Public Service Company of New Mexico PFD 4.58% (PNMXO) 10-Q 2007 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period endedJune 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. YESþ NOo

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

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

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

Large accelerated filerþ                    Accelerated filero                    Non-accelerated filero

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

Large accelerated filero                    Accelerated filero                    Non-accelerated filerþ

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

As of August 1, 2007, 76,726,852 shares of common stock, no par value per share, of PNMR were outstanding.

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

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

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

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		63
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK		94
ITEM 4. CONTROLS AND PROCEDURES		100
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS		102
ITEM 1A. RISK FACTORS		102
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		102
ITEM 6. EXHIBITS		103
SIGNATURE		104
Exhibit 2.1
Exhibit 4.23
Exhibit 12.1
Exhibit 12.2
Exhibit 31.1
Exhibit 31.2
Exhibit 31.3
Exhibit 31.4
Exhibit 31.5
Exhibit 31.6
Exhibit 32.1
Exhibit 32.2
Exhibit 32.3
Exhibit 32.4
Exhibit 32.5
Exhibit 32.6

i

GLOSSARY

Definitions:
Afton	Afton Generating Station
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.
Company	PNM Resources, Inc. and Subsidiaries
Constellation	Constellation Energy Commodities Group, Inc.
CTC	Competition Transition Charge
Decatherm	Million BTUs
EaR	Earnings at Risk
ECJV	ECJV Holdings, LLC
ECMT	EnergyCo Marketing and Trading, 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
ESI	Electric Service Identifier
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
Luna	Luna Energy Facility
MD&A	Management’s Discussion and Analysis of Financial Condition and Results of Operations
MMBTUs	Million BTUs
Moody’s	Moody’s Investor Services, Inc.
MW	Megawatt
MWh	Megawatt Hour
Navajo Acts	Navajo Nation Air Pollution Prevention and Control Act, the Navajo Nation Safe Drinking Water Act, and the Navajo Nation Pesticide Act

1

Definitions:
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
NSPS	New Source Performance Standards
NSR	New Source Review
NYMEX	New York Mercantile Exchange
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 by the Company
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 48 SAB 108	FIN No. 48 “Accounting for Uncertainty in Income Taxes” SEC Staff Accounting Bulletin No. 108“Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”
SFAS 5	SFAS No. 5 “Accounting for Contingencies”
SFAS 57	SFAS No. 57 “Related Party Disclosures”
SFAS 71	SFAS No. 71 “Accounting for Effects of Certain Types of Regulation”
SFAS 128	SFAS No. 128 “Earnings per Share”
SFAS 133	SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities”
SFAS 141	SFAS No. 141 “Business Combinations”
SFAS 144	SFAS No.144 “Accounting for the Impairment or Disposal of Long-Lived Assets”
SFAS 149	SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”
SFAS 154	SFAS No. 154 “Accounting Changes and Error Corrections”

3

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PNM RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
				(As Restated,						(As Restated,
				See Note 16)						See Note 16)
	(In thousands, except share information)
Operating Revenues:
Electric	$	505,376		$	477,603		$	942,183		$	925,819
Gas		75,136			68,869			291,620			276,345
Other		169			197			379			306
Total operating revenues		580,681			546,669			1,234,182			1,202,470
Operating Expenses:
Cost of energy sold		356,533			306,500			735,053			732,472
Administrative and general		64,341			66,311			135,547			131,616
Energy production costs		52,256			44,038			100,080			81,949
Depreciation and amortization		39,695			37,953			80,137			72,283
Transmission and distribution costs		22,194			21,314			44,761			40,364
Taxes other than income taxes		19,003			18,261			37,623			35,225
Total operating expenses		554,022			494,377			1,133,201			1,093,909
Operating income		26,659			52,292			100,981			108,561
Other Income and Deductions:
Interest income		7,041			8,916			17,829			19,067
Gains on investments held by NDT		2,957			1,158			3,001			2,054
Other income		1,890			764			3,929			3,035
Equity in net earnings of EnergyCo		2,272			—			1,610			—
Carrying charges on regulatory assets		—			2,004			—			3,977
Other deductions		(5,530	)		(2,497	)		(6,518	)		(4,013	)
Net other income and deductions		8,630			10,345			19,851			24,120
Interest Charges:
Interest on long-term debt		18,734			24,267			42,743			46,798
Other interest charges		11,158			12,231			24,996			18,263
Total interest charges		29,892			36,498			67,739			65,061
Earnings before Income Taxes		5,397			26,139			53,093			67,620
Income Taxes (Benefit) (See Note 15)		(14,975	)		10,024			2,923			25,372
Preferred Stock Dividend Requirements of Subsidiary		132			132			264			264
Net Earnings	$	20,240		$	15,983		$	49,906		$	41,984
Net Earnings per Common Share (see Note 5):
Basic	$	0.26		$	0.23		$	0.65		$	0.61
Diluted	$	0.26		$	0.23		$	0.64		$	0.61
Dividends Declared per Common Share	$	0.23		$	0.22		$	0.46		$	0.44

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

4

PNM RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

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

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

5

PNM RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

	June 30,		December 31,
	2007		2006
	(In thousands, except share information)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Short-term debt	$	559,670	$	764,345
Current installments of long-term debt		148,935		3,298
Accounts payable		167,512		214,229
Accrued interest and taxes		58,379		98,789
Regulatory liabilities		17,577		1,172
Derivative instruments		105,840		68,575
Other current liabilities		114,052		225,653
Total current liabilities		1,171,965		1,376,061
Long-term Debt		1,531,850		1,765,907
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		579,586		586,283
Accumulated deferred investment tax credits		28,531		30,236
Regulatory liabilities		392,570		389,330
Asset retirement obligations		63,789		61,338
Accrued pension liability and postretirement benefit cost		131,126		134,799
Derivative instruments		19,632		14,581
Other deferred credits		135,797		155,860
Total deferred credits and other liabilities		1,351,031		1,372,427
Total liabilities		4,054,846		4,514,395
Commitments and Contingencies (See Note 9)
Cumulative Preferred Stock of Subsidiary without mandatory redemption requirements ($100 stated value, 10,000,000 shares authorized; issued and outstanding 115,293 shares)		11,529		11,529
Common Stockholders’ Equity:
Common stock outstanding (no par value, 120,000,000 shares authorized; issued and outstanding 76,719,731 and 76,648,472 shares)		1,039,530		1,040,451
Accumulated other comprehensive income, net of income tax		17,599		28,909
Retained earnings		669,449		635,550
Total common stockholders’ equity		1,726,578		1,704,910
	$	5,792,953	$	6,230,834

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

6

PNM RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Six Months Ended June 30,
	2007			2006
				(As Restated,
				See Note 16)
	(In thousands)
Cash Flows From Operating Activities:
Net earnings	$	49,906		$	41,984
Adjustments to reconcile net earnings to net cash flows from operating activities:
Depreciation and amortization		97,093			79,651
Allowance for equity funds used during construction		(876	)		(73	)
Deferred income tax expense (benefit)		13,062			(7,920	)
Equity in net earnings of EnergyCo		(1,610	)		—
Net unrealized losses on derivatives		7,940			1,864
Realized gains on investments held by NDT		(3,001	)		(2,054	)
Realized loss on Altura contribution		3,637			—
Impairment loss on intangible assets		3,380			—
Carrying charges on regulatory assets and liabilities		(513	)		(4,922	)
Amortization of fair value of acquired Twin Oaks sales contract		(35,073	)		(16,878	)
Stock based compensation expense		5,250			5,513
Excess tax benefit from stock-based payment arrangements		(8	)		(908	)
Other, net		(561	)		(9	)
Changes in certain assets and liabilities:
Accounts receivable		23,680			55,214
Unbilled revenues		16,567			17,047
Regulatory assets		(1,752	)		20,878
Other assets		(2,792	)		(7,819	)
Accrued pension liability and postretirement benefit costs		(4,549	)		(5,409	)
Accounts payable		(42,325	)		(88,716	)
Accrued interest and taxes		(14,709	)		35,402
Deferred credits		(17,567	)		(9,168	)
Other liabilities		(7,987	)		(2,234	)
Net cash flows from operating activities		87,192			111,443
Cash Flows From Investing Activities:
Utility plant additions		(213,070	)		(128,568	)
Proceeds from sales of investments held by NDT		62,697			45,534
Purchases of investments held by NDT		(66,903	)		(45,738	)
Proceeds from sales of utility plant		25,041			—
Return of principal on PVNGS lessor notes		11,953			11,297
Investments in EnergyCo		(2,540	)		—
Distributions from EnergyCo		362,275			—
Twin Oaks acquisition		—			(481,015	)
Other, net		(6,977	)		2,309
Net cash flows from investing activities		172,476			(596,181	)

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

7

PNM RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

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

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

8

PNM RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

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

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

9

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
				(As Restated,						(As Restated,
				See Note 16)						See Note 16)
	(In thousands)
Operating Revenues:
Electric	$	300,307		$	259,298		$	540,632		$	570,765
Gas		75,136			68,869			291,620			276,345
Total operating revenues		375,443			328,167			832,252			847,110
Operating Expenses:
Cost of energy sold		230,414			185,410			495,295			524,672
Administrative and general		42,866			40,520			87,248			81,648
Energy production costs		43,330			42,404			84,159			80,315
Depreciation and amortization		26,202			24,289			52,558			49,144
Transmission and distribution costs		17,244			15,916			34,885			30,223
Taxes other than income taxes		10,021			8,414			18,707			17,727
Total operating expenses		370,077			316,953			772,852			783,729
Operating income		5,366			11,214			59,400			63,381
Other Income and Deductions:
Interest income		6,650			8,670			15,352			18,023
Gains on investments held by NDT		2,957			1,158			3,001			2,054
Other income		1,072			547			2,227			1,479
Other deductions		(1,907	)		(1,504	)		(2,516	)		(2,355	)
Net other income and deductions		8,772			8,871			18,064			19,201
Interest Charges:
Interest on long-term debt		11,956			13,167			24,393			25,026
Other interest charges		3,683			1,732			7,338			3,293
Total interest charges		15,639			14,899			31,731			28,319
Earnings (Loss) before Income Taxes		(1,501	)		5,186			45,733			54,263
Income Taxes (Benefit)		(690	)		2,190			17,664			21,163
Net Earnings (Loss)		(811	)		2,996			28,069			33,100
Preferred Stock Dividend Requirements		132			132			264			264
Net Earnings (Loss) Available for Common Stock	$	(943	)	$	2,864		$	27,805		$	32,836

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

10

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

	June 30,		December 31,
	2007		2006
	(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	1,430	$	11,886
Special deposits		774		376
Accounts receivable, net of allowance for uncollectible accounts of $1,571 and $1,788		107,545		122,648
Unbilled revenues		45,339		81,166
Other receivables		79,619		62,040
Affiliate accounts receivable		1,166		8,905
Inventories		57,052		51,801
Regulatory assets		12,321		17,507
Income taxes receivable		—		13,222
Derivative instruments		38,459		27,750
Other current assets		54,515		51,231
Total current assets		398,220		448,532
Other Property and Investments:
Investment in PVNGS lessor notes		245,014		257,659
Investments held by NDT		136,424		123,143
Other investments		26,510		15,634
Non-utility property		976		966
Total other property and investments		408,924		397,402
Utility Plant:
Electric plant in service		2,890,200		2,742,795
Gas plant in service		751,736		721,168
Common plant in service and plant held for future use		18,237		72,806
		3,660,173		3,536,769
Less accumulated depreciation and amortization		1,373,124		1,279,349
		2,287,049		2,257,420
Construction work in progress		294,565		191,403
Nuclear fuel, net of accumulated amortization of $20,353 and $14,008		35,263		28,844
Net utility plant		2,616,877		2,477,667
Deferred Charges and Other Assets:
Regulatory assets		406,299		410,979
Derivative instruments		19,837		12,504
Goodwill		102,601		—
Other deferred charges		65,304		66,465
Total deferred charges and other assets		594,041		489,948
	$	4,018,062	$	3,813,549

