)		53.1		63.4		(10.3	)		(16.2	)
Depreciation and amortization		7.1		7.9		(0.8	)		(10.1	)		21.1		23.5		(2.4	)		(10.2	)
Operating income	$	21.4	$	13.5	$	7.9			58.5		$	41.0	$	29.7	$	11.3			38.0

The table below summarizes the significant changes to operating revenues, gross margin and operating income:

	Three Months Ended September 30, 2007									Nine Months Ended September 30, 2007
	Total			Gross			Operating			Total			Gross			Operating
	Revenues			Margin			Income			Revenues			Margin			Income
	(In millions)									(In millions)
Transfer of assets from PNM	$	(26.5	)	$	(5.6	)	$	(0.7	)	$	(75.4	)	$	(18.2	)	$	(3.7	)
Customer/load growth		2.7			2.7			2.7			3.8			3.8			3.8
PUCT order		5.6			5.6			4.6			13.5			13.5			10.7
Transmission prices		0.6			0.1			0.1			1.2			(0.1	)		(0.1	)
Other		0.1			-			1.2			(0.4	)		(0.4	)		0.6
Total increase (decrease)	$	(17.5	)	$	2.8		$	7.9		$	(57.3	)	$	(1.4	)	$	11.3

72

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

	Three Months Ended September 30,										Nine Months Ended September 30,
	2007		2006(1)		Change			%			2007		2006(1)		Change			%
	(In millions, except customers)										(In millions, except customers)
Residential	$	23.4	$	28.8	$	(5.4	)		(18.8	)	$	53.8	$	68.8	$	(15.0	)		(21.8	)
Commercial		19.2		24.2		(5.0	)		(20.7	)		52.9		66.7		(13.8	)		(20.7	)
Industrial		2.1		7.5		(5.4	)		(72.0	)		5.6		30.1		(24.5	)		(81.4	)
Other		8.0		9.7		(1.7	)		(17.5	)		24.8		28.8		(4.0	)		(13.9	)
	$	52.7	$	70.2	$	(17.5	)		(24.9	)	$	137.1	$	194.4	$	(57.3	)		(29.5	)
Average customers (thousands) (2)		226.8		273.5		(46.7	)		(17.1	)		225.8		272.3		(46.5	)		(17.1	)

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

(2)   Under TECA, customers of TNMP Electric in Texas have the ability to choose First Choice or any other REP to provide energy.  The average customers reported above include 135,325 and 152,327 customers of TNMP Electric for the three months ended September 30, 2007 and 2006 and 139,388 and 155,374 customers for the nine months ended September 30, 2007 and 2006 who have chosen First Choice as their REP.  These customers are also included in the First Choice segment.

73

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

	Three Months Ended September 30,										Nine Months Ended September 30,
	2007		2006(2)		Change			%			2007		2006(2)		Change			%
	(Gigawatt hours(1))										(Gigawatt hours(1))
Residential		860.4		919.7		(59.3	)		(6.4	)		1,978.7		2,158.0		(179.3	)		(8.3	)
Commercial		664.8		757.2		(92.4	)		(12.2	)		1,687.6		2,012.1		(324.5	)		(16.1	)
Industrial		543.7		528.5		15.2			2.9			1,424.9		1,546.6		(121.7	)		(7.9	)
Other		26.4		32.6		(6.2	)		(19.0	)		74.5		93.3		(18.8	)		(20.2	)
		2,095.3		2,238.0		(142.7	)		(6.4	)		5,165.7		5,810.0		(644.3	)		(11.1	)

(1)   The GWh sales reported above include 651.4 and 726.0 GWhs for the three months ended September 30, 2007 and 2006 and 1,611.7 and 1,836.0 GWhs for the nine months ended September 30, 2007 and 2006 used by customers of TNMP Electric respectively, who have chosen First Choice as their REP.  These GWhs are also included below in the First Choice segment.

(2)   The customer class sales have been reclassified.

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

During both the third 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 part of the deregulation 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 $5.6 million in the third quarter of 2007 that was partially offset by an increase in amortization expense of $1.0 million.  Year-to-date, a $13.5 million net increase in revenues related to the same PUCT order was partially offset by an increase in amortization expense of $2.8 million.

Increased transmission prices caused an increase in revenues in both the third quarter of 2007 and year-to-date 2007.  In the third quarter, this increase to revenues also had a favorable impact on operating income.  Year-to-date, the increase in revenues was completely offset by an increase in transmission costs paid to other utilities.

74

PNM Gas

The table below summarizes the operating results for PNM Gas:

	Three Months Ended September 30,												Nine Months Ended September 30,
	2007			2006			Change			%			2007		2006		Change			%
	(In millions)												(In millions)
Total operating revenues	$	59.5		$	69.2		$	(9.7	)		(14.0	)	$	351.3	$	345.7	$	5.6			1.6
Cost of energy		33.9			43.8			(9.9	)		(22.6	)		240.8		243.7		(2.9	)		(1.2	)
Gross margin		25.6			25.4			0.2			0.8			110.5		102.0		8.5			8.3
Operating expenses		23.8			25.6			(1.8	)		(7.0	)		75.3		76.6		(1.3	)		(1.7	)
Depreciation and amortization		5.9			6.0			(0.1	)		(1.7	)		18.1		17.9		0.2			1.1
Operating income	$	(4.1	)	$	(6.2	)	$	2.1			33.9		$	17.1	$	7.5	$	9.6			128.0

The table below summarizes the significant changes to operating revenues, gross margin and operating income:

	Three Months Ended September 30, 2007									Nine Months Ended September 30, 2007
	Total			Gross			Operating			Total			Gross			Operating
	Revenues			Margin			Income			Revenues			Margin			Income
	(In millions)									(In millions)
Gas prices	$	(3.7	)	$	-		$	-		$	(20.5	)	$	-		$	-
Weather		(1.6	)		(1.1	)		(1.1	)		32.0			5.1			5.1
Customer growth/usage		(1.7	)		0.3			0.3			3.7			1.8			1.8
Net unrealized mark-to-market gains and losses		(0.3	)		(0.3	)		(0.3	)		0.3			0.3			0.3
Rate increase		1.4			1.4			1.4			1.4			1.4			1.4
Off-system activities		(3.7	)		0.1			0.1			(10.7	)		0.5			0.5
Other		(0.1	)		(0.2	)		1.7			(0.6	)		(0.6	)		0.5
Total increase (decrease)	$	(9.7	)	$	0.2		$	2.1		$	5.6		$	8.5		$	9.6

75

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

	Three Months Ended September 30,										Nine Months Ended September 30,
	2007		2006		Change			%			2007		2006		Change			%
	(In millions, except customers)										(In millions, except customers)
Residential	$	31.4	$	34.6	$	(3.2	)		(9.2	)	$	232.1	$	214.7	$	17.4			8.1
Commercial		10.4		12.3		(1.9	)		(15.4	)		71.1		69.7		1.4			2.0
Industrial		0.5		1.0		(0.5	)		(50.0	)		1.5		3.2		(1.7	)		(53.1	)
Transportation(1)		2.5		2.7		(0.2	)		(7.4	)		10.9		10.1		0.8			7.9
Other		14.7		18.6		(3.9	)		(21.0	)		35.7		48.0		(12.3	)		(25.6	)
	$	59.5	$	69.2	$	(9.7	)		(14.0	)	$	351.3	$	345.7		5.6			1.6
Average customers (thousands)		490.0		481.1		8.9			1.8			490.8		481.0		9.8			2.0

(1)   Customer-owned gas.

