UNITED
      STATESSECURITIES
      AND EXCHANGE COMMISSIONWashington,
      D.C.  20549FORM
      10-Q(Mark
      One)[X]
      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934For
      the quarterly period ended March 31,
      2009Commission
            
            Name
      of Registrants, State of Incorporation,
            
            I.R.S.
      EmployerFile
      Number
            
            Address
      and Telephone Number
            
            Identification
      No.001-32462
            
            PNM
      Resources, Inc.
            
            85-0468296(A
      New Mexico Corporation)Alvarado
      SquareAlbuquerque,
      New Mexico  87158(505)
      241-2700001-06986
            
            Public
      Service Company of New Mexico
            
            85-0019030(A
      New Mexico Corporation)Alvarado
      SquareAlbuquerque,
      New Mexico  87158(505)
      241-2700002-97230
            
            Texas-New
      Mexico Power Company
            
            75-0204070(A
      Texas Corporation)577
      N. Garden Ridge Blvd.Lewisville,
      Texas  75067(972)
      420-4189





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





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





Indicate
by check mark whether the registrants have submitted electronically and posted
on its corporate Web sites, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such
files).  YES___    NO___  (No
Interactive Data Files required to be submitted)








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





Large accelerated filer  ü
            Accelerated
      filer
            Non-accelerated
      filer





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





Large
      accelerated filer
            Accelerated
      filer
            Non-accelerated
      filer  ü





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





As of
April 30, 2009, 86,620,391 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 April 30, 2009 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 April 30, 2009 was
6,358 all held indirectly by PNMR (and none held by
non-affiliates).





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





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








2


PNM
RESOURCES, INC. AND SUBSIDIARIES


PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY


TEXAS-NEW
MEXICO POWER COMPANY AND SUBSIDIARIES





INDEX





Page No.GLOSSARY
            4PART
      I.  FINANCIAL INFORMATIONITEM
      1.  FINANCIAL STATEMENTS (UNAUDITED)PNM RESOURCES, INC. AND
      SUBSIDIARIESCondensed
      Consolidated Statements of Earnings (Loss)
            6Condensed
      Consolidated Balance Sheets
            7Condensed
      Consolidated Statements of Cash Flows
            9Condensed
      Consolidated Statements of Changes in PNMR Common Stockholders’
      Equity
            11Condensed
      Consolidated Statements of Comprehensive Income (Loss)
            12PUBLIC
      SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIESCondensed
      Consolidated Statements of Earnings (Loss)
            13Condensed
      Consolidated Balance Sheets
            14Condensed
      Consolidated Statements of Cash Flows
            16Condensed
      Consolidated Statements of Changes in PNM Common Stockholder’s
      Equity
            18Condensed
      Consolidated Statements of Comprehensive Income (Loss)
            19TEXAS-NEW
      MEXICO POWER COMPANY AND SUBSIDIARIESCondensed
      Consolidated Statements of Earnings
            20Condensed
      Consolidated Balance Sheets
            21Condensed
      Consolidated Statements of Cash Flows
            23Condensed
      Consolidated Statements of Changes in Common Stockholder’s
      Equity
            25Condensed
      Consolidated Statements of Comprehensive Income
            26NOTES TO CONDENSED CONSOLIDATED
      FINANCIAL STATEMENTS
            27ITEM
      2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
      CONDITION
            65AND
      RESULTS OF OPERATIONSITEM
      3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
      RISK
            83ITEM
      4.  CONTROLS AND PROCEDURES
            89PART
      II.  OTHER INFORMATIONITEM
      1.  LEGAL PROCEEDINGS
            90ITEM
      1A.  RISK FACTORS
            90ITEM
      6.  EXHIBITS
            91SIGNATURE
            93








3


GLOSSARY





Definitions:Afton
            Afton
      Generating StationAG
            New
      Mexico Attorney GeneralALJ
            Administrative
      Law JudgeAltura
            Optim
      Energy Twin Oaks, LP; formerly known as Altura Power L.P.Altura
      Cogen
            Optim
      Energy Altura Cogen, LLC; formerly known as Altura Cogen, LLC (the CoGen
      Lyondell Power Generation Facility)AOCI
            Accumulated
      Other Comprehensive IncomeAPS
            Arizona
      Public Service Company, which is the operator and a co-owner of PVNGS
      and
              Four
      CornersAPB
            Accounting
      Principles BoardBART
            Best
      Available Retrofit TechnologyBoard
            Board
      of Directors of PNMRCal
      PX
            California
      Power ExchangeCascade
            Cascade
      Investment, L.L.C.Continental
            Continental
      Energy Systems, L.L.C.CRHC
            Cap
      Rock Holding Corporation, a subsidiary of ContinentalCTC
            Competition
      Transition ChargeDecatherm
            Million
      BTUsDelta
            Delta-Person
      Limited PartnershipDOE
            Department
      of EnergyECJV
            ECJV
      Holdings, LLCEIP
            Eastern
      Interconnection ProjectEITF
            Emerging
      Issues Task ForceEnergyCo
            EnergyCo,
      LLC, a limited liability company, owned 50% by each of PNMR and ECJV;
      now
              known
      as Optim EnergyEPA
            United
      States Environmental Protection AgencyEPE
            El
      Paso Electric CompanyERCOT
            Electric
      Reliability Council of TexasESPP
            Employee
      Stock Purchase PlanFASB
            Financial
      Accounting Standards BoardFERC
            Federal
      Energy Regulatory CommissionFIN
            FASB
      Interpretation NumberFIP
            Federal
      Implementation PlanFirst
      Choice
            First
      Choice Power, L. P. and SubsidiariesFour
      Corners
            Four
      Corners Power PlantFPPAC
            Fuel
      and Purchased Power Adjustment ClauseFSP
            FASB
      Staff PositionGAAP
            Generally
      Accepted Accounting Principles in the United States of
    AmericaGEaR
            Gross
      Earnings at RiskGHG
            Greenhouse
      Gas EmissionsGWh
            Gigawatt
      hoursIBEW
            International
      Brotherhood of Electrical Workers, Local 611KWh
            Kilowatt
      HourLBB
            Lehman
      Brothers Bank, FSB, a subsidiary of LBHLBH
            Lehman
      Brothers Holdings Inc.LCC
            Lyondell
      Chemical CompanyLordsburg
            Lordsburg
      Generating StationLuna
            Luna
      Energy FacilityMD&A
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      OperationsMoody’s
            Moody’s
      Investor Services, Inc.MW
            MegawattMWh
            Megawatt
      HourNavajo
      Acts
            Navajo
      Nation Air Pollution Prevention and Control Act, the Navajo Nation Safe
      Drinking Water Act, and the Navajo
              Nation Pesticide ActNDT
            Nuclear
      Decommissioning Trusts for PVNGSNinth
      Circuit
            United
      States Court of Appeals for the Ninth Circuit






4


NMED
            New
      Mexico Environment DepartmentNMGC
            New
      Mexico Gas Company, a subsidiary of ContinentalNMPRC
            New
      Mexico Public Regulation CommissionNOX
            Nitrogen
      OxidesNOI
            Notice
      of InquiryNRC
            United
      States Nuclear Regulatory CommissionO&M
            Operations
      and MaintenanceOCI
            Other
      Comprehensive IncomeOptim
      Energy
            Optim
      Energy, LLC, a limited liability company, owned 50% by each of PNMR and
      ECJV; formerly known as EnergyCoPG&E
            Pacific
      Gas and Electric Co.PNM
            Public
      Service Company of New Mexico and SubsidiariesPNM
      Facility
            PNM’s
      $400 Million Unsecured Revolving Credit FacilityPNMR
            PNM
      Resources, Inc. and SubsidiariesPNMR
      Facility
            PNMR’s
      $600 Million Unsecured Revolving Credit FacilityPPA
            Power
      Purchase AgreementPRP
            Potential
      Responsible PartyPUCT
            Public
      Utility Commission of TexasPVNGS
            Palo
      Verde Nuclear Generating StationREC
            Renewable
      Energy CertificatesREP
            Retail
      Electricity ProviderRFP
            Request
      for ProposalRMC
            Risk
      Management CommitteeSEC
            United
      States Securities and Exchange CommissionSFAS
            FASB
      Statement of Financial Accounting StandardsSJCC
            San
      Juan Coal CompanySJGS
            San
      Juan Generating StationSO2
            Sulfur
      DioxideSPS
            Southwestern
      Public Service CompanySRP
            Salt
      River ProjectS&P
            Standard
      and Poor’s Ratings ServicesTECA
            Texas
      Electric Choice ActTerm
      Loan Agreement
            PNM’s
      $300 Million Unsecured Delayed Draw Term Loan FacilityTNMP
      Bridge Facility
            TNMP’s
      $100 Million Bridge Term Loan Credit AgreementTNMP
      Facility
            TNMP’s
      $200 Million Unsecured Revolving Credit FacilityTNMP
            Texas-New
      Mexico Power Company and SubsidiariesTNP
            TNP
      Enterprises, Inc. and SubsidiariesTwin
      Oaks
            Assets
      of Twin Oaks Power, L.P. and Twin Oaks Power III, L.P.Valencia
            Valencia
      Energy FacilityVaR
            Value
      at RiskAccounting Pronouncements (as amended and
      interpreted):FIN
      46R
            FIN
      46R “Consolidation of
      Variable Interest Entities an Interpretation of ARB No.
      51”FSP
      FAS 157-2
            FSP
      FAS 157-2 “Effective
      Date of FASB Statement No. 157”SFAS
      5
            SFAS
      No. 5 “Accounting for
      Contingencies”SFAS
      57
            SFAS
      No. 57 “Related Party
      Disclosures”SFAS
      106
            SFAS
      No. 106 “Employers'
      Accounting for Postretirement Benefits Other Than
      Pensions”SFAS
      112
            SFAS
      No. 112 “Employers’
      Accounting for Postemployment Benefits – an amendment of FASB Statements
      No. 5 and 43”SFAS
      128
            SFAS
      No. 128 “Earnings per
      Share”SFAS
      133
            SFAS
      No. 133 “Accounting for
      Derivative Instruments and Hedging Activities”SFAS
      141
            SFAS
      No. 141 “Business
      Combinations”SFAS
      144
            SFAS
      No. 144 “Accounting for
      the Impairment or Disposal of Long-Lived
Assets”SFAS
      157
            SFAS
      No. 157 “Fair Value
      Measurements”SFAS
      160
            SFAS
      No. 160 “Noncontrolling
      Interests in Consolidated Financial Statements – an amendment of ARB No.
      51”SFAS
      161
            SFAS
      No. 161 “Disclosures
      about Derivative Instruments and Hedging Activities—an amendment of FASB
      Statement No. 133”


5


PART
I. FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS


PNM
RESOURCES, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(LOSS)


(Unaudited)





Three
      Months Ended March 31,2009
            
            
            2008(In thousands, except per shareamounts)Operating
      Revenues:Electric
            
            $
            385,803
            
            
            $
            364,403Other
            
            
            62
            
            
            
            100Total
      operating revenues
            
            
            385,865
            
            
            
            364,503Operating
      Expenses:Cost
      of energy
            
            
            181,248
            
            
            
            234,380Administrative
      and general
            
            
            62,138
            
            
            
            47,362Energy
      production costs
            
            
            48,557
            
            
            
            51,204Regulatory
      disallowances
            
            
            -
            
            
            
            30,248Depreciation
      and amortization
            
            
            36,071
            
            
            
            34,037Transmission
      and distribution costs
            
            
            14,017
            
            
            
            13,376Taxes
      other than income taxes
            
            
            13,931
            
            
            
            12,867Total
      operating expenses
            
            
            355,962
            
            
            
            423,474Operating
      income (loss)
            
            
            29,903
            
            
            
            (58,971
            )Other
      Income and Deductions:Interest
      income
            
            
            5,223
            
            
            
            5,530Gains
      (losses) on investments held by NDT
            
            
            (4,382
            )
            
            
            (3,705
            )Other
      income
            
            
            23,164
            
            
            
            890Equity
      in net earnings (loss) of Optim Energy
            
            
            1,395
            
            
            
            (25,083
            )Other
      deductions
            
            
            (2,360
            )
            
            
            (3,882
            )Net
      other income (deductions)
            
            
            23,040
            
            
            
            (26,250
            )Interest
      Charges:Interest
      on long-term debt
            
            
            24,200
            
            
            
            18,908Other
      interest charges
            
            
            4,749
            
            
            
            8,927Total
      interest charges
            
            
            28,949
            
            
            
            27,835Earnings
      (Loss) before Income Taxes
            
            
            23,994
            
            
            
            (113,056
            )Income
      Taxes (Benefit)
            
            
            7,587
            
            
            
            (42,053
            )Earnings
      (Loss) from Continuing Operations
            
            
            16,407
            
            
            
            (71,003
            )Earnings
      from Discontinued Operations, net of IncomeTaxes
      of $43,842 and $13,655
            
            
            81,675
            
            
            
            22,499Net
      Earnings (Loss)
            
            
            98,082
            
            
            
            (48,504
            )Earnings
      Attributable to Valencia Non-controlling Interest
            
            
            (2,579
            )
            
            
            -Preferred
      Stock Dividend Requirements of Subsidiary
            
            
            (132
            )
            
            
            (132
            )Net
      Earnings (Loss) Attributable to PNMR
            
            $
            95,371
            
            
            $
            (48,636
            )Earnings
      (Loss) from Continuing Operations Attributable to PNMR per Common
      Share:Basic
            
            $
            0.15
            
            
            $
            (0.93
            )Diluted
            
            $
            0.15
            
            
            $
            (0.93
            )Net
      Earnings (Loss) Attributable to PNMR per Common
Share:Basic
            
            $
            1.04
            
            
            $
            (0.63
            )Diluted
            
            $
            1.04
            
            
            $
            (0.63
            )Dividends
      Declared per Common Share
            
            $
            0.125
            
            
            $
            0.230





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


6


PNM
RESOURCES, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


(Unaudited)





March
      31,
            
            
            December
      31,2009
            
            
            2008(In
      thousands)ASSETSCurrent
      Assets:Cash
      and cash equivalents
            
            $
            70,470
            
            
            $
            140,619Special
      deposits
            
            
            3,480
            
            
            
            3,480Accounts
      receivable, net of allowance for uncollectible accounts of $18,659 and
      $21,466
            
            
            102,949
            
            
            
            119,174Unbilled
      revenues
            
            
            66,368
            
            
            
            81,126Other
      receivables
            
            
            89,149
            
            
            
            73,083Materials,
      supplies, and fuel stock
            
            
            47,450
            
            
            
            49,397Regulatory
      assets
            
            
            1,537
            
            
            
            1,541Derivative
      instruments
            
            
            72,259
            
            
            
            51,250Income
      taxes receivable
            
            
            -
            
            
            
            49,584Current
      assets of discontinued operations
            
            
            -
            
            
            
            107,986Other
      current assets
            
            
            83,928
            
            
            
            75,393Total
      current assets
            
            
            537,590
            
            
            
            752,633Other
      Property and Investments:Investment
      in PVNGS lessor notes
            
            
            154,172
            
            
            
            168,729Equity
      investment in Optim Energy
            
            
            254,279
            
            
            
            239,950Investments
      held by NDT
            
            
            107,992
            
            
            
            111,671Other
      investments
            
            
            31,833
            
            
            
            32,966Non-utility
      property, net of accumulated depreciation of $2,938 and
    $2,582
            
            
            8,768
            
            
            
            9,135Total
      other property and investments
            
            
            557,044
            
            
            
            562,451Utility
      Plant:Electric
      plant in service
            
            
            4,387,225
            
            
            
            4,329,169Common
      plant in service and plant held for future use
            
            
            156,907
            
            
            
            147,5764,544,132
            
            
            
            4,476,745Less
      accumulated depreciation and amortization
            
            
            1,569,235
            
            
            
            1,545,9502,974,897
            
            
            
            2,930,795Construction
      work in progress
            
            
            186,405
            
            
            
            202,556Nuclear
      fuel, net of accumulated amortization of $19,671 and
    $16,018
            
            
            67,283
            
            
            
            58,674Net
      utility plant
            
            
            3,228,585
            
            
            
            3,192,025Deferred
      Charges and Other Assets:Regulatory
      assets
            
            
            490,334
            
            
            
            629,141Goodwill
            
            
            321,310
            
            
            
            321,310Other
      intangible assets, net of accumulated amortization of $4,822 and
      $4,672
            
            
            27,017
            
            
            
            27,167Derivative
      instruments
            
            
            29,500
            
            
            
            25,620Non-current
      assets of discontinued operations
            
            
            -
            
            
            
            561,915Other
      deferred charges
            
            
            86,182
            
            
            
            75,720Total
      deferred charges and other assets
            
            
            954,343
            
            
            
            1,640,873$
            5,277,562
            
            
            $
            6,147,982





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


7


PNM
RESOURCES, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


(Unaudited)





March
      31,
            
            
            December
      31,2009
            
            
            2008(In
      thousands, except share information)LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Short-term
      debt
            
            $
            145,600
            
            
            $
            744,667Current
      installments of long-term debt
            
            
            38,004
            
            
            
            205,694Accounts
      payable
            
            
            102,952
            
            
            
            174,068Accrued
      interest and taxes
            
            
            141,595
            
            
            
            51,618Regulatory
      liabilities
            
            
            8,776
            
            
            
            1,746Derivative
      instruments
            
            
            61,340
            
            
            
            33,951Current
      liabilities of discontinued operations
            
            
            -
            
            
            
            77,082Other
      current liabilities
            
            
            113,793
            
            
            
            139,562Total
      current liabilities
            
            
            612,060
            
            
            
            1,428,388Long-term
      Debt
            
            
            1,530,906
            
            
            
            1,379,011Deferred
      Credits and Other Liabilities:Accumulated
      deferred income taxes
            
            
            437,792
            
            
            
            572,719Accumulated
      deferred investment tax credits
            
            
            22,437
            
            
            
            23,834Regulatory
      liabilities
            
            
            327,911
            
            
            
            327,175Asset
      retirement obligations
            
            
            66,732
            
            
            
            63,492Accrued
      pension liability and postretirement benefit cost
            
            
            243,713
            
            
            
            246,136Derivative
      instruments
            
            
            14,769
            
            
            
            6,934Non-current
      liabilities of discontinued operations
            
            
            -
            
            
            
            94,615Other
      deferred credits
            
            
            143,994
            
            
            
            149,237Total
      deferred credits and other liabilities
            
            
            1,257,348
            
            
            
            1,484,142Total
      liabilities
            
            
            3,400,314
            
            
            
            4,291,541Commitments
      and Contingencies (See Note 9)Cumulative
      Preferred Stock of Subsidiarywithout
      mandatory redemption requirements ($100 stated value, 10,000,000 shares
      authorized:issued
      and outstanding 115,293 shares)
            
            
            11,529
            
            
            
            11,529Equity:PNMR Convertible Preferred Stock, Series A without mandatory
      redemption requirements(no stated value, 10,000,000 shares authorized: issued and outstanding
      477,800 shares)
            
            
            100,000
            
            
            
            100,000PNMR common stockholders’ equity:Common stock outstanding (no par value, 120,000,000 shares authorized:
      issuedand outstanding 86,607,560 and 86,531,644 shares)
            
            
            1,288,536
            
            
            
            1,288,168Accumulated
      other comprehensive income (loss), net of income taxes
            
            
            (27,743
            )
            
            
            30,948Retained earnings
            
            
            411,239
            
            
            
            327,290Total PNMR common stockholders’ equity
            
            
            1,672,032
            
            
            
            1,646,406Non-controlling
      interest in Valencia
            
            
            93,687
            
            
            
            98,506Total
      equity
            
            
            1,865,719
            
            
            
            1,844,912$
            5,277,562
            
            
            $
            6,147,982





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





8


PNM
RESOURCES, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





Three
      Months Ended March 31,2009
            
            
            2008(In
      thousands)Cash
      Flows From Operating Activities:Net
      earnings (loss)
            
            $
            98,082
            
            
            $
            (48,504
            )Adjustments
      to reconcile net earnings (loss) to net cash flows from operating
      activities:Depreciation and amortization
            
            
            42,305
            
            
            
            39,855Amortization of pre-payments on PVNGS firm-sales contracts
            
            
            (6,330
            )
            
            
            -Bad debt expense
            
            
            14,908
            
            
            
            4,127Deferred income tax expense (benefit)
            
            
            (85,899
            )
            
            
            (24,849
            )Equity in net (earnings) loss of Optim Energy
            
            
            (1,395
            )
            
            
            25,083Net unrealized losses on derivatives
            
            
            6,955
            
            
            
            18,015Realized losses on investments held by NDT
            
            
            4,382
            
            
            
            3,705Gain on sale of PNM Gas
            
            
            (111,006
            )
            
            
            -Gain on reacquired debt
            
            
            (7,467
            )
            
            
            -Stock based compensation expense
            
            
            1,070
            
            
            
            1,983Regulatory disallowances
            
            
            -
            
            
            
            30,248Other, net
            
            
            333
            
            
            
            (2,891
            )Changes in certain assets and liabilities:Customer
      accounts receivable and unbilled revenues
            
            
            (3,211
            )
            
            
            5,964Materials,
      supplies, and fuel stock
            
            
            2,098
            
            
            
            525Other
      current assets
            
            
            (1,034
            )
            
            
            9,156Other
      assets
            
            
            1,386
            
            
            
            (360
            )Accounts
      payable
            
            
            (79,025
            )
            
            
            (17,754
            )Accrued
      interest and taxes
            
            
            139,815
            
            
            
            (12,873
            )Other
      current liabilities
            
            
            (26,815
            )
            
            
            (9,168
            )Other
      liabilities
            
            
            (4,440
            )
            
            
            2,562Net
      cash flows from operating activities
            
            
            (15,288
            )
            
            
            24,824Cash
      Flows From Investing Activities:Utility
      plant additions
            
            
            (75,442
            )
            
            
            (77,793
            )Proceeds
      from sales of investments held by NDT
            
            
            44,391
            
            
            
            36,635Purchases
      of investments held by NDT
            
            
            (44,724
            )
            
            
            (36,760
            )Proceeds
      from sale of PNM Gas
            
            
            640,620
            
            
            
            -Return
      of principal on PVNGS lessor notes
            
            
            11,458
            
            
            
            10,645Reduction
      in restricted special deposits
            
            
            -
            
            
            
            2,554Other,
      net
            
            
            (15,596
            )
            
            
            (3,183
            )Net
      cash flows from investing activities
            
            
            560,707
            
            
            
            (67,902
            )





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





9


PNM
RESOURCES, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





Three
      Months Ended March 31,2009
            
            
            2008(In
      thousands)Cash
      Flows From Financing Activities:Short-term
      borrowings (repayments), net
            
            
            (599,067
            )
            
            
            71,100Long-term
      borrowings
            
            
            309,242
            
            
            
            -Repayment
      of long-term debt
            
            
            (314,079
            )
            
            
            -Issuance
      of common stock
            
            
            620
            
            
            
            1,309Proceeds
      from stock option exercise
            
            
            -
            
            
            
            86Purchase
      of common stock to satisfy stock awards
            
            
            (803
            )
            
            
            (1,140
            )Excess
      tax (shortfall) from stock-based payment arrangements
            
            
            (519
            )
            
            
            (380
            )Dividends
      paid
            
            
            (11,546
            )
            
            
            (17,934
            )Payments
      received on PVNGS firm-sales contracts
            
            
            7,634
            
            
            
            -Other,
      net
            
            
            (7,075
            )
            
            
            (3
            )Net
      cash flows from financing activities
            
            
            (615,593
            )
            
            
            53,038Change
      in Cash and Cash Equivalents
            
            
            (70,174
            )
            
            
            9,960Cash
      and Cash Equivalents at Beginning of Period
            
            
            140,644
            
            
            
            17,791Cash
      and Cash Equivalents at End of Period
            
            $
            70,470
            
            
            $
            27,751Supplemental
      Cash Flow Disclosures:Interest
      paid, net of capitalized interest
            
            $
            29,240
            
            
            $
            41,321Income
      taxes paid (refunded), net
            
            $
            (1,777
            )
            
            $
            (4,176
            )





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


10


PNM
RESOURCES, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN PNMR COMMON STOCKHOLDERS’
EQUITY


(Unaudited)





Accumulated
            
            
            
            
            
            Total
      PNMRCommon
      Stock
            
            
            Other
            
            
            
            
            
            CommonNumber
      of
            
            
            Aggregate
            
            
            Comprehensive
            
            
            Retained
            
            
            Stockholders’Shares
            
            
            Value
            
            
            Income
      (Loss)
            
            
            Earnings
            
            
            Equity(Dollars
      in thousands)Balance
      at December 31, 2008
            
            
            86,531,644
            
            
            $
            1,288,168
            
            
            $
            30,948
            
            
            $
            327,290
            
            
            $
            1,646,406Purchase
      of common stock to satisfy stock
              awards
            
            
            -
            
            
            
            (803
            )
            
            
            -
            
            
            
            -
            
            
            
            (803
            )Tax
      shortfall from stock-based compensation arrangements
            
            
            -
            
            
            
            (519
            )
            
            
            -
            
            
            
            -
            
            
            
            (519
            )Stock
      based compensation expense
            
            
            -
            
            
            
            1,070
            
            
            
            -
            
            
            
            -
            
            
            
            1,070Sale
      of common stock
            
            
            48,633
            
            
            
            406
            
            
            
            -
            
            
            
            -
            
            
            
            406Common
      stock issued to ESPP
            
            
            27,283
            
            
            
            214
            
            
            
            -
            
            
            
            -
            
            
            
            214Net
      earnings attributable to PNMR
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            95,371
            
            
            
            95,371Total
      other comprehensive income (loss)
            
            
            -
            
            
            
            -
            
            
            
            (58,691
            )
            
            
            -
            
            
            
            (58,691
            )Dividends
      declared on common stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (11,422
            )
            
            
            (11,422
            )Balance
      at March 31, 2009
            
            
            86,607,560
            
            
            $
            1,288,536
            
            
            $
            (27,743
            )
            
            $
            411,239
            
            
            $
            1,672,032





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





11


PNM
RESOURCES, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)


(Unaudited)





Three
      Months Ended March 31,2009
            
            
            2008(In
      thousands)Net Earnings (Loss)
            
            $
            98,082
            
            
            $
            (48,504
            )Other Comprehensive Income (Loss):Unrealized Gain (Loss) on Investment
    Securities:Unrealized
      holding gains (losses) arising duringthe period, net of income tax (expense) benefitof $(255) and $1,501
            
            
            390
            
            
            
            (2,291
            )Reclassification
      adjustment for (gains) included innet earnings (loss), net of income tax expenseof $195 and $902
            
            
            (298
            )
            
            
            (1,377
            )Pension liability adjustment, net of income tax (expense)
      benefitof $42,487 and $0
            
            
            (64,830
            )
            
            
            -Fair Value Adjustment for Designated Cash Flow
      Hedges:Change
      in fair market value, net of income tax (expense) benefitof $(10,794) and $6,789
            
            
            15,137
            
            
            
            (10,206
            )Reclassification
      adjustment for (gains) losses included innet earnings (loss), net of income tax expense (benefit)of $6,101and $2,251
            
            
            (9,090
            )
            
            
            (3,352
            )Total Other Comprehensive Income (Loss)
            
            
            (58,691
            )
            
            
            (17,226
            )Comprehensive Income (Loss)
            
            
            39,391
            
            
            
            (65,730
            )Comprehensive
      Income Attributable to Valencia Non-controlling Interest
            
            
            (2,579
            )
            
            
            -Preferred
      Stock Dividend Requirements of Subsidiary
            
            
            (132
            )
            
            
            (132
            )Comprehensive Income (Loss) Attributable to PNMR
            
            $
            36,680
            
            
            $
            (65,862
            )





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





12


PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(LOSS)


(Unaudited)





Three
      Months Ended March 31,2009
            
            
            2008(In
      thousands)Electric Operating Revenues
            
            $
            231,955
            
            
            $
            252,664Operating Expenses:Cost
      of energy
            
            
            101,533
            
            
            
            135,693Administrative
      and general
            
            
            29,690
            
            
            
            26,826Energy
      production costs
            
            
            50,944
            
            
            
            53,583Regulatory
      disallowances
            
            
            -
            
            
            
            30,248Depreciation
      and amortization
            
            
            22,428
            
            
            
            20,970Transmission
      and distribution costs
            
            
            9,073
            
            
            
            8,907Taxes
      other than income taxes
            
            
            7,801
            
            
            
            7,019Total operating expenses
            
            
            221,469
            
            
            