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

11

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

	June 30,		December 31,
	2007		2006
	(In thousands, except share information)
LIABILITIES AND STOCKHOLDER’S EQUITY
Current Liabilities:
Short-term debt	$	242,070	$	251,300
Accounts payable		81,556		138,577
Affiliate accounts payable		14,958		16,898
Accrued interest and taxes		47,650		41,340
Regulatory liabilities		17,577		1,172
Derivative instruments		55,735		43,096
Other current liabilities		69,166		82,262
Total current liabilties		528,712		574,645
Long-term Debt		1,005,639		987,205
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		394,973		368,256
Accumulated deferred investment tax credits		28,207		29,404
Regulatory liabilities		351,578		335,196
Asset retirement obligations		63,076		60,493
Accrued pension liability and postretirement benefit cost		126,187		129,595
Derivative instruments		11,560		14,100
Other deferred credits		104,073		112,990
Total deferred credits and liabilities		1,079,654		1,050,034
Total liabilities		2,614,005		2,611,884
Commitments and Contingencies (See Note 9)
Cumulative Preferred Stock without mandatory redemption requirements ($100 stated value, 10,000,000 authorized; issued and outstanding 115,293 shares)		11,529		11,529
Common Stockholder’s Equity:
Common stock outstanding (no par value, 40,000,000 shares authorized; issued and outstanding 39,117,799 shares)		932,522		765,500
Accumulated other comprehensive income, net of income tax		15,685		8,761
Retained earnings		444,321		415,875
Total common stockholder’s equity		1,392,528		1,190,136
	$	4,018,062	$	3,813,549

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

12

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

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

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

13

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

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

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

14

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

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

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

15

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
	(In thousands)
Electric Operating Revenues	$	43,536		$	39,696		$	84,464		$	75,244
Operating Expenses:
Cost of energy sold		7,221			7,145			14,392			13,594
Administrative and general		7,361			7,848			16,263			17,061
Depreciation and amortization		7,041			6,337			14,041			12,512
Transmission and distribution costs		4,945			4,463			9,868			8,208
Taxes other than income taxes		5,413			5,482			10,238			10,672
Total operating expenses		31,981			31,275			64,802			62,047
Operating income		11,555			8,421			19,662			13,197
Other Income and Deductions:
Interest income		776			81			864			336
Other income		770			85			1,046			253
Carrying charges on regulatory assets		—			2,004			—			3,977
Other deductions		(46	)		(20	)		(73	)		(43	)
Net other income and deductions		1,500			2,150			1,837			4,523
Interest Charges:
Interest on long-term debt		6,153			6,432			12,585			12,864
Other interest charges		718			829			1,364			1,632
Total interest charges		6,871			7,261			13,949			14,496
Earnings before Income Taxes		6,184			3,310			7,550			3,224
Income taxes		1,950			2,101			2,378			1,330
Net Earnings from Continuing Operations		4,234			1,209			5,172			1,894
Discontinued Operations, net of income tax expense (benefit) of $0, $(16), $0 and $987		—			1,627			—			2,098
Net Earnings	$	4,234		$	2,836		$	5,172		$	3,992

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)

	June 30,		December 31,
	2007		2006
	(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	34	$	2,542
Special deposits		50		—
Accounts receivable, net of allowance for uncollectible accounts of $0 and $31		8,757		10,317
Unbilled revenues		3,018		6,000
Affiliate accounts receivable		7,680		—
Other receivables		5,483		1,515
Inventories		1,670		1,509
Federal income tax receivable		38,018		40,473
Other current assets		803		944
Total current assets		65,513		63,300
Other Property and Investments:
Other investments		554		511
Non-utility property, net of accumulated depreciation of $0 and $3		2,111		2,120
Total other property and investments		2,665		2,631
Utility Plant:
Electric plant in service		770,630		925,538
Common plant in service and plant held for future use		488		589
		771,118		926,127
Less accumulated depreciation and amortization		264,203		326,404
		506,915		599,723
Construction work in progress		10,242		13,799
Net utility plant		517,157		613,522
Deferred Charges and Other Assets:
Stranded costs		87,962		89,949
Carrying charges on stranded costs		40,652		41,584
Other regulatory assets		10,826		11,052
Goodwill		260,144		363,764
Pension asset		10,163		8,853
Other deferred charges		6,919		9,205
Total deferred charges and other assets		416,666		524,407
	$	1,002,001	$	1,203,860

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

17

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

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

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

18

TEXAS-NEW MEXICO POWER COMPANY
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

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

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

19

TEXAS-NEW MEXICO POWER COMPANY
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

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

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

20

TEXAS-NEW MEXICO POWER COMPANY
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

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

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

21

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1) Significant Accounting Policies and Responsibility for Financial Statements

Financial Statement Preparation

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

These Condensed Consolidated Financial Statements are unaudited, and certain information and note disclosures normally included in the 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, 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 COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(2) Acquisitions and Disposition

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

As part of the acquisition of Twin Oaks, PNMR determined the fair value of two contractual obligations to sell power. The first contract obligates Altura to sell power through September 2007 at which time the second contract begins and extends for three years. In comparing the pricing terms of the contractual obligations against the forward price of electricity in the relevant market, PNMR concluded that the contracts were below market. In accordance with SFAS 141, the contracts were recorded at fair value to be amortized as an increase in operating revenue over the contract periods. The amortization matches the difference between the forward price curve and the contractual obligations for each month in accordance with the contract as of the acquisition date. For the first contract, which runs through September 30, 2007, $94.9 million was recorded in other current liabilities and $52.4 million was recorded in other deferred credits for a contract total of $147.3 million. As of May 31, 2007, the Company had amortized $105.9 million, including $20.0 million during the three months ended March 31, 2007 and $15.0 million during the period from April 1, 2007 through May 31, 2007. For the second contract, which begins October 1, 2007, $29.6 million was recorded in other deferred credits and no amortization has been recorded.

The Twin Oaks purchase agreement also includes the development rights for a possible 600-megawatt expansion of the plant, which PNMR classified as an intangible asset with a value of $25 million at the date of acquisition. PNMR reassessed this valuation during the quarter ended June 30, 2007 and determined that the asset was impaired, resulting in a pre-tax loss of $3.4 million, which was recorded in energy production costs.

On June 29, 2007, a wholly-owned subsidiary of PNMR purchased 100% of a trust, which owns a 2.27% undivided interest, representing 29.8 MW, in PVNGS Unit 2 and a 0.76% undivided interest in certain PVNGS common facilities, as well as a lease under which such facilities are leased to PNM. The beneficial interest in the trust was purchased for $44.0 million in cash and the assumption of $41.2 million in long-term debt payable to PVNGS Capital Trust. This long-term debt offsets a portion of the investment in PVNGS lessor notes and is eliminated in PNMR’s consolidated 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.

(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 is presented as previously reported and does not reflect this transfer.

23

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

REGULATED OPERATIONS

PNM Electric

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

TNMP Electric

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

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

PNM Gas

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

24

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

UNREGULATED OPERATIONS

Wholesale

Wholesale for PNMR includes PNM Wholesale and Altura and consists of the generation and sale of electricity into the wholesale market. PNM Wholesale sells the unused capacity of PNM’s jurisdictional assets as well as the capacity of PNM’s wholesale plants excluded from retail rates. Although the FERC has jurisdiction over the rates of PNM Wholesale, 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 and EnergyCo’s revenues and expenses are not included in PNMR’s consolidated results of operations or the following tables. See Notes 2 and 11.

25

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

CORPORATE AND OTHER

PNMR provides energy and technology related services through its wholly owned subsidiary, Avistar, and those results are included in the Corporate and Other segment. PNMR Services Company, which provides corporate services to the Company, 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 business segment. Explanations for footnotes (a) through (e) follow the tables.

26

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

PNMR SEGMENT INFORMATION

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

27

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

PNMR SEGMENT INFORMATION

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

28

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

PNM SEGMENT INFORMATION

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

29

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

PNM SEGMENT INFORMATION

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

30

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

TNMP SEGMENT INFORMATION

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

Footnote explanations for the above tables are as follows:

(a)	Reflects EITF 03-11 impact of $26.5 million and $6.6 million for the three months ended June 30, 2007 and 2006 and $43.2 million and $11.4 million for the six months ended June 30, 2007 and 2006.
(b)	For the three months and six months ended June 30, 2007, includes EnergyCo formation costs of $3.0 million and $4.2 million, impairment loss on Twin Oaks intangible assets of $3.4 million and $3.4 million, and a loss related to the contribution of Altura to EnergyCo of $3.6 million and $3.6 million (all included in operating expenses) and an income tax benefit of $4.0 million and $4.4 million (included in income taxes).
(c)	Includes an income tax benefit of $16.0 million for the settlement with the IRS on previously unrecognized income tax benefits. See Note 15.
(d)	Operations and assets, including goodwill, transferred from TNMP Electric to PNM Electric on January 1, 2007 are included in PNM Electric and excluded from TNMP Electric in 2007, and excluded from PNM Electric and included in TNMP Electric in 2006.
(e)	For the three months and six months ended June 30, 2006, includes TNP and Twin Oaks acquisition integration costs of $1.8 million and $2.8 million and an income tax benefit of $0.7 million and $1.1 million in income taxes.

(4) Energy Related Derivative Contracts

OVERVIEW

The Company may enter into agreements for the sale or purchase of derivative instruments, including options and swaps, to manage risks related to changes in natural gas prices and electric prices and to take advantage of existing market opportunities. At the inception of any such transaction meeting the definition of a hedge, the Company documents the relationships between the hedging instruments and the items being hedged. This documentation includes the strategy that supports executing the specific transaction. SFAS 133 requires that certain derivative instruments, which the Company classifies as mark-to-market instruments and hedge instruments, be carried at fair value in the Condensed Consolidated Balance Sheets. Note 8 of Notes to Consolidated Financial Statements in the 2006 Annual Reports on Form 10-K/A (Amendment No. 1) contains information regarding energy related derivative contracts. See Note 7 for additional information regarding interest rate swaps.

Changes in the fair value of mark-to-market instruments are reflected in results of operations, with changes related to sales contracts included in operating revenues and changes related to purchase contracts included in cost of energy sold. Changes in the fair value of hedge instruments are included in accumulated other comprehensive income, except for amounts related to the PGAC that are recoverable from or refundable to customers, which are included in regulatory assets and liabilities on the Condensed Consolidated Balance Sheets. Amounts due to or from counterparties for energy related derivative contracts are shown as derivative contracts on the Condensed Consolidated Balance Sheets.

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

31

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

Valuation of certain derivative instruments requires the use of models and assumptions. At June 30, 2007, PNM implemented new market price curve models and assumptions. This change in valuation is a change in accounting estimate under SFAS 154. The effect of the change in estimate was a decrease in net earnings for PNMR and PNM of $1.2 million, which is $0.015 per share for PNMR. Fluctuating commodity prices on open positions prevent the Company from predicting with certainty the future impact of the change in estimate.