The following table shows PNM Gas throughput by customer class:

	Three Months Ended September 30,										Nine Months Ended September 30,
	2007		2006		Change			%			2007		2006		Change			%
	(Thousands of Decatherms)										(Thousands of Decatherms)
Residential		2,244		2,450		(206	)		(8.4	)		20,015		17,471		2,544			14.6
Commercial		1,138		1,320		(182	)		(13.8	)		7,288		6,877		411			6.0
Industrial		65		129		(64	)		(49.6	)		178		395		(217	)		(54.9	)
Transportation(1)		9,784		8,769		1,015			11.6			30,733		29,171		1,562			5.4
Other		1,774		2,327		(553	)		(23.8	)		3,599		5,394		(1,795	)		(33.3	)
		15,005		14,995		10			0.1			61,813		59,308		2,505			4.2

(1)   Customer-owned gas.

76

PNM Gas purchases natural gas in the open market and resells it at no profit to its sales-service customers.  As a result, increases or decreases in gas revenues driven by gas costs do not impact the gross margin or operating income of PNM Gas.  Increases or decreases to gross margin caused by changes in sales-service volumes represent margin earned on the delivery of gas to customers based on regulated rates.  On May 30, 2006, PNM filed for an increase in base gas service rates of $22.6 million. On June 29, 2007 the NMPRC approved an increase in annual revenues of approximately $9 million for PNM, which included a 9.53% return on equity.  PNM and the New Mexico Attorney General have appealed certain aspects of the NMPRC decision to the New Mexico Supreme Court, which is pending.  Implementation of the approved rate increase resulted in an increase to revenues and gross margin for the third quarter and year-to-date 2007.

Warmer weather in the third quarter resulted in decreased revenues and operating income for the third quarter of 2007.  However, for year-to-date 2007, this impact was offset by cooler weather throughout the first half of the year, resulting in increased revenues and operating income.  Year-to-date heating degree-days increased 16.1%.

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

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

Reduced off-system activity decreased revenues, but has slightly positive impact to margin and operating income, as the decreases in revenues were more than offset by the decreases in costs for the transactions.

77

Unregulated Operations

Wholesale

The table below summarizes the operating results for Wholesale:

	Three Months Ended September 30,											Nine Months Ended September 30,
	2007			2006		Change			%			2007		2006		Change			%
	(In millions)											(In millions)
Total operating revenues	$	204.1		$	204.7	$	(0.6	)		(0.3	)	$	532.7	$	538.7	$	(6.0	)		(1.1	)
Cost of energy		189.2			141.8		47.4			33.4			433.2		401.3		31.9			7.9
Gross margin		14.9			62.9		(48.0	)		(76.3	)		99.5		137.4		(37.9	)		(27.6	)
Operating expenses		13.7			15.2		(1.5	)		(9.9	)		58.7		45.3		13.4			29.6
Depreciation and amortization		3.1			7.9		(4.8	)		(60.8	)		17.0		18.2		(1.2	)		(6.6	)
Operating income	$	(1.9	)	$	39.8	$	(41.7	)		(104.8	)	$	23.8	$	73.9	$	(50.1	)		(67.8	)

The table below summarizes the significant changes to operating revenues, gross margin and operating income:

	Three Months Ended September 30, 2007									Nine Months Ended September 30, 2007
	Total			Gross			Operating			Total			Gross			Operating
	Revenues			Margin			Income			Revenues			Margin			Income
	(In millions)									(In millions)
Twin Oaks	$	(51.8	)	$	(37.6	)	$	(28.5	)	$	(19.2	)	$	(15.9	)	$	(24.4	)
Net unrealized mark-to-market gains and losses		(7.5	)		(4.4	)		(4.4	)		(24.7	)		(13.9	)		(13.9	)
Marketing activity		61.3			(3.8	)		(3.8	)		35.7			(13.2	)		(14.1	)
Plant performance		(2.3	)		(2.6	)		(4.5	)		2.8			6.7			7.7
Coal costs		-			(0.4	)		(0.4	)		-			(1.5	)		(1.5	)
General operational increases		-			-			(0.1	)		-			-			(2.1	)
Other		(0.3	)		0.8			-			(0.6	)		(0.1	)		(1.8	)
Total increase (decrease)	$	(0.6	)	$	(48.0	)	$	(41.7	)	$	(6.0	)	$	(37.9	)	$	(50.1	)

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

	For the Period		For the Period
	July 1 – September 30		January 1 – May 31,		April 18 – September 30
	2006		2007		2006		Change
	(Dollars in millions)		(Dollars in millions)
Total operating revenues	$	51.8	$	65.4	$	84.6	$	(19.2	)
Cost of energy		14.2		22.1		25.4		(3.3	)
Gross margin		37.6		43.3		59.2		(15.9	)
Operating expenses		4.6		17.3		8.0		9.3
Depreciation and amortization		4.5		7.7		8.5		(0.8	)
Operating income	$	28.5	$	18.3	$	42.7	$	(24.4	)
Sales Volumes (GWhs)		618.6		915.9		1,111.0		(195.1	)

78

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

	Three Months Ended September 30,										Nine Months Ended September 30,
	2007		2006		Change			%			2007		2006		Change			%
	(In millions)										(In millions)
Long-term sales	$	48.1	$	91.4	$	(43.3	)		(47.4	)	$	201.1	$	196.6	$	4.5			2.3
Short-term sales		156.0		113.3		42.7			37.7			331.6		342.1		(10.5	)		(3.1	)
	$	204.1	$	204.7	$	(0.6	)		(0.3	)	$	532.7	$	538.7	$	(6.0	)		(1.1	)

The following table shows Wholesale GWh sales by type:

	Three Months Ended September 30,										Nine Months Ended September 30,
	2007		2006		Change			%			2007		2006		Change			%
	(Gigawatt hours)										(Gigawatt hours)
Long-term sales		867.8		1,319.0		(451.2	)		(34.2	)		3,214.4		2,999.9		214.5			7.2
Short-term sales		2,270.5		1,719.1		551.4			32.1			5,411.3		5,509.0		(97.7	)		(1.8	)
		3,138.3		3,038.1		100.2			3.3			8,625.7		8,508.9		116.8			1.4

79

The following discussion of results will exclude variances due to the timing of PNMR’s ownership of the Twin Oaks power plant that are shown above.

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

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

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

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

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

For the third quarter and year-to-date 2007, increases in general operational expenses include costs for materials and supplies, as well as shared service, employee labor, pension and benefit costs.  In the third quarter, these costs were mostly offset by decreases in incentive-based and stock-based compensation.

80

First Choice

The table below summarizes the operating results for First Choice:

	Three Months Ended September 30,										Nine Months Ended September 30,
	2007		2006		Change			%			2007		2006		Change			%
	(In millions)										(In millions)
Total operating revenues	$	177.7	$	187.0	$	(9.3	)		(5.0	)	$	463.3	$	447.0	$	16.3			3.6
Cost of energy		159.2		146.4		12.8			8.7			395.9		354.8		41.1			11.6
Gross margin		18.5		40.6		(22.1	)		(54.4	)		67.4		92.2		(24.8	)		(26.9	)
Operating expenses		13.5		17.3		(3.8	)		(22.0	)		41.7		45.9		(4.2	)		(9.2	)
Depreciation and amortization		0.5		0.5		-			-			1.4		1.5		(0.1	)		(6.7	)
Operating income	$	4.5	$	22.8	$	(18.3	)		(80.3	)	$	24.3	$	44.8	$	(20.5	)		(45.8	)

The following table summarizes the significant changes to operating revenues, gross margin and operating income:

	Three Months Ended September 30, 2007									Nine Months Ended September 30, 2007
	Total			Gross			Operating			Total			Gross			Operating
	Revenues			Margin			Income			Revenues			Margin			Income
	(In millions)									(In millions)
Weather	$	(7.0	)	$	(1.8	)	$	(1.8	)	$	(9.9	)	$	(2.4	)	$	(2.4	)
Customer growth/usage		3.3			(1.1	)		(1.1	)		27.8			(1.2	)		(1.2	)
Retail per-MWh margins		2.1			(11.5	)		(10.2	)		12.0			(7.6	)		(4.4	)
Trading margin		(7.1	)		(7.1	)		(7.1	)		(14.3	)		(14.3	)		(14.3	)
Bad debt expense		-			-			(0.1	)		-			-			(2.1	)
Incentive-based compensation		-			-			2.1			-			-			2.8
Other		(0.6	)		(0.6	)		(0.1	)		0.7			0.7			1.1
Total increase (decrease)	$	(9.3	)	$	(22.1	)	$	(18.3	)	$	16.3		$	(24.8	)	$	(20.5	)

81

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

	Three Months Ended September 30,											Nine Months Ended September 30,
	2007			2006(1)		Change			%			2007			2006(1)		Change			%
	(In millions, except customers)											(In millions, except customers)
Residential	$	124.1		$	119.1	$	5.0			4.2		$	298.1		$	267.9	$	30.2			11.3
Mass-market		16.2			23.2		(7.0	)		(30.2	)		50.5			65.9		(15.4	)		(23.4	)
Mid-market		40.5			37.7		2.8			7.4			109.5			93.3		16.2			17.4
Trading gains (losses)		(5.7	)		1.4		(7.1	)		(507.1	)		(7.3	)		7.1		(14.4	)		(202.8	)
Other		2.6			5.6		(3.0	)		(53.6	)		12.5			12.8		(0.3	)		(2.3	)
	$	177.7		$	187.0	$	(9.3	)		(5.0	)	$	463.3		$	447.0	$	16.3			3.6
Actual customers (thousands) (2,3)		258.6			243.4		15.2			6.2			258.6			243.4		15.2			6.2

(1)   The customer class revenues and the customer counts have been reclassified to be consistent with the current year presentation.

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

(3)   Due to the competitive nature of First Choice’s business, actual customer count at September 30 is presented in the table above as a more representative business indicator than the average customers that are shown in the table for TNMP customers.

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

	Three Months Ended September 30,										Nine Months Ended September 30,
	2007		2006(2)		Change			%			2007		2006(2)		Change			%
	(Gigawatt hours (1))										(Gigawatt hours (1))
Residential		886.5		847.3		39.2			4.6			2,139.5		1,911.5		228.0			11.9
Mass-market		101.3		157.6		(56.3	)		(35.7	)		312.7		440.4		(127.7	)		(29.0	)
Mid-market		348.9		345.3		3.6			1.0			944.5		846.5		98.0			11.6
Other		11.3		5.2		6.1			117.3			21.6		15.5		6.1			39.4
		1,348.0		1,355.4		(7.4	)		(0.5	)		3,418.3		3,213.9		204.4			6.4

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

(2)   The customer class sales have been reclassified to be consistent with current year presentation.

Cooler weather throughout 2007 resulted in lower sales volumes and reduced operating income for both the third quarter and year-to-date 2007.

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

An increase in the average sales price over 2006 levels for the third quarter and year-to-date 2007 resulted in increased revenues.  However, this was more than offset by increased purchase power prices and transmission charges, causing a decrease in the average retail margin per MWh sold.

For the third quarter, a decrease in trading margins from a $1.4 million gain in 2006 to a $5.7 million loss in 2007 resulted in a net $7.1 million decrease to operating income.  Year-to-date, a decrease in trading margins from a $7.0 million gain in 2006 to a $7.3 million loss in 2007 resulted in a net $14.3 million decrease to operating income.  Current year trading losses were driven by third quarter market positions related to surplus power supply that decreased in value due to a decrease in market heat rates, largely due to milder weather, along with a decrease in gas prices.

Bad debt expense remained flat during the third quarter of 2007, but increased during the first half of the year, resulting in a decrease to year-to-date operating income.  Reductions in incentive-based compensation as a result of lower earnings in 2007 have decreased operating expenses for both the third quarter and year-to-date 2007.

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EnergyCo

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

	For the Period
	July 1 - September 30, 2007			June 1 - September 30, 2007
	(In thousands)
Operating revenue	$	100,463		$	114,828
Cost of energy		56,419			60,979
Gross margin		44,044			53,849
Operating expenses		12,279			15,046
Depreciation and amortization		5,790			7,318
Operating income		25,975			31,485
Other income and (deductions)		217			241
Net interest expense		(6,978	)		(7,796	)
Earnings before income taxes		19,214			23,930
Income taxes (1)		399			399
Net earnings	$	18,815		$	23,531
50 percent of net earnings	$	9,408		$	11,765
Amortization of basis difference in EnergyCo		1,148			1,733
PNMR equity in net earnings of EnergyCo	$	10,556		$	13,498

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

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

Corporate and Other

Operating revenues decreased along with an offsetting decrease in cost of energy for both the second quarter and year-to-date was a result of eliminations made at the corporate level for transactions between PNM Electric and TNMP’s New Mexico operations that are no longer necessary as these assets were transferred to PNM Electric on January 1, 2007.

Operating expenses increased $22.6 million for the third quarter of 2007 and $30.8 million year-to-date 2007, primarily driven by third quarter increases for the impairment of Afton of $19.5 million and business improvement plan costs of $12.6 million, in addition to costs associated with the formation of the EnergyCo joint venture, an impairment loss on intangible assets, and the loss on the contribution of Altura to EnergyCo of $11.2 million year-to-date 2007.  These costs were partially offset by third quarter decreases for a $2.8 million gain on the sale of a turbine, $2.4 million for the elimination of a PVNGS capital trust lease, and a $2.1 million true-up in property taxes related to Twin Oaks for periods prior to its contribution to EnergyCo.  Costs were also decreased by depreciation costs that were allocated through the corporate allocation driven by the construction of a new data center and additional shared service software, and the absence of TNP and Twin Oaks acquisition integration costs in 2006 of $0.9 million for the third quarter and $3.7 million year-to-date.

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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.

PNMR Consolidated

Realized gains on investments held by the NDT increased $4.1 million for the third quarter and $5.0 million year-to-date primarily resulting from a rebalancing of the asset allocation of the investment portfolio.  Carrying charges on regulatory assets decreased $2.0 million for the third quarter and $6.0 million year-to-date as a result of the absence of interest income earned on TNMP stranded costs in 2006 based on the collection of costs ordered by the PUCT, as discussed in the TNMP Electric segment.  Other deductions increased primarily due to the amortization of $0.8 million for the third quarter and $3.3 million year-to-date for a wind energy investment.

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

PNMR’s consolidated income tax expense decreased primarily as a result of the settlement with the IRS regarding previously unrecognized tax benefits (See Note 15), which had a $16.0 million non-recurring impact on income taxes for the nine months ended September 30, 2007.  In addition, 2007 income taxes were reduced 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 for the three months and nine months ended September 30, 2007 were 19.6% and 7.8%, respectively, compared to 36.3% and 36.9% for the three months and nine months ended September 30, 2006.  Excluding the non-recurring impact to income taxes related to the IRS settlement, the effective tax rates for the nine months ended September 30, 2007 would have been 33.0%.  PNMR’s effective tax rates for the three months and nine months ended September 30, 2007 were also impacted by a reduction in the effective rate applicable to non-operating income primarily due to the impacts of tax credits from a wind energy investment.