            283,246Operating income (loss)
            
            
            10,486
            
            
            
            (30,582
            )Other Income and Deductions:Interest
      income
            
            
            5,961
            
            
            
            6,091Gains
      (losses) on investments held by NDT
            
            
            (4,382
            )
            
            
            (3,705
            )Other
      income
            
            
            316
            
            
            
            547Other
      deductions
            
            
            (866
            )
            
            
            (2,314
            )Net other income and deductions
            
            
            1,029
            
            
            
            619Interest Charges:Interest
      on long-term debt
            
            
            17,185
            
            
            
            10,530Other
      interest charges
            
            
            22
            
            
            
            3,573Total interest charges
            
            
            17,207
            
            
            
            14,103Earnings (Loss) before Income Taxes
            
            
            (5,692
            )
            
            
            (44,066
            )Income Taxes (Benefit)
            
            
            (3,348
            )
            
            
            (17,089
            )Earnings (Loss) from Continuing Operations
            
            
            (2,344
            )
            
            
            (26,977
            )Earnings from Discontinued Operations, net of IncomeTaxes
      of $43,842 and $13,655
            
            
            81,675
            
            
            
            22,499Net Earnings (Loss)
            
            
            79,331
            
            
            
            (4,478
            )Earnings Attributable to Valencia Non-controlling Interest
            
            
            (2,579
            )
            
            
            -Net Earnings (Loss) Attributable to PNM
            
            
            76,752
            
            
            
            (4,478
            )Preferred Stock Dividends Requirements
            
            
            132
            
            
            
            132Net Earnings (Loss) Available for PNM Common Stock
            
            $
            76,620
            
            
            $
            (4,610
            )





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


13


PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS


(Unaudited)





March
      31,
            
            
            December
      31,2009
            
            
            2008(In
      thousands)ASSETSCurrent
      Assets:Cash
      and cash equivalents
            
            $
            63,690
            
            
            $
            46,596Special
      deposits
            
            
            3,430
            
            
            
            3,430Accounts
      receivable, net of allowance for uncollectible accounts of $1,293 and
      $1,345
            
            
            63,312
            
            
            
            74,257Unbilled
      revenues
            
            
            31,232
            
            
            
            37,350Other
      receivables
            
            
            86,419
            
            
            
            72,096Affiliate
      accounts receivable
            
            
            304
            
            
            
            -Materials,
      supplies, and fuel stock
            
            
            45,707
            
            
            
            47,254Regulatory
      assets
            
            
            1,537
            
            
            
            1,541Derivative
      instruments
            
            
            46,321
            
            
            
            28,852Current
      assets of discontinued operations
            
            
            -
            
            
            
            107,986Other
      current assets
            
            
            48,537
            
            
            
            49,690Total current assets
            
            
            390,489
            
            
            
            469,052Other
      Property and Investments:Investment
      in PVNGS lessor notes
            
            
            184,273
            
            
            
            200,711Investments
      held by NDT
            
            
            107,992
            
            
            
            111,671Other
      investments
            
            
            9,675
            
            
            
            9,951Non-utility
      property
            
            
            976
            
            
            
            976Total other property and investments
            
            
            302,916
            
            
            
            323,309Utility
      Plant:Electric
      plant in service
            
            
            3,470,222
            
            
            
            3,430,818Common
      plant in service and plant held for future use
            
            
            17,619
            
            
            
            17,4003,487,841
            
            
            
            3,448,218Less
      accumulated depreciation and amortization
            
            
            1,218,075
            
            
            
            1,204,4242,269,766
            
            
            
            2,243,794Construction
      work in progress
            
            
            161,606
            
            
            
            156,997Nuclear
      fuel, net of accumulated amortization of $19,671 and
    $16,018
            
            
            67,283
            
            
            
            58,674Net utility plant
            
            
            2,498,655
            
            
            
            2,459,465Deferred
      Charges and Other Assets:Regulatory
      assets
            
            
            357,822
            
            
            
            494,481Derivative
      instruments
            
            
            18,786
            
            
            
            17,744Goodwill
            
            
            51,632
            
            
            
            51,632Non-current
      assets of discontinued operations
            
            
            -
            
            
            
            561,915Other
      deferred charges
            
            
            56,262
            
            
            
            51,137Total deferred charges and other assets
            
            
            484,502
            
            
            
            1,176,909$
            3,676,562
            
            
            $
            4,428,735





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





14


PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS


(Unaudited)





March
      31,
            
            
            December
      31,2009
            
            
            2008(In
      thousands, except share information)LIABILITIES
      AND STOCKHOLDER’S EQUITYCurrent
      Liabilities:Short-term
      debt
            
            $
            -
            
            
            $
            340,000Current
      installments of long-term debt
            
            
            36,000
            
            
            
            36,000Accounts
      payable
            
            
            66,289
            
            
            
            90,502Affiliate
      accounts payable
            
            
            14,751
            
            
            
            17,607Accrued
      interest and taxes
            
            
            186,870
            
            
            
            50,125Regulatory
      liabilities
            
            
            8,776
            
            
            
            1,746Derivative
      instruments
            
            
            21,352
            
            
            
            7,884Current
      liability of discontinued operations
            
            
            -
            
            
            
            77,082Other
      current liabilities
            
            
            70,169
            
            
            
            93,131Total current liabilities
            
            
            404,207
            
            
            
            714,077Long-term
      Debt
            
            
            1,019,720
            
            
            
            1,019,717Deferred
      Credits and Other Liabilities:Accumulated
      deferred income taxes
            
            
            277,083
            
            
            
            414,995Accumulated
      deferred investment tax credits
            
            
            22,437
            
            
            
            23,834Regulatory
      liabilities
            
            
            294,163
            
            
            
            292,146Asset
      retirement obligations
            
            
            65,919
            
            
            
            62,696Accrued
      pension liability and postretirement benefit cost
            
            
            227,728
            
            
            
            229,683Derivative
      instruments
            
            
            2,380
            
            
            
            569Non-current
      liabilities of discontinued operations
            
            
            -
            
            
            
            94,615Other
      deferred credits
            
            
            118,879
            
            
            
            124,929Total deferred credits and liabilities
            
            
            1,008,589
            
            
            
            1,243,467Total liabilities
            
            
            2,432,516
            
            
            
            2,977,261Commitments
      and Contingencies (See Note 9)Cumulative
      Preferred Stockwithout
      mandatory redemption requirements ($100 stated value, 10,000,000
      authorized:issued and outstanding 115,293 shares)
            
            
            11,529
            
            
            
            11,529Equity:PNM
      common stockholder’s equityCommon
      stock outstanding (no par value, 40,000,000 shares authorized:
      issuedand
      outstanding 39,117,799 shares)
            
            
            932,523
            
            
            
            932,523Accumulated
      other comprehensive income (loss), net of income tax
            
            
            (41,483
            )
            
            
            17,746Retained
      earnings
            
            
            247,790
            
            
            
            391,170Total
      PNM common stockholder’s equity
            
            
            1,138,830
            
            
            
            1,341,439Non-controlling
      interest in Valencia
            
            
            93,687
            
            
            
            98,506Total
      equity
            
            
            1,232,517
            
            
            
            1,439,945$
            3,676,562
            
            
            $
            4,428,735





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








15


PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





Three
      Months Ended March 31,2009
            
            
            2008(In
      thousands)Cash
      Flows From Operating Activities:Net
      earnings (loss)
            
            $
            79,331
            
            
            $
            (4,478
            )Adjustments to reconcile net earnings (loss) to net cash flows from
      operating activities:Depreciation and amortization
            
            
            25,934
            
            
            
            25,077Amortization of prepayments on PVNGS firm-sales contracts
            
            
            (6,330
            )
            
            
            -Deferred income tax expense
            
            
            (87,666
            )
            
            
            (5,574
            )Net unrealized (gains) losses on derivatives
            
            
            5,887
            
            
            
            (10,332
            )Realized losses on investments held by NDT
            
            
            4,382
            
            
            
            3,705Gain on sale of PNM Gas
            
            
            (111,006
            )
            
            
            -Regulatory disallowances
            
            
            -
            
            
            
            30,248Other, net
            
            
            262
            
            
            
            (1,543
            )Changes in certain assets and liabilities:Accounts
      receivable and unbilled revenues
            
            
            (2,171
            )
            
            
            (4,850
            )Materials,
      supplies, and fuel stock
            
            
            1,698
            
            
            
            414Other
      current assets
            
            
            9,496
            
            
            
            25,757Other
      assets
            
            
            4,504
            
            
            
            (565
            )Accounts
      payable
            
            
            (32,121
            )
            
            
            (9,917
            )Accrued
      interest and taxes
            
            
            136,943
            
            
            
            2,076Other
      current liabilities
            
            
            (28,197
            )
            
            
            (3,567
            )Other
      liabilities
            
            
            (3,380
            )
            
            
            799Net cash flows from operating activities
            
            
            (2,434
            )
            
            
            47,250Cash Flows From Investing Activities:Utility plant additions
            
            
            (65,715
            )
            
            
            (68,566
            )Proceeds from sales of NDT investments
            
            
            44,391
            
            
            
            36,635Purchases of NDT investments
            
            
            (44,724
            )
            
            
            (36,760
            )Proceeds from sale of PNM Gas
            
            
            640,620
            
            
            
            -Return of principal on PVNGS lessor notes
            
            
            13,339
            
            
            
            12,304Reduction in restricted special deposits
            
            
            -
            
            
            
            2,554Other, net
            
            
            (15,911
            )
            
            
            423Net
      cash flows from investing activities
            
            
            572,000
            
            
            
            (53,410
            )





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





16


PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





Three
      Months Ended March 31,2009
            
            
            2008(In
      thousands)Cash
      Flows From Financing Activities:Short-term
      borrowings (repayments), net
            
            
            (340,000
            )
            
            
            24,004Payments
      received on PVNGS firm-sales contracts
            
            
            7,634
            
            
            
            -Dividends
      paid
            
            
            (220,132
            )
            
            
            (132
            )Other,
      net
            
            
            -
            
            
            
            (308
            )Net
      cash flows from financing activities
            
            
            (552,498
            )
            
            
            23,564Change
      in Cash and Cash Equivalents
            
            
            17,068
            
            
            
            17,404Cash
      and Cash Equivalents at Beginning of Period
            
            
            46,622
            
            
            
            4,331Cash
      and Cash Equivalents at End of Period
            
            $
            63,690
            
            
            $
            21,735Supplemental
      Cash Flow Disclosures:Interest
      paid, net of capitalized interest
            
            $
            14,462
            
            
            $
            23,110Income
      taxes paid (refunded), net
            
            $
            -
            
            
            $
            (1,855
            )





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





17


PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


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


(Unaudited)





Accumulated
            
            
            
            
            
            Total
      PNMCommon
      Stock
            
            
            Other
            
            
            
            
            
            CommonNumber
      of
            
            
            Aggregate
            
            
            Comprehensive
            
            
            Retained
            
            
            Stockholder’sShares
            
            
            Value
            
            
            Income
      (Loss)
            
            
            Earnings
            
            
            Equity(Dollars
      in thousands)Balance
      at December 31, 2008
            
            
            39,117,799
            
            
            $
            932,523
            
            
            $
            17,746
            
            
            $
            391,170
            
            
            $
            1,341,439Net
      earnings attributable to PNM
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            76,752
            
            
            
            76,752Total
      other comprehensive income (loss)
            
            
            -
            
            
            
            -
            
            
            
            (59,229
            )
            
            
            -
            
            
            
            (59,229
            )Dividends
      on preferred stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (132
            )
            
            
            (132
            )Dividends
      on common stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (220,000
            )
            
            
            (220,000
            )Balance
      at March 31, 2009
            
            
            39,117,799
            
            
            $
            932,523
            
            
            $
            (41,483
            )
            
            $
            247,790
            
            
            $
            1,138,830





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





18


PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)


(Unaudited)





Three
      Months Ended March 31,2009
            
            
            2008(In
      thousands)Net Earnings (Loss)
            
            $
            79,331
            
            
            $
            (4,478
            )Other Comprehensive Income (Loss):Unrealized Gain (Loss) on Investment Securities:Unrealized
      holding gains (losses) arising duringthe period, net of income tax (expense) benefitof $(255) and $1,501
            
            
            390
            
            
            
            (2,291
            )Reclassification
      adjustment for (gains) included innet earnings, net of income tax expenseof $195 and $902
            
            
            (298
            )
            
            
            (1,377
            )Pension liability adjustment, net of income tax benefitof $42,487 and $0
            
            
            (64,830
            )
            
            
            -Fair Value Adjustment for Designated Cash Flow Hedges:Change
      in fair market value, net of income tax (expense)benefit of $(7,459) and $700
            
            
            11,381
            
            
            
            (1,067
            )Reclassification
      adjustment for (gains) losses included innet earnings, net of income tax expense (benefit)of $3,849 and $599
            
            
            (5,872
            )
            
            
            (914
            )Total Other Comprehensive Income (Loss)
            
            
            (59,229
            )
            
            
            (5,649
            )Comprehensive Income (Loss)
            
            
            20,102
            
            
            
            (10,127
            )Comprehensive
      Income Attributable to Valencia Non-controlling Interest
            
            
            (2,579
            )
            
            
            -Comprehensive Income (Loss) Attributable to PNM
            
            $
            17,523
            
            
            $
            (10,127
            )





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


19


TEXAS-NEW
MEXICO POWER COMPANY AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS


(Unaudited)





Three
      Months Ended March 31,2009
            
            
            2008(In
      thousands)Electric Operating Revenues
            
            $
            41,225
            
            
            $
            42,228Operating Expenses:Cost
      of energy
            
            
            8,595
            
            
            
            7,812Administrative
      and general
            
            
            8,329
            
            
            
            6,570Depreciation
      and amortization
            
            
            8,598
            
            
            
            8,359Transmission
      and distribution costs
            
            
            4,941
            
            
            
            4,464Taxes,
      other than income taxes
            
            
            4,677
            
            
            
            4,440Total operating expenses
            
            
            35,140
            
            
            
            31,645Operating income
            
            
            6,085
            
            
            
            10,583Other Income and Deductions:Interest
      income
            
            
            -
            
            
            
            2Other
      income
            
            
            417
            
            
            
            414Other
      deductions
            
            
            (25
            )
            
            
            (19
            )Net other income and deductions
            
            
            392
            
            
            
            397Interest Charges:Interest
      on long-term debt
            
            
            1,012
            
            
            
            4,408Other
      interest charges
            
            
            3,083
            
            
            
            581Net interest charges
            
            
            4,095
            
            
            
            4,989Earnings Before Income Taxes
            
            
            2,382
            
            
            
            5,991Income Taxes
            
            
            961
            
            
            
            2,261Net Earnings
            
            $
            1,421
            
            
            $
            3,730





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





20


TEXAS-NEW
MEXICO POWER COMPANY AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS


(Unaudited)





March
      31,
            
            
            December
      31,2009
            
            
            2008(In
      thousands)ASSETSCurrent
      Assets:Cash
      and cash equivalents
            
            $
            59
            
            
            $
            124Special
      deposits
            
            
            50
            
            
            
            50Accounts
      receivable
            
            
            11,219
            
            
            
            11,457Unbilled
      revenues
            
            
            4,594
            
            
            
            6,421Other
      receivables
            
            
            1,872
            
            
            
            480Affiliate
      accounts receivable
            
            
            5,004
            
            
            
            7,110Materials
      and supplies
            
            
            1,718
            
            
            
            1,625Income
      taxes receivable
            
            
            -
            
            
            
            9Other
      current assets
            
            
            409
            
            
            
            958Total current assets
            
            
            24,925
            
            
            
            28,234Other
      Property and Investments:Other
      investments
            
            
            556
            
            
            
            550Non-utility
      property
            
            
            2,111
            
            
            
            2,111Total other property and investments
            
            
            2,667
            
            
            
            2,661Utility
      Plant:Electric
      plant in service
            
            
            834,240
            
            
            
            815,588Common
      plant in service and plant held for future use
            
            
            488
            
            
            
            488834,728
            
            
            
            816,076Less
      accumulated depreciation and amortization
            
            
            296,294
            
            
            
            291,228538,434
            
            
            
            524,848Construction
      work in progress
            
            
            17,700
            
            
            
            30,948Net utility plant
            
            
            556,134
            
            
            
            555,796Deferred
      Charges and Other Assets:Regulatory
      assets
            
            
            132,512
            
            
            
            134,660Goodwill
            
            
            226,665
            
            
            
            226,665Other
      deferred charges
            
            
            29,095
            
            
            
            23,982Total deferred charges and other assets
            
            
            388,272
            
            
            
            385,307$
            971,998
            
            
            $
            971,998





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





21


TEXAS-NEW
MEXICO POWER COMPANY AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS


(Unaudited)





March
      31,
            
            
            December
      31,2009
            
            
            2008(In
      thousands, except share information)LIABILITIES
      AND STOCKHOLDER’S EQUITYCurrent Liabilities:Short-term debt
            
            $
            -
            
            
            $
            150,000Short-term
      debt – affiliate
            
            
            38,800
            
            
            
            14,100Current
      installments of long-term debt
            
            
            -
            
            
            
            167,690Accounts
      payable
            
            
            3,850
            
            
            
            11,846Affiliate
      accounts payable
            
            
            1,943
            
            
            
            1,238Accrued
      interest and taxes
            
            
            26,878
            
            
            
            35,118Other
      current liabilities
            
            
            2,508
            
            
            
            3,111Total current liabilities
            
            
            73,979
            
            
            
            383,103Long-term Debt
            
            
            309,242
            
            
            
            -Deferred Credits and Other Liabilities:Accumulated
      deferred income taxes
            
            
            110,105
            
            
            
            111,193Regulatory
      liabilities
            
            
            33,748
            
            
            
            35,028Asset
      retirement obligations
            
            
            726
            
            
            
            711Accrued
      pension liability and postretirement benefit cost
            
            
            15,985
            
            
            
            16,453Derivative
      instruments
            
            
            840
            
            
            
            -Other
      deferred credits
            
            
            2,803
            
            
            
            1,820Total deferred credits and other liabilities
            
            
            164,207
            
            
            
            165,205Total liabilities
            
            
            547,428
            
            
            
            548,308Commitments 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 shares)
            
            
            64
            
            
            
            64Paid-in-capital
            
            
            427,320
            
            
            
            427,320Accumulated
      other comprehensive income (loss), net of income tax
            
            
            (683
            )
            
            
            (142
            )Retained
      earnings (deficit)
            
            
            (2,131
            )
            
            
            (3,552
            )Total
      common stockholder’s equity
            
            
            424,570
            
            
            
            423,690$
            971,998
            
            
            $
            971,998





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








22


TEXAS-NEW
MEXICO POWER COMPANY AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





Three
      Months Ended March 31,2009
            
            
            2008(In
      thousands)Cash
      Flows From Operating Activities:Net
      earnings
            
            $
            1,421
            
            
            $
            3,730Adjustments
      to reconcile net earnings tonet cash flows from operating activities:Depreciation and amortization
            
            
            10,317
            
            
            
            9,321Deferred income tax expense (benefit)
            
            
            (789
            )
            
            
            (1,484
            )Other, net
            
            
            13
            
            
            
            (681
            )Changes in certain assets and liabilities:Accounts
      receivable and unbilled revenues
            
            
            2,065
            
            
            
            (596
            )Materials and supplies
            
            
            (93
            )
            
            
            (5
            )Other current assets
            
            
            (144
            )
            
            
            545Other
      assets
            
            
            (11
            )
            
            
            37Accounts
      payable
            
            
            (7,996
            )
            
            
            (1,560
            )Accrued
      interest and taxes
            
            
            (8,230
            )
            
            
            (2,995
            )Other
      current liabilities
            
            
            2,209
            
            
            
            4,991Other
      liabilities
            
            
            (796
            )
            
            
            220Net cash flows from operating activities
            
            
            (2,034
            )
            
            
            11,523Cash Flows From Investing Activities-Utility
      plant additions
            
            
            (8,052
            )
            
            
            (8,669
            )Net
      cash flows from investing activities
            
            
            (8,052
            )
            
            
            (8,669
            )





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





23


TEXAS-NEW
MEXICO POWER COMPANY AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





Three
      Months Ended March 31,2009
            
            
            2008(In
      thousands)Cash
      Flow From Financing Activities:Short-term
      borrowings (repayments), net
            
            
            (150,000
            )
            
            
            -Short-term
      borrowings – affiliate
            
            
            24,700
            
            
            
            (2,904
            )Long-term
      debt issuance
            
            
            309,242
            
            
            
            -Repayment
      of long-term debt
            
            
            (167,690
            )
            
            
            -Other,
      net
            
            
            (6,231
            )
            
            
            (50
            )Net
      cash flows from financing activities
            
            
            10,021
            
            
            
            (2,954
            )Change
      in Cash and Cash Equivalents
            
            
            (65
            )
            
            
            (100
            )Cash
      and Cash Equivalents at Beginning of Period
            
            
            124
            
            
            
            187Cash
      and Cash Equivalents at End of Period
            
            $
            59
            
            
            $
            87Supplemental
      Cash Flow Disclosures:Interest
      paid, net of capitalized interest
            
            $
            8,650
            
            
            $
            5,269Income
      taxes paid (refunded), net
            
            $
            (935
            )
            
            $
            (858
            )








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





24


TEXAS-NEW
MEXICO POWER COMPANY AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDER’S EQUITY


(Unaudited)





Accumulated
            
            
            
            
            
            TotalCommon
      Stock
            
            
            
            
            
            Other
            
            
            Retained
            
            
            CommonNumber
      of
            
            
            Aggregate
            
            
            Paid-in
            
            
            Comprehensive
            
            
            Earnings
            
            
            Stockholder’sShares
            
            
            Value
            
            
            Capital
            
            
            Income
      (Loss)
            
            
            (Deficit)
            
            
            Equity(Dollars
      in thousands)Balance
      at December 31, 2008
            
            
            6,358
            
            
            $
            64
            
            
            $
            427,320
            
            
            $
            (142
            )
            
            $
            (3,552
            )
            
            $
            423,690Net
      earnings
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,421
            
            
            
            1,421Total
      other comprehensive income (loss)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (541
            )
            
            
            -
            
            
            
            (541
            )Balance
      at March 31, 2009
            
            
            6,358
            
            
            $
            64
            
            
            $
            427,320
            
            
            $
            (683
            )
            
            $
            (2,131
            )
            
            $
            424,570





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





25


TEXAS-NEW
MEXICO POWER COMPANY AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME


(Unaudited)





Three
      Months Ended March 31,2009
            
            
            2008(In
      thousands)Net
      Earnings
            
            $
            1,421
            
            
            $
            3,730Other
      Comprehensive Income (Loss):Fair
      Value Adjustment for Designated Cash Flow Hedges:Change in
      fair market value, net of income tax (expense)benefit
      of $300 and $0
            
            
            (541
            )
            
            
            -Total
      Other Comprehensive Income (Loss)
            
            
            (541
            )
            
            
            -Comprehensive
      Income
            
            $
            880
            
            
            $
            3,730





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











26
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 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
that are necessary to present fairly the consolidated financial position at
March 31, 2009 and December 31, 2008, and the consolidated results of
operations, comprehensive income, and cash flows for the three months ended
March 31, 2009 and 2008.  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
2008 Annual Reports on Form 10-K.





Principles
of Consolidation





The
Condensed Consolidated Financial Statements of each of PNMR, PNM, and TNMP
include their accounts and those of subsidiaries in which that entity owns a
majority voting interest.  PNMR’s primary subsidiaries are PNM, TNMP,
and First Choice.  PNM consolidates the PVNGS Capital Trust and
Valencia.  PNMR shared services’ administrative and general expenses,
which represent costs that are primarily driven by corporate level activities,
are allocated to the business segments.  Other significant
intercompany transactions between PNMR, PNM, and TNMP include energy purchases
and sales, transmission and distribution services, lease payments, dividends
paid on common stock, and interest paid by PVNGS Capital Trust to
PNM.  All intercompany transactions and balances have been
eliminated.  See Note 12.





Presentation





The Notes
to Condensed Consolidated Financial Statements include disclosures for PNMR,
PNM, and TNMP.  For discussion purposes, this report will use the term
“Company” when discussing matters of common applicability to PNMR, PNM and
TNMP.  Discussions regarding only PNMR, PNM or TNMP will be indicated
as such.  Certain amounts in the 2008 Condensed Consolidated Financial
Statements and Notes thereto have been reclassified to conform to the 2009
financial statement presentation.


27
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


(2)
            Disposition





PNM
Gas Sale





On
January 12, 2008, PNM reached a definitive agreement to sell its natural gas
operations, which comprised the PNM Gas segment, to NMGC, a subsidiary of
Continental, for $620 million in cash, subject to adjustment based on the actual
level of working capital at closing. In a separate transaction conditioned upon
the sale of the natural gas operations, PNMR proposed to acquire CRHC,
Continental's regulated Texas electric transmission and distribution business,
for $202.5 million in cash. On July 22, 2008, PNMR and Continental agreed to
terminate the agreement for the acquisition of CRHC.  Under the
termination agreement, Continental agreed to pay PNMR $15.0 million upon the
closing of the PNM Gas transaction.  PNM completed the sale of PNM Gas
on January 30, 2009 and recognized a gain of $72.9 million, after income taxes
of $38.1 million in 2009, which is included in discontinued operations on the
Condensed Consolidated Statements of Earnings (Loss).  PNMR recognized
an additional pre-tax gain of $15.0 million due to the CRHC termination payment,
which is included in other income on the Condensed Consolidated Statements of
Earnings (Loss).  In connection with the sale, PNM retained
obligations under the frozen PNM pension and executive retirement plans for
employees transferred to NMGC.  PNM had a regulatory asset related to
these plans, which was removed from regulatory assets and transferred to AOCI.
The after-tax charge to AOCI was $64.8 million.





PNM used
proceeds from the sale to retire short-term debt and paid a dividend of $220.0
million to PNMR. The remaining funds were invested in a money market fund and
will be used to pay income taxes on the gain from the sale.  PNMR used
the dividend from PNM and the $15.0 million from Continental to retire debt.
There were no material prior relationships between the PNMR and Continental
parties other than in respect of the transactions described herein. PNM and PNMR
Services Company will provide certain corporate administrative and customer
service support at cost to NMGC under a transition services agreement. The
agreement term began January 30, 2009 and will continue for twelve months,
subject to early termination. See Note 14 for financial information concerning
PNM Gas, which is classified as discontinued operations in the accompanying
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.  A reconciliation of the segment presentation to the GAAP
financial statements is provided.





PNM
Electric





PNM
Electric includes the retail electric utility operations of PNM that are subject
to traditional rate regulation by the NMPRC.  PNM Electric provides
integrated electricity services that include the generation, transmission and
distribution of electricity for retail electric customers in New Mexico as well
as the sale of transmission to third parties.  PNM Electric also
includes the generation and sale of electricity into the wholesale
market.  This includes optimization of PNM’s jurisdictional assets as
well as the capacity of its generating plants excluded from retail
rates.  See Note 10.  Although the FERC has jurisdiction
over the wholesale rates, they are not subject to traditional
regulation.





TNMP
Electric





TNMP
Electric is a regulated utility operating in Texas.  TNMP’s operations
are subject to traditional rate regulation by the PUCT.  TNMP provides
regulated transmission and distribution services in Texas under the
TECA.





28
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


PNM
Gas





PNM Gas
distributed natural gas to most of the major communities in New Mexico, subject
to traditional rate regulation by the NMPRC.  The customer base of PNM
Gas included both sales-service customers and transportation-service
customers.  PNM Gas purchased natural gas in the open market and sold
it at cost to its sales-service customers.  As a result, increases or
decreases in gas revenues resulting from gas price fluctuations did not impact
gross margin or earnings.  As described in Note 2, PNM completed the
sale of its gas operations on January 30, 2009.  PNM Gas is reported
as discontinued operations in the accompanying financial statements and is not
included in the segment information presented below.  Financial
information regarding PNM Gas is presented in Note 14.





First
Choice





First
Choice is a certified retail electric provider operating in Texas, which allows
it to provide electricity to residential, small commercial, and governmental
customers.  Although First Choice is regulated in certain respects by
the PUCT, it is not subject to traditional rate of return
regulation.





Optim
Energy





Optim
Energy is treated as a separate segment for PNMR.  PNMR’s investment
in Optim Energy is held in the Corporate and Other segment and is accounted for
using the equity method of accounting. Optim Energy’s revenues and expenses are
not included in PNMR’s consolidated revenues and expenses or the following
tables.  See Note 11.