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

32

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

PNMR

PNMR’s commodity derivative instruments are summarized as follows:

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

33

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

PNM

PNM’s commodity derivative instruments are summarized as follows:

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

34

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(5) Earnings Per Share

In accordance with SFAS 128, dual presentation of basic and diluted earnings per share has been presented in the Condensed Consolidated Statements of Earnings of PNMR. Information regarding the computation of earnings per share is as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
			(As				(As
			Restated,				Restated,
			See note 16)				See note 16)
	(In thousands, except per share amounts)
Net Earnings	$	20,240	$	15,983	$	49,906	$	41,984
Average Number of Common Shares Outstanding		76,695		68,852		76,677		68,819
Dilutive effect of common stock equivalents (a):
Stock options and restricted stock		659		520		680		492
Equity-linked units		1,439		61		1,089		38
Average Common and Common Equivalent Shares		78,793		69,433		78,446		69,349
Net Earnings per Share of Common Stock:
Basic	$	0.26	$	0.23	$	0.65	$	0.61
Diluted	$	0.26	$	0.23	$	0.64	$	0.61

(a) Excludes the effect of average anti-dilutive common stock equivalents related to out-of-the-money stock options of zero and 661,855 for the three months and zero and 736,869 for the six months ended June 30, 2007 and 2006, respectively.

35

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(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 six months ended June 30, 2007:

								Weighted-
				Weighted-		Aggregate		Average
				Average		Intrinsic		Remaining
				Exercise		Value		Contract Life
Options for PNMR Common Stock	Shares			Price		(In thousands)		(Years)
Outstanding at beginning of period		2,999,606		$	21.02
Granted		762,400		$	30.50
Exercised		(431,065	)	$	20.45
Forfeited		(19,837	)	$	27.18
Outstanding at end of period		3,311,104		$	23.24	$	15,063		7.35
Options exercisable at end of period		1,898,008		$	19.73	$	15,292		6.08
Options available for future grant		2,477,194

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

Options for PNMR Common Stock	2007		2006
	(In thousands,
	except per share amounts)
Weighted-average grant date fair value per share of options granted	$	4.70	$	3.87
Total intrinsic value of options exercised during the period	$	4,847	$	2,556

36

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Restricted Stock

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

				Weighted-
				Average
Nonvested Restricted				Grant-Date
PNMR Common Stock	Shares			Fair Value
Nonvested at beginning of period		161,769		$	24.55
Granted		102,400		$	28.78
Vested		(69,551	)	$	23.35
Nonvested at end of period		194,618		$	26.09

The total fair value of shares of restricted stock that vested during the six months ended June 30, 2007 was $1.6 million.

37

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(7) Capitalization

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. To facilitate the repayment, PNMR borrowed $250.5 million under its revolving credit facility, which amount has been repaid as of June 30, 2007.

Short-term debt outstanding consists of:

	June 30,		December 31,
Short-term Debt	2007		2006
	(In thousands)
PNM
Commercial paper	$	188,370	$	251,300
Revolving credit facility		47,300		—
Local lines of credit		6,400		—
		242,070		251,300
PNMR
Commercial paper		317,600		263,550
Bridge loan		—		249,495
	$	559,670	$	764,345

At August 1, 2007, PNMR and PNM had $221.7 million and $141.8 million of availability under their respective revolving credit facilities and local lines of credit, including reductions of availability due to outstanding letters of credit and amounts outstanding under the commercial paper programs.

As of June 30, 2007, TNMP had outstanding borrowings of $27.2 million from PNMR under its intercompany loan agreement.

Long-term Debt

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

38

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Effective June 15, 2007, TNMP redeemed $100.0 million of its 6.125% Senior Notes Due 2008 at a redemption price of 100.50% of the principal amount redeemed, plus accrued interest. To facilitate the redemption, PNMR made a cash contribution, recorded as equity, of $101.2 million to TNP, which then made an equity contribution to TNMP in the same amount.

PNMR has entered into three fixed-to-floating interest rate swaps with an aggregate notional principal amount of $150.0 million. The swaps are accounted for as fair-value hedges with a liability position of approximately $3.5 million at June 30, 2007, with a corresponding reduction of long-term debt.

Stockholders’ Equity

PNMR offers new shares of PNMR common stock through the PNM Direct Plan and an equity distribution agreement. For the six months ended June 30, 2007, PNMR sold a combined total of 47,049 shares of its common stock through the PNMR Direct Plan and the equity distribution agreement for net proceeds of $1.4 million. PNMR also issued 24,210 shares of its common stock for $0.7 million through its ESPP during the six months ended June 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 legally obligated for the benefits owed to participants under the PNM Plans. TNP, TNMP and First Choice have a qualified defined benefit pension plan, a plan providing medical and death benefits to eligible retirees and an executive retirement program (“TNMP Plans”). Benefits were frozen in 1997 for the PNM pension plan and 2005 for the TNMP pension plan. 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 COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

PNM Plans

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

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

	Six Months Ended June 30,
							Other Postretirement						Executive Retirement
	Pension Plan						Benefits						Program
	2007			2006			2007			2006			2007		2006
	(In thousands)
Components of Net Periodic
Benefit Cost (Income)
Service cost	$	72		$	252		$	1,264		$	1,356		$	28	$	28
Interest cost		15,906			15,420			3,856			3,684			544		527
Expected long-term return on assets		(20,389	)		(20,277	)		(2,927	)		(2,709	)		—		—
Amortization of net loss		1,944			2,420			2,922			3,340			46		50
Amortization of prior service cost		158			158			(2,844	)		(2,844	)		6		6
Net periodic benefit cost (income)	$	(2,309	)	$	(2,027	)	$	2,271		$	2,827		$	624	$	611

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

TNMP Plans

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

	Three Months Ended June 30,
							Other Postretirement						Executive Retirement
	Pension Plan						Benefits						Program
	2007			2006			2007			2006			2007		2006
	(In thousands)
Components of Net Periodic
Benefit Cost (Income)
Service cost	$	—		$	—		$	98		$	106		$	—	$	—
Interest cost		1,057			1,085			165			178			19		19
Expected long-term return on assets		(1,710	)		(1,754	)		(114	)		(114	)		—		—
Amortization of net gain		(2	)		—			(39	)		—			—		—
Amortization of prior service cost		—			—			15			15			—		—
Net Periodic Benefit Cost (Income)	$	(655	)	$	(669	)	$	125		$	185		$	19	$	19

	Six Months Ended June 30,
							Other Postretirement						Executive Retirement
	Pension Plan						Benefits						Program
	2007			2006			2007			2006			2007		2006
	(In thousands)
Components of Net Periodic
Benefit Cost (Income)
Service cost	$	—		$	—		$	196		$	212		$	—	$	—
Interest cost		2,114			2,170			330			355			38		38
Expected long-term return on assets		(3,420	)		(3,508	)		(228	)		(228	)		—		—
Amortization of net gain		(4	)		—			(78	)		—			—		—
Amortization of prior service cost		—			—			30			30			—		—
Net Periodic Benefit Cost (Income)	$	(1,310	)	$	(1,338	)	$	250		$	369		$	38	$	38

For the three and six months ended June 30, 2007, TNMP contributed $0.3 million for the other postretirement benefits. For the three and six months ended June 30, 2006, TNMP made no contributions to trusts for other postretirement benefits. TNMP expects to make contributions totaling $0.5 million during 2007 to trusts for other postretirement benefits. 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 COMPANY AND 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 annual renewable energy portfolio report and 2007 renewable energy procurement plan. In its procurement plan, PNM stated that it would continue to procure renewable energy and RECs from wind and solar photovoltaic facilities and to capitalize the costs for recovery in its next rate case in accordance with a stipulation approved by the NMPRC in 2003. The procurement plan requested the NMPRC to amend PNM’s solar photovoltaic program to eliminate the annual ceiling on new customer subscriptions, to approve the procurement of renewable energy and RECs from a biomass facility under a 20-year PPA beginning in 2009 and to authorize recovery of the costs of procurement under the PPA, including costs related to imputed debt. The NMPRC issued a final order on December 14, 2006 which approved the amendment to the photovoltaic program, approved the procurement under the biomass PPA, and recognized a “disputable presumption” of the reasonableness of the costs of energy and capacity under the PPA. The NMPRC denied PNM’s request to recover imputed debt costs, but gave PNM leave to present the issue again in a rate case. On February 6, 2007, the NMPRC entered an order reopening the case with the limited purpose of reconsidering its determination that the act creates only a “disputable presumption” of the reasonableness of costs incurred under an approved procurement plan and invited briefs on that issue. PNM, the NMPRC staff, and the New Mexico Attorney General filed briefs. A decision is pending.

42

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The Clean Air Act

Regional Haze

In 2005, the EPA issued the final rule addressing regional haze and guidelines for BART determinations. The purpose of the regional haze regulations is to address regional haze visibility impairment in the United States’ national parks and wilderness areas. The rule calls for all states to establish goals and emission reduction strategies for improving visibility in these areas. In October 2006, the EPA issued the final BART alternatives rule which made revisions to the 2005 regional haze rules. In particular, the alternatives rule defines how an SO₂ emissions trading program developed by the Western Regional Air Partnership, a voluntary organization of western states, tribes and federal agencies, can be used by western states. New Mexico will be participating in the SO₂ program, which is a trading program that will be implemented if SO₂ reduction milestones, which are still being developed, are not met. The NMED 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 Court of Appeals for the District of Columbia Circuit vacated this rule. The action by the court did not eliminate the NSR exclusion for routine maintenance, repair, and replacement work nor did the decision rule on what activities are physical changes. The EPA’s authority to write a rule based on the current NSPS hourly emission increase test remains in place, although the U.S. Supreme Court agreed to hear an appeal of the Fourth U.S. Circuit Court of Appeals ruling in favor of Duke Energy Corp with respect to the hourly emission increase test being the appropriate method for calculating an emissions increase for PSD purposes. On April 2, 2007, the U.S. Supreme Court issued its decision. In a unanimous decision, the U.S. Supreme Court vacated the decision of the Fourth U.S. Circuit Court of Appeals and remanded for further proceedings consistent with the U.S. Supreme Court’s opinion. The decision precludes the use of an increase in the maximum hourly emission rate for determining an emissions increase for PSD purposes. The decision did not eliminate the NSR exclusion for routine maintenance, repair, or replacement, nor did it preclude the EPA from promulgating a regulation allowing an emission increase test for PSD purposes to be based on an increase in the maximum hourly emission rate. The EPA has announced that it will proceed with revision of the NSR rules to specify that only activities that increase an emitting unit’s hourly rate of emissions 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 United States District Court for the District of New Mexico on October 6 and 12, 2006, seeking a determination that PNM had complied with the Consent Decree with respect to the matters at issue. The controversies related to PNM’s reports on NOX controls and demisters at SJGS. PNM reached an agreement with the Plaintiffs and the NMED concerning these issues which was set forth in a Stipulated Order. The Court entered the Stipulated Order approving the settlement on December 27, 2006. The settlement does not require any additional material expenditures with respect to the implementation of the Consent Decree. Counsel for Plaintiffs has submitted statements to PNM for payment of attorneys fees and costs incurred with respect to post-decree administration and disputes. The parties have settled the fee request for a nominal amount.

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The Consent Decree includes a provision whereby stipulated penalties are assessed for non-compliance with specified emissions limits. Stipulated penalty amounts are placed in escrow on a quarterly basis pending review of SJGS’s emissions performance for each quarter. For the years 2005 and 2006, PNM has placed $1.2 million into escrow as potential stipulated penalties. By letter dated March 20, 2007, the NMED and Plaintiffs requested information concerning PNM’s calculation of potential stipulated penalty amounts and the amounts held in escrow. PNM submitted its response to NMED on May 23, 2007.