85

LIQUIDITY AND CAPITAL RESOURCES

Statements of Cash Flows

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

	Nine Months Ended September 30,
	2007			2006			Change
				(In millions)
Net cash flows from operating activities	$	127.0		$	186.2		$	(59.2	)
Net cash flows from investing activities		19.2			(651.5	)		670.7
Net cash flows from financing activities		(252.9	)		498.0			(750.9	)
Net change in cash and cash equivalents	$	(106.7	)	$	32.7		$	(139.4	)

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

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

The change in PNMR’s cash flows for financing activities for the nine months ended September 30, 2007 is primarily driven by the redemption of long-term debt by TNMP, the issuance of PCRBs by PNM, and a decrease in short-term debt in 2007 compared to an increase in short-term debt in 2006 that was primarily related to financing the acquisition of Twin Oaks.

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.  Projections, including amounts expended through September 30, 2007, for total capital requirements for 2007 are $501.7 million, including construction expenditures of $430.7 million.  Total capital requirements for the years 2007-2011 are projected to be $2,442.7 million, including construction expenditures of $2,006.6 million.  This projection includes completion of the expansion at Afton and $150.6 million for the SJGS environmental project to install low NOX combustion control and mercury reduction technologies, as well as equipment to increase SO₂ controls.  These estimates are under continuing review and subject to on-going adjustment, as well as to board review and approval.

During the first nine months of 2007, the Company utilized cash generated from operations and cash on hand, as well as its liquidity arrangements, to meet its capital requirements and construction expenditures.  On April 18, 2006, PNMR borrowed $480.0 million under a bridge loan facility for temporary financing of the Twin Oaks acquisition.  On April 17, 2007, PNMR repaid the remaining principal balance of $249.5 million under the bridge loan at its maturity.  As discussed in Note 7, TNMP redeemed $100 million of its senior unsecured notes using funds from PNMR and PNMR received $9.8 million from draws under $20 million of PCRBs issued by the City of Farmington, New Mexico during the nine months ended September 30, 2007.  As discussed in Note 11, PNMR received cash distributions from EnergyCo aggregating $362.3 million during this same period.  PNMR and PNM have an aggregate of $60.2 million of commercial paper outstanding and $605.0 million of borrowings under revolving credit facilities as of November 1, 2007.  PNMR, including its subsidiaries, also has $616.6 million in senior unsecured notes and $347.3 million in equity-linked units (which include a debt component) that will come due through 2011, of which $448.9 million in unsecured notes is due prior to September 30, 2008.

86

As discussed in Note 11, EnergyCo purchased an electric generating plant in August 2007 for $467.5 million for which PNMR and ECJV each made a cash contribution to EnergyCo of $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 financing for these EnergyCo projects will be obtained from EnergyCo’s credit facility.  To the extent EnergyCo’s credit facility should be insufficient to finance the current projects, PNMR and ECJV may, at their option, provide additional funds to EnergyCo.  Likewise, if EnergyCo undertakes additional projects, which require funds that would exceed the capacity of its current credit facility and EnergyCo is unable to obtain additional financing capabilities, PNMR and ECJV may be asked to provide additional funding, but such funding would be at the option of PNMR and ECJV.  PNMR is unable to predict if these possibilities will occur or, if they do occur, the amount or timing of additional funds that would be provided to EnergyCo.

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

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

87

Liquidity

PNMR’s liquidity arrangements include the PNMR Facility and the PNM Facility both of which primarily expire in 2012.  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.  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.

A summary of these arrangements as of November 1, 2007 is as follows:

	PNM		PNMR		PNMR
	Separate		Separate		Consolidated
			(In millions)
Financing Capacity:
Revolving credit facility	$	400.0	$	600.0	$	1,000.0
Local lines of credit		13.5		15.0		28.5
Total financing capacity	$	413.5	$	615.0	$	1,028.5
Commercial paper program maximum	$	300.0	$	400.0	$	700.0
Amounts outstanding as of November 1, 2007:
Commercial paper program	$	-	$	60.2	$	60.2
Revolving credit facility		275.0		330.0		605.0
Local lines of credit		5.7		-		5.7
Total short-term debt outstanding		280.7		390.2		670.9
Letters of credit		3.1		36.6		39.7
Total short term-debt and letters of credit	$	283.8	$	426.8	$	710.6
Remaining availability as of November 1, 2007	$	129.7	$	188.2	$	317.9

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

Pursuant to the terms of the PNM Direct Plan, PNMR began offering new shares of PNMR common stock through the plan beginning June 1, 2006.  PNMR may also waive the maximum investment limit upon request in individual cases pursuant to the terms of the plan.  In August 2006, PNMR entered into an equity distribution agreement to offer and sell up to 8 million shares of PNMR common stock from time to time.  The agreement provides that PNMR will not sell more shares than needed for the aggregate gross proceeds from such sales to reach $200.0 million.  From January 1, 2007 through November 1, 2007, PNMR had sold a combined total of 87,026 shares of its common stock through the PNMR Direct Plan and the equity distribution agreement for net proceeds of $2.4 million.

88

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

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

On April 16, 2007, Moody’s changed the credit outlook of PNMR, PNM, and TNMP to negative from stable.  S&P considered the outlook of PNMR, PNM, and TNMP as negative as of the date of this report.  As of September 30, 2007, ratings on the Company’s securities were as follows:

	PNMR	PNM	TNMP
S&P
Senior unsecured notes	BBB-	BBB	BBB
Commercial paper	A3	A3	*
Moody’s
Senior unsecured notes	Baa3	Baa2	Baa3
Commercial paper	P3	P2	*
Preferred stock	*	Ba1	*

*  Not applicable

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

Off-Balance Sheet Arrangements

PNMR’s off-balance sheet arrangements include PNM’s operating lease obligations for PVNGS Units 1 and 2, the EIP transmission line, and the entire output of Delta, a gas-fired generating plant.  See Note 7 of Notes to Consolidated Financial Statements in the 2006 Annual Reports on Form 10-K/A (Amendment No. 1).  These arrangements help ensure PNM the availability of lower-cost generation needed to serve customers.  In addition, PNMR’s investment in EnergyCo is accounted for under the equity method of accounting.  Therefore, EnergyCo’s assets, liabilities, results of operations, and cash flows are not consolidated with PNMR’s other operations.  See Note 11 for further discussion of this arrangement and summarized financial information concerning EnergyCo.

Commitments and Contractual Obligations

PNMR, PNM and TNMP have contractual obligations for long-term debt, operating leases, purchase obligations and certain other long-term liabilities that were summarized in a table of contractual obligations in the 2006 Annual Reports on Form 10-K/A (Amendment No. 1).  The adoption of FIN 48, effective January 1, 2007, was not material to the Company’s contractual obligations.  Under FIN 48, certain liabilities related to uncertain tax positions have been recognized.  See Note 15 for a discussion of these obligations and timing of the payments.

Contingent Provisions of Certain Obligations

PNMR, PNM and TNMP have a number of debt obligations and other contractual commitments that contain contingent provisions.  Some of these, if triggered, could affect the liquidity of the Company.  PNMR, PNM or TNMP could be required to provide security, immediately pay outstanding obligations or be prevented from drawing on unused capacity under certain credit agreements if the contingent requirements were to be triggered.  The most significant consequences resulting from these contingent requirements are detailed in the discussion below.

89

The PNMR Facility and the PNM Facility contain “ratings triggers,” for pricing purposes only.  If PNMR or PNM is downgraded or upgraded by the ratings agencies, the result would be an increase or decrease in interest cost, respectively.  In addition, these facilities contain contingent requirements that require PNMR and PNM to maintain debt-to-capital ratios, inclusive of off-balance sheet debt, of less than 65%.  If the debt-to-capital ratio, inclusive of off-balance sheet debt, were to exceed 65%, the entity could be required to repay all borrowings under its facility, be prevented from drawing on the unused capacity under the facility, and be required to provide security for all outstanding letters of credit issued under the facility.