Corporate
and Other





PNMR
Services Company is included in the Corporate and Other segment.





The
following tables present summarized financial information for PNMR by reportable
segment. Excluding PNM Gas, which is presented as discontinued operations, PNM
has only one operating segment.  TNMP operates in only one reportable
segment.  Therefore, tabular segment information is not presented for
PNM and TNMP.





29
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


PNMR
SEGMENT INFORMATION








PNM
              
              
              TNMP
              
              
              First
              
              
              CorporateThree Months Ended March 31,
      2009
              
              Electric
              
              
              Electric
              
              
              Choice
              
              
              and
      Other
              
              
              Consolidated(In
      thousands)Operating revenues
              
              $
              231,944
              
              
              $
              31,922
              
              
              $
              122,174
              
              
              $
              (175
              )
              
              $
              385,865Intersegment revenues
              
              
              11
              
              
              
              9,303
              
              
              
              -
              
              
              
              (9,314
              )
              
              
              -Total revenues
              
              
              231,955
              
              
              
              41,225
              
              
              
              122,174
              
              
              
              (9,489
              )
              
              
              385,865Cost of energy
              
              
              101,533
              
              
              
              8,595
              
              
              
              80,423
              
              
              
              (9,303
              )
              
              
              181,248Gross margin
              
              
              130,422
              
              
              
              32,630
              
              
              
              41,751
              
              
              
              (186
              )
              
              
              204,617Other operating expenses
              
              
              97,508
              
              
              
              17,947
              
              
              
              29,332
              
              
              
              (6,144
              )
              
              
              138,643Depreciation and amortization
              
              
              22,428
              
              
              
              8,598
              
              
              
              518
              
              
              
              4,527
              
              
              
              36,071Operating income
              
              
              10,486
              
              
              
              6,085
              
              
              
              11,901
              
              
              
              1,431
              
              
              
              29,903Interest income
              
              
              5,961
              
              
              
              -
              
              
              
              35
              
              
              
              (773
              )
              
              
              5,223Equity
      in net earnings of Optim Energy
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,395
              
              
              
              1,395Other income (deductions)
              
              
              (4,932
              )
              
              
              392
              
              
              
              -
              
              
              
              20,962
              
              
              
              16,422Net interest charges
              
              
              (17,207
              )
              
              
              (4,095
              )
              
              
              (999
              )
              
              
              (6,648
              )
              
              
              (28,949
              )Segment
      earnings (loss) before income taxes
              
              
              (5,692
              )
              
              
              2,382
              
              
              
              10,937
              
              
              
              16,367
              
              
              
              23,994Income taxes (benefit)
              
              
              (3,348
              )
              
              
              961
              
              
              
              3,899
              
              
              
              6,075
              
              
              
              7,587Segment
      earnings (loss) from continuing operations
              
              
              (2,344
              )
              
              
              1,421
              
              
              
              7,038
              
              
              
              10,292
              
              
              
              16,407Earnings
      attributable to Valencia non-controlling interest
              
              
              (2,579
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,579
              )Preferred
      stock dividend requirements of subsidiary
              
              
              (132
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (132
              )Segment
      earnings (loss) from continuing operations attributable to
      PNMR
              
              $
              (5,055
              )
              
              $
              1,421
              
              
              $
              7,038
              
              
              $
              10,292
              
              
              $
              13,696At March 31, 2009:Total Assets
              
              $
              3,676,562
              
              
              $
              971,998
              
              
              $
              245,885
              
              
              $
              383,117
              
              
              $
              5,277,562Goodwill
              
              $
              51,632
              
              
              $
              226,665
              
              
              $
              43,013
              
              
              $
              -
              
              
              $
              321,310








30
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)





PNM
            
            
            TNMP
            
            
            First
            
            
            CorporateThree Months Ended March 31,
      2008
            
            Electric
            
            
            Electric
            
            
            Choice
            
            
            and
      Other
            
            
            Consolidated(In
      thousands)Operating revenues
            
            $
            252,639
            
            
            $
            27,818
            
            
            $
            84,169
            
            
            $
            (123
            )
            
            $
            364,503Intersegment revenues
            
            
            25
            
            
            
            14,410
            
            
            
            -
            
            
            
            (14,435
            )
            
            
            -Total revenues
            
            
            252,664
            
            
            
            42,228
            
            
            
            84,169
            
            
            
            (14,558
            )
            
            
            364,503Cost of energy
            
            
            135,693
            
            
            
            7,812
            
            
            
            105,268
            
            
            
            (14,393
            )
            
            
            234,380Gross margin
            
            
            116,971
            
            
            
            34,416
            
            
            
            (21,099
            )
            
            
            (165
            )
            
            
            130,123Other operating expenses
            
            
            126,583
            
            
            
            15,474
            
            
            
            15,455
            
            
            
            (2,455
            )
            
            
            155,057Depreciation and amortization
            
            
            20,970
            
            
            
            8,359
            
            
            
            470
            
            
            
            4,238
            
            
            
            34,037Operating income (loss)
            
            
            (30,582
            )
            
            
            10,583
            
            
            
            (37,024
            )
            
            
            (1,948
            )
            
            
            (58,971
            )Interest income
            
            
            6,091
            
            
            
            2
            
            
            
            476
            
            
            
            (1,039
            )
            
            
            5,530Equity
      in net earnings (loss) of Optim Energy
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (25,083
            )
            
            
            (25,083
            )Other income (deductions)
            
            
            (5,472
            )
            
            
            395
            
            
            
            (65
            )
            
            
            (1,555
            )
            
            
            (6,697
            )Net interest charges
            
            
            (14,103
            )
            
            
            (4,989
            )
            
            
            (294
            )
            
            
            (8,449
            )
            
            
            (27,835
            )Segment
      earnings (loss) before income taxes
            
            
            (44,066
            )
            
            
            5,991
            
            
            
            (36,907
            )
            
            
            (38,074
            )
            
            
            (113,056
            )Income taxes (benefit)
            
            
            (17,089
            )
            
            
            2,261
            
            
            
            (12,843
            )
            
            
            (14,382
            )
            
            
            (42,053
            )Segment earnings (loss) from continuing operations
            
            
            (26,977
            )
            
            
            3,730
            
            
            
            (24,064
            )
            
            
            (23,692
            )
            
            
            (71,003
            )Preferred
      stock dividend requirements of subsidiary
            
            
            (132
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (132
            )Segment
      earnings (loss) from continuing operations attributable to
      PNMR
            
            $
            (27,109
            )
            
            $
            3,730
            
            
            $
            (24,064
            )
            
            $
            (23,692
            )
            
            $
            (71,135
            )At March 31, 2008:Total Assets*
            
            $
            3,505,550
            
            
            $
            972,514
            
            
            $
            485,426
            
            
            $
            349,961
            
            
            $
            5,313,451Goodwill
            
            $
            102,775
            
            
            $
            261,121
            
            
            $
            131,768
            
            
            $
            -
            
            
            $
            495,664





*  Excludes
total assets of PNM Gas discontinued operations of $650,150.





(4)
            Energy
      Related Derivative Contracts and Fair Value
  Disclosures





Energy
Related Derivative Contracts





Overview





The
Company is exposed to certain risks relating to its ongoing business
operations.  The primary objective for the use of derivative
instruments, including energy contracts, options, and futures, is to manage
price risk associated with forecasted purchases of energy or fuel used to
generate electricity, or to manage anticipated generation capacity in excess of
forecasted demand from existing customers.  Substantially all of the
Company’s energy related derivative contracts are entered into to manage
commodity risk and the Company does not currently engage in speculative
trading.  The Company ceased speculative trading in the second quarter
of 2008.  Effective January 1, 2009, the Company adopted SFAS 161,
which enhanced disclosures for derivative instruments and hedging
activities.


31
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


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.  The Company routinely enters into
various derivative instruments such as forward contracts, option agreements and
price basis swap agreements to economically hedge price and volume risk on power
commitments and fuel requirements and to minimize the risk of market
fluctuations in wholesale portfolios. The Company monitors the market risk of
its commodity contracts using VaR and GEaR calculations to maintain total
exposure within management-prescribed limits.





PNM’s
unregulated operations are managed primarily through a net asset-backed
marketing strategy, whereby PNM’s aggregate net open forward contract position
is covered by its forecasted excess generation capabilities or market
purchases.  PNM would be exposed to market risk if its generation
capabilities were to be disrupted or if its retail load requirements were to be
greater than anticipated.  If all or a portion of the net open
contract position were required to be covered as a result of the aforementioned
unexpected situations, commitments would have to be met through market
purchases.





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 can affect
First Choice’s operating results with respect to margins and changes in retail
customer load requirements.  First Choice is exposed to market risk to
the extent that it has not hedged fixed price load commitments or to the degree
that market price movements affect customer retention, customer additions or
customer attrition.  Additionally, volumetric fluctuations in First
Choice retail load requirements due to weather or other conditions may subject
First Choice to market risk.  First Choice’s strategy is to minimize
its exposure to fluctuations in market energy prices by matching sales contracts
with supply instruments designed to preserve targeted margins.





Accounting
for Derivatives





Under
derivative accounting and related rules for energy contracts, the Company
accounts for its various derivative instruments for the purchase and sale of
energy based on the Company’s intent.  Energy contracts that meet the
definition of a derivative under SFAS 133 and do not qualify for the normal
sales and purchases exception are recorded on the balance sheet at fair value at
each period end.  The changes in fair value are recognized in earnings
unless specific hedge accounting criteria are met.  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.





For
derivative transactions meeting the definition of a cash flow or fair value
hedge, the Company documents the relationships between the hedging instruments
and the items being hedged.  This documentation includes the strategy
that supports executing the specific transaction and the methods utilized to
assess the effectiveness of the hedges.  Changes in the fair value of
contracts qualifying for cash flow hedge accounting are included in AOCI to the
extent effective.  Ineffectiveness gains and losses were immaterial
for the three months ended March 31, 2009 and 2008.  The amounts shown
as current assets and current liabilities relate to contracts that will be
settled in the next twelve months.  Gains or losses related to cash
flow hedge instruments are reclassified from AOCI when the hedged transaction
settles and impacts earnings.  Based on market prices at March 31,
2009, after-tax gains of $11.3 million for PNMR and $19.4 million for
PNM would be reclassified from AOCI into earnings during the next twelve months.
However, the actual amount reclassified into earnings will vary due to future
changes in market prices.  As of March 31, 2009, the maximum length of
time over which the Company is hedging its exposure to the variability in future
cash flows is through December 2011.




32
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)





Note 8 of
Notes to Consolidated Financial Statements in the 2008 Annual Reports on Form
10-K contains information regarding energy related derivative
contracts.  See Note 7 for additional information regarding an
interest rate swap.





Fair
value is defined under SFAS 157 as the exchange price that would be received for
an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date.  Fair value is
based on current market quotes as available and is supplemented by modeling
techniques and assumptions made by the Company to the extent quoted market
prices or volatilities are not available.  External pricing input
availability varies based on commodity location, market liquidity, and term of
the agreement.  As stated in SFAS 157, valuations of derivative assets
and liabilities must take into account nonperformance risk including the effect
of the Company’s own credit standing.  The Company regularly assesses
the validity and availability of pricing data for its derivative
transactions.  Although management uses its best judgment in
estimating the fair value of these instruments, there are inherent limitations
in any estimation technique.





At March
31, 2009, amounts recognized for the right to reclaim cash collateral are $7.5
million for PNMR and $2.6 million for PNM.  PNMR and PNM had
obligations to return cash collateral of $0.3 million.





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








33
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


Commodity
Derivatives





PNMR’s
commodity derivative instruments are summarized as follows:





Economic
      Hedges
            
            
            Trading
      Transactions
            
            
            Qualified
      Cash Flow HedgesMarch
      31, 2009
            
            
            December
      31, 2008
            
            
            March
      31, 2009
            
            
            December
      31, 2008
            
            
            March
      31, 2009
            
            
            December
      31, 2008Type of Derivative
            
            
            
            
            (In
      thousands)Current
      AssetsEnergy
      contracts
            
            $
            5,519
            
            
            $
            1,558
            
            
            $
            14,396
            
            
            $
            7,810
            
            
            $
            32,114
            
            
            $
            25,528Swaps
      and futures
            
            
            11,464
            
            
            
            3,724
            
            
            
            8,563
            
            
            
            11,659
            
            
            
            17
            
            
            
            367Options
            
            
            52
            
            
            
            417
            
            
            
            -
            
            
            
            -
            
            
            
            134
            
            
            
            187Total
            
            
            17,035
            
            
            
            5,699
            
            
            
            22,959
            
            
            
            19,469
            
            
            
            32,265
            
            
            
            26,082Deferred
      ChargesEnergy
      contracts
            
            
            414
            
            
            
            2,060
            
            
            
            5,494
            
            
            
            5,490
            
            
            
            18,264
            
            
            
            15,683Swaps
      and futures
            
            
            128
            
            
            
            -
            
            
            
            4,997
            
            
            
            2,104
            
            
            
            203
            
            
            
            283Options
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            
            542
            
            
            
            2,060
            
            
            
            10,491
            
            
            
            7,594
            
            
            
            18,467
            
            
            
            15,966Total
      Assets
            
            
            17,577
            
            
            
            7,759
            
            
            
            33,450
            
            
            
            27,063
            
            
            
            50,732
            
            
            
            42,048Current
      LiabilitiesEnergy
      contracts
            
            
            (5,321
            )
            
            
            (2,963
            )
            
            
            (10,951
            )
            
            
            (6,415
            )
            
            
            -
            
            
            
            -Swaps
      and futures
            
            
            (20,717
            )
            
            
            (8,565
            )
            
            
            (11,968
            )
            
            
            (11,727
            )
            
            
            (7,681
            )
            
            
            (2,134
            )Options
            
            
            (517
            )
            
            
            (1,102
            )
            
            
            -
            
            
            
            -
            
            
            
            (4,185
            )
            
            
            (1,045
            )Total
            
            
            (26,555
            )
            
            
            (12,630
            )
            
            
            (22,919
            )
            
            
            (18,142
            )
            
            
            (11,866
            )
            
            
            (3,179
            )Long-term
      LiabilitiesEnergy
      contracts
            
            
            -
            
            
            
            -
            
            
            
            (5,957
            )
            
            
            (3,852
            )
            
            
            -
            
            
            
            -Swaps
      and futures
            
            
            (2,309
            )
            
            
            (551
            )
            
            
            (3,588
            )
            
            
            (2,513
            )
            
            
            (2,075
            )
            
            
            (18
            )Options
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            
            (2,309
            )
            
            
            (551
            )
            
            
            (9,545
            )
            
            
            (6,365
            )
            
            
            (2,075
            )
            
            
            (18
            )Total
      Liabilities
            
            
            (28,864
            )
            
            
            (13,181
            )
            
            
            (32,464
            )
            
            
            (24,507
            )
            
            
            (13,941
            )
            
            
            (3,197
            )Net
      Total Assets and
              Total
      Liabilities
            
            $
            (11,287
            )
            
            $
            (5,422
            )
            
            $
            986
            
            
            $
            2,556
            
            
            $
            36,791
            
            
            $
            38,851





In 2007,
First Choice entered into a series of forward trades that arbitraged basis
differentials among certain ERCOT delivery zones.  During the three
months ended March 31, 2008, these trades were negatively affected by extreme
transmission congestion within the ERCOT market. This congestion resulted in
historically high basis differences between the various delivery zones. As a
result, in the first quarter of 2008, First Choice recorded a total pre-tax loss
of $47.1 million in the trading margins from these speculative trades that is
reflected in electric revenues. Because of continued market volatility and the
concern that the forward basis market would continue to deteriorate, First
Choice decided to end any further speculative trading and flattened remaining
speculative positions.  At March 31, 2009 and December 31, 2008, the
trading transactions column of the above table includes $22.1 million and $19.1
million of current assets, $10.5 million and $7.6 million of deferred charges,
$22.3 million and $18.1 million of current liabilities, and $9.5 million and
$6.4 million of long-term liabilities related to the flattened speculative
positions of First Choice.  No significant additional costs are
expected related to speculative trading.


34
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)





PNM’s
commodity derivative instruments are summarized as follows:


Economic
      Hedges
            
            
            Trading
      Transactions
            
            
            Qualified
      Cash Flow HedgesMarch
      31, 2009
            
            
            December
      31, 2008
            
            
            March
      31, 2009
            
            
            December
      31, 2008
            
            
            March
      31, 2009
            
            
            December
      31, 2008Type of Derivative
            
            
            
            
            (In
      thousands)Current
      AssetsEnergy
      contracts
            
            $
            2,000
            
            
            $
            388
            
            
            $
            869
            
            
            $
            342
            
            
            $
            32,114
            
            
            $
            25,529Swaps
      and futures
            
            
            11,338
            
            
            
            2,588
            
            
            
            -
            
            
            
            5
            
            
            
            -
            
            
            
            -Total
            
            
            13,338
            
            
            
            2,976
            
            
            
            869
            
            
            
            347
            
            
            
            32,114
            
            
            
            25,529Deferred
      ChargesEnergy
      contracts
            
            
            414
            
            
            
            2,060
            
            
            
            -
            
            
            
            -
            
            
            
            18,264
            
            
            
            15,684Swaps
      and futures
            
            
            108
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            
            522
            
            
            
            2,060
            
            
            
            -
            
            
            
            -
            
            
            
            18,264
            
            
            
            15,684Total
      Assets
            
            
            13,860
            
            
            
            5,036
            
            
            
            869
            
            
            
            347
            
            
            
            50,378
            
            
            
            41,213Current
      LiabilitiesEnergy
      contracts
            
            
            (1,438
            )
            
            
            (1,567
            )
            
            
            (614
            )
            
            
            (80
            )
            
            
            -
            
            
            
            -Swaps
      and futures
            
            
            (19,296
            )
            
            
            (6,218
            )
            
            
            -
            
            
            
            (6
            )
            
            
            (4
            )
            
            
            (13
            )Total
            
            
            (20,734
            )
            
            
            (7,785
            )
            
            
            (614
            )
            
            
            (86
            )
            
            
            (4
            )
            
            
            (13
            )Long-term
      LiabilitiesEnergy
      contracts
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Swaps
      and futures
            
            
            (2,307
            )
            
            
            (551
            )
            
            
            -
            
            
            
            -
            
            
            
            (73
            )
            
            
            (18
            )Total
            
            
            (2,307
            )
            
            
            (551
            )
            
            
            -
            
            
            
            -
            
            
            
            (73
            )
            
            
            (18
            )Total
      Liabilities
            
            
            (23,041
            )
            
            
            (8,336
            )
            
            
            (614
            )
            
            
            (86
            )
            
            
            (77
            )
            
            
            (31
            )Net
      Total Assets and
              Total
      Liabilities
            
            $
            (9,181
            )
            
            $
            (3,300
            )
            
            $
            255
            
            
            $
            261
            
            
            $
            50,301
            
            
            $
            41,182





The
following table presents the effect of PNMR’s and PNM’s commodity derivative
instruments, excluding qualified cash flow hedging instruments, on earnings for
the three months ended March 31, 2009:





Gain
      (Loss) Recognized in EarningsLocation
            
            Economic
      Hedges
            
            
            Trading
      Transactions(In
      thousands)PNMR
            Electric
      operating revenues
            
            $
            3,804
            
            
            $
            (5
            )Cost
      of energy
            
            
            (14,065
            )
            
            
            -Total
      gain (loss)
            
            $
            (10,261
            )
            
            $
            (5
            )PNM
            Electric
      operating revenues
            
            $
            3,804
            
            
            $
            61Cost
      of energy
            
            
            (11,783
            )
            
            
            -Total
      gain (loss)
            
            $
            (7,979
            )
            
            $
            61




35
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


The
following table presents the impact, excluding tax effects, of PNMR’s and PNM’s
qualified commodity cash flow hedge instruments on OCI, as well as the location
and amount of income reclassified from AOCI as the hedged transactions
settled and impacted earnings for the three months ended March 31,
2009:





Gain
      (Loss)Recognized
            
            Reclassified
      from AOCI into EarningsIn
      OCI
            
            Location
            
            Amount(In thousands)
            
            (In
      thousands)PNMR
            
            $
            (1,232
            )
            Electric
      operating revenues
            
            $
            9,676Cost
      of energy
            
            
            (2,161
            )Total
            
            $
            7,515PNM
            
            $
            9,119
            
            Electric
      operating revenues
            
            $
            9,676Cost
      of energy
            
            
            46Total
            
            $
            9,722





Commodity
contract volume positions are presented by Decatherms for gas related contracts
and by MWh for power related contracts.  The table below presents the
PNMR’s and PNM’s net volume positions at March 31, 2009:


Decatherms
            
            
            MWhEconomic
              Hedges
            
            
            Trading
              Transactions
            
            
            Qualified
      Cash Flow Hedges
            
            
            Economic
              Hedges
            
            
            Trading
              Transactions
            
            
            Qualified
      Cash Flow HedgesType
      of DerivativePNMREnergy
      contracts
            
            
            750,000
            
            
            
            -
            
            
            
            -
            
            
            
            34,825
            
            
            
            5
            
            
            
            (1,382,490
            )Swaps
      and futures
            
            
            9,337,250
            
            
            
            (511,941
            )
            
            
            10,382,750
            
            
            
            329,575
            
            
            
            -
            
            
            
            165,025Options
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -PNMEnergy
      contracts
            
            
            750,000
            
            
            
            -
            
            
            
            -
            
            
            
            13,225
            
            
            
            5
            
            
            
            (1,382,490
            )Swaps
      and futures
            
            
            8,770,000
            
            
            
            -
            
            
            
            -
            
            
            
            311,975
            
            
            
            -
            
            
            
            -





In
connection with managing its commodity risks, the Company enters into master
agreements with certain counterparties.  If the Company is in a net
liability position under an agreement: some agreements provide that the
counterparties can request collateral from the Company if the Company’s credit
rating is downgraded; other agreements provide that the counterparty may request
collateral to provide it with “adequate assurance” that the Company will
perform; and others have no provision for collateral.





The table
below presents information about the Company’s contingent requirements to
provide collateral under commodity contracts having an objectively determinable
collateral provision that are in net liability positions as of March 31, 2009
and are not fully collateralized with cash.  Contractual liability
represents commodity derivative contracts recorded at fair value on the balance
sheet, determined on an individual contract basis without offsetting amounts for
individual contracts that are in an asset position and could be offset under
master netting agreements with the same counterparty.  The table only
reflects cash collateral that has been posted under the existing contracts and
does not reflect letters of credit under the Company’s revolving credit
facilities that have been issued as collateral.  Net exposure is the
net contractual liability for all contracts, including those designated as
normal purchases and sales, offset by existing cash collateral and by any
offsets available under master netting agreements, including both asset and
liability positions, as well as accounts receivable and accounts
payable.


36
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)




Contingent
      Feature
            
            Contractual
      Liability
            
            
            Existing
      Cash Collateral
            
            
            Net
      Exposure(In
      thousands)PNMRCredit rating  downgrade
            
            $
            (41,081
            )
            
            $
            2,200
            
            
            $
            (38,873
            )PNMCredit rating downgrade
            
            $
            (8,720
            )
            
            $
            2,200
            
            
            $
            (2,131
            )


Fair
      Value Disclosures





The
Company determines the fair market values of its derivative and other
instruments based on the fair value hierarchy established in SFAS 157, which
requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. The standard describes three
levels of inputs that may be used to measure fair value.  Level 1
inputs are quoted prices (unadjusted) in active markets for identical assets or
liabilities that the reporting entity has the ability to access at the
measurement date.  Level 2 inputs are inputs other than quoted prices
included within Level 1 that are observable for the asset or liability, either
directly or indirectly.  Level 3 inputs are unobservable inputs for
the asset or liability.  The fair values determinations at March 31,
2009 and December 31, 2008 are as follows:





Assets
and Liabilities Fair Value Measurements





Total(1)
            
            
            Quoted
      Prices in Active Market for Identical Assets
              (Level
      1)
            
            
            Significant
      Other Observable Inputs
              (Level
      2)
            
            
            Significant
      Unobservable Inputs
              (Level
      3)March 31, 2009
            
            
            
            
            (In
      thousands)PNMRAssetsCommodity
      derivatives
            
            $
            101,759
            
            
            $
            4,088
            
            
            $
            97,329
            
            
            $
            139NDT
            
            
            107,992
            
            
            
            65,154
            
            
            
            42,838
            
            
            
            -Total Assets
            
            
            209,751
            
            
            
            69,242
            
            
            
            140,167
            
            
            
            139LiabilitiesCommodity
      derivatives
            
            
            (75,269
            )
            
            
            (18,651
            )
            
            
            (54,065
            )
            
            
            (2,350
            )Interest
      rate swap
            
            
            (840
            )
            
            
            -
            
            
            
            (840
            )
            
            
            -Total Liabilities
            
            
            (76,109
            )
            
            
            (18,651
            )
            
            
            (54,905
            )
            
            
            (2,350
            )Net
      Total Assets and
              Total Liabilities
            
            $
            133,642
            
            
            $
            50,591
            
            
            $
            85,262
            
            
            $
            (2,211
            )





37
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)





PNMAssetsCommodity
      derivatives
            
            $
            65,107
            
            
            $
            568
            
            
            $
            64,400
            
            
            $
            139NDT
            
            
            107,992
            
            
            
            65,154
            
            
            
            42,838
            
            
            
            -Total
      Assets
            
            
            173,099
            
            
            
            65,722
            
            
            
            107,238
            
            
            
            139LiabilitiesCommodity
      derivatives
            
            
            (23,732
            )
            
            
            (3,297
            )
            
            
            (18,431
            )
            
            
            (2,004
            )Net Total Assets and

              Total
      Liabilities
            
            $
            149,367
            
            
            $
            62,425
            
            
            $
            88,807
            
            
            $
            (1,865
            )December 31,
      2008PNMRAssetsCommodity
      derivatives
            
            $
            76,870
            
            
            $
            9,390
            
            
            $
            66,953
            
            
            $
            13NDT
            
            
            111,671
            
            
            
            69,150
            
            
            
            42,521
            
            
            
            -Rabbi
      Trust
            
            
            811
            
            
            
            811
            
            
            
            -
            
            
            
            -Total
      Assets
            
            
            189,352
            
            
            
            79,351
            
            
            
            109,474
            
            
            
            13LiabilitiesCommodity
      derivatives
            
            
            (40,885
            )
            
            
            (12,052
            )
            
            
            (27,897
            )
            
            
            (422
            )Net
      Total Assets and
              Total
      Liabilities
            
            $
            148,467
            
            
            $
            67,299
            
            
            $
            81,577
            
            
            $
            (409
            )PNMAssetsCommodity
      derivatives
            
            $
            46,596
            
            
            $
            -
            
            
            $
            45,519
            
            
            $
            13NDT
            
            
            111,671
            
            
            
            69,150
            
            
            
            42,521
            
            
            
            -Rabbi
      Trust
            
            
            811
            
            
            
            811
            
            
            
            -
            
            
            
            -Total
      Assets
            
            
            159,078
            
            
            
            69,961
            
            
            
            88,040
            
            
            
            13LiabilitiesCommodity
      derivatives
            
            
            (8,453
            )
            
            
            (510
            )
            
            
            (6,457
            )
            
            
            (422
            )Net
      Total Assets and
              Total
      Liabilities
            
            $
            150,625
            
            
            $
            69,451
            
            
            $
            81,583
            
            
            $
            (409
            )








(1)The
      Level 1, 2 and 3 columns in the above table are presented based on the
      nature of each instrument.  The total column is presented based
      on the balance sheet classification of the instruments and reflect unit of
      account reclassifications between commodity derivative assets and
      commodity derivative liabilities of $0.2 million for PNMR and zero for PNM
      at March 31, 2009 and $0.5
      million for PNMR and $1.1 million for PNM at December 31,
      2008.