Navajo Nation Environmental Issues

Four Corners is located on the Navajo Reservation and is held under an easement granted by the federal government as well as a lease from the Navajo Nation. APS is the Four Corners operating agent and PNM owns a 13.0% ownership interest in Units 4 and 5 of Four Corners.

The Navajo Acts, enacted in 1995, purport to give the Navajo Nation EPA authority to promulgate regulations covering air quality, drinking water, and pesticide activities, including those activities that occur at Four Corners. In October 1995, the Four Corners participants filed a lawsuit in the District Court of the Navajo Nation, Window Rock District, challenging the applicability of the Navajo Acts as to Four Corners. The District Court stayed these proceedings pursuant to a request by the parties and the parties are seeking to negotiate a settlement.

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

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

The Company cannot currently predict the outcome of these matters.

Four Corners Federal Implementation Plan Litigation

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

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

Santa Fe Generating Station

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

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

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

Coal Combustion Waste Disposal

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

NRC Matters

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

OTHER COMMITMENTS AND CONTINGENCIES

PNM

PVNGS Liability and Insurance Matters

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

San Juan River Adjudication

In 1975, the State of New Mexico filed an action entitled “State of New Mexico v. United States, et al.”, in the District Court of San Juan County, New Mexico, to adjudicate all water rights in the San Juan River Stream System. The Company was made a defendant in the litigation in 1976. The action is expected to adjudicate water rights used at Four Corners and at SJGS. 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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PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

California Refund Proceeding

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

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

Pacific Northwest Refund Proceeding

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

California Attorney General Complaint

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

California Antitrust Litigation

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

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

FERC Office of Market Oversight and Investigations

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

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

Natural Gas Royalties Qui Tam Litigation

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

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

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Biomass Project

PNM has entered into a 20-year contract for the purchase of 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 is scheduled for August 20, 2007 on the owner’s appeal of the denial of the air permit.

Valencia Energy Facility

On April 18, 2007, PNM entered into a power purchase agreement to purchase all of the electric capacity and energy from the Valencia Energy Facility, a proposed natural gas-fired power plant to be constructed near Albuquerque, New Mexico. A third-party will build, own and operate the facility while PNM will be the sole purchaser of the electricity generated. The total projected construction cost for the facility is from $100 million to $105 million. The term of the 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). The Company is evaluating the accounting treatment of this PPA.

On May 31, 2007, the office of the New Mexico Attorney General and the Utility Staff of the NMPRC filed a Petition For Formal Review requesting the NMPRC to investigate the power purchase agreement and related transactions relating to the Valencia Energy Facility to determine, among other things, whether the transactions are prudent, appropriate and consistent with NMPRC rules, and to establish the ratemaking treatment of the power purchase agreement. On June 21, 2007, the NMPRC ordered PNM to respond to the Petition so that the NMPRC could ascertain PNM’s position on the matters raised before proceeding further with processing the Petition. In its Response, filed July 11, 2007, PNM described the terms of the agreement and process used to select this resource, stated that an investigation was not warranted and joined in the Staff and Attorney General’s request for determination of the ratemaking treatment for the agreement. To date, the NMPRC has taken no further action on the petition.

(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 the district court, in Austin, Texas. TNMP and FCP have intervened and will defend the PUCT’s Final Order approving the NUS.

52

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Energy Agreement

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

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

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

PNM

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 and has until August 27, 2007 to file which components will be appealed.

53

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Electric Rate Case

On February 21, 2007, PNM filed a general electric rate case requesting the NMPRC to approve an increase in service fees to all of PNM’s retail customers except those formerly served by TNMP. The application requests an annual increase in electric service revenues of $68.9 million effective January 1, 2008, an increase of approximately 12.3% over test period revenues. The request is designed to provide PNM’s electric utility an opportunity to earn a 10.75% return on equity. The application also requests authorization to implement a Fuel and Purchased Power Adjustment Clause through which changes in the cost of fuel and purchased power, above or below the costs included in base rates, will be passed through to customers on a monthly basis. The NMPRC initially suspended operation of the proposed new rates through December 23, 2007, but subsequently extended the suspension through February 21, 2008. A hearing is scheduled to begin October 1, 2007. A recommended decision of the hearing examiner is due by December 31, 2007.

Complaint Against Southwestern Public Service Company

In September 2005, PNM filed a complaint under the Federal Power Act against SPS. PNM believes that through its fuel cost adjustment clause, SPS has been overcharging PNM for deliveries of energy under three contracts, and continues to do so under the remaining contracts. PNM requested that the FERC investigate these charges for the period 2001 through 2004, and going forward. PNM had previously intervened in the Golden Spread Electric Coop complaint case against SPS for the same matter. The hearing was held in that case and in May 2006, the ALJ issued an initial decision in that proceeding recommending that SPS make refunds to customers, including PNM, for misapplication of charges in its fuel cost adjustment clause. The parties in that proceeding filed their exceptions to the initial decision, which has gone to the FERC for review. Fuel cost charges for 2005 and 2006 are being addressed as part of the finding in the Golden Spread Electric Coop fuel charge adjustment clause case pending before the FERC, in which PNM is an intervenor. PNM’s complaint also alleges that SPS’ demand charge rates for interruptible power sales are excessive and requested that the FERC set a refund effective date of September 13, 2005 for these rates. Settlement conferences were held before a FERC settlement judge throughout the first quarter of 2006. Upon the failure of the parties to reach a settlement, the judge recommended the case proceed to hearing. Additionally, in November 2005, SPS filed an electric rate case proposing to unbundled and raise rates charged to customers effective July 2006. PNM intervened in the case and objected to the proposed rate increase. In September 2006, PNM and SPS filed a settlement agreement at FERC in which PNM settled its issues in the complaint proceeding, as well as its concerns with SPS’ proposed rate increases in the SPS rate case. On October 10, 2006, interested parties and FERC Trial Staff filed comments on the proposed settlement. Only one party opposed the settlement, which was supported or not opposed by the remaining active parties and the FERC Trial Staff. On October 19, 2006, PNM, SPS and FERC Trial Staff each filed reply comments contending that opposition was without merit. The Settlement Judge and the Administrative Law Judge have certified the contested partial settlement and sent it to the FERC for final approval. The settlement must be approved by the FERC before it may be effective. The settlement has no impact on the initial decision of the ALJ in the fuel cost adjustment clause case or the pending petitions for rehearing in that docket. In July 2007, the FERC open meeting agenda indicated the Golden Spread Electric Coop complaint case initial decision was on the docket for consideration by the FERC. SPS and Golden Spread Electric Coop filed a motion to delay the FERC action on the initial decision to provide additional opportunity for the parties to reach settlement. PNM filed its opposition to the motion requesting the FERC to proceed to issue an order on the initial decision. Then the FERC removed the Golden Spread item from its agenda. PNM cannot predict if the settlement will be approved by the FERC or what the outcome of the fuel cost adjustment clause proceeding at the FERC will be.

54

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

TNMP

TNMP Competitive Transition Charge True-Up Proceeding

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

In July 2005, the PUCT issued a final order confirming the calculation of carrying costs and the amount of stranded costs allowed for recovery. TNMP and other parties appealed the July PUCT order. On July 24, 2006, the district court in Austin, Texas affirmed the PUCT order. TNMP has appealed that decision to the Texas Third Court of Appeals in Austin, Texas and has filed its briefs. Oral argument 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 20th 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 competition transition charge for recovery of the true-up balance. As noted above, TNMP’s 60-day rate review, along with First Choice’s price-to-beat rate reset filing, were consolidated. See “Price-To-Beat Base Rate Reset” above for further updates. On November 2, 2006, the PUCT issued a signed order which would allow TNMP to begin collecting its true-up balance, which includes carrying charges, over a 14 year period. The order also allows TNMP to collect expenses associated with several cases over a three-year period. The PUCT allowed TNMP to begin collecting its competition transition charge and its rate case expenses on December 1, 2006. In January 2007, this proceeding was appealed by various Texas cities to the district court, in Austin, Texas. TNMP and First Choice have intervened and will defend the PUCT’s Final Order in this proceeding.

(11) EnergyCo Joint Venture

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

55

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

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

EnergyCo has entered into a bank financing arrangement with a term of five years which includes a revolving line of credit. This facility also provides for bank letters of credit to be issued as credit support for certain contractual arrangements entered into by EnergyCo. Cascade has guaranteed EnergyCo’s obligations on this facility and, to secure EnergyCo’s obligation to reimburse Cascade for any payments made under the guaranty, has a first lien on all assets of EnergyCo and its subsidiaries. In June 2007, EnergyCo borrowed $181 million of long-term debt under this facility. From this borrowing, $87.5 million was distributed to each of PNMR and ECJV.

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

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

Other than as described above, PNMR has no commitments or guarantees with respect to EnergyCo.

56

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Summarized financial information for EnergyCo is as follows:

	Three Months		Six Months
	Ended		Ended
	June 30, 2007
	(In thousands)
Operating revenues	$	14,366	$	14,366
Operating expenses		10,990		12,314
Net earnings	$	3,376	$	2,052
50 percent of net earnings	$	1,688	$	1,026
Amortization of basis difference in EnergyCo		584		584
PNMR equity in net earnings of EnergyCo	$	2,272	$	1,610

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

57

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(12) Related Party Transactions

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

58

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(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 June 30, 2006. Due to the fact the net assets were distributed to TNMP’s parent, PNMR, the assets and liabilities were considered “held and used” up until the date of transfer and, according to SFAS 144, are not classified as “held for sale” within TNMP’s Consolidated Balance Sheet at December 31, 2006. No gain or loss or impairments were recognized on the disposition due to the fact the transfer was among entities under common control. Furthermore, the TNMP New Mexico operations are subject to traditional rate of return regulation. Subsequent to the transfer, the NMPRC regulates these operations in the same manner as prior to the transfer. Under SFAS 71, the assets and liabilities were recorded by PNM at TNMP’s carrying amounts, which represent their fair value within the regulatory environment.

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

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

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

59

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

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

(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. PNMR has received notice that its agreement with the IRS regarding substantially all of the unrecognized tax benefits has been returned from the Joint Committee on Taxation with no changes and the issue is considered settled. As a result, PNMR has recognized approximately $16.0 million of income tax benefit in June 2007. Including this benefit, PNMR’s effective tax rates were (277.5)% and 5.5% for the three and six months ended June 30, 2007. Without this non-recurring benefit, PNMR’s effective tax rates would have been 19.7% and 35.7% for the three and six months ended June 30, 2007.

During the three months ended June 30, 2007, PNMR established a liability of $13.9 million for additional unrecognized tax benefits, which was offset by deferred income taxes and had no effect on earnings. At June 30, 2007, PNMR had $16.0 million of unrecognized tax benefits, PNM had $3.5 million of unrecognized tax expense, and TNMP had no unrecognized tax benefits. While it cannot be assured, it is anticipated that approximately $.5 million of unrecognized tax expense of PNMR and $3.3 million of unrecognized tax expense of PNM will be reversed by June 30, 2008. The Company is unable to make reasonably reliable estimates of the period of cash settlement of the remaining unrecognized tax benefits and expenses.

60

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Estimated interest income related to refunds expected to be received is included in Other Income and estimated interest expense and penalties are included in Interest Expense in the Condensed Consolidated Statements of Operations. Interest income under FIN 48 for the six months ended June 30, 2007 was $0.1 million for PNMR. Due to the settlement discussed above, during for the three months ended June 30, 2007, PNMR reversed interest expense of $4.8 million previously recorded. At June 30, 2007, PNMR had accumulated accrued interest receivable of $4.3 million and accumulated accrued interest payable of $2.1 million; PNM had accumulated interest receivable of $0.3 million and accumulated interest payable of $0.1 million; and TNMP had accumulated interest receivable of $4.0 million.