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

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

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

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

Capital Structure

The capitalization tables below include the current maturities of long-term debt, but do not include operating lease obligations as debt.  The tables for PNM and TNMP reflect the transfer of TNMP’s New Mexico operations as of January 1, 2007, which decreased the common equity of TNMP and increased the common equity of PNM.  This transfer had no impact on PNMR.  See Note 14.

	September 30,			December 31,
PNMR	2007			2006
Common equity		50.2	%		48.9	%
Preferred stock of subsidiary		0.3	%		0.3	%
Long-term debt		49.5	%		50.8	%
Total capitalization		100.0	%		100.0	%

PNM
Common equity	57.7	%	54.4	%
Preferred stock	0.5	%	0.5	%
Long-term debt	41.8	%	45.1	%
Total capitalization	100.0	%	100.0	%

TNMP
Common equity	59.6	%	54.9	%
Long-term debt	40.4	%	45.1	%
Total capitalization	100.0	%	100.0	%

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MD&A FOR PNM

RESULTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2007

COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2006

PNM’s segments are PNM Electric, PNM Gas and PNM Wholesale.  The PNM Electric and PNM Gas segments are identical to the segments presented above for PNMR.  The PNM Wholesale segment reported for PNM does not include Twin Oaks.  See Notes 2 and 11.  The results of operations of these segments are discussed further under “MD&A for PNMR – Results of Operations” above.  The results of operations for Twin Oaks is set forth in a table under “MD&A for PNMR – Results of Operations – Unregulated Operations - Wholesale” above.

PNM’s net earnings for the nine months ended September 30, 2007 were $25.9 million compared to $50.4 million for the nine months ended September 30, 2006.  The major causes of changes in net earnings were the impairment of Afton; reduced margins associated with PNM Electric/Wholesale growth and weather, as increased retail loads resulted in the use of gas generation or higher-cost purchased power and limited the amount of excess energy available to sell in wholesale markets; mark-to-market losses; an increase in generation prices due to the increase of coal costs; business improvement plan costs; and higher financing costs.  These decreases were partially offset by improved plant performance, primarily at PVNGS, and the TNMP asset transfer to PNM Electric.  The positive or (negative) after-tax impacts of these items on net earnings in 2007 compared to 2006 are as follows:

	Nine Months Ended
	September 30, 2007
	(In millions)
After-tax Impacts
TNMP asset transfer	$	2.6
Plant performance		5.2
Net unrealized mark-to-market		(8.4	)
Coal costs		(6.2	)
PNM Electric/Wholesale growth and weather		(3.3	)
PNM Gas growth and weather		4.2
Afton impairment		(11.8	)
Business improvement plan		(4.2	)
Financing		(3.5	)
Other		0.9
Net change	$	(24.5	)

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

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MD&A FOR TNMP

RESULTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2007

COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2006

TNMP operates in only one reportable segment, “TNMP Electric.”  Results for the nine months ended September 30, 2006 present TNMP’s New Mexico operations as discontinued operations, as these operations were transferred to PNM on January 1, 2007.  See Note 14.  TNMP’s results of operations are discussed further under “MD&A for PNMR – Results of Operations – Regulated Operations – TNMP Electric” above.

The PUCT issued an order on November 2, 2006 related to the stranded costs incurred by TNMP as part of the deregulation of the Texas energy market and the associated carrying charges.  The details of this order are discussed in TNMP’s Annual Report on Form 2006 10-K/A (Amendment No. 1).

TNMP’s net earnings for the nine months ended September 30, 2007 were $15.4 million compared to $10.0 million for the nine months ended September 30, 2006.  The major causes of changes in net earnings were the recovery of costs as a result of the PUCT order and customer/load growth and weather, which were partially offset by the transfer of New Mexico assets to PNM Electric, and a decrease in carrying charges on regulatory assets as a result of the absence of interest income earned on TNMP stranded costs in 2006 based on the collection of costs order by the PUCT.  The positive or (negative) after-tax impacts of these items on net earnings in 2007 compared to 2006 are as follows:

	Nine Months Ended
	September 30, 2007
After-tax Impacts	(In millions)
Discontinued operations	$	(2.6	)
Carrying Charges		(3.9	)
PUCT order		7.8
Growth and weather		2.5
Long-term debt reduction		1.8
Other		(0.2	)
Net change	$	5.4

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

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OTHER ISSUES FACING THE COMPANY

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

Global Warming Issues

Global warming increasingly is a concern for the energy industry.  Although there continues to be significant debate regarding its existence and extent, scientific evidence suggests that the emission of so-called greenhouse gases (particularly CO₂) from fossil fuel-fired generation facilities is a contributing factor.  The Company is a founding member of the United States Climate Action Partnership, a group of businesses and leading environmental organizations calling on the federal government to quickly enact strong national legislation to require significant reductions of greenhouse gas emissions and that has issued a landmark set of principles and recommendations to underscore the urgent need for a policy framework on climate change.  The Company intends to continue working with this group and with others in order to best address this challenging issue.

The Company believes that future governmental regulations applicable to the Company’s operations will limit emissions of greenhouse gases, although at this point the Company cannot predict with any level of certainty what form such future regulations will take or when they will become effective.  Under consideration are limitations on the amount of greenhouse gases that can be emitted (so called “caps”) together with systems of trading permitted emissions capacities.  Such a system could require the Company to reduce emissions, although current technology is not available for efficient reduction.  Emissions also could be taxed independently of limits.

The NMPRC issued an order on June 19, 2007, requiring that New Mexico utilities factor a standardized cost of carbon emissions into their integrated resource plans using prices ranging between $8 and $40 per metric ton of CO₂ emitted.  Pursuant to New Mexico law, utility integrated resource plans must be submitted every three years to evaluate renewable energy, energy efficiency, load management, distributed generation and conventional supply-side resources on a consistent and comparable basis, taking into consideration risk and uncertainty of fuel supply, price volatility and costs of anticipated environmental regulations in order to identify the most cost-effective portfolio of resources to supply the energy needs of customers.  Under the NMPRC order, starting with each utility’s next required filing of its integrated resource plan, each utility must analyze these standardized prices as projected operating costs with respect to years 2010 and thereafter.  The Company’s next integrated resource plan is due to be filed with the NMPRC in July 2008.  Reflecting the developing nature of this issue, the NMPRC order states that these prices may be changed in the future to account for additional information or changed circumstances.   The Company is required, however, to use these prices for planning purposes, and the prices may not reflect the costs that it ultimately will incur.

On February 26, 2007 five western states (Arizona, California, New Mexico, Oregon and Washington) entered into an accord, called the Western Regional Climate Action Initiative (the “Initiative”), to reduce greenhouse gas emissions from automobiles and certain industries, including utilities.  Since then, Utah, British Columbia and Manitoba have joined the Initiative.  The Initiative requires the states and provinces to set emission goals within nine months and determine a specific plan to meet such goals within eighteen months.  The Company is monitoring the impact of this Initiative.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

NEW ACCOUNTING STANDARDS

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

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

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

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

·   The risk that EnergyCo is unable to identify and implement profitable acquisitions, including development of the Cedar Bayou Generating Station and implementation of the acquisition of the Lyondell facility, or that 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,

·   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,

·   Availability of fuel supplies,

·   The effectiveness of risk management and commodity risk transactions,

·   Seasonality and other changes in supply and demand in the market for electric power,

·   Variability of wholesale power prices and natural gas prices,

·   Volatility and liquidity in the wholesale power markets and the natural gas markets,

·   Changes in the competitive environment in the electric and natural gas industries,

·   The performance of generating units, including PVNGS, SJGS, Four Corners, and EnergyCo generating units, and transmission systems,

·   The ability to secure long-term power sales,

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·   The risk that the Company and its subsidiaries and EnergyCo may have to commit to substantial capital investments and additional operating costs to comply with new environmental control requirements including possible future requirements to address concerns about global climate change,

·   The risks associated with completion of generation, including pollution control equipment at SJGS, the expansion of the Afton Generating Station, and the EnergyCo Cedar Bayou Generating Station, transmission, distribution, and other projects, including construction delays and unanticipated cost overruns,

·   State and federal regulatory and legislative decisions and actions,

·   The outcome of legal proceedings,

·   Changes in applicable accounting principles, and

·   The performance of state, regional, and national economies.