38
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


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





Fair
Value Measurements Using Significant Unobservable Inputs


(Level
3)





Three
      Months Ended March 31,2009
            
            
            2008PNMR
            
            
            PNM
            
            
            PNMR
            
            
            PNMLevel 3 Fair Value Assets and LiabilitiesBalance at beginning of period
            
            
            
            
            
            
            
            $
            2,061
            
            
            $
            2,679Adoption
      of FAS 157
            
            
            
            
            
            
            
            
            16,407
            
            
            
            16,407Balance
      at beginning of period
            
            $
            (409
            )
            
            $
            (409
            )
            
            
            18,468
            
            
            
            19,086Total
      gains (losses) included in earnings
            
            
            (2,088
            )
            
            
            (2,088
            )
            
            
            15,391
            
            
            
            14,970Total
      gains (losses) included in other comprehensive income
            
            
            (413
            )
            
            
            -
            
            
            
            -
            
            
            
            -Purchases,
      issuances, and settlements(1)
            
            
            699
            
            
            
            632
            
            
            
            (913
            )
            
            
            (708
            )Balance at end of period
            
            $
            (2,211
            )
            
            $
            (1,865
            )
            
            $
            32,946
            
            
            $
            33,348Total
      gains (losses) included in earnings attributable to the change in
      unrealized gains or losses relating to assets still held at the end of the
      period
            
            $
            (1,522
            )
            
            $
            (1,522
            )
            
            $
            29,228
            
            
            $
            28,970





(1)
            Includes
      fair value reversal of contracts settled,unearned and prepaid
      option premiums received and paid during the period for contracts still
      held at end of period and the 2008 sale of PNM Electric wholesale
      contracts.





Gains and
losses (realized and unrealized) for Level 3 fair value measurements included in
earnings for the three months ended March 31, 2009 and 2008 are reported in
operating revenues and cost of energy as follows:





Three
      Months Ended March 31,2009
            
            
            2008PNMR
            
            Operating
      Revenues
            
            
            Cost
      of Energy
            
            
            Operating
      Revenues
            
            
            Cost
      of EnergyTotal
      gains (losses) included in earnings
            
            $
            159
            
            
            $
            (2,247
            )
            
            $
            (741
            )
            
            $
            16,132Change
      in unrealized gains or (losses)
              relating
      to assets still held at reporting date
            
            $
            123
            
            
            $
            (1,645
            )
            
            $
            2,005
            
            
            $
            27,223





PNMTotal
      gains (losses) included in earnings
            
            $
            159
            
            
            $
            (2,247
            )
            
            $
            (1,029
            )
            
            $
            15,999Change
      in unrealized gains or (losses)
              relating
      to assets still held at reporting date
            
            $
            123
            
            
            $
            (1,645
            )
            
            $
            1,662
            
            
            $
            27,308





39
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


(5)
            Earnings
      Per Share





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





Three
      Months Ended
              March
      31,2009
            
            
            2008(In
      thousands, except
              per
      share amounts)Earnings
      (Loss) Attributable to PNMR:Earnings
      (loss) from continuing operations
            
            $
            16,407
            
            
            $
            (71,003
            )Earnings
      from continuing operations attributable to Valencia Non-controlling
      Interest
            
            
            (2,579
            )
            
            
            -Preferred
      stock dividend requirements of subsidiary
            
            
            (132
            )
            
            
            (132
            )Earnings
      from continuing operations attributable to
              PNMR
            
            
            13,696
            
            
            
            (71,135
            )Earnings
      from discontinued operations
            
            
            81,675
            
            
            
            22,499Net Earnings (Loss) Attributable to PNMR
            
            $
            95,371
            
            
            $
            (48,636
            )Average
      Number of Common Shares:Outstanding
      during period
            
            
            86,554
            
            
            
            76,850Equivalents
      from convertible preferred stock
            
            
            4,778
            
            
            
            -Average Shares - Basic
            
            
            91,332
            
            
            
            76,850Dilutive
      Effect of Common Stock Equivalents (a) -Stock
      options and restricted stock
            
            
            108
            
            
            
            -Average
      Shares - Diluted
            
            
            91,440
            
            
            
            76,850Per
      Share of Common Stock – Basic:Earnings
      (loss) from continuing operations
            
            $
            0.15
            
            
            $
            (0.93
            )Earnings
      from discontinued operations
            
            
            0.89
            
            
            
            0.30Net Earnings (Loss)
            
            $
            1.04
            
            
            $
            (0.63
            )Per
      Share of Common Stock – Diluted:Earnings
      (loss) from continuing operations
            
            $
            0.15
            
            
            $
            (0.93
            )Earnings
      from discontinued operations
            
            
            0.89
            
            
            
            0.30Net Earnings (Loss)
            
            $
            1.04
            
            
            $
            (0.63
            )





(a)
            Excludes
      the effect of anti-dilutive common stock equivalents related to
      out-of-the-money stock options of 3,652,432 for the three months ended
      March 31, 2009.  Due to losses in the three months ended March
      31, 2008, no potentially dilutive securities are reflected in the average
      number of common shares used to compute earnings (loss) per share since
      any impact would be anti-dilutive.





40
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


(6)
            Stock-Based
      Compensation





Information
concerning stock-based compensation plans is contained in Note 13 of Notes to
Consolidated Financial Statements in the 2008 Annual Reports on Form
10-K.





Stock
Options





The
following table represents stock option activity for the three months ended
March 31, 2009:





Weighted-Weighted-
            
            
            Aggregate
            
            
            AverageAverage
            
            
            Intrinsic
            
            
            RemainingExercise
            
            
            Value
            
            
            Contract
      LifeOptions
      for PNMR Common Stock
            
            Shares
            
            
            Price
            
            
            (In
      thousands)
            
            
            (Years)Outstanding
      at beginning of period
            
            
            3,725,907
            
            
            $
            21.54Granted
            
            
            778,064
            
            
            $
            8.20Exercised
            
            
            -
            
            
            $
            -Forfeited
            
            
            (73,475
            )
            
            $
            18.86Outstanding
      at end of period
            
            
            4,430,496
            
            
            $
            19.24
            
            
            $
            128
            
            
            
            6.80Options
      exercisable at end of period
            
            
            3,145,979
            
            
            $
            22.12
            
            
            
            *
            
            
            
            5.75Options
      available for future grant
            
            
            1,107,421





* At
March 31, 2009, the exercise price of exercisable stock options is greater than
the closing price of PNMR common stock on that date so the options have no
intrinsic value.





The
following table provides additional information concerning stock option
activity:





Three
      Months Ended
              March
      31,Options
      for PNMR Common Stock
            
            2009
            
            
            2008(In
      thousands,
              except
      per share amounts)Weighted-average
      grant date fair value per share of options granted
            
            $
            1.62
            
            
            $
            1.38Total
      intrinsic value of options exercised during the period
            
            $
            -
            
            
            $
            15





The
Company uses the Black-Scholes option pricing model to estimate the fair value
of stock-based awards with the following weighted-average assumptions for
options granted in the three months ended March 31, 2009:





Dividend
      yield
            
            
            6.27
            %Expected
      volatility
            
            
            42.03
            %Risk-free
      interest rates
            
            
            1.56
            %Expected
      life (years)
            
            
            4.48





The
assumptions above are based on multiple factors, including historical exercise
patterns of employees in relatively homogeneous groups with respect to exercise
and post-vesting employment termination behaviors, expected future exercising
patterns for these same homogeneous groups and both the implied and historical
volatility of PNMR’s stock price.




41
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  Restricted
Stock





The
following table summarizes nonvested restricted stock activity for the three
months ended March 31, 2009:





Weighted-AverageNonvested
      Restricted
            
            
            
            
            Grant-DatePNMR
      Common Stock
            
            Shares
            
            
            Fair
      ValueNonvested
      at beginning of period
            
            
            195,626
            
            
            $
            17.43Granted
            
            
            53,000
            
            
            $
            6.99Vested
            
            
            (85,611
            )
            
            $
            19.24Forfeited
            
            
            -
            
            
            $
            -Nonvested
      at end of period
            
            
            163,015
            
            
            $
            13.09





The total
fair value of shares of restricted stock that vested during the three months
ended March 31, 2009 was $0.7 million.





(7)
            Capitalization





Information
concerning financing activities is contained in Note 6 of Notes to Consolidated
Financial Statements in the 2008 Annual Reports on Form 10-K.





Short-term
Debt





PNMR and
PNM have revolving credit facilities for borrowings up to $600.0 million under
the PNMR Facility and $400.0 million under the PNM Facility that primarily
expire in 2012 and local lines of credit amounting to $10.0 million and $8.5
million.  TNMP had a revolving credit facility for borrowings up to
$200.0 million under the TNMP Facility that was scheduled to expire May 13,
2009.  The maximum borrowing amount under the TNMP Facility was
reduced to $75.0 million on March 23, 2009.  On April 30, 2009, TNMP
entered into the $75 million TNMP Revolving Credit Facility described under
Financing Activities below and the TNMP Facility terminated.  PNMR and
PNM also have commercial paper programs under which they may issue up to $400.0
million and $300.0 million of commercial paper.  The Company has
suspended the commercial paper programs due to market conditions and no
commercial paper has been issued since March 11, 2008. The revolving credit
facilities serve as support for the commercial paper
programs.  Operationally, this means the aggregate borrowings under
the commercial paper program and the revolving credit facility for each of PNMR
and PNM cannot exceed the maximum amount of the revolving credit facility for
that entity.  At March 31, 2009, the weighted average interest rate
was 2.02% for the PNMR Facility.  Short-term debt outstanding consists
of:





42
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)





March
      31,
            
            
            December
      31,Short-term
      Debt
            
            2009
            
            
            2008(In
      thousands)PNMCommercial
      paper
            
            $
            -
            
            
            $
            -Revolving
      credit facility
            
            
            -
            
            
            
            340,000Local
      lines of credit
            
            
            -
            
            
            
            --
            
            
            
            340,000TNMP
      – Revolving credit facility
            
            
            -
            
            
            
            150,000PNMRCommercial
      paper
            
            
            -
            
            
            
            -Revolving
      credit facility
            
            
            143,000
            
            
            
            254,667Local
      lines of credit
            
            
            2,600
            
            
            
            -$
            145,600
            
            
            $
            744,667





At April
30, 2009, PNMR, PNM, and TNMP had $390.6 million, $385.8 million, and $73.5
million of availability under their respective revolving credit facilities and
local lines of credit, including reductions of availability due to outstanding
letters of credit.  Total availability at April 30, 2009, on a
consolidated basis, was $849.9 million for PNMR. LBB is a lender under the PNMR
Facility.  LBH, the parent of LBB, has filed for bankruptcy
protection.  Subsequent to the bankruptcy filing by LBH, LBB declined
to fund a borrowing request under the PNMR Facility amounting to $5.3 million.
The availability includes $26.3 million that represents the unfunded portion of
the PNMR Facility attributable to LBB.  At April 30, 2009, PNM had
cash investments of $17.1 million and PNMR and TNMP had no such
investments.





As of
March 31, 2009, TNMP had outstanding borrowings of $38.8 million from PNMR under
its intercompany loan agreement.





Financing
Activities





On
January 5, 2009, PNMR commenced a tender offer whereby it offered to repurchase
up to $150.0 million of its 9.25% senior unsecured notes due
2015.  The tender offer requested the holders of the notes to submit
the amount of notes they would be willing to sell to PNMR and at the price they
would be willing to sell, within the range of 83% to 93% of face value,
including additional compensation of 3% of face value for those holders that
tendered their notes and did not withdraw them prior to the stated early
participation date. Prior to expiration of the offer, $157.5 million of notes
were tendered to PNMR for purchase.  Under the applicable rules for
this type of arrangement, PNMR was able to purchase $157.0 million of notes at
the 93% cap price.  On February 5, 2009, PNMR repurchased and retired
these notes for $146.0 million plus accrued interest. On February 26, 2009, PNMR
purchased an additional $0.4 million of the 9.25% senior unsecured notes at 93%
of face value in a private transaction.  PNMR recognized a pre-tax
gain on these transactions of $7.5 million, net of related transaction costs and
write-off of the proportionate amount or the deferred costs of the original
issuance of the notes.





On
October 31, 2008, TNMP entered into a $100.0 million term loan credit agreement
with two lenders (the “TNMP Bridge Facility”) to provide an additional source of
funds to repay TNMP’s $167.7 million of senior unsecured notes that matured
January 15, 2009.  On January 14, 2009, TNMP borrowed $100.0 million
under the TNMP Bridge Facility.  On January 15, 2009, TNMP repaid the
entire principal and interest due on the $167.7 million principal amount
outstanding of 6.25% senior unsecured notes utilizing the proceeds from the TNMP
Bridge Facility and inter-company borrowings from PNMR.


43
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


On March
23, 2009, TNMP issued $265.5 million aggregate principal amount of 9.50% First
Mortgage Bonds, due 2019, Series 2009A at a price equal to 97.643% of their face
value.  The bonds bear interest at the rate of 9.50% per annum of
their face value. TNMP may redeem some or all of the bonds at any time at a
redemption price that reflects a make-whole provision, plus accrued
interest.  The bonds are secured by a first mortgage on substantially
all of TNMP’s property.





On March
25, 2009, TNMP entered into a $50.0 million loan agreement with Union Bank, N.
A. (the “2009 Term Loan Agreement”).   TNMP borrowed $50.0
million under this agreement on March 30, 2009.  Borrowings under the
2009 Term Loan Agreement must be repaid by March 25, 2014 and are secured by
$50.0 million aggregate principal amount of TNMP first mortgage bonds (the
“Series 2009B Bonds”).  Through hedging arrangements, TNMP has
established fixed interest rates of 6.05% for the first three years and 6.30%
thereafter.  The hedging obligations are also secured by the Series
2009B Bonds.  The hedge is accounted for as a cash-flow hedge and its
March 31, 2009 pre-tax fair value of $(0.8) million is included in other
comprehensive income.  The fair value determination was made using
Level 2 inputs under SFAS 157.





TNMP used
the proceeds received from the 9.50% First Mortgage Bonds and the 2009 Term Loan
Agreement to repay the $100.0 million borrowed under the TNMP Bridge Facility
and the $150.0 million outstanding under the TNMP Facility.  The
remaining proceeds, after offering expenses, were used to reduce intercompany
borrowings from PNMR.





On April
30, 2009, TNMP entered into a new $75.0 million revolving credit facility among
TNMP, certain lenders, and JPMorgan Chase Bank, N.A., as administrative agent
(the “TNMP Revolving Credit Facility”), and the existing TNMP Facility was
terminated.  Borrowings under the TNMP Revolving Credit Facility are
secured by $75.0 million aggregate principal amount of first mortgage bonds of
TNMP (the “Series 2009C Bonds”).  The TNMP Revolving Credit Facility,
which will expire in April 2011, allows TNMP to borrow up to $75.0
million.





On
February 26, 2009, the Finance Committee of the PNMR Board authorized PNMR
to provide support for the debt of TNMP by approving additional loans to TNMP as
a contingency in the event TNMP was unable to obtain external financing
sufficient to pay amounts borrowed under the TNMP Facility and the TNMP Bridge
Facility when they came due.  With the completion of the financing
described above, the PNMR support terminated on April 30, 2009.





Common
Stock





PNMR
offers new shares of PNMR common stock through the PNMR Direct Plan and an
equity distribution agreement.  The equity distribution agreement is
currently suspended.  For the three months ended March 31, 2009, PNMR
sold 48,633 shares of its common stock through the PNMR Direct Plan for net
proceeds of $0.4 million.  PNMR also issued 27,283 shares of its
common stock for $0.2 million through its ESPP during the three months ended
March 31, 2009.





Convertible
Preferred Stock





In
November 2008, PNMR issued 477,800 shares of Series A convertible preferred
stock.  The Series A convertible preferred stock is convertible into
PNMR common stock in a ratio of 10 shares of common stock for each share of
preferred stock.  The Series A convertible preferred stock is entitled
to receive dividends equivalent to any dividends paid on PNMR common stock as if
the preferred stock had been converted into common stock.  The Series
A convertible preferred stock is entitled to vote on all matters voted upon by
common stockholders, except for the election of the Board.  In the
event of liquidation of PNMR, preferred holders would receive a preference of
$0.10 per common share equivalent.  After that preference, common
holders would receive an equivalent liquidation preference per share and all
remaining distributions would be shared ratably between common and preferred
holders.  The terms of the Series A convertible


44
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)






(8)
            Pension
      and Other Postretirement Benefit
Plans





PNMR and
its subsidiaries maintain qualified defined benefit pension plans,
postretirement benefit plans providing medical and dental benefits, and
executive retirement programs (“PNM Plans” and “TNMP Plans”).  PNMR
maintains the legal obligation for the benefits owed to participants under these
plans.





Readers
should refer to Note 12 of Notes to the Consolidated Financial Statements in the
2008 Annual Reports on Form 10-K for additional information on these
plans.





PNM
Plans





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





Three
      Months Ended March 31,Pension
      Plan
            
            
            Other
      Postretirement Benefits
            
            
            Executive
      Retirement Program2009
            
            
            2008
            
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008(In
      thousands)Components
      of Net PeriodicBenefit
      Cost (Income)Service cost
            
            $
            -
            
            
            $
            -
            
            
            $
            104
            
            
            $
            178
            
            
            $
            15
            
            
            $
            14Interest cost
            
            
            8,610
            
            
            
            8,317
            
            
            
            1,847
            
            
            
            2,086
            
            
            
            284
            
            
            
            284Expected long-term return on assets
            
            
            (9,691
            )
            
            
            (10,336
            )
            
            
            (1,458
            )
            
            
            (1,532
            )
            
            
            -
            
            
            
            -Amortization of net loss
            
            
            955
            
            
            
            481
            
            
            
            822
            
            
            
            1,204
            
            
            
            7
            
            
            
            13Amortization of prior service cost
            
            
            79
            
            
            
            79
            
            
            
            (1,065
            )
            
            
            (1,422
            )
            
            
            3
            
            
            
            3Curtailment
      (gain)*
            
            
            -
            
            
            
            -
            
            
            
            (2,943
            )
            
            
            -
            
            
            
            -
            
            
            
            -Net
      periodic benefit cost (income)
            
            $
            (47
            )
            
            $
            (1,459
            )
            
            $
            (2,693
            )
            
            $
            514
            
            
            $
            309
            
            
            $
            314





* The
January 2009 sale of PNM Gas resulted in the retiree medical obligation
associated with the gas designated employees to cease.  This action
meets the definition of a curtailment under SFAS 106 and resulted in a
curtailment gain.





PNM does
not anticipate making any contributions to its pension plan trust during
2009.  Based on current law and estimates of portfolio performance,
PNM anticipates making contributions to its pension plan trust of approximately
$21.7 million in 2010 and a total of $134.6 million for
2011-2013.  For the three months ended March 31, 2009 and 2008, PNM
contributed $0.7 million and $1.0 million to trusts for other postretirement
benefits.  PNM expects to make contributions totaling $4.2 million
during the year ended December 31, 2009 to the trust for other postretirement
benefits.  Disbursements under the executive retirement program, which
are funded by the Company and considered to be contributions to the plan, were
$0.4 million in the three months ended March 31, 2009 and 2008, and are expected
to total $1.5 million during 2009.





45
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


TNMP
Plans





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





Three
      Months Ended March 31,Pension
      Plan
            
            
            Other
      Postretirement Benefits
            
            
            Executive
      Retirement Program2009
            
            
            2008
            
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008(In
      thousands)Components of Net PeriodicBenefit Cost (Income)Service cost
            
            $
            -
            
            
            $
            -
            
            
            $
            65
            
            
            $
            71
            
            
            $
            -
            
            
            $
            -Interest cost
            
            
            1,099
            
            
            
            1,061
            
            
            
            183
            
            
            
            179
            
            
            
            19
            
            
            
            19Expected long-term return on assets
            
            
            (1,523
            )
            
            
            (1,659
            )
            
            
            (124
            )
            
            
            (122
            )
            
            
            -
            
            
            
            -Amortization of net gain
            
            
            -
            
            
            
            (36
            )
            
            
            (66
            )
            
            
            (68
            )
            
            
            -
            
            
            
            -Amortization of prior service cost
            
            
            -
            
            
            
            -
            
            
            
            15
            
            
            
            15
            
            
            
            -
            
            
            
            -Net
      Periodic Benefit Cost (Income)
            
            $
            (424
            )
            
            $
            (634
            )
            
            $
            73
            
            
            $
            75
            
            
            $
            19
            
            
            $
            19





TNMP made
no first quarter contributions to its pension plan trust in either 2009 or 2008
and no contributions are anticipated for 2009.  Based on current law
and estimates of portfolio performance, TNMP anticipates making contributions to
its pension plan trust of approximately $1.8 million in 2010 and a total of $7.5
million for 2011-2013.For the three months ended
March 31, 2009 and 2008, TNMP contributed zero and $0.2 million and expects to
make contributions totaling $0.3 million during the year ended December 31, 2009
to the trust for other postretirement benefits.  Disbursements under
the executive retirement program, which are funded by the Company and considered
to be contributions to the plan, were less than $0.1 million in the three months
ended March 31, 2009 and 2008, and are expected to total $0.2 million during
2009.





(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 liability has been incurred
and the amount of expected costs of these items to be incurred is reasonably
estimable.  The Company is also involved in various legal proceedings
in the normal course of its business.  The legal costs for these
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, results of
operations, or cash flows, although the outcome of litigation, investigations,
and other legal proceedings is inherently uncertain.





Commitments
and Contingencies Related to the Environment





Nuclear
Spent Fuel and Waste Disposal





Nuclear
power plant operators are required to enter into spent fuel disposal contracts
with the DOE, and the DOE is required to accept and dispose of all spent nuclear
fuel and other high-level radioactive wastes generated by domestic power
reactors.  Although the Nuclear Waste Policy Act required the DOE to
develop a permanent


46
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


repository
for the storage and disposal of spent nuclear fuel by 1998, the DOE has
announced that the repository cannot be completed before at least
2017.  In November 1997, the United States Court of Appeals for the
District of Columbia Circuit issued a decision preventing the DOE from excusing
its own delay, but refused to order the DOE to begin accepting spent nuclear
fuel.  Based on this decision and the DOE’s delay, a number of
utilities, including APS (on behalf of itself and the other PVNGS owners
including PNM), filed damages actions against the DOE in the Court of Federal
Claims and is currently pursuing that damages claim. In August 2008, the
United States Court of Appeals for the Federal Circuit issued decisions in three
damages actions brought by other nuclear utilities that could result in a
decrease in the amount of PNM’s recoverable damages; however, additional appeals
in those actions are possible and APS continues to monitor the status of those
actions.  The trial in the APS matter began on January 28,
2009.  Testimony and evidence have been presented by both
sides.  The trial court has set a post-trial briefing schedule and is
expected to hear closing arguments in the early summer of 2009.  PNM
currently estimates that it will incur approximately $46.1 million (in 2007
dollars) over the life of PVNGS for its share of the fuel costs related to the
on-site interim storage of spent nuclear fuel during the operating life of the
plant.  PNM accrues these costs as a component of fuel expense,
meaning that the charges are accrued as the fuel is burned.  At March
31, 2009 and December 31, 2008, PNM had $14.9 million and $14.5 million recorded
as a liability on its Consolidated Balance Sheets for interim storage
costs.





The
Clean Air Act





Regional
Haze





In 1999,
the EPA announced final regional haze rules and in 2005, the EPA issued the
final rule addressing regional haze and guidelines for BART determinations. The
rule calls for all states to establish goals and emission reduction strategies
for improving visibility in national parks and wilderness 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.





In
November 2006, the NMED requested a BART analysis for NOX and particulates for
each of the four units at SJGS.  PNM submitted the analysis to the
NMED in early June 2007, recommending against installing additional pollution
control equipment on any of the SJGS units beyond those recently
installed.  PNM has provided additional data in response to requests
from the NMED.  The NMED is presently reviewing the analysis and
supplemental data.  Potentially, additional NOX emission reductions
could be required.  The nature and cost of compliance with these
potential requirements cannot be determined at this time.





In
addition, EPA requested APS to perform a BART analysis for Four
Corners.  APS completed the analysis and submitted it to the EPA on
January 30, 2008.  In December 2008, APS provided additional data in
response to a request from the EPA.  APS’ recommendations include the
installation of certain pollution control equipment that APS believes
constitutes BART.  Once APS receives the EPA’s final determination as
to what constitutes BART for Four Corners, APS will have five years to complete
the installation of the equipment and to achieve the emission limits established
by the EPA.  However, in order to coordinate with the plant’s other
scheduled activities, APS will begin implementing initial portions of APS’
recommended plan later this year for Four Corners on a voluntary
basis.   Until the EPA makes a final determination on this
matter, PNM cannot accurately estimate the expenditures that may be
required.  As a result, PNM’s current environmental expenditure
estimates do not include amounts for Four Corners BART
expenditures.





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


47
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


Ozone
Non-Attainment





The NMED
recently published its draft recommendation of area designations for the 2008
revised ozone national ambient air quality standard.  The draft
recommended that San Juan County, New Mexico be designated as non-attainment for
ozone.  SJGS is situated in San Juan County.  However, the
NMED subsequently determined that the monitor indicating high ozone levels was
not reliable and did not recommend to the EPA that San Juan County be designated
as non-attainment.  EPA will make a final designation for the status
of San Juan County in March 2010.  The Company cannot predict the
outcome of this matter or if additional NOX controls would be required as a
result of ozone non-attainment designation.





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





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





In May
2005, APS and the Navajo Nation signed a Voluntary Compliance Agreement (“VCA”)
resolving the dispute regarding the Navajo Nation Air Pollution Prevention and
Control Act portion of the lawsuit.  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 VCA, APS sought 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, and the Courts have dismissed the claims accordingly. The
agreement does not address or resolve any dispute relating to other aspects of
the Navajo Acts.





The
Company cannot currently predict the outcome of these matters.





Four
Corners Federal Implementation Plan Litigation





On April
30, 2007, the EPA adopted a source specific FIP to set air quality standards at
Four Corners.  The FIP essentially federalizes the requirements
contained in the New Mexico State Implementation Plan, which Four Corners has
historically followed.  The FIP also includes a requirement to
maintain and enhance dust suppression methods.  APS filed a petition
for review in the U.S. District Court of Appeals for the Tenth Circuit seeking
revisions to the FIP to clarify certain requirements and allow operational
flexibility.  The Sierra Club intervened in this action and with other
parties filed a petition for review with the same court challenging the FIP’s
compliance with the Clean Air Act.  APS intervened in that
action.  In APS’ lawsuit, APS challenges two key provisions of the
FIP:  a 20% opacity limit on certain fugitive dust emissions and a 20%


48
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


stack
opacity limit on Units 4 and 5.  During 2008, the EPA voluntarily
moved to vacate the fugitive dust provisions of the FIP, and on April 14, 2009,
the court granted EPA’s motion.  The court also rejected the Sierra
Club’s challenges to the FIP and ruled in favor of the 20% stack opacity
limit.The
Company does not believe that compliance with this limit will have a material
adverse impact on the Company’s financial position, results of operations or
cash flows.





Section 114
Request





On April
6, 2009, APS received a request from the EPA under Section 114 of the Clean Air
Act seeking detailed information regarding projects at and operations of Four
Corners.  APS is in the process of responding to this request, and the
Company is currently unable to predict the timing or content of EPA’s response
or any resulting actions.





Santa
Fe Generating Station





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





PNM
believes that the data compiled indicates observed groundwater contamination
originated from off-site sources.  However, to avoid a prolonged legal
dispute, PNM agreed to a settlement agreement with the NMED under which 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.  PNM will continue to operate the remediation facilities until
the groundwater meets applicable federal and state standards or until such time
as the NMED determines that additional remediation is not required, whichever is
earlier.  The well continues to operate and meets federal drinking
water standards.  PNM is not able to assess the duration of this
project.





The
Superfund Oversight Section of the NMED has conducted multiple investigations
into the chlorinated solvent plume in the vicinity of the site of the former
Santa Fe Generating Station   In February 2008, a NMED site
inspection report was submitted to the EPA, which states that neither the source
nor extent of contamination has been determined and also states that the source
may not be the former Santa Fe Generating Station.  The NMED
investigation is ongoing.  The Company is unable to predict the
outcome of this matter.





Coal
Combustion Waste Disposal





The EPA
is in the process of developing an inventory of coal combustion product (“CCP”)
impoundments through the issuance of an Information Collection Request (“ICR”)
to facilities that have surface impoundments that handle CCPs.  This
is primarily in response to the incident that occurred at Tennessee Valley
Authority’s Kingston Power Plant in December 2008.  This is EPA’s
first step to determine the risk that these impoundments pose to the
environment and it is their intent is to conduct surveys to assess impoundment
integrity and safety.  The agency is also developing national
standards for CCP disposal and evaluating regulatory options that include
regulations under non-hazardous waste standards, hazardous waste regulations, or
a combination of both.  The agency is expected to determine which
regulatory path it will pursue some time this spring.