The Company files a 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 2001-2004 are currently under federal income tax examination. Additionally, the reporting years 2003-2006 are currently under Texas franchise tax examination. Based on the status and the process involved in finalizing these examinations, it is not possible to estimate the impact, if any, upon the Company’s previously recorded uncertain tax positions.

(16) Restatement

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

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

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

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

61

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following is a summary of the corrections described above:

PNMR

	Three Months Ended June 30, 2006				Six Months Ended June 30, 2006
	As Previously				As Previously
	Reported		As Restated		Reported			As Restated
	(In thousands, except per share amounts)				(In thousands, except per share amounts)
Consolidated Statements of Earnings
Energy production costs	$	43,714	$	44,038	$	81,301		$	81,949
Net earnings*		16,307		15,983		42,632			41,984
Net earnings per share
Basic		0.24		0.23		0.62			0.61
Diluted		0.23		0.23		0.61			0.61
Consolidated Statements of Cash Flows
Deferred credits**						(9,816	)		(9,168	)
Consolidated Statements of Comprehensive Income (Loss)
Total comprehensive income		13,740		13,416		35,053			34,405

*	Net earnings also appears in the Consolidated Statements of Cash Flows and Consolidated Statements of Comprehensive Income (Loss)
**	Deferred credits was combined into other liabilities in the June 30, 2006 Form 10-Q, as originally filed

PNM

	Three Months Ended June 30, 2006				Six Months Ended June 30, 2006
	As Previously				As Previously
	Reported		As Restated		Reported			As Restated
	(In thousands)				(In thousands)
Consolidated Statements of Earnings
Energy production costs	$	42,080	$	42,404	$	79,667		$	80,315
Net earnings*		3,320		2,996		33,748			33,100
Net earnings available for common stock**		3,188		2,864		33,484			32,836
Consolidated Statements of Cash Flows
Deferred credits***						(9,309	)		(8,661	)
Consolidated Statements of Comprehensive Income (Loss)
Total comprehensive income		1,098		774		29,049			28,401

*	Net earnings also appears in the Consolidated Statements of Cash Flows
**	Net earnings available for common stock also appears in the Consolidated Statements of Comprehensive Income (Loss)
***	Deferred credits was combined into other liabilities in the June 30, 2006 Form 10-Q, as originally filed

62

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations for PNMR is presented on a combined basis, including information applicable to PNM and TNMP. The MD&A for PNM and TNMP only includes a narrative analysis of results of operations as 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 in Texas.

PNMR, primarily through EnergyCo, intends to enhance and diversify its presence in the southwest region through the acquisition or development of quality generation assets, including renewable or clean technology resources, to serve the Company’s retail and wholesale load while maintaining diversity of fuel mix. PNMR also plans to increase long-term sales contracts in tandem with increases in its generation capacity. 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 under which it borrowed $181 million on a long-term basis from which it distributed $87.5 million to each of PNMR and ECJV. PNMR utilized amounts distributed from EnergyCo to reduce debt. Subsequent to June 30, 2007, EnergyCo completed the acquisition of one electric generating plant and announced plans to co-develop another generating unit.

TNMP Asset Transfer to PNM

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

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RESULTS OF OPERATIONS

Executive Summary

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006
	(In thousands, except per share amounts)
Net earnings	$	20,240	$	15,983	$	49,906	$	41,984
Average common and common equivalent shares		78,793		69,433		78,446		69,349
Net earnings per diluted share	$	0.26	$	0.23	$	0.64	$	0.61

The major causes of changes in net earnings were the recognition of income tax benefit for a settlement with the IRS regarding previously unrecognized tax benefits; increased plant performance at SJGS and PVNGS, offset by decreased performance at Four Corners; increases due to regulated load growth and weather impacts; changes in First Choice earnings, excluding mark-to-market impacts; changes in Wholesale marketing activity; mark-to-market losses; higher coal costs; non-recurring costs related to Twin Oaks and EnergyCo for the costs of forming EnergyCo, the loss due to the impairment of intangible assets, and the loss on the contribution of Altura to EnergyCo; and higher financing costs. The after-tax impacts of these items on net earnings in 2007 compared to 2006 are as follows:

	Three Months Ended			Six Months Ended
	June 30, 2007			June 30, 2007
	(In millions)
After-tax impacts
IRS settlement	$	16.0		$	16.0
Plant performance		7.2			10.9
Regulated load growth and weather		1.0			7.3
First Choice (excluding mark-to-market)		(5.7	)		2.4
Wholesale marketing activity		0.2			(6.3	)
Mark-to-market		(8.6	)		(9.3	)
Coal costs		(2.6	)		(4.8	)
Twin Oaks and EnergyCo		(6.0	)		(6.8	)
Financing		(0.8	)		(3.5	)
Other		3.6			2.0
Net change in net earnings	$	4.3		$	7.9

64

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

Segment Information

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

The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto. Trends and contingencies of a material nature are discussed to the extent known. Refer also to “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.

65

Regulated Operations

PNM Electric

The table below summarizes operating results for PNM Electric:

	Three Months Ended June 30,										Six Months Ended June 30,
	2007		2006		Change			%			2007			2006		Change			%
			(In millions)											(In millions)
Total operating revenues	$	171.1	$	146.3	$	24.8			17.0		$	341.3		$	285.1	$	56.2			19.7
Cost of energy		65.9		43.3		22.6			52.1			132.4			88.8		43.6			49.1
Intersegment energy transfer		3.6		8.5		(4.9	)		(57.4	)		(2.0	)		3.3		(5.3	)		(160.7	)
Gross margin		101.6		94.5		7.1			7.5			210.9			193.0		17.9			9.3
Operating expenses		73.5		66.9		6.6			10.0			146.2			134.4		11.8			8.8
Depreciation and amortization		16.4		14.3		2.1			14.5			32.8			29.3		3.5			11.9
Operating income	$	11.7	$	13.3	$	(1.6	)		(12.3	)	$	31.9		$	29.3	$	2.6			8.8

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

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

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

	Three Months Ended June 30,										Six Months Ended June 30,
	2007		2006		Change			%			2007		2006		Change		%
	(In millions, except customers)										(In millions, except customers)
Residential	$	58.4	$	52.0	$	6.4			12.3		$	126.2	$	107.4	$	18.8		17.6
Commercial		73.1		65.6		7.5			11.5			137.8		122.7		15.1		12.4
Industrial		25.8		15.6		10.2			65.4			49.2		30.3		18.9		62.3
Transmission		8.0		7.2		0.8			11.6			16.9		14.2		2.7		18.6
Other		5.8		5.9		(0.1	)		(3.2	)		11.2		10.5		0.7		4.9
	$	171.1	$	146.3	$	24.8			17.0		$	341.3	$	285.1	$	56.2		19.7
Average customers (thousands)		488.1		428.6		59.5			13.9			487.6		427.3		60.3		14.1

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

	Three Months Ended June 30,										Six Months Ended June 30,
	2007		2006		Change			%			2007		2006		Change			%
	(Gigawatt hours)										(Gigawatt hours)
Residential		704.9		647.4		57.5			8.9			1,525.6		1,335.9		189.7			14.2
Commercial		992.6		929.2		63.4			6.8			1,869.5		1,732.9		136.6			7.9
Industrial		494.2		332.6		161.6			48.6			964.5		646.6		317.9			49.2
Other		63.4		71.6		(8.2	)		(11.4	)		119.8		126.4		(6.6	)		(5.3	)
		2,255.1		1,980.8		274.3			13.9			4,479.4		3,841.8		637.6			16.6

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

	Three Months Ended		Six Months Ended
	June 30, 2006		June 30, 2006
	(Dollars in millions)
Total revenues	$	21.8	$	48.9
Cost of energy		15.5		36.2
Gross margin		6.3		12.7
Operating Expenses		3.2		6.6
Depreciation and amortization		1.5		3.1
Operating income	$	1.6	$	3.0
Sales volumes (GWhs)		308.4		590.7
Average customers (thousands)		49.6		49.6

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The following discussion of results will exclude variances due to the transfer of New Mexico operations from TNMP on January 1, 2007, that are shown above.

During the second quarter of 2007, cooler temperatures resulted in decreased sales volume, as cooling degree-days decreased 31.4% from the second quarter of 2006. Year-to-date 2007, the impact of weather is minimal, as reduced usage in the second quarter was offset by increased usage during the heating season in the early part of the year. During both the second quarter of 2007 and year-to-date 2007, an increase in average customer counts and load growth resulted in increases in sales volumes and operating revenues.

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

During the second quarter of 2007, improved performance over the prior year at PVNGS resulted in a $6.7 million increase to gross margin. However, O&M costs related to outages at jurisdictional units (Units 1 and 2) increased by $1.6 million during the second quarter of 2007. Improved performance at SJGS over the prior year increased gross margin by $1.6 million for the second quarter and also decreased O&M costs by $1.9 million. Decreased performance at Four Corners compared to the second quarter of 2006 resulted in a $3.4 million decrease to gross margin and a $0.8 million increase to O&M costs.

Year-to-date 2007 compared to 2006, PVNGS performance resulted in a $12.4 million increase to gross margin and a $1.3 million increase in O&M costs. SJGS performance resulted in a $0.4 million increase to gross margin and a $0.9 million decrease to O&M costs. Decreased Four Corners performance resulted in a $4.7 million decrease to gross margin and a $1.0 million increase to O&M costs.

For the second quarter and year-to-date 2007, increases in general operational expenses include costs for materials and supplies, as well as shared services, employee labor, pension and benefit costs.

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TNMP Electric

The table below summarizes the operating results for TNMP Electric:

	Three Months Ended June 30,										Six Months Ended June 30,
	2007		2006		Change			%			2007		2006		Change			%
			(In millions)										(In millions)
Total operating revenues	$	43.5	$	61.5	$	(18.0	)		(29.2	)	$	84.5	$	124.1	$	(39.6	)		(32.0	)
Cost of energy		7.2		22.7		(15.5	)		(68.1	)		14.4		49.8		(35.4	)		(71.1	)
Gross margin		36.3		38.8		(2.5	)		(6.4	)		70.1		74.3		(4.2	)		(5.7	)
Operating expenses		17.7		21.0		(3.3	)		(15.5	)		36.4		42.4		(6.0	)		(14.4	)
Depreciation and amortization		7.0		7.8		(0.8	)		(10.1	)		14.0		15.6		(1.6	)		(9.8	)
Operating income	$	11.6	$	10.0	$	1.6			15.4		$	19.7	$	16.3	$	3.4			20.9

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

	Three Months Ended June 30, 2007									Six Months Ended June 30, 2007
	Total			Gross			Operating			Total			Gross			Operating
	Revenues			Margin			Income			Revenues			Margin			Income
	(In millions)									(In millions)
Transfer of assets to PNM	$	(21.8	)	$	(6.3	)	$	(1.6	)	$	(48.9	)	$	(12.7	)	$	(3.0	)
Weather		(1.8	)		(1.8	)		(1.8	)		(0.4	)		(0.4	)		(0.4	)
Customer/load growth		0.6			0.6			0.6			1.5			1.5			1.5
PUCT order		4.1			4.1			3.1			7.9			7.9			6.0
Transmission prices		0.3			0.3			0.3			0.7			—			—
Other		0.6			0.6			1.0			(0.4	)		(0.5	)		(0.7	)
Total increase (decrease)	$	(18.0	)	$	(2.5	)	$	1.6		$	(39.6	)	$	(4.2	)	$	3.4

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

	Three Months Ended June 30,										Six Months Ended June 30,
	2007		2006(1)		Change			%			2007		2006(1)		Change			%
	(In millions, except customers)										(In millions, except customers)
Residential	$	15.6	$	20.7	$	(5.1	)		(24.3	)	$	30.4	$	39.9	$	(9.5	)		(23.9	)
Commercial		17.7		21.9		(4.2	)		(18.9	)		33.7		42.5		(8.8	)		(20.7	)
Industrial		1.8		9.3		(7.5	)		(80.9	)		3.5		22.7		(19.2	)		(84.4	)
Other		8.4		9.6		(1.2	)		(12.5	)		16.9		19.0		(2.1	)		(11.7	)
	$	43.5	$	61.5	$	(18.0	)		(29.2	)	$	84.5	$	124.1	$	(39.6	)		(32.0	)
Average customers (thousands)(2)		225.3		272.2		(46.9	)		(17.2	)		225.3		271.7		(46.4	)		(17.1	)

(1)

The customer class revenues and the average customer count have been reclassified to be consistent with the current year presentation.