Any material changes to risk factors occurring after the filing of PNMR’s, PNM’s, or TNMP’s 2006 Annual Report on Form 10-K/A (Amendment No. 1) are disclosed in Item 1A, Risk Factors, in Part II of this Form 10-Q.

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

SECURITIES ACT DISCLAIMER

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

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

PNMR controls the scope of its various forms of risk through a comprehensive set of policies and procedures and oversight by senior level management and the Board.  The Board’s Finance Committee sets the risk limit parameters.  The RMC, comprised of corporate and business segment officers and other managers, oversees all of the risk management activities, which include commodity price, credit, equity, interest rate and business risks.  The RMC has oversight for the ongoing evaluation of the adequacy of the risk control organization and policies.  PNMR has a risk control organization, headed by an Executive Director of Financial Risk Management, which is assigned responsibility for establishing and enforcing the policies, procedures and limits and evaluating the risks inherent in proposed transactions, on an enterprise-wide basis.

The RMC’s responsibilities specifically include: establishment of a general policy regarding risk exposure levels and activities in each of the business segments; authority to approve the types of instruments traded; authority to establish a general policy regarding counterparty exposure and limits; authorization and delegation of transaction limits; review and approval of controls and procedures; review and approval of models and assumptions used to calculate mark-to-market and risk exposure; authority to approve and open brokerage and counterparty accounts; review of hedging and risk activities; and quarterly reporting to the Board and its Finance Committee on these activities.

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

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

To the extent an open position exists, fluctuating commodity prices can impact financial results and financial position, either favorably or unfavorably.  As a result, the Company cannot predict with certainty the impact that its risk management decisions may have on its businesses, operating results or financial position.

Accounting for Derivatives

Under derivative accounting and related rules for energy contracts, the Company accounts for its various derivative instruments for the purchase and sale of energy differently based on the Company’s intent.  Energy contracts that meet the definition of a derivative under SFAS 133 and do not qualify for the normal sales and purchases exception are recorded on the balance sheet at fair value at each period end.  The changes in fair value are recognized in earnings unless specific hedge accounting criteria are met.  Should an energy transaction qualify as a hedge under SFAS 133, fair value changes are recognized on the balance sheet with a corresponding entry in other comprehensive income to the extent effective.  Hedges are recognized in results of operations when the hedged transaction settles.  Derivatives that meet the normal sales and purchases exception within SFAS 133 are not marked to market but rather recorded in results of operations when the underlying transaction settles.  The contracts recorded at fair value that do not qualify for hedge accounting are classified as trading transactions or economic hedges.  Trading transactions are defined as derivative instruments used to take advantage of existing market opportunities.  Economic hedges are defined as derivative instruments, including long-term power agreements, used to hedge generation assets and purchase power costs.

Commodity Risk

Marketing and procurement of energy often involve market risks associated with managing energy commodities and establishing open positions in the energy markets, primarily on a short-term basis.  These risks fall into three different categories:  price and volume volatility, credit risk of counterparties and adequacy of the control environment.  The Company’s operations subject to market risk routinely enter into various derivative instruments such as forward contracts, option agreements and price basis swap agreements to hedge price and volume risk on their purchase and sale commitments, fuel requirements and to enhance returns and minimize the risk of market fluctuations.

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PNM Wholesale’s operations, including long-term contracts and short-term sales, are managed primarily through a net asset-backed marketing strategy, whereby PNM Wholesale’s aggregate net open forward contract position is covered by its forecasted excess generation capabilities.  PNMR 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.  As such, PNMR 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.

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, First Choice utilizes discrete market-based transactions to take advantage of opportunities that present themselves in the ordinary course of business.  These positions are subject to market risk that is not mitigated by First Choice's retail operations.

GAAP defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation.  Fair value is based on current market quotes as available and are supplemented by modeling techniques and assumptions made by the Company to the extent quoted market prices or volatilities are not available.  Generally, market data to value these instruments is available for up to five years for gas swaps and electricity contracts and up to 18 months for options.  The remaining periods are referred to as the illiquid period and are valued using internally developed pricing data.  The Company regularly assesses the validity and availability of pricing data for the illiquid period of its derivative transactions.  Although management uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique.

The Company has entered into a limited number of derivative energy contracts with terms that extend through 15 years.  Observable market data is not available for the illiquid period of these contracts.  In the third quarter of 2007, the Company refined the modeling technique used to value the impacts of the illiquid periods and the utilization of net present value in fair valuing its portfolio.  In the second quarter of 2007, PNM implemented new market price curve models and assumptions.  The cumulative effect of these changes in valuation is accounted for as a change in accounting estimate under SFAS 154.  The effect of the change in estimate was a decrease to net earnings for PNMR and PNM of $1.3 million and $2.5 million for the three and nine months ended September 30, 2007, which is $0.02 and $0.03 per dilutive share for PNMR

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The following table shows the net fair value of mark-to-market energy contracts included in PNMR’s Condensed Consolidated Balance Sheet.  See Note 4 for additional information.

	September 30, 2007
	(In thousands)
	Trading			Economic Hedges			Total
Mark-to-market energy contracts:
Current asset	$	25,856		$	24,936		$	50,792
Long-term asset		6,278			19,686			25,964
Total mark-to-market assets		32,134			44,622			76,756
Current liability		(26,431	)		(31,607	)		(58,038	)
Long-term liability		(5,999	)		(24,871	)		(30,870	)
Total mark-to-market liabilities		(32,430	)		(56,478	)		(88,908	)
Net fair value of mark-to-market energy contracts	$	(296	)	$	(11,856	)	$	(12,152	)

	December 31, 2006
	(In thousands)
	Trading			Economic Hedges			Total
Mark-to-market energy contracts:
Current asset	$	22,442		$	21,238		$	43,680
Long-term asset		391			10,591			10,982
Total mark-to-market assets		22,833			31,829			54,662
Current liability		(21,425	)		(20,595	)		(42,020	)
Long-term liability		(482	)		(8,694	)		(9,176	)
Total mark-to-market liabilities		(21,907	)		(29,289	)		(51,196	)
Net fair value of mark-to-market energy contracts	$	926		$	2,540		$	3,466

The mark-to-market energy transactions represent net liabilities at September 30, 2007 and net assets at December 31, 2006 after netting all applicable open purchase and sale contracts.