SJCC
currently disposes of CCPs consisting of fly ash, bottom ash, and gypsum from
SJGS in the surface mine pits adjacent to the plant and did not receive an ICR
from the EPA.  The Office of Surface Mining (“OSM”) developed draft
proposed regulations for the mine placement of CCPs.  OSM’s rulemaking
effort is currently tabled by the Obama Administration.  PNM cannot
predict the outcome of the EPA’s actions regarding this matter and whether such
actions will have a material adverse impact on its operations or financial
position.  The Company continues to advocate for the non-hazardous
regulation of CCPs.  It also believes the proper place for oversight
of mine placement of CCPs is through the OSM and state mining and mining
reclamation agencies.





49
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


Gila
River Indian Reservation Superfund Site





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





Other
Commitments and Contingencies





Coal
Supply





The coal
requirements for SJGS are being supplied by SJCC, a wholly owned subsidiary of
BHP Billiton.  APS purchases all of Four Corners’ coal requirements
from a supplier with a long-term lease of coal reserves with the Navajo
Nation.  In 2003, PNM completed a comprehensive review of the final
reclamation costs for both the surface mines that previously provided coal to
SJGS and the current underground mine providing coal.  Based on this
study, PNM revised its estimates of the final reclamation of the surface
mine.  In addition, the estimate for decommissioning the Four Corners
mine was revised.  Based on the most recent estimates, the final cost
of surface mine reclamation is expected to be $130.5 million in future dollars
excluding contract buyout costs paid to SJCC.  As of March 31, 2009
and December 31, 2008, $32.2 million and $33.8 million was recognized on PNM’s
Consolidated Balance Sheet for the obligation for surface mine reclamation using
the fair value method to determine the liability.  At March 31, 2009
and December 31, 2008, the balance on PNM’s Consolidated Balance Sheets for the
reclamation liability related to underground mining activities was $1.7 million
and $1.6 million.





In 2003,
the NMPRC granted PNM permission to collect as a part of its rates up to $100.0
million of surface mine final reclamation costs.  In the 2007 Electric
Rate Case, PNM requested recovery of increased surface mine decommissioning
costs, as well as underground mine reclamation costs. Recovery of the final
underground mine reclamation costs was allowed; however, the NMPRC denied
recovery of amounts for surface mine decommissioning in excess of $100.0
million. PNM has filed an appeal of this issue in the New Mexico Supreme
Court.  See Note 10.  The Company cannot predict the outcome
of this appeal.





PVNGS
Liability and Insurance Matters





The PVNGS
participants have insurance for public liability resulting from nuclear energy
hazards to the full limit of liability under federal law.  This
potential liability is covered by primary liability insurance provided by
commercial insurance carriers in the amount of $300 million and the balance by
an industry-wide retrospective assessment program.  If losses at any
nuclear power plant covered by the program exceed the accumulated funds, PNM
could be assessed retrospective premium adjustments.  The maximum
assessment per reactor under the program for each nuclear incident is $117.5
million, subject to an annual limit of $17.5 million per incident, to be
periodically adjusted for inflation.  Based on PNM’s 10.2% interest in
the three PVNGS units, PNM’s maximum potential assessment per incident for all
three units is $36.0 million, with an annual payment limitation of $5.4
million.





The PVNGS
participants maintain “all risk” (including nuclear hazards) insurance for
property damage to, and decontamination of, property at PVNGS in the aggregate
amount of $2.75 billion, a substantial portion of which must first be applied to
stabilization and decontamination.  The participants have also secured
insurance against portions of any increased cost of generation or purchased
power and business interruption resulting from a sudden and unforeseen
accidental outage of any of the three units.  The property damage,
decontamination, and replacement power coverages are provided by Nuclear
Electric Insurance Limited (“NEIL”).  PNM is subject to retrospective


50
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


assessments
under all NEIL policies if NEIL’s losses in any policy year exceed accumulated
funds.  The maximum amount of retrospective assessments PNM could
incur under the current NEIL policies totals $7.3 million.  The
insurance coverage discussed in this and the previous paragraph is subject to
policy conditions and exclusions.





Water
Supply





Because
of New Mexico’s arid climate and periodic drought conditions, there is a growing
concern in New Mexico about the use of water for power plants.  PNM
has secured water rights in connection with the existing plants at Afton, Luna
and Lordsburg.  Water availability does not appear to be an issue for
these plants at this time.





The “four
corners” region of New Mexico, in which SJGS and Four Corners are located,
experienced drought conditions during 2002 through 2004 that could have affected
the water supply for PNM’s generation plants.  In future years, if
adequate precipitation is not received in the watershed that supplies the four
corners region, the plants could be impacted.  Consequently, PNM, APS
and BHP Billiton have undertaken activities to secure additional water supplies
for SJGS, Four Corners and related mines.  PNM has reached an
agreement for a voluntary shortage sharing agreement with tribes and other water
users in the San Juan Basin for a term ending December 31,
2012.  Further, PNM and BHP Billiton have reached agreement on a
long-term supplemental contract relating to water for SJGS with the Jicarilla
Apache Nation that ends in 2016.  APS and BHP Billiton have entered
into a similar contract for Four Corners.    Although the
Company does not believe that its operations will be materially affected by the
drought conditions at this time, it cannot forecast the weather situation or its
ramifications, or how regulations and legislation may impact the Company’s
situation in the future, should the shortages occur in the future.





PVNGS
Water Supply Litigation





A summons
was served on APS in 1986 that required all water claimants in the Lower Gila
River Watershed of Arizona to assert any claims to water on or before January
20, 1987, in an action pending in the Maricopa County Superior
Court.  PVNGS is located within the geographic area subject to the
summons.  APS’ rights and the rights of the other PVNGS participants
to the use of groundwater and effluent at PVNGS are potentially at issue in this
action.  APS filed claims that dispute the court’s jurisdiction over PVNGS’
groundwater rights and their contractual rights to effluent relating to PVNGS
and, alternatively, seek confirmation of those rights.  In 1999, the
Arizona Supreme Court issued a decision finding that certain groundwater rights
may be available to the federal government and Indian tribes.  In
addition, the Arizona Supreme Court issued a decision in 2000 affirming the
lower court’s criteria for resolving groundwater claims.  Litigation
on both these issues has continued in the trial court.  No trial dates
have been set in these matters.  PNM does not expect that this
litigation will have a material adverse impact on its results of operation or
financial position.





NRC
Matters




Because
of several NRC findings relating to situations at PVNGS Unit 3 in 2004 and 2006,
PVNGS has been subject to a heightened level of oversight by the
NRC.  On March 24, 2009, the NRC informed APS that it was removing
PVNGS Unit 3 from the "multiple/repetitive degraded cornerstone" column of the
NRC's Action Matrix (“Column 4”), removing PVNGS Units 1 and 2 from the “one
degraded cornerstone” column (“Column 3”), and returning all three units of the
plant to routine inspection and oversight by the NRC.  This
notification follows the NRC's completion of its inspections of the corrective
actions taken by PVNGS to address performance deficiencies that caused the NRC
to place Unit 3 into Column 4 and Units 1 and 2 into Column 3.  The
NRC has closed the confirmatory action letter that outlined the performance
deficiencies and associated corrective actions.




51
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


San
Juan River Adjudication





In 1975,
the State of New Mexico filed an action entitled “State of New Mexico v. United
States, et al.”, in the District Court of San Juan County, New Mexico, to
adjudicate all water rights in the San Juan River Stream System.  The
Company was made a defendant in the litigation in 1976.  The action is
expected to adjudicate water rights used at Four Corners and at
SJGS.  In 2005, the Navajo Nation and various parties announced a
settlement of the Nation’s reserved surface water rights.  On March
30, 2009, President Obama signed legislation confirming the settlement with the
Navajo Nation.  The Company cannot determine the effect, if any, of
any water rights adjudication on the present arrangements for water at SJGS and
Four Corners.  Final resolution of the case cannot be expected for
several years. The Company 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.  SJCC has reached settlement with several gas
leaseholders and has other potential claimants.  PNM cannot predict
the outcome of any future disputes between SJCC and other gas
leaseholders.





Right
of Way Matters





Many of
PNM’s electric transmission and distribution facilities are located on lands
that require the grant of rights-of-way from governmental entities, Native
American tribes, or private parties.  Several of the agreements
granting the rights-of-way may have expired or may expire within the next few
years.  PNM is actively reviewing these matters and negotiating with
certain parties, as appropriate, for the renewal of these
rights-of-way.  However, there can be no assurance that all of these
rights-of-way will be renewed.  If PNM is not successful in renewing
the rights-of-way on Native American lands, it could be forced to remove its
facilities from or abandon its facilities on the property covered by the
rights-of-way and seek alternative routes for its transmission or distribution
facilities.  With respect to non-tribal government land and private
land, PNM may have condemnation rights. If rights-of-way are renewed, they may
be renewed at prices that are higher than historical levels, based on current
renewal experience.  Rights-of-way costs have historically been
recovered in rates charged to customers.  PNM will seek to recover
such costs in future rates.





Republic
Savings Bank Litigation





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





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





On
January 25, 2008, the court entered its opinion granting the Federal
government’s motion to dismiss MRI, denying the Federal government’s motion for
summary judgment and granting the remaining Plaintiffs’ motion for summary
judgment on the issues of liability and damages, awarding the Plaintiffs damages
in the amount of $14.9 million. MRI had previously received payment from the
FDIC in the amount of $0.3 million.  This payment reduces the amount
of damages owed to $14.6 million.


52
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


The
matter is currently pending before the U. S. Court of Appeals for the Federal
Circuit on appeal by the Federal government and cross-appeal by
Plaintiffs.  PNMR is unable to predict the outcome of this
litigation.





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 and Western markets
energy crisis of 2000-2001 and the bankruptcy filings of the Cal PX and
PG&E.  As a result of the conditions in the Western markets during this
time period, between late-2000 and mid-2003, FERC, the California Attorney
General and private parties initiated investigations, litigation, and other
proceedings relevant to PNM and other sellers in the Western markets at FERC and
in both California State and Federal District Courts, seeking a determination
whether sellers of wholesale electric energy during the crisis period, including
PNM, should be ordered to pay monetary refunds to buyers of such energy. 
These proceedings continue at FERC as well as before the U.S. Court of Appeals
for the Ninth Circuit.  PNM has participated in these proceedings at FERC,
the Federal District Courts and the Ninth Circuit, including filing appeals to
that court.  Both FERC and the Ninth Circuit continue to hold settlement
and mediation conferences, in which PNM continues to
participate.





The Company cannot predict the ultimate outcome of the appeals or any FERC
decision resulting therefrom.  At this time, it is unclear whether PNM will
ultimately be directed to make refunds as a result of these court and FERC
decisions, or whether settlement may be reached.





Complaint
Against Southwestern Public Service Company





In
September 2005, PNM filed a complaint under the Federal Power Act against SPS.
PNM argued that SPS’ rates for sale of interruptible energy were excessive and
that SPS had been overcharging PNM for deliveries of energy through its fuel
cost adjustment clause practices.  PNM also intervened in a complaint
proceeding brought by other customers raising similar arguments relating to SPS’
fuel cost adjustment clause practices (the “Golden Spread complaint
proceeding”).  Additionally, in November 2005, SPS filed an electric
rate case at FERC proposing to unbundle and raise rates charged to customers
effective July 2006. PNM intervened in the case and objected to the proposed
rate increase. In September 2006, PNM and SPS filed a settlement agreement
providing for resolution of issues relating to rates for sales of interruptible
energy, but not resolving the fuel clause issues. In September 2008, FERC issued
its order approving the settlement between PNM and SPS.





In April
2008, FERC issued its order in the Golden Spread complaint
proceeding.  FERC affirmed in part and reversed in part an ALJ’s
initial decision, which had, among other things, ordered SPS to pay refunds to
PNM with respect to the fuel clause issues.  FERC affirmed the
decision of the ALJ that SPS violated its fuel cost adjustment clause
tariffs.   However, FERC shortened the refund period applicable
to the violation of the fuel cost adjustment clause issues.PNM
and SPS have filed petitions for rehearing and clarification of the scope of the
remedies that were ordered and reversal of various rulings in the order. FERC
has not yet acted upon the requests for rehearing or clarification and they
remain pending further decision.  PNM cannot predict the final outcome
of the case at FERC.





53
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


Begay
v. PNM et al





A
putative class action was filed against PNM and other utilities on February 11,
2009 in the United States District Court in Albuquerque.  PNM was
served on March 31, 2009.  Plaintiffs claim to be allottees, members
of the Navajo Nation, who pursuant to the Dawes Act of 1887, were allotted
ownership in land carved out of the Navajo Nation. Plaintiffs, including an
allottee association, make broad, general assertions that defendants, including
PNM, are right-of-way grantees with rights-of-way across the allotted lands and
are either in trespass or have paid insufficient fees for the grant of
rights-of-way or both.  The plaintiffs, who have sued the defendants for
breach of fiduciary duty, seek a constructive trust.  They have also
included a breach of trust claim against the United States and its Secretary of
the Interior, Ken Salazar.  PNM is evaluating plaintiffs’ claims.  PNM
is unable to determine the outcome of this case but intends to defend it
vigorously.





(10)
            Regulatory
      and Rate Matters





PNMR





First
Choice 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 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 2006,
TNMP, First Choice, the PUCT staff and other parties filed a non-unanimous
settlement agreement (“NUS”).  The PUCT unanimously approved the NUS
on November 2, 2006 and made First Choice’s new price-to-beat base rates
effective on December 1, 2006, as First Choice had requested.  As
price-to-beat rates expired on December 31, 2006, the approved rates are no
longer applicable.  In January 2007, TNMP’s 60-Day Rate Review
proceeding and the underlying NUS were appealed by various Texas cities to a
Texas District Court.  TNMP and First Choice have intervened in this
appeal.   The Company is unable to predict the outcome of this
matter.





First
Choice Request for ERCOT Alternative Dispute Resolution





In June
2008, First Choice filed a request for alternative dispute resolution with ERCOT
alleging that ERCOT incorrectly applied its protocols with respect to congestion
management during the first quarter of 2008.  First Choice requested
that ERCOT resolve the dispute by restating certain elements of its first
quarter 2008 congestion management data and by refunding to First Choice
allegedly overstated congestion management charges.  The amount at
issue in First Choice’s claim can only be determined by running ERCOT market
models with corrected inputs but First Choice believes that the amount is
significant.  ERCOT protocols provide that ERCOT will notify
potentially impacted market participants and subsequently consider the merits of
First Choice’s allegations.  The Company is unable to predict the
outcome of this matter.





PNM





2007
Electric Rate Case





On
February 21, 2007, PNM filed a general electric rate case (“2007 Electric Rate
Case”) requesting the NMPRC approve an increase in service fees to all of PNM’s
retail customers except those formerly served by TNMP.  The request
was designed to provide PNM’s electric utility an opportunity to earn a 10.75
percent return on equity.  The application also requested
authorization to implement a FPPAC through which changes in the cost of fuel and
purchased power, above or below the costs included in base rates, will be passed
through to customers on a monthly basis.  On April 24, 2008, the NMPRC
issued a final order that resulted in a revenue increase of $34.4
million.  The rate increase provides for a 10.1 percent return on
equity.New rates
reflecting the $34.4 million


54
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


increase
were effective for bills rendered on and after May 1, 2008.  In its
final order, the NMPRC disallowed recovery of costs associated with the RECs
used to meet the New Mexico Renewable Energy Portfolio Standards that were being
deferred as regulatory assets, but did allow PNM the opportunity to seek
recovery in the next rate case if it can demonstrate that it incurred an actual
incremental cost for its compliance with the renewable portfolio
standard.  The NMPRC also ruled that recovery of surface coal mine
decommissioning costs be capped at $100 million.  The order resulted
in PNM being unable to assert it is probable, as defined under GAAP, that the
costs previously deferred on PNM’s balance sheet will be recoverable through
future rates charged to its customers.  Accordingly, as of March 31,
2008, PNM recorded regulatory disallowances for pre-tax write offs of $19.6
million for coal mining decommissioning costs and $10.6 million for deferred REC
costs.  PNM has appealed the NMPRC’s treatment of coal mine
decommissioning and the RECs to the New Mexico Supreme Court.  If the
appeal is successful or if PNM is successful in demonstrating that these costs
are recoverable through future rate proceedings, the costs will be restored to
PNM’s balance sheet. In connection with the stipulation in the 2008 Electric
Rate Case described below, PNM agreed to dismiss its appeal of the treatment of
the REC costs if that stipulation is approved.  Oral argument before
the New Mexico Supreme Court is currently scheduled for May 13, 2009, but is
likely to be postponed to await ruling by the NMPRC on the stipulation in the
2008 Electric Rate Case.  PNM is unable to predict the outcome of this
matter.





Emergency
FPPAC





On March
20, 2008, PNM and the IBEW filed a joint motion in the general electric rate
case requesting NMPRC authorization to implement an Emergency FPPAC on an
interim basis.On
May 22, 2008, the NMPRC issued a final order that approved the Emergency FPPAC
with certain modifications.  The Emergency FPPAC permits PNM to
recover its actual fuel and purchased power costs up to $0.024972 per kWh, which
is an increase of $0.008979 per kWh above the fuel costs included in base
rates.  PNM is unable to predict if actual fuel and purchased power
costs will exceed the cap during the period the Emergency FPPAC is in
effect.  PNM implemented the Emergency FPPAC as modified on June 2,
2008.  The Albuquerque Bernalillo County Water Utility Authority and
the New Mexico Industrial Energy Consumers Inc. filed notices of appeal to the
New Mexico Supreme Court, which seek to have vacated the NMPRC order approving
the Emergency FPPAC. The appeals have been consolidated and PNM has been granted
party status.  PNM is unable to predict the final outcome of these
appeals.





The NMPRC order approving the Emergency
FPPAC required PNM to pay for an audit of PNM’s monthly FPPAC reports and a
prudence review of PNM’s fuel and purchased power costs, to be conducted by
auditors selected by the NMPRC.  PNM’s costs will be recoverable
through future rate proceedings.  On February 11, 2009, the NMPRC
issued a RFP for related audit and prudence review professional
services.  The NMPRC order states that the prudence review shall
continue until all costs flowed through the Emergency FPPAC have been subject to
review.  Results of the RFP are not yet known.





2008
Electric Rate Case





On
September 22, 2008, PNM filed a general rate case (“2008 Electric Rate Case”)
requesting the NMPRC to approve an increase in electric service rates to all PNM
retail customers except those formerly served by TNMP. The proposed rates are
designed to increase annual operating revenue by $123.3 million, based on a
March 31, 2008 test period and calculating base fuel costs using a projection of
costs for the 12 months ending March 31, 2009. PNM has also proposed a FPPAC in
the general form authorized by the NMPRC, but with PNM retaining 25% of
off-system sales margins and crediting 75% against fuel and purchased power
costs. On September 30, 2008, the NMPRC ordered that PNM‘s proposed rates be
suspended for a period of nine months from October 22, 2008 and appointed a
hearing examiner to conduct a hearing and otherwise preside over the
case.





On March
6, 2009, PNM, the NMPRC staff and most of the intervening parties filed a
stipulation which, if approved by the NMPRC, would resolve all issues in the
case, including the approval of the Resource Stipulation described below. No
party opposed the stipulation.   The stipulation provides for an
increase in annual non-fuel revenues of $77.3 million, of which 65% ($50.2
million) will be implemented for bills beginning on July 1, 2009


55
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


and the
remaining 35% ($27.1 million) will be implemented in rates as of April 1,
2010.  As an offset to the non-fuel revenue increase, PNM will
implement a credit to customers totaling $26.3 million, representing the amount
of revenues from past sales of SO2 allowances.  This amount will be
credited to ratepayers over 21 months beginning July 1, 2009. The crediting
mechanism will also be used to credit customers with revenues received by PNM
from future sales of SO2 allowances.  If the stipulation is approved,
PNM would record an expense for the regulatory disallowance and a regulatory
liability for the amount to be credited to ratepayers. The stipulation also
provides that a revised FPPAC will go into effect with the new
rates.  The stipulation provides that 100% of off-systems sales
margins be credited against fuel and purchased power costs in the
FPPAC.  The FPPAC factor will be set annually beginning July 1, 2010.
A public hearing on the stipulation before the NMPRC concluded on April 9,
2009.  A decision of the NMPRC is pending.  PNM is unable to
predict the outcome of this matter.





Resource
Stipulation





In
anticipation of the 2008 Electric Rate Case, on September 10, 2008, a
stipulation (the “Resource Stipulation”) executed by PNM, the NMPRC staff, the
AG and the Coalition for Clean Affordable Energy, and later joined by the New
Mexico Industrial Energy Consumers Inc., was filed with the NMPRC. If approved
by the NMPRC, the Resource Stipulation would allow recovery in rates of costs
related to and resolve all issues in the proceedings regarding 1) the Valencia
PPA, 2) PNM’s proposed acquisition of an ownership interest in Unit 2 of PVNGS
currently being leased, 3) the application to own and operate Lordsburg and its
interest in Luna as jurisdictional assets. Hearings were held in January
2009and the Hearing
Examiner has recommended approval of the Resource Stipulation.  A
decision of the NMPRC is pending. The Company is unable to predict whether the
NMPRC will approve the Resource Stipulation or the ultimate outcome of these
proceedings.





NMPRC
      Inquiry on Fuel and Purchased Power Adjustment
  Clauses





In
October 2007, the NMPRC voted to open a notice of inquiry
that may eventually lead to establishing simple and consistent rules
for the implementation of FPPACs for all investor-owned utilities
and electric cooperatives in New Mexico.  The
investor-owned utilities and electric cooperatives were asked to
respond to a series of questions.  The NMPRC staff
was directed to make a filing dealing with the need for consistency of the
fuel clauses, streamlining, and whether a single methodology would be beneficial
and should be applied to all of the utilities.  PNM has filed its
comments. A workshop to discuss the comments filed by PNM and others is
scheduled for May 18, 2009.





NMPRC
Rulemaking on Disincentives to Energy Efficiency Programs





In
January 2008, the NMPRC issued a NOI to identify disincentives in utility
expenditures on energy efficiency and measures to mitigate those disincentives,
including specific ratemaking alternatives and appointed a Hearing Examiner to
conduct workshops as part of the process.  The NMPRC proposed
amendments to its energy efficiency rule that includes provisions addressing
incentives for disincentives to energy efficiency and load management.  PNM
filed comments and testimony addressing the proposed rule on April 13, 2009.
Response comments and rebuttal testimony are due May 11, 2009.





PNM
Electric Energy Efficiency and Load Management Programs





The NMPRC
requires public utilities to file annually a plan to implement energy efficiency
and load management programs. Costs to implement approved programs are recovered
through a rate rider. On September 15, 2008, PNM filed its annual plan which
included new programs, modifications to existing programs and a request to
recover program costs of about $10.5 million.  Various parties filed
testimony recommending revisions to PNM’s proposals and the calculation of
carrying costs.  A hearing was held on February 19,
2009.  Supplemental testimony filed on March 12, 2009 by PNM and other
parties proposed some revisions to the plan and sought NMPRC approval to recover
approximately $12.3 million in program costs.  The hearing examiner
has recommended approval of PNM’s plan.  A decision of the NMPRC is
pending.


56
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


Rates
for Former TNMP Customers in New Mexico





PNM
serves the former New Mexico customers of TNMP (“TNMP-NM”) under rates approved
by the NMPRC in its order approving PNMR’s acquisition of TNMP.  Under
that order, rates charged to customers were set through December 31,
2010.  In January 2009, the NMPRC directed PNM to estimate the revenue
requirement increase that would be reflected in a TNMP-NM rate application for
rates effective January 2011.  PNM estimated that the rate increase
could be between 40% and 56% depending on fuel costs. In April 2009, the NMPRC
directed PNM, the NMPRC staff, and other parties to attempt to reach consensus
on ways to mitigate the impact of this potential rate increase and appointed a
“mediator.”  The initial discussion session is scheduled for May 27,
2009.  No date was set for completion of this process.  PNM
cannot predict the ultimate outcome of this matter.





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.  TNMP and other parties have made a series of appeals
on the ruling and it is currently before the Texas Supreme Court. TNMP is unable
to predict if the Texas Supreme Court will review the decision or the ultimate
outcome of this matter.





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





The PUCT
approved an amendment to the true-up rule in 2006, which results in a lower
interest rate that TNMP is allowed to collect on the unsecuritized true-up
balance through a CTC. The PUCT concluded that the correct rate at which a
utility should accrue carrying costs through a CTC is the weighted average of an
adjusted form of its marginal cost of debt and its unadjusted historical cost of
debt, with the weighting based on the utility’s most recently authorized capital
structure.  The revised rate affects TNMP by lowering the
previously approved carrying cost rate of 10.93%.  After regulatory
proceedings, the PUCT issued an order approving the 8.31% rate proposed by TNMP
and the PUCT staff. Various municipal intervenors (“Cities”) appealed the PUCT’s
order to the District Court in Austin, Texas, with TNMP as an
intervenor.  The District Court affirmed the PUCT’s decision and the
Cities filed an appeal in the Texas 3rd Court
of Appeals.  Oral argument was held on February 26,
2009.  TNMP is unable to predict the ultimate outcome of this
matter.





Interest
Rate Compliance Tariff





Following
the revision of the interest rate on TNMP’s carrying charge, TNMP filed a
compliance tariff to implement the new 8.31% rate. TNMP’s filing proposed to put
the new rates into effect on February 1, 2008.  Intervenors asserted
objections to the compliance filing.  PUCT staff urged that the PUCT
make the new rate effective as of December 27, 2007 when the PUCT’s order
establishing the correct rate became final.  After regulatory
proceedings, the PUCT issued an order making the new rate retroactive to July
20, 2006.  TNMP filed an appeal of this order in the District Court in
Austin, Texas.  While there is inherent uncertainty in this type of
proceeding, TNMP believes it will ultimately be successful in overturning any
ruling that the effective date should be prior to December 27,
2007.





60-Day
Rate Review





In 2005,
TNMP made a required 60-day rate review filing.  TNMP’s case
establishes a CTC for recovery of the true-up balance.  As noted
above, TNMP’s 60-day rate review, along with First Choice’s price-to-beat rate
reset filing, were consolidated.  See “First Choice Price-To-Beat Base
Rate Reset” above for further updates.  In 2006, the PUCT issued a
signed order which would allow TNMP to begin collecting its true-up balance,
which includes


57
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


carrying
charges, over a 14-year period.  The order also allows TNMP to collect
expenses associated with several cases over a three-year period.  TNMP
began collecting its CTC and its rate case expenses on December 1,
2006.  In January 2007, this proceeding was appealed by various Texas
cities to the District Court, in Austin, Texas.  TNMP and First Choice
have intervened.TNMP
is unable to predict the ultimate outcome of this matter.





2008
Rate Case





On August
29, 2008, TNMP filed with the PUCT for an $8.7 million increase in
revenues.  If approved, new rates would go into effect in September
2009.  In its request, TNMP also asked for permission to implement a
catastrophe reserve fund similar to those approved for other transmission and
distribution companies in Texas. Catastrophe funds help pay for a utility
system’s recovery from natural disasters and acts of terrorism.  Once
the rate case is finalized by the PUCT, TNMP may update its transmission rates
annually to reflect changes in its invested capital.  Updated rates
would reflect the addition and retirement of transmission facilities, including
appropriate depreciation, federal income tax and other associated taxes, and the
approved rate of return on such facilities. On October 10, 2008, the PUCT issued
a preliminary order permitting TNMP to file supplemental testimony on costs
caused by Hurricane Ike. These costs may be included in rates or captured as a
regulatory asset for review and approval in a subsequent proceeding.





In
December 2008, the parties in the TNMP rate case requested that the case be
abated and the ALJ granted the request.  The abatement suspended
procedural deadlines until after the submittal of supplemental testimony by TNMP
relating to costs incurred during Hurricane Ike and anticipated financing
costs.  On March 31, 2009, TNMP filed it supplemental testimony, requesting
an additional revenue increase of $15.7 million annually. This amount includes a
five year amortization of Hurricane Ike restoration cost, recovery of increased
interest expense associated with the recent refinancing of TNMP’s debt, and
additional carrying charges on the CTC balance.  Following a
pre-hearing conference on April 30, 2009, the ALJ approved a procedural schedule
that sets hearing on the merits for June 16-26, 2009 and contemplates a final
order from the PUCT no later than October 9, 2009.  Discovery on TNMP’s
supplemental filing and the intervenors’ positions is ongoing.TNMP is
unable to predict the ultimate outcome of this matter.





Senate
Bill 769





On April 16, 2009, the Governor of Texas signed into law Senate Bill 769 (“SB
769”) concerning the recovery of hurricane costs by utilities.  SB 769
authorizes the PUCT, after a full review, to permit an electric utility to
obtain timely recovery of system restoration costs, and permits utilities to use
securitization financing for the recovery of such costs. The proposed costs can
be approved in any current or future proceeding.