(2)

Under TECA, customers of TNMP Electric in Texas have the ability to choose First Choice or any other REP to provide energy. The average customers reported above include 130,762 and 146,549 customers of TNMP Electric for the three months ended June 30, 2007 and 2006 and 133,235 and 147,782 customers for the six months ended June 30, 2007 and 2006 who have chosen First Choice as their REP. These customers are also included in the First Choice segment.

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

	Three Months Ended June 30,										Six Months Ended June 30,
	2007		2006(2)		Change			%			2007		2006(2)		Change			%
	(Gigawatt hours(1))										(Gigawatt hours(1))
Residential		579.9		710.4		(130.5	)		(18.4	)		1,118.3		1,238.3		(120.0	)		(9.7	)
Commercial		563.7		774.4		(210.7	)		(27.2	)		1,022.9		1,255.0		(232.1	)		(18.5	)
Industrial		473.9		462.0		11.9			2.6			881.2		1,018.1		(136.9	)		(13.4	)
Other		23.9		31.8		(7.9	)		(24.4	)		48.1		60.7		(12.6	)		(20.7	)
		1,641.4		1,978.6		(337.2	)		(17.0	)		3,070.5		3,572.1		(501.6	)		(14.0	)

(1)	The GWh sales reported above include 487.3 and 635.1 GWhs for the three months ended June 30, 2007 and 2006 and 960.3 and 1,110.0 GWhs for the six months ended June 30, 2007 and 2006 used by customers of TNMP Electric respectively, who have chosen First Choice as their REP. These GWhs are also included below in the First Choice segment.
(2)	The customer class sales have been reclassified to be consistent with current year presentation.

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

During the second quarter of 2007, cooler temperatures resulted in decreased sales volume, as cooling degree-days decreased 20.4% from the second quarter of 2006. The reduced usage in the second quarter resulting from the cooler weather was mostly offset by increased usage during the heating season in the early part of the year. During both the second quarter of 2007 and year-to-date 2007, an increase in average customer counts 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 $4.1 million in the second quarter of 2007 that was partially offset by an increase in amortization expense of $0.9 million. Year-to-date, a $7.9 million net increase in revenues related to the same PUCT order was partially offset by an increase in amortization expense of $1.9 million.

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

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PNM Gas

The table below summarizes the operating results for PNM Gas:

	Three Months Ended June 30,										Six Months Ended June 30,
	2007			2006			Change		%		2007		2006		Change		%
				(In millions)									(In millions)
Total operating revenues	$	75.2		$	69.0		$	6.2		9.0	$	291.7	$	276.5	$	15.2		5.5
Cost of energy		45.1			42.2			2.9		6.9		206.8		199.9		6.9		3.5
Gross margin		30.1			26.8			3.3		12.3		84.9		76.6		8.3		10.8
Operating expenses		25.9			25.9			—		0.2		51.6		51.0		0.6		1.1
Depreciation and amortization		6.1			6.0			0.1		1.2		12.2		11.9		0.3		2.8
Operating income	$	(1.9	)	$	(5.1	)	$	3.2		62.7	$	21.1	$	13.7	$	7.4		53.8

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

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

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

	Three Months Ended June 30,										Six Months Ended June 30,
	2007		2006		Change			%			2007		2006		Change			%
	(In millions, except customers)										(In millions, except customers)
Residential	$	48.4	$	38.5	$	9.9			25.7		$	200.7	$	180.2	$	20.5			11.4
Commercial		15.5		13.4		2.1			15.7			60.6		57.4		3.2			5.7
Industrial		0.4		1.5		(1.1	)		(70.7	)		1.0		2.3		(1.3	)		(54.4	)
Transportation(1)		3.4		2.8		0.6			19.2			8.4		7.5		0.9			12.0
Other		7.5		12.8		(5.3	)		(41.1	)		21.0		29.1		(8.1	)		(28.4	)
	$	75.2	$	69.0	$	6.2			9.0		$	291.7	$	276.5	$	15.2			5.5
Average customers (thousands)		490.5		480.5		10.0			2.1			491.2		480.6		10.6			2.2

(1) Customer-owned gas.

The following table shows PNM Gas throughput by customer class:

	Three Months Ended June 30,										Six Months Ended June 30,
	2007		2006		Change			%			2007		2006		Change			%
	(Thousands of Decatherms)										(Thousands of Decatherms)
Residential		3,827		3,058		769			25.1			17,771		15,020		2,751			18.3
Commercial		1,515		1,391		124			8.9			6,149		5,557		592			10.7
Industrial		50		195		(145	)		(74.4	)		113		267		(154	)		(57.7	)
Transportation(1)		10,149		9,371		778			8.3			20,949		20,402		547			2.7
Other		500		1,501		(1,001	)		(66.7	)		1,826		3,067		(1,241	)		(40.5	)
		16,041		15,516		525			3.4			46,808		44,313		2,495			5.6

(1) Customer-owned gas.

73

PNM Gas purchases natural gas in the open market and resells it at no profit to its sales-service customers. As a result, increases or decreases in gas revenues driven by gas costs do not impact the gross margin or operating income of PNM Gas. Increases or decreases to gross margin caused by changes in sales-service volumes represent margin earned on the delivery of gas to customers based on regulated rates. Changes in gas prices resulted in a $3.5 million increase in total revenues during the second quarter and a $16.9 million decrease year-to-date 2007. On May 30, 2006, PNM filed for an increase in base gas service rates of $22.6 million. On June 29, 2007 the NMPRC approved an increase in annual revenues of approximately $9 million for PNM, which included a 9.53% return on equity. PNM filed a Notice of Appeal with the New Mexico Supreme Court on July 27, 2007 and has until August 27, 2007 to file which components will be appealed.

Cooler weather throughout the year resulted in increased revenues and operating income for both the second quarter of 2007 and year-to-date 2007. The year-to-date impact was much larger as cooler weather in the heating season resulted in higher sales volumes in the first quarter of 2007. Year-to-date heating degree-days increased 19.2%.

During the second quarter of 2007, an overall increase in the number of average customers was more than offset by a shift to more lower usage customers. The year-to-date impact of the shift in customers was more than offset by the overall increase in customers and reduced customer conservation.

Both the second quarter of 2007 and year-to-date 2007 saw increased revenue and operating income as a result of mark-to-market gains, which did not occur in 2006.

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

74

Unregulated Operations

Wholesale

The table below summarizes the operating results for Wholesale:

	Three Months Ended June 30,												Six Months Ended June 30,
	2007			2006			Change			%			2007		2006			Change			%
	(In millions)												(In millions)
Total operating revenues	$	194.1		$	154.5		$	39.6			25.6		$	328.6	$	334.0		$	(5.4	)		(1.6	)
Cost of energy		165.6			119.9			45.7			38.2			242.0		262.7			(20.7	)		(7.9	)
Intersegment energy transfer		(3.5	)		(8.5	)		5.0			57.4			2.0		(3.3	)		5.3			160.7
Gross margin		32.0			43.1			(11.1	)		(25.7	)		84.6		74.6			10.0			13.4
Operating expenses		19.2			18.3			0.9			4.6			45.0		30.2			14.8			48.9
Depreciation and amortization		6.2			7.2			(1.0	)		(13.5	)		13.9		10.3			3.6			35.2
Operating income	$	6.6		$	17.6		$	(11.0	)		(62.3	)	$	25.7	$	34.1		$	(8.4	)		(24.6	)

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

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

75

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

	Three Months Ended June 30,								Six Months Ended June 30,
	2007		2006		Change		%		2007		2006		Change			%
	(In millions)								(In millions)
Long-term sales	$	77.5	$	73.9	$	3.6		4.8	$	153.0	$	105.2	$	47.8			45.5
Short-term sales		116.6		80.6		36.0		44.7		175.6		228.8		(53.2	)		(23.2	)
	$	194.1	$	154.5	$	39.6		25.6	$	328.6	$	334.0	$	(5.4	)		(1.6	)

The following table shows Wholesale GWh sales by type:

	Three Months Ended June 30,								Six Months Ended June 30,
	2007		2006		Change		%		2007		2006		Change			%
	(Gigawatt hours)								(Gigawatt hours)
Long-term sales		1,184.4		1,102.4		82.0		7.4		2,346.6		1,680.9		665.7			39.6
Short-term sales		1,700.4		1,569.1		131.3		8.4		3,140.8		3,789.9		(649.1	)		(17.1	)
		2,884.8		2,671.5		213.3		8.0		5,487.4		5,470.8		16.6			0.3

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

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

76

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

Changes in mark-to-market positions had a positive impact on revenue for the second quarter of 2007, driven by an increase in short-term revenues of $18.6 million; however, this increase was more than offset by increased costs, which resulted in decreases to both gross margin and operating income. Mark-to-market changes also decreased year-to-date gross margin and operating income, as lower revenues were partially offset by lower costs.

Wholesale marketing activity, which includes long-term contract growth, sales of SO₂ credits, as well as other activities, increased revenue for the second quarter of 2007, but the increase in revenue was almost completely offset by an increase in costs associated with these activities, resulting in a slight increase to gross margin and operating income. Operating income year-to-date was decreased by marketing activity primarily due to the absence of market opportunities that allowed for the forward sale of first quarter 2006 excess resources.

During the second quarter of 2007, improved performance over the prior year at PVNGS resulted in a $7.3 million increase to gross margin and a $1.5 million decrease to O&M costs. Improved performance at SJGS over the prior year increased gross margin by $1.7 million for the second quarter, but increased O&M costs by $0.1 million. Decreased performance at Four Corners compared to the second quarter of 2006 resulted in a $3.2 million decrease to gross margin and a $0.3 million decrease to O&M costs.

Year-to-date 2007 compared to 2006, PVNGS performance resulted in an $11.9 million increase to gross margin and a $2.0 million decrease in O&M costs. SJGS performance resulted in a $1.2 million increase to gross margin and a $0.1 million decrease to O&M costs. Decreased Four Corners performance resulted in a $3.7 million decrease to gross margin and a $0.2 million increase to O&M costs.

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

For the second quarter and year-to-date 2007, increases in general operational expenses include costs for materials and supplies as well as shared service, employee labor, pension and benefit costs.