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

	September 30, 2007
	Trading			Economic Hedges			Total
	(In thousands)
Sources of fair value gain (loss):
Fair value at beginning of year	$	926		$	2,540		$	3,466
Amount realized on contracts delivered during period		6,683			6,270			12,953
Changes in valuation techniques		301			(4,410	)		(4,109	)
Changes in fair value		(8,206	)		(16,256	)		(24,462	)
Net fair value at end of period	$	(296	)	$	(11,856	)	$	(12,152	)
Net unrealized loss for the period	$	(1,222	)	$	(14,396	)	$	(15,618	)

	September 30, 2006
	Trading			Economic Hedges			Total
	(In thousands)
Sources of fair value gain (loss):
Fair value at beginning of year	$	2,270		$	2,258		$	4,528
Amount realized on contracts delivered during period		(7,390	)		120			(7,270	)
Changes in fair value		4,420			(1,635	)		2,785
Net fair value at end of period	$	(700	)	$	743		$	43
Net unrealized loss for the period	$	(2,970	)	$	(1,515	)	$	(4,485	)

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

Fair Value at September 30, 2007

	Less than
	1 year			1-3 Years		4+ Years			Total
				(In thousands)
Trading	$	(575	)	$	30	$	249		$	(296	)
Economic hedges		(6,671	)		2,195		(7,380	)		(11,856	)
Total	$	(7,246	)	$	2,225	$	(7,131	)	$	(12,152	)

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

	Nine Months Ended
	September 30,
	2007			2006
Type of Derivative	Hedge Instruments
	(In thousands)
Change in fair value of energy contracts	$	(31,970	)	$	27,354
Change in fair value of gas fixed for float swaps		4,924			(24,649	)
Change in the fair value of options		(193	)		607
Change in regulatory assets for gas off-system sales		-			135
Net change in fair value	$	(27,239	)	$	3,447

Risk Management Activities

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

PNM Wholesale measures VaR for all transactions that are not directly asset related and have economic risk.  For the three months ended September 30, 2007, the average VaR amount for these transactions was $1.3 million with high and low VaR amounts for the period of $2.8 million and $0.2 million.  The VaR amount for these transactions at September 30, 2007 was $0.2 million.  For the three months ended September 30, 2006, the average VaR amount for these transactions was $1.5 million with high and low VaR amounts for the period of $4.6 million and $0.5 million.  The total VaR amount for these transactions at September 30, 2006 was $1.7 million.

First Choice measures the market risk of its activities using an EaR calculation to maintain PNMR’s total exposure within management-prescribed limits.  Because of its obligation to serve customers, First Choice must take certain contracts to settlement.  Accordingly, a measure that evaluates the settlement of First Choice’s positions against earnings provides management with a useful tool to manage its portfolio.  First Choice’s EaR calculation reports the possible losses against forecasted earnings for its retail load and supply portfolio.  This calculation is based on First Choice’s forecasted earnings on the reporting date.  The Company utilizes a Delta/Gamma approximation model of EaR.  The Delta/Gamma model calculates a price change within a given time frame, correlation and volatility parameters for each price curve utilized in valuing the mark-to-market of each position to develop a change in value for any position.  This process is repeated multiple times to calculate a standard deviation, which is used to arrive at an EaR amount based on a certain confidence level.  First Choice utilizes the one-tailed confidence level at 95%.  The quantitative risk information, however, is limited by the parameters established in creating the model.  The instruments being evaluated may trigger a potential loss in excess of calculated amounts if changes in commodity prices exceed the confidence level of the model used.  The EaR calculation considers the Company’s forward position for the next twelve months and holds each position to settlement.  The volatility and the correlation estimates measure the impact of adverse price movements both at an individual position level as well as at the total portfolio level.  For example, if EaR is calculated at $10.0 million, it is estimated that in 950 out of 1000 market scenarios calculated by the model the losses against the Company’s forecasted earnings over the next twelve months would not exceed $10.0 million.

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For the nine months ended September 30, 2007, the average EaR amount was $14.9 million, with high and low EaR amounts for the period of $27.1 million and $5.7 million.  The total EaR amount at September 30, 2007 was $18.8 million.  For the nine months ended September 30, 2006, the average EaR amount for these transactions was $9.9 million, with high and low EaR amounts for the period of $15.1 million and $4.7 million.  The total EaR amount for these transactions at September 30, 2006 was $14.9 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 as the EaR measure; however, the VaR measure is intended to capture the effects of changes in market prices over a 10 day holding period.  This holding period is considered appropriate given the nature of First Choice’s supply portfolio and the constraints faced by First Choice in the ERCOT market.  The calculation utilizes the same Monte Carlo simulation approach described above at a 95% confidence level.  The VaR amount for these transactions was $1.3 million at September 30, 2007.  For the nine months ended September 30, 2007, the high, low and average mark-to-market VaR amounts were $6.2 million, $1.3 million and $3.9 million.  The VaR amount for these transactions was $3.6 million at September 30, 2006.  For the nine months ended September 30, 2006, the high, low and average mark-to-market VaR amounts were $5.8 million, $1.7 million and $3.0 million.

The second VaR limit was established for First Choice transactions that are subject to mark-to-market accounting as defined by SFAS 133 and SFAS 149.  This calculation captures the effect of changes in market prices over a three-day holding period and utilizes the same Monte Carlo simulation approach described above at a 95% confidence level.  The VaR amount for these transactions was $0.8 million at September 30, 2007.  For the nine months ended September 30, 2007, the high, low and average mark-to-market VaR amounts were $4.4 million, $0.1 million and $1.6 million.  The VaR amount for these transactions was $2.0 million at September 30, 2006.  For the nine months ended September 30, 2006, the high, low and average mark-to-market VaR amounts were $2.0 million, $0.5 million and $1.0 million.

The Company's risk measures are regularly monitored by the Company's RMC.  The RMC has put in place procedures to ensure that increases in risk measures that exceed the prescribed limits are reviewed and, if deemed necessary, acted upon to reduce exposures.  The VaR and EaR limits represent an estimate of the potential gains or losses that could be recognized on the Company’s portfolios, subject to market risk, given current volatility in the market, and are not necessarily indicative of actual results that may occur, since actual future gains and losses will differ from those estimated.  Actual gains and losses may differ due to actual fluctuations in market prices, operating exposures, and the timing thereof, as well as changes to the underlying portfolios during the year.

Credit Risk

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

PNM Wholesale

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

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PNM Wholesale

Schedule of Credit Risk Exposure

September 30, 2007

					Net
	(b)		Number		Exposure
	Net		of		of
	Credit		Counter		Counter-
	Risk		-parties		parties
Rating (a)	Exposure		>10%		>10%
	(Dollars in thousands)
External ratings:
Investment grade	$	151,891		2	$	51,277
Non-investment grade		17,044		-		-
Split		849		-		-
Internal ratings:
Investment grade		104		-		-
Non-investment grade		7,676		-		-
Total	$	177,564			$	51,277

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

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

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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

September 30, 2007

					Greater		Total
	Less than				than		Net
Rating	2 Years		2-5 Years		5 Years		Exposure
			(In thousands)
External ratings:
Investment grade	$	133,153	$	17,282	$	1,456	$	151,891
Non-investment grade		17,044		-		-		17,044
Split		849		-		-		849
Internal ratings:
Investment grade		104		-		-		104
Non-investment grade		7,676		-		-		7,676
Total	$	158,826	$	17,282	$	1,456	$	177,564

The Company provides for losses due to market and credit risk.  Credit risk for PNM Wholesale's largest counterparty as of September 30, 2007 and December 31, 2006 was $30.0 million and $29.7 million.