(11)
            Optim
      Energy





Optim
Energy was created by PNMR and ECJV, a wholly owned subsidiary of Cascade, to
serve expanding U.S. markets, principally the areas of Texas covered by
ERCOT.  PNMR and ECJV each have a 50 percent ownership interest in
Optim Energy, a limited liability company.  See Note 22 of the Notes
to Consolidated Financial Statements in the 2008 Annual Reports on Form
10-K.  PNMR has no commitments or guarantees with respect to Optim
Energy.





Optim
Energy is jointly developing a 550 MW combined-cycle natural gas unit with NRG
Energy, Inc. at the existing NRG Cedar Bayou Generating Station near
Houston.  Optim Energy anticipates the construction of the project
will be completed in June 2009, at which time 275 MW of electricity will be
available for sale by Optim Energy.  Optim Energy has funded its
portion of the Cedar Bayou construction with borrowings under its existing
credit facility and operating cash flows.  At some future date and
depending on appropriate market conditions, Optim Energy may arrange long-term
financing of a mix of debt and equity.





58
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


Optim
Energy has a bank financing arrangement expiring in May 2012, 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 Optim Energy.  Cascade and ECJV have
guaranteed Optim Energy’s obligations on this facility and, to secure Optim
Energy’s obligation to reimburse Cascade and ECJV for any payments made under
the guaranty, have a first lien on all assets of Optim Energy and its
subsidiaries.





Summarized
financial information for Optim Energy is as follows:





Results
of Operations





Three
      Months Ended March 31,2009
            
            
            2008(In
      thousands)Operating revenues
            
            $
            78,398
            
            
            $
            87,768Cost of sales
            
            
            45,718
            
            
            
            110,860Gross margin
            
            
            32,680
            
            
            
            (23,092
            )Non-fuel operations and maintenance expenses
            
            
            5,981
            
            
            
            4,655Administrative and general expenses
            
            
            10,009
            
            
            
            6,102Depreciation and amortization expense
            
            
            7,659
            
            
            
            7,569Interest expense
            
            
            2,480
            
            
            
            6,568Taxes other than income tax
            
            
            3,329
            
            
            
            3,661Other (income) and deductions
            
            
            (56
            )
            
            
            (257
            )Earnings (loss) before income taxes
            
            
            3,278
            
            
            
            (51,390
            )Income taxes (benefit)(1)
            
            
            162
            
            
            
            (384
            )Net
      earnings (loss)
            
            $
            3,116
            
            
            $
            (51,006
            )50 percent of net earnings (loss)
            
            $
            1,558
            
            
            $
            (25,503
            )Plus amortization of basis difference in Optim Energy
            
            
            (163
            )
            
            
            420PNMR
      equity in net earnings (loss) of Optim Energy
            
            $
            1,395
            
            
            $
            (25,083
            )





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





Financial
Position





March
      31,
            
            
            December
      31,2009
            
            
            2008(In
      thousands)Current
      assets
            
            $
            193,920
            
            
            $
            151,677Net
      property plant and equipment
            
            
            955,012
            
            
            
            946,420Deferred
      assets
            
            
            224,729
            
            
            
            224,776Total assets
            
            
            1,373,661
            
            
            
            1,322,873Current
      liabilities
            
            
            111,629
            
            
            
            104,826Long-term
      debt
            
            
            745,778
            
            
            
            730,778Other
      long-term liabilities
            
            
            8,156
            
            
            
            7,763Total liabilities
            
            
            865,563
            
            
            
            843,367Owners’
      equity
            
            $
            508,098
            
            
            $
            479,50650 percent of owners’ equity
            
            $
            254,049
            
            
            
            239,753Unamortized PNMR basis difference in Optim Energy
            
            
            230
            
            
            
            197PNMR equity investment in Optim Energy
            
            $
            254,279
            
            
            $
            239,950





59
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


Optim
Energy has a hedging program that covers a multi-year period.  The
level of hedging at any given time varies depending on current market conditions
and other factors.  Economic hedges that do not qualify for or are not
designated as cash flow hedges or normal purchases/sales under SFAS 133 are
derivative instruments that are required to be marked to market.  Due
to the extreme ERCOT market volatility experienced in the first quarter of 2008,
Optim Energy made the decision to exit its speculative trading business and
close out its speculative trading positions.  Optim Energy incurred
settled and forward speculative losses of $2.4 million in the first quarter of
2008.  The market volatility contributed to Optim Energy recording
forward mark-to-market losses of $47.1 million on its economic hedges in the
first quarter of 2008.  In the first quarter of 2009, Optim Energy
recorded income of $9.4 million on the mark-to-market of economic
hedges.





SFAS 141
requires that Optim Energy individually value each asset and liability received
in the Altura (Twin Oaks) and Altura Cogen transactions and initially record
them on its balance sheet at the determined fair value.  For both
transactions, this accounting results in a significant amount of amortization
since the acquired contracts’ terms differed significantly from fair value at
the date of acquisition and emission allowances, while acquired from government
programs without future cost to Optim Energy, have significant market
value.  During the three months ended March 31, 2009 and 2008, Optim
Energy recorded amortization of contracts acquired of $3.1 million, which
reduced operating revenues, and $1.3 million, which increased operating
revenues, and amortization expense on emission allowances of $1.3 million and
$4.1 million, which is recorded in cost of sales.





The
contribution of Altura created a basis difference between PNMR’s recorded
investment in Optim Energy and 50 percent of Optim Energy’s
equity.  While the portion of the basis difference related to contract
amortization will only continue through 2010, other basis differences, including
a difference related to emission allowances, will continue to exist through the
life of the Altura plant.  For the three months ended March 31, 2009
and 2008, the basis difference adjustment detailed above relates mainly to
contract amortization with insignificant offsets related to the other minor
basis difference components.





On
January 6, 2009, LCC filed for bankruptcy protection under Chapter 11 of the
U.S. Bankruptcy Code.  LCC is Optim Energy’s counterparty in several
agreementsfor power
and steam sales.  In addition, LCC leases Optim Energy the land
for the Altura Cogen facility and provides other services, including water, to
that facility.  The pre-petition net
amount due from LCC as of March 31, 2009 is immaterial to Optim Energy’s results
and has been fully reserved.  LCC has continued to perform under the
existing contracts since its bankruptcyfiling.





(12)
            Related
      Party Transactions





PNMR,
PNM, TNMP, and Optim Energy are considered related parties as defined in
SFAS 57.  PNMR Services Company provides corporate services to
PNMR, its subsidiaries, and Optim Energy.  Additional information
concerning the Company’s related party transactions is contained in Note 20 of
the Notes to Consolidated Financial Statements in the 2008 Annual Reports on
Form 10-K.





See Note
11 for information concerning Optim Energy.  The table below
summarizes the nature and amount of other related party transactions of PNMR,
PNM and TNMP:





60
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)





Three
      Months EndedMarch
      31,2009
            
            
            2008(In
      thousands)Electricity,
      transmission and related services billings:TNMP
      to PNMR
            
            $
            9,303
            
            
            $
            14,410Services
      billings:PNMR
      to PNM*
            
            
            17,028
            
            
            
            21,428PNMR
      to TNMP
            
            
            5,284
            
            
            
            4,559PNM
      to TNMP
            
            
            133
            
            
            
            -PNMR
      to Optim Energy
            
            
            1,415
            
            
            
            2,424Optim
      Energy to PNMR
            
            
            128
            
            
            
            -Income
      tax sharing payments from:PNMR
      to PNM
            
            
            -
            
            
            
            1,855PNMR
      to TNMP
            
            
            -
            
            
            
            858Interest
      payments:TNMP
      to PNMR
            
            
            430
            
            
            
            89





* PNM
shared services include billings to PNM Gas of $0.9 million and $5.5 million for
the three months ended March 31, 2009 and 2008.





(13)
            New
      Accounting Pronouncements





Note 21
of Notes to Consolidated Financial Statements in the 2008 Annual Reports on Form
10-K contains information regarding recently issued accounting pronouncements
that could have a material impact on the Company.  See Note 4
regarding the implementation of SFAS 161.





FSP FAS
157-2 delayed the effective date of SFAS 157 for nonfinancial assets and
liabilities, until January 1, 2009, at which time it was adopted by the
Company.  This FSP did not have a significant impact on the Company’s
March 31, 2009 financial statements.  The Company will apply this FSP
to the fair value determinations made by the Company in evaluating intangible
assets for potential impairment, which will be performed during the second
quarter of 2009; however, the Company does not anticipate it will have a
significant impact.





In April
2009, the FASB issued the following FSPs, which are effective for interim and
annual reporting periods ending after June 15, 2009.  Early adoption
is permitted for periods ending after March 15, 2009 provided that all three
FSPs are adopted.  The Company has not early adopted these
FSPs.  The Company is currently reviewing the requirements of these
FSPs and will implement them and the required disclosures for the period ended
June 30, 2009.  The Company does not anticipate these FSPs will have a
significant impact.





FSP
FAS 157-4 – Determining the Fair Value When the Volume and Level Activity for
the Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly





FSP FAS
157-4 amends SFAS 157 by providing additional guidance on determining fair value
when the volume and level of activity for an asset or liability have
significantly decreased when compared to normal market activity for the asset or
liability, as well as providing additional guidance for determining fair values
in inactive markets.


61
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


FSP
FAS 107-1 and APB 28-1 – Interim Disclosures about Fair Value of Financial
Instruments





FSP FAS
107-1 and APB 28-1 requires disclosures about fair value of financial
instruments, currently required in annual financial statements,  to be
included for interim reporting periods of publicly traded
companies.





FSP
FAS 115-2 and FAS 124-2 – Recognition and Presentation of Other-Than-Temporary
Impairments





FSP FAS
115-2 and FAS 124-2 amends the other-than-temporary impairment guidance for debt
securities to make the guidance more operational and to improve the presentation
and disclosure of other-than-temporary impairments on debt and equity securities
in interim and annual financial statements.





(14)
            Discontinued
      Operations





As
discussed in Note 2, PNM sold its gas operations, which comprised the PNM Gas
segment.  Under GAAP, the assets and liabilities of PNM Gas were
considered to be held-for-sale at December 31, 2008 and presented as
discontinued operations on the accompanying balance sheets.  The PNM
Gas results of operations are excluded from continuing operations and presented
as discontinued operations on the statements of earnings.  In
accordance with SFAS 144, no depreciation is recorded on assets held for sale in
2008.  Summarized financial information for PNM Gas is as
follows:





Results
of Operations





Three
      Months Ended
              March
      31,2009
            
            
            2008(In
      thousands)Operating
      revenues
            
            $
            65,696
            
            
            $
            220,455Cost
      of energy
            
            
            44,698
            
            
            
            160,828Gross
      margin
            
            
            20,998
            
            
            
            59,627Operating
      expenses
            
            
            5,817
            
            
            
            21,443Depreciation
      and amortization
            
            
            -
            
            
            
            -Operating
      income
            
            
            15,181
            
            
            
            38,184Other
      income (deductions)
            
            
            292
            
            
            
            941Net
      interest charges
            
            
            (962
            )
            
            
            (2,971
            )Gain
      on disposal
            
            
            111,006
            
            
            
            -Segment
      earnings before income taxes
            
            
            125,517
            
            
            
            36,154Income
      taxes
            
            
            43,842
            
            
            
            13,655Segment
      earnings
            
            $
            81,675
            
            
            $
            22,499








(15)
            Business
      Improvement Plan




As
discussed in Note 24 of the Notes to Consolidated Financial Statements in the
2008 Annual Reports on Form 10-K, the Company began a business improvement
process that included a comprehensive cost structure analysis of its operations
and a benchmarking analysis to similar-sized utilities.  During 2007
and 2008, the Company implemented a series of initiatives designed to manage
future operational costs, maintain financial strength and strengthen its
regulated utilities.   The multi-phase process includes a
business improvement plan to streamline internal processes and reduce the
Company’s work force.  The utility-related process enhancements are
designed to improve and centralize business functions.


62
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


The
Company has existing plans providing severance benefits to employees who are
involuntarily terminated due to elimination of their positions.  Under
SFAS 112, the severance benefits payable under the Company’s existing plans
should be recorded when it is probable that a liability has been incurred and
the amount can be reasonably estimated.  No significant costs were
incurred during the three months ended March 31, 2009.  During the
three months ended March 31, 2008, the Company recorded pre-tax severance
benefits payable of $0.3 million and other costs, primarily consulting fees,
related to the business improvement plan of $1.9
million.  Substantially all of these costs were recorded by
PNMR.  As additional phases of the business improvement plan are
developed, the associated costs will be analyzed and recorded.





(16)
            Variable
      Interest Entities





Information
regarding the Company’s assessment of potential variable interest entities is
contained in Note 9 of Notes to the Consolidated Financial Statements in the
2008 Annual Reports on Form 10-K.





On April
18, 2007, PNM entered into a PPA to purchase all of the electric capacity and
energy from Valencia, a natural gas-fired power plant near Belen, New
Mexico.  Valencia became operational on May 30, 2008.  A
third-party built, owns and operates the facility while PNM is the sole
purchaser of the electricity generated. The total construction cost for the
facility was $90.0 million. The term of the PPA is for 20 years beginning June
1, 2008, with the full output of the plant estimated to be 148
MW.  During the term of the PPA, PNM has the option to purchase and
own up to 50% of the plant or the variable interest entity. PNM estimates that
the plant will typically operate during peak periods of energy demand in summer
(less than 18% of the time on an annual basis).  PNM is obligated to
pay fixed O&M and capacity charges in addition to variable O&M charges
under this PPA.  For the three months ended March 31, 2009, PNM paid
$3.3 million for fixed charges and $0.8 million for variable
charges.  PNM does not have any other financial obligations related to
Valencia and creditors of Valencia do not have any recourse against PNM’s
assets.





PNM has
evaluated the accounting treatment of this arrangement and concluded that the
third party entity that owns Valencia is a variable interest entity and that PNM
is the primary beneficiary of the entity under FIN 46R since PNM will absorb the
majority of the variability in the cash flows of the plant.  As the
primary beneficiary, PNM has consolidated the entity in its financial statements
beginning on the commercial operations date.  Accordingly, the assets,
liabilities, operating expenses, and cash flows of Valencia are included in the
consolidated financial statements of PNM although PNM has no legal ownership
interest or voting control of the variable interest entity.  The
owner’s equity and net income of Valencia are considered attributable to
non-controlling interest.  PNM did not consolidate the variable
interest entity prior to May 30, 2008 since PNM had no financial
risk.





The
Company adopted SFAS 160 beginning January 1, 2009.  SFAS 160 changes
the way companies measure and present an acquisition of a non-controlling
(minority) interest and changes in a controlling interest.  On the
balance sheet, SFAS 160 results in minority interests being reflected in
stockholders’ equity rather than as liabilities.  On the income
statement, earnings attributable to minority interests are removed from net
earnings to arrive at earnings attributable to the controlling
interest.  PNM and PNMR have reclassified prior periods to be
consistent with this presentation.





63
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


Summarized
financial information for Valencia is as follows:





Results
of Operations





Three
      Months EndedMarch
      31, 2009(In
      thousands)Operating
      revenues
            
            $
            4,058Operating
      expenses
            
            
            (1,479
            )Earnings
      attributable to non-controlling interest
            
            $
            2,579





Financial
Position





March
      31,
            
            
            December
      31,2009
            
            
            2008(In
      thousands)Current
      assets
            
            $
            5,905
            
            
            $
            9,925Net
      property, plant and equipment
            
            
            88,472
            
            
            
            89,011Total
      assets
            
            
            94,377
            
            
            
            98,936Current
      liabilities
            
            
            690
            
            
            
            430Owners’
      equity – non-controlling interest
            
            $
            93,687
            
            
            $
            98,506





Changes
in Owners Equity – Non-controlling Interest





Three
      Months EndedMarch
      31, 2009(In
      thousands)Balance
      at beginning of period
            
            $
            98,506Earnings
      attributable to non-controlling interest
            
            
            2,579Net
      equity transactions with Valencia’s owner
            
            
            (7,398
            )Balance
      at end of period
            
            $
            93,687














64


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





The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations for PNMR is presented on a combined basis, including
certain information applicable to PNM and TNMP.  The MD&A for PNM
and TNMP is presented as permitted by Form 10-Q General Instruction H
(2).  For discussion purposes, this report will use the term “Company”
when discussing matters of common applicability to PNMR, PNM and
TNMP.  A reference to a “Note” in this Item 2 refers to the
accompanying Notes to Condensed Consolidated Financial Statements (Unaudited)
included in Item 1, unless otherwise specified.  Certain of the tables
below may not appear visually accurate due to rounding.





MD&A
FOR PNMR





BUSINESS
AND STRATEGY





Overview





The
overall strategy of PNMR is to “Build America’s Best Merchant Utility” through
concentrated effort on its core regulated and unregulated electric
businesses.  PNM sold its gas operations on January 30, 2009 and is
now positioned to focus on its regulated electric business.  The
growth of the unregulated electric business is expected through the further
development of Optim Energy and from First Choice.





The focus
on the electric businesses also includes environmental sustainability
efforts.  These efforts are comprised of various components including
environmental upgrades, energy efficiency, solar generating site and technology
feasibility, expansion of the renewable energy portfolio of generation
resources, and climate change.





Another
initiative of PNMR is the separation of its merchant operations from PNM
Electric, which will be accomplished in several steps.  In June 2008,
PNMR completed the sale of certain wholesale power, natural gas and transmission
contracts as an initial step in separating its merchant plant activities from
PNM.  In addition, Luna and Lordsburg are required to be separated by
January 1, 2010 under an existing NMPRC regulatory order.  PNM is
proposing to the NMPRC that these units be included in retail rates beginning
with PNM’s 2008 Electric Rate Case.  See Note 10. PVNGS Unit 3, which
is not subject to the separation order, can remain in PNM.  PNM has
entered into contracts for the sale of
capacity and energy from its entire ownership interest in PVNGS Unit 3 through
December 31, 2010.





Critical
to PNMR’s success for the foreseeable future is the financial health of PNM,
PNMR’s largest subsidiary.  As discussed in Note 10, on September 22,
2008, PNM filed its 2008 Electric Rate Case requesting the NMPRC to approve
an increase in electric service rates to all PNM retail customers except those
formerly served by TNMP. The proposed rates are designed to increase annual
operating revenue by $123.3 million. PNM has also proposed a more customary
FPPAC.  Stipulations have been executed with the NMPRC staff and other
intervening parties that would resolve all issues in the rate case, including
the inclusion of additional sources of power in determining
rates.  The stipulation, if approved by the NMPRC, would allow for an
increase in annual non-fuel revenues of $77.3 million, 65% of which would be
implemented July 1, 2009 with the remainder implemented March 31,
2010.  Hearings before the NMPRC have been held and a decision is
pending.  PNM is unable to predict the final outcome of this
matter.





On April
6, 2009, the Governor of New Mexico signed Senate Bill 477 into law, which will
become effective June 19, 2009.  SB 477 is designed to promote more
timely recovery of reasonable costs of providing utility service in two
ways.  First, SB 477 requires the NMPRC, when setting rates, to use
the test period that best reflects the conditions the utility will experience
when new rates are anticipated to go into effect.  The NMPRC is
required to give due consideration that a future test period may be the one that
best meets this test.  A future test period is defined as one that
begins no later than the time new rates are to go into
effect.  Traditionally, the NMPRC has used an historical test period,
adjusted for known and measurable changes occurring within five months after the
end of the test period, which reflects costs that could be up to two years old
at the time new rates become effective.  Second, SB 477 requires the
NMPRC to include construction work in progress in rate base, without an offset
for allowance for funds used during construction, for environmental improvement
projects and generation and transmission projects for which a certificate of
public convenience and necessity has been issued.   This
provision will allow utilities to collect costs as projects are being built
rather than waiting until they are finished to include




65


them in
rate base, so long as the projects will be used and useful no later than two
years after the rate case seeking inclusion is filed.





On August
29, 2008, TNMP filed with the PUCT for an $8.7 million increase in
revenues.  In its request, TNMP also asked for permission to implement
a catastrophe reserve fund similar to those approved for other transmission and
distribution companies in Texas. Catastrophe funds help pay for a utility
system’s recovery from natural disasters and acts of terrorism.  Once
the rate case is finalized by the PUCT, TNMP may update its transmission rates
annually to reflect changes in its invested capital.  The PUCT issued
a preliminary order permitting TNMP to file supplemental testimony on costs
caused by Hurricane Ike and costs related to financing completed in March 2009.
The supplemental testimony was filed on March 31, 2009, which requested an
additional revenue increase of $15.7 million.  A hearing on the rate case
is scheduled for June 2009.  TNMP is unable to predict the outcome of
this matter.





As a REP,
First Choice operates in the highly competitive Texas retail
market.  During 2008, the Texas market experienced extreme price
volatility and transmission congestion.  This caused First Choice to
incur losses in its speculative trading portfolio and led to termination of
speculative activities.  These anomalies also negatively impacted the
margins realized from end use customers.  These conditions were
exacerbated by the impacts of Hurricane Ike and depressed economic conditions
resulting in very high levels of customer turnover and levels of uncollectible
accounts significantly higher than historical experience.





The
recent and unprecedented disruption in the credit markets has had a significant
adverse impact on numerous financial institutions, including several of the
financial institutions that the Company deals with. However, at this point in
time, the Company’s existing liquidity instruments have not been materially
impacted by the credit environment and management does not expect that it will
be materially impacted in the near future. The Company is closely monitoring its
liquidity and the credit markets.  In addition, there has been a
significant decline in the level of prices of marketable equity securities,
including those held in trusts maintained for future payments of benefits under
pension and retiree medical plans.  The stock market decline will
likely result in increased levels of funding and expense applicable to these
trusts.





In the
last half of 2008 and early 2009, global economic conditions deteriorated
dramatically, encompassing the U.S. residential housing market, and global and
domestic equity and credit markets.  The tightening of the credit
markets coupled with extreme volatility in commodity markets has had a direct,
negative impact on several of First Choice’s competitors in the ERCOT retail
market.





Optim
Energy





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 Optim
Energy.  Optim Energy’s anticipated business lines will consist
of:





·
            Development, operation and ownership of diverse generation
      assets


·
            Wholesale marketing to optimize its
assets





66


RESULTS
OF OPERATIONS





Executive
Summary





A summary
of net earnings (loss) attributable to PNMR is as follows:





Three
      Months Ended March 31,2009
            
            
            2008
            
            
            Change(In
      millions, except per share amounts)Earnings
      (loss) from continuing operations
            
            $
            13.7
            
            
            $
            (71.1
            )
            
            $
            84.8Earnings from discontinued operations, net of income taxes
            
            
            81.7
            
            
            
            22.5
            
            
            
            59.2Net
      earnings (loss)
            
            $
            95.4
            
            
            
            (48.6
            )
            
            $
            144.0Average common and common equivalent shares outstanding
            
            
            91.4
            
            
            
            76.9
            
            
            
            14.5Earnings (loss) from continuing operations per diluted
    share
            
            $
            0.15
            
            
            $
            (0.93
            )
            
            $
            1.08Net
      earnings (loss) per diluted share
            
            $
            1.04
            
            
            $
            (0.63
            )
            
            $
            1.67





The
components of the change in earnings (loss) from continuing operations
attributable to PNMR (in millions) are:





PNM Electric
            
            $
            22.0TNMP Electric
            
            
            (2.3
            )First Choice
            
            
            31.1Corporate and Other
            
            
            18.0Optim Energy
            
            
            16.0Net
      change
            
            $
            84.8





Detailed
information regarding the changes in earnings (loss) from continuing and
discontinued operations are included in the segment information below. The
increase in the number of common and common equivalent shares is primarily due
to PNMR’s convertible preferred stock.  See Note 5 of Notes to
Consolidated Financial Statements in the 2008 Annual Reports on Form
10-K.





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.  See Note 3 for more information on PNMR’s
operating segments.





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 Item 2 and to Part II, Item 1A. Risk Factors.





67


PNM
Electric





The table
below summarizes operating results for PNM Electric:





Three
      Months Ended March 31,2009
            
            
            2008
            
            
            Change(In
      millions)Total
      revenues
            
            $
            232.0
            
            
            $
            252.7
            
            
            $
            (20.7
            )Cost
      of energy
            
            
            101.5
            
            
            
            135.7
            
            
            
            (34.2
            )Gross
      margin
            
            
            130.4
            
            
            
            117.0
            
            
            
            13.5Other
      operating expenses
            
            
            97.5
            
            
            
            126.6
            
            
            
            (29.1
            )Depreciation
      and amortization
            
            
            22.4
            
            
            
            21.0
            
            
            
            1.4Operating
      income (loss)
            
            
            10.5
            
            
            
            (30.6
            )
            
            
            41.1Other
      income (deductions)
            
            
            1.0
            
            
            
            0.6
            
            
            
            0.4Net
      interest charges
            
            
            (17.2
            )
            
            
            (14.1
            )
            
            
            (3.1
            )Earnings
      (loss) before income taxes
            
            
            (5.7
            )
            
            
            (44.1
            )
            
            
            38.4Income
      (taxes) benefit
            
            
            3.3
            
            
            
            17.1
            
            
            
            (13.8
            )Preferred
      stock dividend requirements
            
            
            (0.1
            )
            
            
            (0.1
            )
            
            
            -Valencia
      non-controlling interest
            
            
            (2.6
            )
            
            
            -
            
            
            
            (2.6
            )Segment earnings (loss)
            
            $
            (5.1
            )
            
            $
            (27.1
            )
            
            $
            22.0





The table
below summarizes the significant changes to total revenues, cost of energy, and
gross margin:





2009/2008
      ChangeTotal
            
            
            Cost
      of
            
            
            GrossRevenues
            
            
            Energy
            
            
            MarginRegulated
      fuel costs and rate recovery
            
            $
            (0.2
            )
            
            $
            (26.9
            )
            
            $
            26.7Unregulated
      margins
            
            
            (53.4
            )
            
            
            (52.8
            )
            
            
            (0.6
            )Net
      unrealized economic hedges
            
            
            32.9
            
            
            
            49.6
            
            
            
            (16.7
            )Consolidation
      of Valencia PPA
            
            
            -
            
            
            
            (4.1
            )
            
            
            4.1Total
      increase (decrease)
            
            $
            (20.7
            )
            
            $
            (34.2
            )
            
            $
            13.5





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





Three
      Months Ended March 31,2009
            
            
            2008
            
            
            Change(In
      millions, except customers)Residential
            
            $
            73.7
            
            
            $
            71.2
            
            
            $
            2.5Commercial
            
            
            69.9
            
            
            
            67.5
            
            
            
            2.4Industrial
            
            
            19.0
            
            
            
            25.8
            
            
            
            (6.8
            )Public
      authority
            
            
            4.4
            
            
            
            3.5
            
            
            
            0.9Other
      retail
            
            
            3.0
            
            
            
            2.8
            
            
            
            0.2Transmission
            
            
            7.7
            
            
            
            6.5
            
            
            
            1.2Firm
      requirements wholesale
            
            
            7.6
            
            
            
            12.3
            
            
            
            (4.7
            )Other
      sales for resale
            
            
            43.5
            
            
            
            93.6
            
            
            
            (50.1
            )Mark-to-market
      activity
            
            
            3.2
            
            
            
            (30.5
            )
            
            
            33.7$
            232.0
            
            
            $
            252.7
            
            
            $
            (20.7
            )Average
      retail customers (thousands)
            
            
            498.0
            
            
            
            494.1
            
            
            
            3.9





68


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





Three
      Months Ended March 31,2009
            
            
            2008
            
            
            Change(Gigawatt
      hours)Residential
            
            
            795.7
            
            
            
            857.7
            
            
            
            (62.0
            )Commercial
            
            
            855.5
            
            
            
            910.3
            
            
            
            (54.8
            )Industrial
            
            
            355.2
            
            
            
            441.8
            
            
            
            (86.6
            )Public
      authority
            
            
            58.8
            
            
            
            59.6
            
            
            
            (0.8
            )Other
      retail
            
            
            -
            
            
            
            -
            
            
            
            -Transmission
            
            
            -
            
            
            
            -
            
            
            
            -Firm
      requirements wholesale
            
            
            183.6
            
            
            
            295.0
            
            
            
            (111.4
            )Other
      sales for resale
            
            
            1,060.1
            
            
            
            1,438.5
            
            
            
            (378.4
            )Mark-to-market
      activity
            
            
            -
            
            
            
            -
            
            
            
            -3,308.9
            
            
            
            4,002.9
            
            
            
            (694.0
            )





In 2009,
PNM electric’s regulated revenues increased associated with the base rate
increase and implementation of a FPPAC during second quarter
2008.  However, these increases in revenues were more than offset by
decreased residential and commercial loads driven by lower per-customer usage
and warmer temperatures and reduced operations of a major industrial
customer.