77

First Choice

The table below summarizes the operating results for First Choice:

	Three Months Ended June 30,										Six Months Ended June 30,
	2007		2006		Change			%			2007		2006		Change			%
	(In millions)										(In millions)
Total operating revenues	$	150.0	$	154.9	$	(4.9	)		(3.1	)	$	285.6	$	260.0	$	25.6			9.8
Cost of energy		125.8		118.1		7.7			6.6			236.7		208.4		28.3			13.6
Gross margin		24.2		36.8		(12.6	)		(34.4	)		48.9		51.6		(2.7	)		(5.2	)
Operating expenses		13.0		15.3		(2.3	)		(15.7	)		28.1		28.6		(0.5	)		(1.5	)
Depreciation and amortization		0.5		0.5		—			(7.8	)		0.9		1.0		(0.1	)		(6.6	)
Operating income	$	10.7	$	21.0	$	(10.3	)		(48.8	)	$	19.9	$	22.0	$	(2.1	)		(9.8	)

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

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

78

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

	Three Months Ended June 30,										Six Months Ended June 30,
	2007		2006(1)		Change			%			2007			2006(1)		Change			%
	(In millions, except customers)										(In millions, except customers)
Residential	$	88.4	$	89.2	$	(0.8	)		(0.8	)	$	174.0		$	148.8	$	25.2			16.9
Mass-market		18.0		23.7		(5.7	)		(24.3	)		34.1			42.5		(8.4	)		(19.8	)
Mid-market		37.8		33.9		3.9			11.7			68.4			53.3		15.1			28.2
Mark-to-market(4)		1.7		3.8		(2.1	)		(55.1	)		(0.3	)		5.5		(5.8	)		(104.7	)
Other		4.1		4.3		(0.2	)		(5.8	)		9.4			9.9		(0.5	)		(4.1	)
	$	150.0	$	154.9	$	(4.9	)		(3.1	)	$	285.6		$	260.0	$	25.6			9.8
Actual customers (thousands)(2,3)		249.5		230.1		19.4			8.4			249.5			230.1		19.4			8.4

(1)	The customer class revenues and the customer counts have been reclassified to be consistent with the current year presentation.
(2)	See note above in the TNMP Electric segment discussion about the impact of TECA.
(3)	Due to the competitive nature of First Choice’s business, actual customer count at June 30 is presented in the table above as a more representative business indicator than the average customers that are shown in the table for TNMP customers.
(4)	Includes financial gas trading.

79

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

	Three Months Ended June 30,										Six Months Ended June 30,
	2007		2006(2)		Change			%			2007		2006(2)		Change			%
	(Gigawatt hours(1))										(Gigawatt hours(1))
Residential		638.0		636.7		1.3			0.2			1,252.9		1,064.2		188.7			17.7
Mass-market		110.8		160.6		(49.8	)		(31.0	)		210.7		281.6		(70.9	)		(25.2	)
Mid-market		329.7		308.4		21.3			6.9			589.6		486.1		103.5			21.3
Other		8.0		13.6		(5.6	)		(41.6	)		17.2		26.6		(9.4	)		(35.3	)
		1,086.5		1,119.3		(32.8	)		(2.9	)		2,070.4		1,858.5		211.9			11.4

(1)	See note above in the TNMP Electric segment discussion about the impact of TECA.
(2)	The customer class sales have been reclassified to be consistent with current year presentation.

Cooler weather throughout 2007 resulted in lower sales volumes and reduced operating income for both the second quarter and year-to-date 2007. The cooler weather had a large impact on the second quarter as cooling degree-days are down 20.4% compared to the second quarter of 2006.

For the second quarter of 2007, an overall increase in customers and increased sales prices increased revenues, but were more than offset by an increase in purchase prices and a shift in the mix of overall customers to include more lower margin customers, resulting in a decrease to gross margin and operating income. Year-to-date 2007, the increase in sales prices was greater than the increase in purchase prices, resulting in an increase to margin and operating income. However, the increase in total customers was more than offset by the shift in the mix of customers to lower margin customers.

A mark-to-market gain of $1.7 million during the second quarter of 2007, and a loss of $0.3 million year-to-date, compared to gains of $3.3 million and $5.5 million for the second quarter and year-to-date 2006 resulted in reduced income compared to last year.

Bad debt expense has increased in 2007, primarily in the second quarter, compared to 2006, resulting in a decrease to operating income. A reduction in incentive-based compensation as a result of lower than projected earnings in 2007 has decreased operating expenses for both the second quarter and year-to-date 2007. Other operating expenses were reduced for the second quarter and year-to-date 2007 by the outsourcing of customer service operations. Year-to-date 2007, these savings were offset by an increase in marketing expenses to support growth in the business.

80

EnergyCo

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

	For the
	Period of June 1
	- June 30, 2007
	(In thousands)
Operating revenue	$	14,366
Cost of energy		4,561
Gross margin		9,805
Operating expenses		2,767
Depreciation and amortization		1,528
Operating income		5,510
Other income		24
Net interest charges		(818	)
Net earnings	$	4,716
50 percent of net earnings	$	2,358
Amortization of basis difference in EnergyCo		584
PNMR equity in net earnings of EnergyCo	$	2,942

Corporate and 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 $5.9 million for the second quarter of 2007 and $8.2 million year-to-date 2007. These increases were primarily driven by 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 $10.0 million for the second quarter and $11.2 million year-to-date 2007. 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 an increase in legal reserves for year-to-date 2007. These costs were partially offset by costs in 2006 related to TNP and Twin Oaks acquisition integration costs of $1.8 million for the second quarter and $2.8 million year-to-date, costs that were allocated to EnergyCo in 2007, which did not exist in 2006, and the absence of severance and other costs in 2006 related to the TNP acquisition of $0.8 million for the second quarter and $1.0 million year-to-date.

Depreciation expense increased primarily due to an increase in asset base as a result of new software implementation and completion of a data center for shared services. These expenses were allocated to the business segments through the corporate allocation.

81

PNMR Consolidated

Interest income decreased in 2007 primarily due to lower interest income of $1.0 million for the second quarter and $1.3 million year-to-date resulting from lower PGAC balances, as well as lower interest income of $0.5 million for the second quarter and $1.1 million year-to-date earned on the PVNGS lessor notes due to lower principal balances, which were partially offset by increased interest income of $0.3 million for the second quarter and $0.5 million year-to-date from higher cash balances at First Choice.

Other income and deductions decreased in 2007 primarily due to the decrease of $2.0 million for the second quarter and $4.0 million year-to-date in carrying charges on regulatory assets as a result of the absence of interest income earned on TNMP stranded costs in 2006 based on the collection of costs ordered by the PUCT, as discussed in the TNMP Electric segment. Other income and deductions also decreased as a result of the amortization of $2.5 million for the second quarter and year-to-date for a wind energy investment in other deductions. These decreases were partially offset by increased realized gains on investments held by the NDT.

PNMR’s consolidated interest charges decreased primarily due to interest effects of the settlement with the IRS regarding previously unrecognized tax benefits (See Note 15), which reduced interest expense by $5.5 million for the second quarter and year-to-date, and increased capitalized interest on construction of Afton and AFUDC on the SJGS environmental project of $1.4 million for the second quarter and $1.9 million year-to-date. These decreases were partially offset by increased interest of $2.5 million for the second quarter and $6.1 million year-to-date on short-term borrowings, increased interest expense of $1.0 million year-to-date related to the refinancing of PCRBs, and interest expense on a wind energy investment that began in late 2006. The bridge loan associated with the Altura purchase of Twin Oaks decreased interest expense for the quarter but increased expense for the year, as that loan was outstanding for only one-half of a month during the second quarter of 2007 compared to two and one-half months of the same period of 2006, but for three and one-half months of 2007 year-to-date, compared to two and one-half months for the same period of 2006.

PNMR’s consolidated income tax expense decreased primarily as a result of the settlement with the IRS regarding previously unrecognized tax benefits (See Note 15), which had a $16.0 million non-recurring impact on income taxes for both the second quarter and year-to-date of 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 six months ended June 30, 2007 were (277.5%) and 5.5%, respectively, compared to 38.3% and 37.5% for the three months and six months ended June 30, 2006. Excluding the non-recurring impact to income taxes related to the IRS settlement, the effective tax rates for the three months and six months ended June 30, 2007 would have been 19.7% and 35.7%. PNMR’s effective tax rates for the three months and six months ended June 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.

82

LIQUIDITY AND CAPITAL RESOURCES

Statements of Cash Flows

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

	Six Months Ended June 30,
	2007			2006			Variance
	(In millions)
Net cash flows from operating activities	$	87.2		$	111.5		$	(24.3	)
Net cash flows from investing activities		172.4			(596.2	)		768.6
Net cash flows from financing activities		(325.0	)		490.4			(815.4	)
Net change in cash and cash equivalents	$	(65.4	)	$	5.7		$	(71.1	)

The change in PNMR’s cash flows from operating activities is a result of PNM’s higher load growth in 2007 offset by higher coal costs, lower plant performance, and lower wholesale activity. In addition, First Choice Power had higher customer growth and pricing offset by changes in customer mix. There were also higher incentive based compensation payouts in 2007 and higher interest charges that were a result of higher short-term borrowings in 2007. Higher than normal gas and market prices at the end of 2005 contributed to higher receivable collections in 2006 as compared to 2007 partially offset by reduced payments in 2007 associated with gas purchases due to lower prices as compared to 2006.

PNMR had net positive cash flows from investing activities for the six months ended June 30, 2007 primarily due to 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. In addition, PNMR incurred increased expenditures for utility plant additions, including the purchase of assets underlying a portion of PVNGS leased by PNM (See Note 2).

The change in PNMR’s cash flows for financing activities for the six months ended June 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 for total capital requirements for 2007 are $485.8 million, including construction expenditures of $414.8 million. Total capital requirements for the years 2007-2011 are projected to be $2,426.8 million, including construction expenditures of $1,990.7 million. This projection includes $56.0 million for 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.

The Company continues to look for appropriately priced generation acquisition and expansion opportunities to support retail electric load growth, for the continued expansion of its long-term contract business, and to supplement its natural transmission position in the southwestern and western United States.

During the first half 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 through a borrowing of $250.5 million under the PNMR Facility, PNMR’s $600.0 million revolving credit facility, which amount has been repaid.

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As discussed in Note 7 to Condensed Consolidated Financial Statements, TNMP redeemed $100 million of its senior unsecured notes using funds from PNMR and PNMR received $7.6 million from the initial draw under $20 million of PCRBs issued by the City of Farmington, New Mexico during the six months ended June 30, 2007. As discussed in Note 11, PNMR received cash distributions from EnergyCo aggregating $362.3 million during this same period. PNMR and PNM have an aggregate of $631.4 million of commercial paper outstanding as of August 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 $148.9 million in unsecured notes is due within the next twelve months.

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.

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.

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A summary of these arrangements as of August 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 August 1, 2007:
Commercial paper program	$	268.6	$	362.8	$	631.4
Revolving credit facility		—		—		—
Local lines of credit		—		—		—
Total short-term debt outstanding		268.6		362.8		631.4
Letters of credit		3.1		30.5		33.6
Total short term-debt and letters of credit	$	271.7	$	393.3	$	665.0
Remaining availability as of August 1, 2007	$	141.8	$	221.7	$	363.5

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

Pursuant to the terms of the PNM Direct Plan, PNMR began offering new shares of PNMR common stock through the plan beginning June 1, 2006. PNMR may also waive the maximum investment limit upon request in individual cases pursuant to the terms of the plan. In August 2006, PNMR entered into an equity distribution agreement to offer and sell up to 8 million shares of PNMR common stock from time to time. The agreement provides that PNMR will not sell more shares than needed for the aggregate gross proceeds from such sales to reach $200.0 million. From January 1, 2007 through August 1, 2007, PNMR had sold a combined total of 54,170 shares of its common stock through the PNMR Direct Plan and the equity distribution agreement for net proceeds of $1.6 million.