First Choice

First Choice is subject to credit risk from non-performance by its supply counterparties to the extent these contracts have a mark-to-market value in the favor of First Choice.  The Constellation power supply agreement established FCPSP, a bankruptcy remote special purpose entity, to hold all of First Choice's customer contracts and wholesale power and gas contracts.  Constellation received a lien on accounts receivable, customer contracts, cash, and the equity of FCPSP as security for FCPSP’s performance under the power supply agreement.  The provisions of this agreement severely limit FCPSP’s ability to secure power from alternate sources.  Additionally, the terms of the security agreement do not require Constellation to post collateral for any mark-to-market balances in FCPSP’s favor.  At September 30, 2007, FCPSP was in an unfavorable mark-to-market position with Constellation.  The Constellation power supply agreement provisions will continue as long as FCPSP is purchasing power from Constellation to serve retail customers.  The existing pricing mechanism under the Constellation power supply agreement expired on December 31, 2006, and the obligations of Constellation to act as a qualified scheduling entity continue until the expiration of the agreement on December 31, 2007.  First Choice's credit exposure to other counterparties at September 30, 2007 was $6.7 million and the time period of these exposures extends through 2010.

First Choice’s retail bad debt expense for the nine months ended September 30, 2007 was $11.8 million.  A reduction in bad debt expense from retail customers is expected due to reduced customer receivables resulting partially from effective disconnect policies, increased collection activity and refined consumer credit and securitization policies.

Interest Rate Risk

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

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%, if interest rates were to decline by 50 basis points from their levels at September 30, 2007.  In general, an increase in fair value would impact earnings and cash flows to the extent not recoverable in rates if PNM were to reacquire all or a portion of its debt instruments in the open market prior to their maturity.

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During the three and nine months ended September 30, 2007, PNM contributed cash of approximately $1.5 million and $4.6 million to the trust for other post retirement benefits. For the three and nine months ended September 30, 2007, PNM made no contributions and $4.9 million to the NDT.  PNM made no contributions to the trusts for the pension or executive retirement plans.  The securities held by these trusts had an estimated fair value of $722.0 million at September 30, 2007, of which approximately 24.4% were fixed-rate debt securities that subject PNM to risk of loss of fair value with movements in market interest rates.  If rates were to increase by 50 basis points from their levels at September 30, 2007, the decrease in the fair value of the fixed-rate securities would be approximately 3.6%, or $6.3 million.  PNM does not currently recover or return through rates any losses or gains on these securities.  PNM, therefore, is at risk for shortfalls in its funding of its obligations due to investment losses.  PNM does not believe that long-term market returns over the period of funding will be less than required for PNM to meet its obligations.  However, this belief is based on assumptions about future returns that are inherently uncertain.

During the three and nine months ended September 30, 2007, TNMP contributed $0.1 million and $0.4 million to the trust for other postretirement benefits for plan year 2007.  TNMP made no contributions to the trust for its pension plan.  The securities held by the trusts had an estimated fair value of $92.5 million at September 30, 2007, of which approximately 23.1% were fixed-rate debt securities that subject TNMP to risk of loss of fair value with movements in market interest rates.  If rates were to increase by 50 basis points from their levels at September 30, 2007, the decrease in the fair value of the fixed-rate securities would be approximately 4.1%, or $0.9 million.  TNMP, therefore, is at risk for shortfalls in its funding of its obligations due to investment losses.  TNMP does not believe that long-term market returns over the period of funding will be less than required for TNMP to meet its obligations.  However, this belief is based on assumptions about future returns that are inherently uncertain.

Equity Market Risk

The trusts established to fund PNM’s share of the decommissioning costs of PVNGS and pension and other postretirement benefits hold certain equity securities at September 30, 2007.  These equity securities also expose the Company to losses in fair value.  Approximately 60.8% of the securities held by the various trusts were equity securities as of September 30, 2007.  Similar to the debt securities held for funding decommissioning and certain pension and other postretirement costs, PNM does not recover or earn a return through rates on any losses or gains on these equity securities.

The trusts established to fund TNMP’s pension and other postretirement benefits hold certain equity securities at September 30, 2007.  These equity securities also expose the Company to losses in fair value.  Approximately 53.3% of the securities held by the various trusts were equity securities as of September 30, 2007.  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

Disclosure of controls and procedures

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

Changes in internal controls

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

·   Implemented a new system to assist with complex billing calculations for large industrial customers at TNMP to record billing activities for Texas market ERCOT electronic data interchange transactions and modified the related business process controls.

·   Implemented a new system that will support FCP’s trading activities by providing an end-to-end flow of deal information from deal capture through scheduling into settlements and posting in the general ledger and redesigned the related business process controls.

·   Outsourced FCP’s retail electric provider function to assist with streamlining FCP’s processes and improve upon recording and collecting revenue and receivables for FCP’s mass market and commercial customers and redesigned the related business process controls.

·   Currently designing and implementing monitoring controls for its equity investment in EnergyCo to ensure that PNMR maintains its compliance with Section 404 of the Sarbanes-Oxley Act of 2002. It is expected that this effort will continue through the end of 2007.

System Upgrade

·   Upgraded an integrated system for inventory management, purchasing, warehousing, and work flow management, except for TNMP.  The upgrade will also enhance internal monitoring and reporting for balance/reconciliation of interface processing and clearly define allowable criteria for when disbursement authorization is required.

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

PNM

Disclosure of controls and procedures

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

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System Upgrade

·   Upgraded an integrated system for inventory management, purchasing, warehousing, and work flow management.  The upgrade will also enhance internal monitoring and reporting for balance/reconciliation of interface processing and clearly define allowable criteria for when disbursement authorization is required.

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

TNMP

Disclosure of controls and procedures

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

Changes in internal controls

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

·    Implemented a new system to assist with complex billing calculations for large industrial customers at TNMP to record billing activities for Texas market ERCOT electronic data interchange transactions and modified the related business process controls.

Except as described above, there have been no other changes in TNMP’s internal controls over financial reporting for the quarter ended September 30, 2007, 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 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

·   Legal Proceedings discussed under the caption, “Western United States Wholesale Power Market”

·   Natural Gas Royalties Qui Tam Litigation

·   TNMP Competitive Transition Charge True-Up Proceeding

·   San Juan River Adjudication

ITEM 1A.  RISK FACTORS

As of the date of this report, there have been no material changes with regard to the  Risk Factors disclosed in PNMR’s, PNM’s and TNMP’s Annual Reports on Form 10-K for the year ended December 31, 2007.

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ITEM 6.  EXHIBITS

10.1**	PNMR	Third Amendment to the PNM Resources Executive Savings Plan II executed June 4, 2007
10.2**	PNMR	Fifth Amendment to the PNM Resources Non-Union Severance Pay Plan executed on March 12, 2007
10.3**	PNMR	PNM Resources, Inc. Non-Union Severance Pay Plan effective August 1, 2007
10.4**	PNMR	Amended and Restated Retention Bonus Agreement for Jeffry E. Sterba executed September 7, 2007
10.5**	PNMR	Second Amendment to the PNM Resources Officer Life Insurance Plan executed April 15, 2007
10.6**	PNMR	Agreement dated August 16, 2007 between PNM Resources and Public Policy Strategy Group LLC for consulting services performed by William J. Real
12.1	PNMR	Ratio of Earnings to Fixed Charges
12.2	PNM	Ratio of Earnings to Fixed Charges
12.3	PNM	Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
31.1	PNMR	Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	PNMR	Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.3	PNM	Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.4	PNM	Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.5	TNMP	Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.6	TNMP	Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	PNMR	Chief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	PNMR	Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.3	PNM	Chief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.4	PNM	Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.5	TNMP	Chief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.6	TNMP	Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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

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SIGNATURE

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

	PNM RESOURCES, INC. PUBLIC SERVICE COMPANY OF NEW MEXICO TEXAS-NEW MEXICO POWER COMPANY
	(Registrants)
Date:   November 8, 2007	/s/ Thomas G. Sategna
	Thomas G. Sategna
	Vice President and Corporate Controller
	(Officer duly authorized to sign this report)

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