Increased
availability of base-load power plants in 2009 contributed to lower costs to
serve regulated customers.  The weighted-average equivalent
availability factor at these plants was 81.2% in the first quarter of 2009,
compared to 66.7% in the same period last year.   The increase in
lower-cost generation associated with lower retail loads to serve resulted in
significant savings to cost of energy and margins.





Unregulated
revenues and cost of energy related to unregulated margins decreased due to the
sale of the merchant portfolio in June 2008.  Unregulated revenues and
margins increased due to more favorable pricing terms under the forward sales
agreement at PVNGS, but were more than offset by decreased revenues and margins
due to lower market prices achieved from sales from unregulated assets and costs
incurred under the Valencia PPA.





Changes
in net unrealized gains and losses on economic hedges were driven by decreasing
gas and electric prices in the first quarter of 2009 on open positions,
coupled with unrealized gains recorded in the same period last year on
merchant contracts that were sold in the second quarter of 2008.





PNM
Electric currently analyzes results associated with the Valencia PPA, which is
not subject to regulation by the NMPRC, as costs of energy. See Note 10 for
discussion of the proposed inclusion of Valencia PPA in regulation. Cost of
energy is reduced due to the Valencia PPA being consolidated under FIN
46R.  See Note 16.  Consolidation results in amounts being
reflected as operating expenses and non-controlling interest that otherwise
would have been included in cost of energy if Valencia was not
consolidated.





Operating
expenses decreased due to regulatory disallowances recorded in 2008 from the
NMPRC’s rate order dated April 24, 2008, which included write-offs of $10.6
million for deferred costs of RECs and $19.6 million for coal mine
decommissioning costs.  See Note 10 for discussion of appeal of these
matters to the New Mexico Supreme Court.  Administrative and general
expenses have increased due to medical and pension expenses, which are offset by
lower energy production costs related to timing of a major outage in the first
quarter of 2008 at PVNGS.





In 2009,
depreciation expense increased primarily due to the completion of the
environmental upgrades on Units 1 and 3 at SJGS.  The environmental
upgrade of SJGS Unit 2 was completed as of March 31, 2009.  This
completes the environmental upgrades on all four units at SJGS.





Interest
charges increased in 2009 related to higher borrowings at higher long-term
interest rates.





69


TNMP
Electric





The table
below summarizes the operating results for TNMP Electric:





Three
      Months Ended March 31,2009
            
            
            2008
            
            
            ChangeTotal
      revenues
            
            $
            41.2
            
            
            $
            42.2
            
            
            $
            (1.0
            )Cost
      of energy
            
            
            8.6
            
            
            
            7.8
            
            
            
            0.8Gross margin
            
            
            32.6
            
            
            
            34.4
            
            
            
            (1.8
            )Other
      operating expenses
            
            
            17.9
            
            
            
            15.5
            
            
            
            2.4Depreciation
      and amortization
            
            
            8.6
            
            
            
            8.4
            
            
            
            0.2Operating income
            
            
            6.1
            
            
            
            10.6
            
            
            
            (4.5
            )Other
      income (deductions)
            
            
            0.4
            
            
            
            0.4
            
            
            
            -Net
      interest charges
            
            
            (4.1
            )
            
            
            (5.0
            )
            
            
            0.9Earnings before income taxes
            
            
            2.4
            
            
            
            6.0
            
            
            
            (3.6
            )Income
      (taxes)
            
            
            (1.0
            )
            
            
            (2.3
            )
            
            
            1.3Segment earnings
            
            $
            1.4
            
            
            $
            3.7
            
            
            $
            (2.3
            )





The table
below summarizes the significant changes to total revenues, cost of energy, and
gross margin:





2009/2008
      ChangeTotal
            
            
            Cost
      of
            
            
            GrossRevenues
            
            
            Energy
            
            
            MarginCustomer usage/load
            
            $
            (1.7
            )
            
            $
            -
            
            
            $
            (1.7
            )Other
            
            
            0.7
            
            
            
            0.8
            
            
            
            (0.1
            )Total
      increase (decrease)
            
            $
            (1.0
            )
            
            $
            0.8
            
            
            $
            (1.8
            )





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





Three
      Months Ended March 31,2009
            
            
            2008
            
            
            Change(In
      millions, except customers)Residential
            
            $
            14.4
            
            
            $
            15.3
            
            
            $
            (0.9
            )Commercial
            
            
            16.0
            
            
            
            16.6
            
            
            
            (0.6
            )Industrial
            
            
            3.0
            
            
            
            3.2
            
            
            
            (0.2
            )Other
            
            
            7.8
            
            
            
            7.1
            
            
            
            0.7$
            41.2
            
            
            $
            42.2
            
            
            $
            (1.0
            )Average
      customers (thousands) (1)
            
            
            230.1
            
            
            
            227.4
            
            
            
            2.7





(1)
            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 90,398 and 124,349 customers of TNMP
      Electric for the three months ended March 31, 2009 and 2008, who have
      chosen First Choice as their REP.  These customers are also
      included in the First Choice
segment.





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





Three
      Months Ended March 31,2009
            
            
            2008
            
            
            Change(Gigawatt
      hours(1))Residential
            
            
            509.8
            
            
            
            538.5
            
            
            
            (28.7
            )Commercial
            
            
            460.3
            
            
            
            473.7
            
            
            
            (13.4
            )Industrial
            
            
            424.1
            
            
            
            543.1
            
            
            
            (119.0
            )Other
            
            
            25.8
            
            
            
            26.5
            
            
            
            (0.7
            )1,420.0
            
            
            
            1,581.8
            
            
            
            (161.8
            )





70


(1)
            The
      GWh sales reported above include 248.3 and 395.0 GWhs for the three months
      ended March 31, 2009 and 2008 used by customers of TNMP Electric, who have
      chosen First Choice as their REP.  These GWhs are also included
      below in the First Choice segment.





Decreases
in retail sales and margin were driven by lower consumption per customer and
milder weather.   Other changes to revenues, cost of energy and
gross margin relate to transmission prices charges to and from other
transmission and distribution providers.





Operating
expenses increased in 2009 related to higher pension and medical expenses and
escalation of labor and administrative costs.





Repayment
of long-term debt outstanding in second quarter 2008 with short-term borrowings
at lower interest costs resulted in savings in interest charges.  As
described in Note 7, TNMP issued $315.5 million aggregate principal amount of
long-term debt that bears interest at rates above the short-term debt rates
during the three months ended March 31, 2009, which will result in increased
interest expense in future periods.





PNM
Gas





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





Three
      Months Ended March 31,2009
            
            
            2008
            
            
            Change(In
      millions)Total
      revenues
            
            $
            65.7
            
            
            $
            220.5
            
            
            $
            (154.8
            )Cost
      of energy
            
            
            44.7
            
            
            
            160.8
            
            
            
            (116.1
            )Gross margin
            
            
            21.0
            
            
            
            59.6
            
            
            
            (38.6
            )Other
      operating expenses
            
            
            5.8
            
            
            
            21.4
            
            
            
            (15.6
            )Depreciation
      and amortization
            
            
            -
            
            
            
            -
            
            
            
            -Operating income
            
            
            15.2
            
            
            
            38.2
            
            
            
            (23.0
            )Other
      income (deductions)
            
            
            0.3
            
            
            
            0.9
            
            
            
            (0.6
            )Net
      interest charges
            
            
            (1.0
            )
            
            
            (3.0
            )
            
            
            2.0Gain
      on disposal
            
            
            111.0
            
            
            
            -
            
            
            
            111.0Earnings before income taxes
            
            
            125.5
            
            
            
            36.2
            
            
            
            89.3Income
      (taxes)
            
            
            (43.8
            )
            
            
            (13.7
            )
            
            
            (30.1
            )Segment earnings (loss)
            
            $
            81.7
            
            
            $
            22.5
            
            
            $
            59.2





PNM
completed the sale of the PNM Gas business on January 30, 2009.  The
Company is reporting this segment as discontinued operations as required under
GAAP.  PNM Gas purchased natural gas in the open market and sold it at
no profit to its sales-service customers. As a result, increases or decreases in
gas revenues driven by gas costs did not impact the gross margin or operating
income of PNM Gas. Increases or decreases to gross margin caused by changes in
sales-service volumes represented margin earned on the delivery of gas to
customers based on regulated rates.





As a result of the sale, the above
table reflects operations from the PNM Gas business from January 1 through
January 30, 2009, compared to a full quarter of operations in
2008.  Milder weather combined with lower usage-per customer reduced
overall sales volumes in 2009 when compared to the same period in the prior
year.  A pre-tax gain of $111.0 million was recognized on the sale of
the PNM Gas business.





71


First
Choice





The table
below summarizes the operating results for First Choice:





Three
      Months Ended March 31,2009
            
            
            2008
            
            
            Change(In
      millions)Total
      revenues
            
            $
            122.2
            
            
            $
            84.2
            
            
            $
            38.0Cost
      of energy
            
            
            80.4
            
            
            
            105.3
            
            
            
            (24.9
            )Gross margin
            
            
            41.8
            
            
            
            (21.1
            )
            
            
            62.9Other
      operating expenses
            
            
            29.3
            
            
            
            15.5
            
            
            
            13.8Depreciation
      and amortization
            
            
            0.5
            
            
            
            0.5
            
            
            
            -Operating income (loss)
            
            
            11.9
            
            
            
            (37.0
            )
            
            
            48.9Other income (deductions)
            
            
            -
            
            
            
            0.4
            
            
            
            (0.4
            )Net
      interest charges
            
            
            (1.0
            )
            
            
            (0.3
            )
            
            
            (0.7
            )Earnings (loss) before income taxes
            
            
            10.9
            
            
            
            (36.9
            )
            
            
            47.8Income
      (taxes) benefit
            
            
            (3.9
            )
            
            
            12.8
            
            
            
            (16.7
            )Segment earnings (loss)
            
            $
            7.0
            
            
            $
            (24.1
            )
            
            $
            31.1





The
following table summarizes the significant changes to total revenues, cost of
energy, and gross margin:





2009/2008
      ChangeTotal
            
            
            Cost
      of
            
            
            GrossRevenues
            
            
            Energy
            
            
            MarginWeather
            
            $
            (0.6
            )
            
            $
            (0.5
            )
            
            $
            (0.1
            )Customer growth/usage
            
            
            (19.7
            )
            
            
            (11.9
            )
            
            
            (7.8
            )Retail margins
            
            
            11.3
            
            
            
            (18.3
            )
            
            
            29.6Trading margins
            
            
            47.0
            
            
            
            -
            
            
            
            47.0Unrealized economic hedges
            
            
            -
            
            
            
            5.8
            
            
            
            (5.8
            )Total
      increase (decrease)
            
            $
            38.0
            
            
            $
            (24.9
            )
            
            $
            62.9





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





Three
      Months Ended March 31,2009
            
            
            2008
            
            
            Change(In
      millions, except customers)Residential
            
            $
            76.0
            
            
            $
            76.7
            
            
            $
            (0.7
            )Mass-market
            
            
            8.3
            
            
            
            15.9
            
            
            
            (7.6
            )Mid-market
            
            
            32.1
            
            
            
            35.6
            
            
            
            (3.5
            )Trading
      gains (losses)
            
            
            (0.1
            )
            
            
            (47.1
            )
            
            
            47.0Other
            
            
            5.9
            
            
            
            3.1
            
            
            
            2.8$
            122.2
            
            
            $
            84.2
            
            
            $
            38.0Actual
      customers (thousands) (1,2)
            
            
            246.7
            
            
            
            257.1
            
            
            
            (10.4
            )





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





(2)
            Due
      to the competitive nature of First Choice’s business, actual customer
      count at March 31 is presented in the table above as a more representative
      business indicator than the average customers that are shown in the table
      for TNMP customers.





72


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





Three
      Months Ended March 31,2009
            
            
            2008
            
            
            Change(Gigawatt
      hours) (1)Residential
            
            
            501.8
            
            
            
            563.7
            
            
            
            (61.9
            )Mass-market
            
            
            42.0
            
            
            
            94.9
            
            
            
            (52.9
            )Mid-market
            
            
            248.7
            
            
            
            278.8
            
            
            
            (30.1
            )Other
            
            
            2.3
            
            
            
            4.4
            
            
            
            (2.1
            )794.8
            
            
            
            941.8
            
            
            
            (147.0
            )





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





An
increase in the average sales price over 2008 levels and significantly lower
purchased power costs resulted in an increase in retail
margins.  A decrease in customers
and lower MWh sales reduced revenues for the first quarter of
2009.Other revenues have also increased as a result of higher
miscellaneous fees in 2009.  Gains or losses on unrealized economic
hedges represent unrealized fair value estimates related to forward energy
contracts and are not necessarily indicative of the amounts that will be
realized upon settlement.  In the first quarter of 2008, First Choice
had gains on economic hedges of $5.8 million more than in 2009.





The
losses in the first quarter of 2008 were primarily the result of a series of
speculative forward trades that arbitraged basis differentials among certain
ERCOT delivery zones that decreased trading margins by $47.1
million.  Because of continued market volatility and concern that the
forward basis market would continue to deteriorate, First Choice ended any
further speculative trading in 2008.  No significant additional costs
have been incurred in 2009 and none are expected in the future related to
speculative trading.





The
allowance for uncollectible accounts and related bad debt expense is based on
collections and write-off experience.  Due to economic conditions,
higher average final bills, and an increase in customer churn, the default rates
experienced late in 2008 and continuing in 2009 rose
significantly.  As a result, bad debt expense increased, which reduced
segment earnings by $10.7 million in the first quarter of 2009 compared to
2008.   Management of First Choice is currently addressing the
bad debt situation by undertaking several initiatives in 2009 to reduce bad debt
expense.  These initiatives include efforts to reduce the default rate
experienced for customers switching to another REP combined with renewed
focus on identifying new customer prospects, who are more likely to demonstrate
desired payment behavior.  In addition, possible regulatory changes
are under discussion with the PUCT that would impede a customer's ability
to switch REPs until past due balances are paid.





Increased
operational costs, largely attributable to customer acquisition expenses and
related services, in the first quarter of 2009 resulted in a decrease in segment
earnings compared to the first quarter of 2008.





Corporate
and Other





The table below summarizes the
operating results for Corporate and Other:





Three
      Months Ended March 31,2009
            
            
            2008
            
            
            Change(In
      millions)Total
      revenues
            
            $
            (9.5
            )
            
            $
            (14.6
            )
            
            $
            5.1Cost
      of energy
            
            
            (9.3
            )
            
            
            (14.4
            )
            
            
            5.1Gross
      margin
            
            
            (0.2
            )
            
            
            (0.2
            )
            
            
            -Other
      operating expenses
            
            
            (6.1
            )
            
            
            (2.5
            )
            
            
            3.6Depreciation
      and amortization
            
            
            4.5
            
            
            
            4.2
            
            
            
            (0.3
            )Operating
      income (loss)
            
            
            1.4
            
            
            
            (1.9
            )
            
            
            3.3Equity
      in net earnings (loss) of Optim Energy
            
            
            1.4
            
            
            
            (25.1
            )
            
            
            26.5Other
      income (deductions)
            
            
            20.2
            
            
            
            (2.6
            )
            
            
            22.8Net
      interest charges
            
            
            (6.6
            )
            
            
            (8.4
            )
            
            
            1.8Earnings
      (loss) before income taxes
            
            
            16.4
            
            
            
            (38.1
            )
            
            
            54.5Income
      (taxes) benefit
            
            
            (6.1
            )
            
            
            14.4
            
            
            
            (20.5
            )Segment
      earnings (loss)
            
            $
            10.3
            
            
            $
            (23.7
            )
            
            $
            34.0





73


The
Corporate and Other Segment includes consolidation eliminations of revenues and
cost of energy between business segments, primarily related to TNMP’s sale of
transmission to First Choice.





Other
operating expenses decreased in the three months ended March 31, 2009 compared
to 2008 primarily due to $2.9 million of costs associated with initial costs to
achieve savings, such as severances and consulting charges related to the
business improvement plan, that were incurred in 2008 but not in
2009.  The decrease includes an offset to depreciation expense
described below.  Favorable variances also include $0.4 million for a
building lease that is offset as a result of allocation of these costs to other
business segments.





Depreciation
expense increased $0.3 million in the three months ended March 31, 2009 compared
to 2008 related to an increase in asset base, which is offset in other operating
expenses as a result of allocation of these costs to other business
segments.





Corporate
and Other results include earnings associated with Optim
Energy.  Further explanation of equity in Optim Energy’s results of
operations is shown below.





Other
income and deductions increased in 2009 compared to 2008 primarily due to a
$15.0 million fee received upon termination of the CRHC acquisition agreement
and a gain of $7.5 million on the re-acquisition of $157.4 million of PNMR’s
9.25% senior unsecured notes.





Interest
charges decreased in 2009 compared to 2008 primarily due to lower short-term
borrowings and rates creating a favorable variance of $3.7 million. The
favorable variance is offset by higher long term interest rates on senior
unsecured notes that were re-marketed in 2008 resulting in increased expense of
$1.6 million after reflecting the re-acquisition of $157.4 million of that debt
in February 2009.





Optim
Energy





The table
below summarizes the operating results for Optim Energy:





Three
      Months Ended March 31,
            
            
            
            2009/20082009
            
            
            2008
            
            
            Change(In
      millions)Total
      revenues
            
            $
            78.4
            
            
            $
            87.8
            
            
            $
            (9.4
            )Cost
      of energy
            
            
            45.7
            
            
            
            110.9
            
            
            
            (65.2
            )Gross
      margin
            
            
            32.7
            
            
            
            (23.1
            )
            
            
            55.8Other
      operating expenses
            
            
            19.3
            
            
            
            14.4
            
            
            
            4.9Depreciation
      and amortization
            
            
            7.7
            
            
            
            7.6
            
            
            
            0.1Operating
      income (loss)
            
            
            5.7
            
            
            
            (45.1
            )
            
            
            50.8Other
      income
            
            
            0.1
            
            
            
            0.3
            
            
            
            (0.2
            )Net
      interest charges
            
            
            (2.5
            )
            
            
            (6.6
            )
            
            
            4.1Earnings
      (loss) before income taxes
            
            
            3.3
            
            
            
            (51.4
            )
            
            
            54.7Income
      (tax) benefit on margin
            
            
            (0.2
            )
            
            
            0.4
            
            
            
            (0.6
            )Net
      earnings (loss)
            
            $
            3.1
            
            
            $
            (51.0
            )
            
            $
            54.150
      percent of net earnings (loss)
            
            $
            1.6
            
            
            $
            (25.5
            )
            
            $
            27.1Plus
      amortization of basis difference in Optim
              Energy
            
            
            (0.2
            )
            
            
            0.4
            
            
            
            (0.6
            )PNMR
      equity in net earnings (loss) of Optim Energy
            
            $
            1.4
            
            
            $
            (25.1
            )
            
            $
            26.5





Optim
Energy has a hedging program that covers a multi-year period.  The
level of hedging at any given time varies depending on current market conditions
and other factors.  Economic hedges that do not qualify for or are not
designated as cash flow hedges or normal purchases/sales under SFAS 133 are
derivative instruments that are required to be marked-to-market.  Due
to the extreme market volatility experienced in the first quarter of 2008 in the
ERCOT market, Optim Energy made the decision to exit its speculative trading
business and close out its speculative trading positions.  Optim
Energy incurred settled and forward speculative losses of $2.4 million in the
first quarter of 2008.  The forward mark-to-market valuations on
economic hedges resulted in a $56.5 million favorable variance in the first
quarter of 2009 compared to the same period in 2008.





74


Altura
(Twin Oaks) and Altura Cogen generation stations are Optim Energy’s core
business.  The generation stations had strong performance during the
first quarter of 2009; however, Altura had a scheduled outage that did not occur
in the first three months of 2008.  This impacted both gross margin
and operating expenses in 2009 compared to 2008.  In addition,
operating expenses further increased in 2009 due to an increase in the number of
employees and related costs.





Management
evaluates the results of operation of Optim Energy on an earnings before
interest, income taxes, depreciation, and amortization (“EBITDA”)
basis.  In this evaluation of Optim Energy, management also excludes
purchase accounting amortization included in gross margin related to contracts
and emission allowances that were recorded in accordance with SFAS
141.  SFAS 141 requires that Optim Energy individually value each
asset and liability received in the Altura and Altura Cogen transactions and
initially record them on its balance sheet at the determined fair
value.  For both transactions, this results in a significant amount of
amortization for contracts acquired that were out of market and emission
allowances, that while acquired from government programs without cost to the
plants, have significant market value.  Amortization related to out of
market contracts decreased total operating revenues by $3.1 million in
2009.  Amortization for out of market contracts will continue through
the expiration of each contract, which is 2010 for Altura and 2021 for Altura
Cogen.  In addition, 2009 cost of energy includes $1.3 million of
amortization related to emission allowances acquired in the 2007
transactions.  The amortizations for emission allowances will be
recorded as the allowances are used in plant operations, sold, expire or become
obsolete.





The
contribution of Altura created a basis difference between PNMR’s recorded
investment in Optim Energy and 50 percent of Optim Energy’s
equity.  The PNMR net earnings impact does not equal 50 percent of the
Optim Energy amortization because of this basis difference.  While the
portion of the basis difference related to contract amortization will only
continue through 2010, other basis differences, including a difference related
to emission allowances, will continue to exist through the life of the Altura
plant.  The basis difference adjustment detailed above relates
primarily to contract amortization with insignificant offsets related to the
other minor basis difference components.





On
January 6, 2009, LCC filed for bankruptcy protection under Chapter 11 of the US
Bankruptcy Code.  LCC is Optim Energy’s counterparty in several
agreements for power and steam sales.  In addition, LCC leases Optim
Energy the land for the Altura Cogen facility and provides other services,
including water, to that facility.  The pre-petition net amount due
from LCC as of March 31, 2009 is immaterial to Optim Energy’s results and has
been fully reserved.  LCC has continued to perform under the existing
contracts since the filing.





LIQUIDITY
AND CAPITAL RESOURCES





Statements
of Cash Flows





The
changes in PNMR’s cash flows for the three months ended March 31, 2009 compared
to 2008 are summarized as follows:





Three
      Months Ended March 31,2009
            
            
            2008
            
            
            Change(In
      millions)Net
      cash flows from:Operating
      activities
            
            $
            (15.3
            )
            
            $
            24.8
            
            
            $
            (40.1
            )Investing
      activities
            
            
            560.7
            
            
            
            (67.9
            )
            
            
            628.6Financing
      activities
            
            
            (615.6
            )
            
            
            53.0
            
            
            
            (668.6
            )Net
      change in cash and cash equivalents
            
            $
            (70.2
            )
            
            $
            10.0
            
            
            $
            (80.1
            )





The
change in PNMR’s cash flows from operating activities relates primarily to the
payment of December 31, 2008 accruals in 2009, primarily related to higher coal
and purchase power costs. The sale of PNM Gas also contributed to the decrease
as the Company benefited from only one month of operations in 2009 versus three
months in 2008. The decrease was partially offset by $15.0 million PNMR received
in 2009 due to the termination of the CRHC acquisition agreement and reduced
interest payments at PNM and PNMR related to lower borrowings as discussed
below.





75


The
changes in cash flows from investing activities relates primarily to the
proceeds from the sale of PNM Gas. Reduced utility plant additions in 2009,
mostly at PNM, also contributed to the change.





The
changes in cash flows from financing activities relates primarily to the use of
the proceeds from the sale of PNM Gas to retire short-term borrowings at PNM and
PNMR, as well as the retirement of long term borrowings at PNMR. At TNMP, the
retirement of both short-term and long-term borrowings was financed by new
long-term borrowings.





Financing
Activities





See Note
7 for information concerning the Company’s financing activities during the three
months ended March 31, 2009.  Additional information on the Company’s
financing activities in contained in Note 6 of Notes to Consolidated Financial
Statements in the 2008 Annual Report on Form 10-K





Capital
Requirements





Total
capital requirements consist of construction expenditures and cash dividend
requirements for both common and preferred stock.  PNMR’s Series A
convertible preferred stock is entitled to receive dividends equivalent to any
dividends paid on PNMR common stock as if the preferred stock had been converted
into common stock.  The main focus of PNMR’s current construction
program is upgrading generation resources, including pollution control
equipment, upgrading and expanding the electric and gas transmission and
distribution systems, and purchasing nuclear fuel.  Projections,
including amounts expended through March 31, 2009, for total capital
requirements for 2009 are $352.6 million, including construction expenditures of
$306.5 million.  Total capital requirements for the years 2009-2013
are projected to be $1,618.7 million, including construction expenditures of
$1,388.1 million.  This projection includes $18.0 million for the
recently completed SJGS environmental project to install low NOX combustion
control and mercury reduction technologies, as well as equipment to increase
SO2
controls. These amounts do not include forecasted construction expenditures of
Optim Energy.  These estimates are under continuing review and subject
to on-going adjustment, as well as to board review and approval.





During
the first three months of 2009, the Company utilized cash generated from
operations and cash on hand, as well as its liquidity arrangements and proceeds
from the sale of PNM Gas, to meet its capital requirements, including
construction expenditures, and the financing activities described in Note
7.





As
discussed in Note 11, Optim Energy is co-developing a generating unit for which
its share of the construction costs is anticipated to be approximately $215
million, including financing costs, of which $195.3 million has been incurred
through March 31, 2009.  PNMR currently anticipates that the remaining
amounts for financing the co-development will be obtained from Optim Energy’s
operating cash flows or Optim Energy’s credit facility.  At some
future date and depending on appropriate market conditions, Optim Energy may
arrange long-term financing of a mix of debt and equity.  If Optim
Energy undertakes additional projects, which require funds that would exceed the
capacity of its current credit facility and Optim Energy 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 additional funding will be
required or, if required, the amount or timing of additional funds that would be
provided to Optim Energy.





Liquidity





PNMR’s
liquidity arrangements include the PNMR Facility and the PNM Facility both of
which primarily expire in 2012 and the TNMP Revolving Credit Facility, which
expires in April 2011.  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 and PNM also have
commercial paper programs under which they may issue commercial paper although
these programs have been suspended.  In addition, PNM has long-term
debt aggregating $36.0 million that is scheduled for mandatory repurchase and
remarketing in July 2009.  The Company is exploring financial
alternatives to meet these obligations.





Although
accessing the capital markets at the current time could be difficult as well as
costly, the Company currently believes that its internal cash generation,
existing credit arrangements, and access to public and private capital markets
will provide sufficient resources to meet the Company’s capital requirements and
retire or refinance




76


its debt
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.  However, if the current market difficulties continue
for an extended period of time or worsen, the Company may not be able to access
the capital markets or renew credit facilities when they expire.  In
such event, the Company would seek to improve cash flows by reducing capital
expenditures and PNM would consider seeking authorization for the issuance of
first mortgage bonds in order to improve access to the capital markets, as well
as any other alternatives that may remedy the situation at that
time.





In
addition to cash received from the sale of PNM Gas, the financings described in
Note 7, and its internal cash generation, the Company anticipates that it will
be necessary to obtain additional long-term financing in the form of debt
refinancing, new debt issuances, and/or new equity in order to fund its capital
requirements during the 2010-2013 period.





The
Company’s ability, if required, to access the capital markets at a reasonable
cost and to provide for other capital needs is largely dependent upon its
ability to earn a fair return on equity, its results of operations, its credit
ratings, its ability to obtain required regulatory approvals and conditions in
the financial markets.