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

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

	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. 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.

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

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

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

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

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

Capital Structure

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

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

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

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

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MD&A FOR PNM

RESULTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 2007
COMPARED TO SIX MONTHS ENDED JUNE 30, 2006

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

PNM’s net earnings for the six months ended June 30, 2007 were $28.1 million compared to $33.1 million for the six months ended June 30, 2006. The major causes of changes in net earnings were the decrease in gains from Wholesale marketing activity from 2006 as a result of the absence of market opportunities that allowed for the forward sale of the first quarter 2006 excess resources, mark-to-market losses, an increase in generation prices due to the increase of coal costs, an increase in general operating expenses, and increased financing costs. These decreases were partially offset by improved plant performance, primarily at PVNGS, increased load growth along with the effects of colder weather, primarily at PNM Gas, and the TNMP asset transfer to PNM Electric. The positive or (negative) after-tax impacts of these items on net earnings in 2007 compared to 2006 are as follows:

	Six Months Ended
	June 30, 2007
	(In millions)
After-tax Impacts
TNMP asset transfer	$	2.1
Plant performance		10.9
Mark-to-market		(5.5	)
Coal costs		(4.8	)
Wholesale marketing activity		(6.3	)
Regulated load growth and weather		6.2
General operational increases		(2.1	)
Financing		(2.1	)
Other		(3.4	)
Net change	$	(5.0	)

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

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MD&A FOR TNMP

RESULTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 2007
COMPARED TO SIX MONTHS ENDED JUNE 30, 2006

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

The PUCT issued an order on November 2, 2006 related to the stranded costs incurred by TNMP as part of the deregulation of the Texas energy market and the associated carrying charges. The details of this order are discussed in TNMP’s Annual Report on Form 2006 10-K.

TNMP’s net earnings for the six months ended June 30, 2007 were $5.2 million compared to $4.0 million for the six months ended June 30, 2006. The major causes of changes in net earnings were the recovery of costs as a result of the PUCT order and customer growth, which was partially offset by the transfer of New Mexico assets to PNM Electric and a decrease in carrying charges on regulatory assets as a result of the absence of interest income earned on TNMP stranded costs in 2006 based on the collection of costs order by the PUCT. The positive or (negative) after-tax impacts of these items on net earnings in 2007 compared to 2006 are as follows:

	Six Months Ended
	June 30, 2007
	(In millions)
After-tax Impacts
Discontinued operations	$	(2.1	)
Carrying Charges		(2.6	)
PUCT order		3.9
Customer growth		1.0
Other		1.0
Net change	$	1.2

TNMP’s consolidated income tax expense from continuing operations was $2.4 million for the six months ended June 30, 2007, compared to $1.3 million for the same period of 2006. TNMP’s effective income tax rates from continuing operations for the six months ended June 30, 2007 and 2006 were 31.5% and 41.3%, respectively.

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OTHER ISSUES FACING THE COMPANY

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

Global Warming Issues

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

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

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

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

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

NEW ACCOUNTING STANDARDS

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

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

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

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

• The risk that EnergyCo is unable to identify and implement profitable acquisitions, including development of the Cedar Bayou Generating Station and implementation of the acquisition of the Lyondell facility, or that the contribution of assets to EnergyCo by PNMR may not be implemented as expected, or that PNMR and ECJV will not agree to make additional capital contributions to EnergyCo,

• The potential unavailability of cash from PNMR’s subsidiaries or EnergyCo due to regulatory, statutory 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,

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

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• The risks associated with completion of generation, including pollution control equipment at SJGS, the expansion of the Afton Generating Station, and the EnergyCo Cedar Bayou 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 are disclosed in Item 1A, Risk Factors, in Part II of this Form 10-Q.

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

SECURITIES ACT DISCLAIMER

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

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company uses derivative instruments to manage risk as it relates to changes in natural gas and electric prices and changes in interest rates. The Company also uses certain derivative instruments for wholesale power marketing and natural gas transactions in order to take advantage of favorable price movements and market timing activities in these power markets. The following additional information is provided.

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

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

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

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

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

Accounting for Derivatives

Under the derivative accounting rules and the related accounting rules for energy contracts, the Company accounts for its various derivative instruments for the purchase and sale of energy differently based on the contract terms. 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.

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.

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

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

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

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

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

	Six Months Ended
	June 30,
	2007			2006
	Mark-to-Market Instruments
	(In thousands)
Sources of fair value gain (loss):
Fair value at beginning of year	$	3,466		$	4,528
Amount realized on contracts delivered during period		2,823			(4,108	)
Changes in fair value		(10,763	)		2,244
Net fair value at end of period	$	(4,474	)	$	2,664
Net change recorded as mark-to-market	$	(7,940	)	$	(1,864	)

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

Fair Value at June 30, 2007

	Less than
	1 year			1-3 Years		4+ Years		Total
	(In thousands)
Net fair value at end of period	$	(11,499	)	$	1,809	$	5,216	$	(4,474	)

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

	Six Months Ended
	June 30,
	2007			2006
Type of Derivative	Hedge Instruments
	(In thousands)
Change in fair value of energy contracts	$	(34,223	)	$	(988	)
Change in fair value of gas fixed for float swaps		6,228			(19,694	)
Change in the fair value of options		30			(7,703	)
Net change in fair value	$	(27,965	)	$	(28,385	)

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.

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

First Choice measures the market risk of its activities using an EaR calculation to maintain PNMR’s total exposure within management-prescribed limits. Because of its obligation to serve customers, First Choice must take certain contracts to settlement. Accordingly, a measure that evaluates the settlement of First Choice’s positions against earnings provides management with a useful tool to manage its portfolio. First Choice’s 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.

For the six months ended June 30, 2007, the average EaR amount was $14.0 million, with high and low EaR amounts for the period of $20.5 million and $5.7 million, respectively. The total EaR amount at June 30, 2007 was $7.3 million. For the six months ended June 30, 2006, the average EaR amount for these transactions was $9.1 million, with high and low EaR amounts for the period of $11.9 million and $6.8 million, respectively. The total EaR amount for these transactions at June 30, 2006 was $9.8 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 $4.5 million at June 30, 2007. For the six months ended June 30, 2007, the high, low and average mark-to-market VaR amounts were $6.2 million, $2.1 million and $4.1 million, respectively. The VaR amount for these transactions was $2.8 million at June 30, 2006. For the six months ended June 30, 2006, the high, low and average mark-to-market VaR amounts were $4.3 million, $2.1 million and $3.1 million, respectively.

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

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

PNM Wholesale
Schedule of Credit Risk Exposure
June 30, 2007

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

(a)

TheRatingincluded 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
June 30, 2007

					Greater		Total
	Less than				than		Net
Rating	2 Years		2-5 Years		5 Years		Exposure
	(In thousands)
External ratings:
Investment grade	$	51,001	$	30,527	$	3,837	$	85,365
Non-investment grade		986		—		—		986
Split		25		—		—		25
Internal ratings:
Investment grade		—		—		—		—
Non-investment grade		917		—		—		917
Total	$	52,929	$	30,527	$	3,837	$	87,293

The Company provides for losses due to market and credit risk. Credit risk for PNM Wholesale’s largest counterparty as of June 30, 2007 and December 31, 2006 was $30.5 million and $29.7 million, respectively.

First Choice

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

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

Interest Rate Risk

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.

98

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 June 30, 2007. In general, an increase in fair value would impact earnings and cash flows to the extent not recoverable in rates if PNM were to reacquire all or a portion of its debt instruments in the open market prior to their maturity.

During the three and six months ended June 30, 2007, PNM contributed $1.5 million and $3.1 million to the trust for other post retirement benefits and $0 million and $4.9 million to the NDT. PNM made no contributions to the trusts for the pension or executive retirement plans. The securities held by all of the trusts had an estimated fair value of $711.6 million at June 30, 2007, of which approximately 24.2% were fixed-rate debt securities that subject PNM to risk of loss of fair value with movements in market interest rates. If rates were to increase by 50 basis points from their levels at June 30, 2007, the decrease in the fair value of the fixed-rate securities would be approximately 3.5%, or $6.1 million.

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

Equity Market Risk

The trusts established to fund PNM’s share of the decommissioning costs of PVNGS and pension and other postretirement benefits also hold certain equity securities at June 30, 2007. Approximately 61.3% of the securities held by the various PNM trusts were equity securities as of June 30, 2007. The trusts established to fund TNMP’s pension and other postretirement benefits hold certain equity securities at June 30, 2007. Approximately 54.2% of the securities held by the various trusts were equity securities as of June 30, 2007. These equity securities also expose the Company to losses in fair value.

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 second quarter of 2007:

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

Except as described above, there have been no other changes in PNMR’s internal controls over financial reporting for the quarter ended June 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).

Changes in internal controls

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

100

TNMP

Disclosure of controls and procedures

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

Changes in internal controls

There have been no changes in TNMP’s internal controls over financial reporting for the quarter ended June 30, 2007, 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.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Annual Meeting

The annual meeting of shareholders was held on May 22, 2007. The matters voted on at the meeting and the results were as follows:

The election of the following nominees to serve as directors as follows:

			Votes Against or
Director	Votes For		Withheld
Terms expiring in 2008:
Adelmo E. Archuleta		64,181,150		6,204,301
Julie A. Dobson		64,185,592		6,199,859
Woody L. Hunt		64,182,949		6,202,502
C. E. McMahen		63,784,715		6,600,736
M. T. Pacheco		70,214,216		171,235
R. M. Price		60,351,592		10,033,859
B. S. Reitz		70,214,050		171,401
Jeffry E. Sterba		66,802,203		3,583,248
Joan B. Woodard		70,218,959		166,492

The approval of the selection by the Company’s Board of Deloitte & Touche LLP as independent auditors for the fiscal year ending December 31, 2007, was voted on, as follows:

Votes For	Votes Against or Withheld	Abstentions
70,231,908	99,434	54,109

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ITEM 6. EXHIBITS

2.1	PNMR	Contribution Agreement, dated as of June 1, 2007, among EnergyCo, LLC, PNM Resources, and ECJV Holdings, LLC
4.23	PNM	Seventh Supplemental Indenture, dated as of June 1, 2007, to Indenture dated as of March 11, 1998, between PNM and The Bank of New York Trust Company, N.A. (successor to JPMorgan Chase Bank), as Trustee
12.1	PNMR	Ratio of Earnings to Fixed Charges
12.2	PNMR	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

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SIGNATURE

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

	PNM RESOURCES, INC. PUBLIC SERVICE COMPANY OF NEW MEXICO TEXAS-NEW MEXICO POWER COMPANY
	(Registrants)
Date: August 14, 2007	/s/ Thomas G. Sategna
	Thomas G. Sategna Vice President and Corporate Controller (Officer duly authorized to sign this report)

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EXHIBIT INDEX

Exhibit
No.		Description
2.1	PNMR	Contribution Agreement, dated as of June 1, 2007, among EnergyCo, LLC, PNM Resources, and ECJV Holdings, LLC
4.23	PNM	Seventh Supplemental Indenture, dated as of June 1, 2007, to Indenture dated as of March 11, 1998, between PNM and The Bank of New York Trust Company, N.A. (successor to JPMorgan Chase Bank), as Trustee
12.1	PNMR	Ratio of Earnings to Fixed Charges
12.2	PNMR	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

105