A summary
of these arrangements as of April 30, 2009 is as follows:





PNMR
            
            
            PNM
            
            
            TNMP
            
            
            PNMRSeparate
            
            
            Separate
            
            
            Separate
            
            
            Consolidated(In
      millions)Financing
      Capacity:Revolving
      credit facility
            
            $
            600.0
            
            
            $
            400.0
            
            
            $
            75.0
            
            
            $
            1,075.0Local
      lines of credit
            
            
            10.0
            
            
            
            8.5
            
            
            
            -
            
            
            
            18.5Total
      financing capacity
            
            $
            610.0
            
            
            $
            408.5
            
            
            $
            75.0
            
            
            $
            1,093.5Commercial
      paper program maximum
            
            $
            400.0
            
            
            $
            300.0
            
            
            $
            -
            
            
            $
            700.0Amounts
      outstanding as of April 30, 2009:Commercial
      paper program
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Revolving
      credit facility
            
            
            135.0
            
            
            
            -
            
            
            
            -
            
            
            
            135.0Local
      lines of credit
            
            
            4.1
            
            
            
            -
            
            
            
            -
            
            
            
            4.1Total short-term debt outstanding
            
            
            139.1
            
            
            
            -
            
            
            
            -
            
            
            
            139.1Letters
      of credit
            
            
            80.3
            
            
            
            22.7
            
            
            
            1.5
            
            
            
            104.5Total short term-debt and letters of credit
            
            $
            219.4
            
            
            $
            22.7
            
            
            $
            1.5
            
            
            $
            243.6Remaining
      availability as of April 30, 2009
            
            $
            390.6
            
            
            $
            385.8
            
            
            $
            73.5
            
            
            $
            849.9Cash
      investments as of April 30, 2009
            
            $
            -
            
            
            $
            17.1
            
            
            $
            -
            
            
            $
            17.1





The above
table excludes intercompany debt.  The remaining availability under
the revolving credit facilities varies based on a number of factors, including
the timing of collections of accounts receivables and payments for construction
and operating expenditures.  LBB was a lender under the PNMR Facility
and the PNM Facility.  LBH, the parent of LBB, has filed for
bankruptcy protection.  Subsequent to the bankruptcy filing by LBH,
LBB declined to fund a borrowing request under the PNMR Facility amounting to
$5.3 million. The above availability includes $26.3 million that represents the
unfunded portion of the PNMR Facility attributable to LBB.





For offerings of debt
and equity securities registered with the SEC, PNMR has two effective shelf
registration statements, one expiring in August 2009 for equity and one expiring
in April 2011 for debt.  These shelf registration statements have
unlimited availability and can be amended to include additional securities,
subject to certain restrictions and limitations.  PNMR can also offer
new shares of PNMR common stock through the PNM Resources




77


Direct
Plan and an equity distribution agreement.  PNMR has suspended the
equity distribution agreement due to market conditions.  In April
2008, PNM filed a new shelf registration statement for the issuance of up to
$750.0 million of senior unsecured notes that was declared effective on April
29, 2008.  As of April 30, 2009, PNM had $600.0 million of remaining
unissued securities registered under this and a prior shelf registration
statement.





As
discussed above and in Note 7, the recent disruption in the current credit
markets has had a significant adverse impact on a number of financial
institutions and several of the financial institutions that the Company deals
with have been impacted. However, at this point in time, the Company’s liquidity
has not been materially impacted by the current credit environment and
management does not expect that it will be materially impacted in the
near-future.





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.  These arrangements help ensure PNM the
availability of lower-cost generation needed to serve customers.  See
MD&A – Off-Balance Sheet Arrangements and Note 7 of Notes to Consolidated
Financial Statements in the 2008 Annual Report on Form 10-K.





Commitments
and Contractual Obligations





PNMR, PNM
and TNMP have contractual obligations for long-term debt, operating leases,
purchase obligations and certain other long-term liabilities. See MD&A – Commitments
and Contractual Obligations in the 2008 Annual Report on Form
10-K.





Contingent
Provisions of Certain Obligations





As
discussed in the 2008 Annual Reports on
Form 10-K, PNMR, PNM and TNMP have a number of debt obligations and other
contractual commitments that contain contingent provisions.  Some of
these, if triggered, could affect the liquidity of the Company.  The
contingent provisions include contractual increases in the interest rate charged
on certain of the Company’s short-term debt obligations in the event of a
downgrade in credit ratings and the requirement to provide security under
certain contractual agreements. The Company believes its financing arrangements
are sufficient to meet the requirements of the contingent
provisions.





Capital
Structure





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





March
      31,
            
            
            December
      31,2009
            
            
            2008PNMRPNMR
      common stockholders’ equity
            
            
            49.9
            %
            
            
            49.3
            %Convertible
      preferred stock
            
            
            3.0
            %
            
            
            3.0
            %Preferred
      stock of subsidiary
            
            
            0.3
            %
            
            
            0.3
            %Long-term
      debt
            
            
            46.8
            %
            
            
            47.4
            %Total
      capitalization
            
            
            100.0
            %
            
            
            100.0
            %





PNMPNM
      common stockholder’s equity
            
            
            51.6
            %
            
            
            55.7
            %Preferred
      stock
            
            
            0.5
            %
            
            
            0.5
            %Long-term
      debt
            
            
            47.9
            %
            
            
            43.8
            %Total
      capitalization
            
            
            100.0
            %
            
            
            100.0
            %





78





TNMPCommon
      equity
            
            
            57.9
            %
            
            
            71.6
            %Long-term
      debt
            
            
            42.1
            %
            
            
            28.4
            %Total
      capitalization
            
            
            100.0
            %
            
            
            100.0
            %





OTHER
ISSUES FACING THE COMPANY





Climate
Change Issues





In May
2007, the U.S. Supreme Court held that the EPA has the authority to regulate GHG
under the Clean Air Act.  This decision, coupled with an increased
focus in Congress on legislation to address climate change, has heightened the
importance of this issue for the energy industry.   Although there
continues to be debate over the details and best design for state and federal
programs, increased state and federal legislative and regulatory activities
calling for regulation of GHG indicate that climate change protection
legislation and regulation are likely in the future.





On July
30, 2008, EPA published the Greenhouse Gas Advanced Notice of Proposed
Rulemaking.   The notice identified, but did not choose among, options
for GHG regulation and requested comments on the options
presented.   Absent Congressional action, in due course we would
expect the EPA to adopt regulations relating to GHG.





In
addition, several legislative initiatives are under consideration in Congress
that would regulate GHG. These initiatives range from general limitations on GHG
to the imposition of a so-called “cap and trade” system to the imposition of a
tariff on GHG.  It is unclear whether or when legislation will be
passed, although the new administration and several leading members of Congress
have expressed their intent to pass legislation as soon as
practicable.





Approximately
82.6% of PNM’s owned and leased generating capacity consists of coal or
gas-fired generation that produces GHG.  All of Optim Energy’s owned
generation produces GHG.  Based on our current plans, we do not expect
our output of GHG to increase significantly in the near-term.  Many
factors affect the amount of GHG, including plant performance.  For
example, if PVNGS experienced prolonged outages, it may require PNM to depend on
other power supply resources such as gas-fired generation, which could increase
GHG.  Because of our dependence on fossil-fueled generation, any
legislation that imposes a limit or cost on GHG will impact the cost at which we
produce electricity.  While we expect to be entitled to recover that
cost through our rates, the timing and outcome of proceedings for cost recovery
is uncertain.  In addition, to the extent that we recover any
additional costs through rates, our customers may reduce their demand, relocate
facilities to other areas with lower energy costs or take other actions that
ultimately will adversely impact us.





Given the
geographic location of our facilities and customers, we generally have not been
exposed to the extreme weather events, and other physical impacts commonly
attributed to climate change, with the possible exception of drought conditions
periodically, and we generally do not expect physical changes to be of material
consequence to us in the near-term. Drought conditions in northwestern New
Mexico could impact the availability of water for cooling the coal
plants.  Water shortage sharing agreements have been in place since
2003 although no shortage has been declared due to sufficient snow pack in the
San Juan Basin.  PNM also has a supplemental water contract in place
with the Jicarilla Tribe to help address any water shortages from primary
sources. The contract expires December 31, 2016.





In 2006,
the Company became a founding member of the United States Climate Action
Partnership (“USCAP”), a coalition currently consisting of 35 businesses and
national environmental organizations calling on the federal government to enact
national legislation to reduce GHG at the earliest practicable date.  
USCAP released A Call To
Action, a set of principles and recommendations outlining a policy
framework for federal climate protection legislation in January 2007, and
released its Blueprint for
Legislative Action to the U.S. Congress and the Obama Administration in
December 2008.   As a member of USCAP, it is the Company’s position
that a mandatory, economy-wide, market-driven approach that includes a cap and
trade program, combined with other complementary state and federal policies, is
the most cost effective and environmentally efficient means of addressing GHG
reductions.  The Company intends to continue working with USCAP,
government agencies, and Congress to




79


advocate
for federal action to address this challenging environmental issue that is
closely linked with the U.S. economy, energy supply, and energy
security.





In 2008,
PNMR’s interests in generating plants, through PNM and Optim
Energy, emitted approximately 7.9 million metric tons of carbon dioxide,
the vast majority of its GHG.  By comparison, the total GHG in the United
States in 2006, the latest year for which the EPA has compiled this data, were
approximately 7 billion metric tons, of which approximately 6 billion metric
tons were carbon dioxide.  Electricity generation accounted for
approximately 2.3 billion metric tons of the carbon dioxide
emissions.





PNM has
several programs underway to mitigate its GHG, and thereby to reduce its climate
change risk.  These include the release of two RFPs in mid-2008 for
additional renewable generation capacity and the launch of customer-owned solar
generation programs. PNM expects to produce approximately 35,000 GWh of
electricity from renewable resources over the next 19 years avoiding nearly 20
million metric tons of GHG. Also in 2008, PNM filed requests for approval to
implement additional electric energy efficiency and load management programs
with the NMPRC and expects approval this year. Over the next 19 years, PNM
projects the expanded energy efficiency and load management programs will
provide the equivalent of approximately 15,000 GWh of electricity, which will
avoid about 8.5 million metric tons of GHG. These estimates are subject to
change given that it is difficult to compute estimated avoidance accurately
because of the many variables that impact it, including changes in demand for
electricity.





The Board
is updated by management and regularly considers the issues around climate
change, our GHG and potential financial consequences that might result from
climate change and the possible regulation of GHG.  In particular, our
management periodically reports to the Board on all of the matters discussed in
this section.  On December 9, 2008, the Board established a new
stand-alone committee, the Public Policy and Sustainability Committee, and
approved a charter of its delegated responsibilities. This committee will review
Company practices and procedures to assess the sustainability impacts of our
operations and products on the environment.  This committee will also
have responsibility to review the Company’s environmental management systems,
monitor the implementation of the Company’s corporate environmental policy,
monitor the promotion of energy efficiency, and our use of renewable energy
resources.  The committee will advise the Board on a regular basis
regarding the Company’s activities and initiatives in these areas.





Pursuant
to New Mexico law, each utility must submit an integrated resource plan to the
NMPRC every three years to evaluate renewable energy, energy efficiency, load
management, distributed generation and conventional supply-side resources on a
consistent and comparable basis.  The integrated resource plan is
required to take into consideration risk and uncertainty of fuel supply, price
volatility and costs of anticipated environmental regulations when evaluating
resources options to meet supply needs of PNM’s customers.  The NMPRC
issued an order in June 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
and escalating these costs by 2.5% per year.  Under the NMPRC order,
each utility must analyze these standardized prices as projected operating costs
in 2010 and thereafter.  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.   PNM is required, however, to use these prices
for purposes of its integrated resource plan, and the prices may not reflect the
costs that it ultimately will incur.  PNM’s integrated resource plan
was filed with the NMPRC on September 16, 2008. The analysis showed that
incorporation of the NMPRC required carbon emissions costs did not significantly
change the dispatch of existing facilities nor the resource decisions regarding
future facilities over the next 20 years.  Much higher GHG costs than
assumed in the NMPRC analysis are necessary to impact the dispatch of existing
resources or future resource decisions. The primary consequence of GHG costs was
an increase to generation portfolio costs.





In 2007,
five western states (Arizona, California, New Mexico, Oregon and Washington)
entered into an accord, called the Western Regional Climate Action Initiative
(the “WCI”), to reduce GHG from automobiles and certain industries, including
utilities.  Since then, Montana, Utah, British Columbia, Manitoba,
Ontario, and Quebec have joined as partners in the
WCI.    The WCI released design recommendations for elements
of a regional cap and trade program on September 23, 2008, and has created
several subcommittees to develop detailed implementation
recommendations.  The subcommittees are slated to complete their work
in 2010.  Under the WCI recommendations, GHG from the electricity
sector and fossil fuel consumption of the industrial and commercial sectors will
be capped at then current levels and subject to regulation starting in
2012.  Over time, producers will be required to reduce their
GHG.   Implementation of the design elements for GHG reductions
will fall to each state




80


and
province.  In New Mexico, PNM believes this will require new
legislation and rulemaking.  The Company expects to participate in the
legislative and rulemaking processes in New Mexico and will not be able to fully
assess the implications of New Mexico regulation of GHG until the legislative
and rulemaking processes have progressed significantly.





In
December 2008, New Energy Economy (“NEE”), a non-profit environmental advocacy
organization, petitioned the New Mexico Environmental Improvement Board (“EIB”)
to amend existing regulations and adopt new regulations requiring a cap on GHG,
including a statewide GHG limit of 25% below 1990 levels by 2020.  The
program provides for an absolute cap without the ability to purchase allowances
from other entities to cover GHG.  The EIB ordered legal briefs to be
filed on the issue of the EIB’s authority to regulate GHG.  After
review of the briefs and a hearing in April 2009, the EIB decided it does have
authority to regulate GHG.  During the hearing, the EIB asked NEE if
NEE would consider amending NEE’s proposed regulation to be a cap and trade
program, and NEE agreed to do so.  The EIB decided that an August 2009
hearing was too soon and will decide on a hearing date at the EIB’s May 2009
meeting.





Also in
February 2009, legislation was introduced in the New Mexico legislature
proposing to require the implementation by EIB of a cap and trade system
designed to reduce GHG. This legislation died in committee during the session.
 The New Mexico House of Representatives did pass a memorial, which
requests the New Mexico Legislative Council to direct the appropriate committee
to study the WCI final design recommendations as well as federal proposals
relating to reducing GHG.  The memorial is a study of impacts and not
a regulation. The memorial further states that the committee is requested to
report its findings and recommendations to the New Mexico legislature by
December 2010.





On April
17, 2009, the EPA released its proposed endangerment finding stating that the
atmospheric concentrations of six key greenhouse gases (carbon dioxide, methane,
nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride)
endanger the public health and welfare of current and future
generations.  The EPA believes that science shows that the high levels
of these six greenhouse gases are clearly the result of human emissions and are
very likely the cause of the increase in average temperatures and other climatic
changes.   The EPA also found that the combined emissions of
carbon dioxide, methane, nitrous oxides, and hydrofluorcarbons from new motor
vehicles contribute to the atmospheric concentration of these greenhouse gases
and to climate change.   The proposed findings do not by
themselves impose any requirements on industry or other entities, but the
findings do set the groundwork for the EPA to regulate GHG from new and existing
stationary sources such as power plants and for new motor vehicles under the
Clean Air Act.





The
regulation of GHG is expected to have a material impact on the utility industry
both in terms of increased costs associated with fossil fuels and increased
opportunities associated with fuels other than fossil fuels, but it is premature
to attempt to quantify the possible costs and other implications of these
impacts on the Company.





Other
Matters





As
discussed under Employees in Item 1. Business in the 2008 Annual Reports on Form
10-K, PNM had a collective bargaining agreement with the IBEW that expired April
30, 2009. The IBEW and PNM reached a tentative agreement on May 1, 2009 for the
period of May 1, 2009 to April 30, 2012. The tentative agreement includes wage
increase provisions of 2% for 2009, 2010 and 2011 effective on May 1 of
each year.  The IBEW has agreed to present the tentative agreement to its
membership for a vote and recommend its ratification. The parties have
agreed to extend the current contract for 14 days to provide employees
adequate time to consider and vote on ratification of the tentative
agreement. The IBEW has advised that the vote will take place by May 14,
2009.





See Notes
9 and 10 herein and Notes 16, 17 and 18 in the 2008 Annual Reports on
Form 10-K for a discussion of commitments and contingencies, rate and
regulatory matters and environmental issues facing the Company.





CRITICAL
ACCOUNTING POLICIES AND ESTIMATES





The
preparation of financial statements in accordance with GAAP requires Company
management to select and apply accounting policies that best provide the
framework to report the results of operations and financial position for PNMR,
PNM, and TNMP.  The selection and application of those policies
requires management to make difficult, subjective and/or complex judgments
concerning reported amounts of revenue and expenses during




81


the
reporting period and the reported amounts of assets and liabilities at the date
of the financial statements.  As a result, there exists the likelihood
that materially different amounts would be reported under different conditions
or using different assumptions.





As of
March 31, 2009, there have been no significant changes with regard to the
critical accounting policies disclosed in PNMR’s, PNM’s, and TNMP’s Annual
Reports on Forms 10-K for the year ended December 31, 2008.  The
policies disclosed included unbilled revenues, regulatory accounting,
impairments, decommissioning costs, derivatives, pension and other
postretirement benefits, accounting for contingencies, income taxes, and market
risk.





MD&A
FOR PNM





RESULTS
OF OPERATIONS





PNM’s
continuing operations are presented in the PNM Electric segment, which is
identical to the segment presented above in Results of Operations for
PNMR.  PNM’s discontinued operations are presented in the PNM Gas
segment, which is identical to the total earnings from discontinued operations,
net of income taxes, shown on the Condensed Consolidated Statements of Earnings
for both PNM and PNMR.  See Note 14.





MD&A
FOR TNMP





RESULTS
OF OPERATIONS





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





DISCLOSURE
REGARDING FORWARD LOOKING STATEMENTS





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





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





·
            Conditions
      affecting the Company’s ability to access the financial markets or Optim
      Energy’s access to additional debt financing following the utilization of
      its existing credit facility, including actions by ratings agencies
      affecting the Company’s credit
ratings,


·
            The
      recession, its consequent extreme disruption in the credit markets, and
      its impacts on the electricity usage of the Company’s
      customers,


·
            State
      and federal regulatory and legislative decisions and actions, including
      the PNM and TNMP electric rate cases filed in 2008 and appeals of prior
      regulatory proceedings,


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


·
            The
      risk that Optim Energy is unable to identify and implement profitable
      acquisitions,including development of the Cedar Bayou Generating Station Unit
      4, or
      that PNMR and ECJV will not agree to make additional capital contributions
      to Optim Energy,


·
            The
      potential unavailability of cash from PNMR’s subsidiaries or Optim Energy
      due to regulatory, statutory or contractual
  restrictions,


·
            The
      impacts of the decline in the values of marketable equity securities on
      the trust funds maintained to provide nuclear decommissioning funding and
      pension and other postretirement benefits, including the levels of funding
      and expense,


·
            The
      ability of First Choice to attract and retain customers and collect
      amounts billed,


·
            Changes
      in ERCOT protocols,


·
            Changes
      in the cost of power acquired by First
Choice,




82




·
            Collections
      experience,


·
            Insurance
      coverage available for claims made in
  litigation,


·
            Fluctuations
      in interest rates,


·
            Weather,


·
            Water
      supply,


·
            Changes
      in fuel costs,


·
            The
      risk that PNM Electric may incur fuel and purchased power costs that
      exceed the cap allowed under its Emergency
  FPPAC,


·
            Availability
      of fuel supplies,


·
            The
      effectiveness of risk management and commodity risk
      transactions,


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


·
            Variability
      of wholesale power prices and natural gas
  prices,


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


·
            Uncertainty
      regarding the ongoing validity of government programs for emission
      allowances,


·
            Changes
      in the competitive environment in the electric
  industry,


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


·
            The
      risks associated with completion of generation, including the Optim Energy
      Cedar Bayou Generating Station Unit 4, transmission, distribution, and
      other projects, including construction delays and unanticipated cost
      overruns,


·
            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 2008 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 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.





ITEM
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





PNMR controls the scope of
its various forms of risk through a comprehensive set of policies and procedures
and oversight by senior level management and the Board.  The Board’s
Finance Committee sets the risk limit parameters.  The RMC, comprised
of corporate and business segment officers, oversees all of the risk management
activities, which include commodity risk, credit risk, interest rate risk, and
business risk.  The RMC has oversight for the ongoing evaluation of
the adequacy of the risk control organization and policies.  PNMR has
risk control organizations, which are 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 policies regarding risk
exposure levels and activities in each of the business segments; authority to
approve the types of derivatives entered into; authority to establish a general
policy regarding counterparty exposure and limits; authorization and delegation
of transaction limits; review and approval of controls and procedures for
derivative activities; review and approval of models and assumptions used to
calculate mark-to-market and market risk exposure; authority to approve and open
brokerage and counterparty accounts for derivatives; review of hedging and risk
activities; the extent and type of reporting to be performed for monitoring of
limits and positions; and quarterly reporting to the Audit and Finance
Committees on these activities.  The RMC also proposes risk limits,
such as VaR and GEaR, to the Finance Committee for their approval.





83


It is the
responsibility of each business segment to create its own control procedures and
policies within the parameters established by the Corporate Financial Risk
Management Policy, approved by the Finance Committee.  The RMC reviews
and approves these policies, which are created with the assistance of the Risk
Management Department, and the Vice President and Treasurer.  Each
business segment’s policies address the following
controls:  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.





Information
concerning accounting for derivatives and the risks associated with PNMR’s
commodity contracts is set forth in Note 4.  Note 4 also contains a
summary of the fair values of mark-to-market energy contracts included in the
Condensed Consolidated Balance Sheets.





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:





March
      31, 2009Trading
            
            
            Economic
              Hedges
            
            
            TotalPNMR
            
            (In
      thousands)Sources of fair value gain
(loss):Net
      fair value at beginning of period
            
            $
            2,556
            
            
            $
            (5,422
            )
            
            $
            (2,866
            )Amount
      realized on contracts delivered during period
            
            
            (1,565
            )
            
            
            4,876
            
            
            
            3,311Changes
      in fair value
            
            
            (5
            )
            
            
            (10,261
            )
            
            
            (10,266
            )Net
      change recorded as mark-to-market
            
            
            (1,570
            )
            
            
            (5,385
            )
            
            
            (6,955
            )Unearned/prepaid option premiums
            
            
            -
            
            
            
            (480
            )
            
            
            (480
            )Net fair value at
      end of period
            
            $
            986
            
            
            $
            (11,287
            )
            
            $
            (10,301
            )





March
      31, 2008Trading
            
            
            Economic
              Hedges
            
            
            TotalPNMR
            
            (In
      thousands)Sources of fair value gain (loss):Net
      fair value at beginning of period
            
            $
            (1,577
            )
            
            $
            (13,136
            )
            
            $
            (14,713
            )Adoption
      of SFAS 157
            
            
            -
            
            
            
            17,253
            
            
            
            17,253Adjusted
      beginning fair value
            
            
            (1,577
            )
            
            
            4,117
            
            
            
            2,540Amount
      realized on contracts delivered during period
            
            
            (8,898
            )
            
            
            863
            
            
            
            (8,035
            )Changes
      in fair value
            
            
            (25,689
            )
            
            
            15,572
            
            
            
            (10,117
            )Net
      change recorded as mark-to-market
            
            
            (34,587
            )
            
            
            16,435
            
            
            
            (18,152
            )Unearned/prepaid option premiums
            
            
            3,188
            
            
            
            221
            
            
            
            3,409Net fair value at end of period
            
            $
            (32,976
            )
            
            $
            20,773
            
            
            $
            (12,203
            )





The
following table provides the maturity of the net assets (liabilities), 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:





84


Fair
Value of Mark-to-Market Instruments at March 31, 2009





Less
      than1
      year
            
            
            1-3
      Years
            
            
            4+
      Years
            
            
            TotalPNMR
            
            (In
      thousands)Trading
      transactions
            
            $
            40
            
            
            $
            946
            
            
            $
            -
            
            
            $
            986Economic
      hedges
            
            
            (9,520
            )
            
            
            (1,834
            )
            
            
            67
            
            
            
            (11,287
            )Total
            
            $
            (9,480
            )
            
            $
            (888
            )
            
            $
            67
            
            
            $
            (10,301
            )





The net
change in fair value of commodity derivative instruments designated as hedging
instruments is summarized as follows:





Three
      Months Ended March 31,2009
            
            
            2008Hedge InstrumentsPNMR
            
            (In
      thousands)Change
      in fair value of energy contracts
            
            $
            9,167
            
            
            $
            (5,994
            )Change
      in fair value of swaps and futures
            
            
            (8,034
            )
            
            
            3,172Change
      in the fair value of options
            
            
            (3,193
            )
            
            
            3,115Net
      change in fair value
            
            $
            (2,060
            )
            
            $
            293





Risk
Management Activities





PNM
measures the market risk of its long-term contracts and wholesale activities
using a VaR calculation to maintain total exposure.  The 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.  PNM
utilizes the Monte Carlo simulation model of VaR.  The Monte Carlo
model utilizes a random generated simulation based on historical volatility to
generate portfolio values.  The quantitative risk information,
however, is limited by the parameters established in creating the
model.  The instruments being evaluated may trigger a potential loss
in excess of calculated amounts if changes in commodity prices exceed the
confidence level of the model used.  The VaR methodology employs the
following critical parameters:  historical volatility estimates,
market values of all contractual commitments, appropriate market-oriented
holding periods, and seasonally adjusted correlation estimates.  The
VaR calculation considers PNM’s forward position for calendar years 2009 and
2010.  PNM uses a holding period of three days as the estimate of the
length of time that will be needed to liquidate the positions.  The
volatility and the correlation estimates measure the impact of adverse price
movements both at an individual position level as well as at the total portfolio
level.  The two-tailed confidence level established is
95%.  For example, if VaR is calculated at $10.0 million, it is
estimated that in 950 out of 1,000 market simulations the pre-tax gain or loss
in liquidating the portfolio would not exceed $10.0 million in the three days
that it would take to liquidate the portfolio.





PNM
measures VaR for all transactions that are not directly asset-related and have
economic risk.  For the three months ended March 31, 2009, the
average, high, and low VaR amounts for these transactions were less than $0.1
million.  The VaR amount for these transactions at March 31, 2009 was
less than $0.1 million.  For the three months ended March 31, 2008,
the average VaR amount for these transactions was $0.1 million with high and low
VaR amounts for the period of $0.6 million and zero.  The total VaR
amount for these transactions at March 31, 2008 was $0.6 million.





First
Choice measures the market risk of its retail sales commitments and supply
sourcing activities using a GEaR calculation to monitor potential risk exposures
related to taking contracts to settlement and a VaR calculation to measure
short-term market price impacts.





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 uses a hold-to-maturity at
risk for 12 months calculation for its GEaR measurement.  The
calculation utilizes the same Monte Carlo simulation approach described above at
a 95% confidence level and includes the retail load and supply portfolios.
Management believes




85


the VaR
results are a reasonable approximation of the potential variability of earnings
against forecasted earnings.  The quantitative risk information,
however, is limited by the parameters established in creating the
model.  The instruments being evaluated may trigger a potential loss
in excess of calculated amounts if changes in commodity prices exceed the
confidence level of the model used.  The GEaR calculation considers
First Choice’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 GEaR
is calculated at $10.0 million, it is estimated that in 950 out of 1,000 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
three months ended March 31, 2009, the average GEaR amount was $7.3 million,
with high and low GEaR amounts for the period of $11.4 million and $3.8
million.  The total GEaR amount at March 31, 2009 was $8.4
million.  For the three months ended March 31, 2008, the average GEaR
amount for these transactions was $25.8 million, with high and low GEaR amounts
for the period of $44.3 million and $19.3 million.  The total GEaR
amount for these transactions at March 31, 2008 was $20.3 million.





First
Choice utilizes a short-term VaR measure to manage its market
risk.  The VaR limit is based on the same total portfolio approach as
the GEaR 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 $0.7 million at March 31, 2009.  For the
three months ended March 31, 2009, the high, low and average mark-to-market VaR
amounts were $2.0 million, $0.5 million and $1.0 million.  The VaR
amount for these transactions was $6.4 million at March 31, 2008.  For
the three months ended March 31, 2008, the high, low and average mark-to-market
VaR amounts were $12.1 million, $4.5 million and $7.1 million.





The
Company's risk measures are regularly monitored by the Company's
RMC.  The RMC has put in place procedures to ensure that increases in
risk measures that exceed the prescribed limits are reviewed and, if deemed
necessary, acted upon to reduce exposures.  In the first quarter of
2008, First Choice experienced speculative pre-tax trading losses of $47.1
million. These transactions triggered exceedences of the GEaR limit and the
10-day VaR limit and ultimately resulted in the decision to exit the basis
transactions and speculative trading.  There were no such exceedences
in the first quarter of 2009.





The VaR
and GEaR 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 conducts counterparty risk analysis across business segmentsand uses a
credit management process to assess 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.





The
following table provides information related to credit exposure as of March 31,
2009.  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.





86


Schedule
of Credit Risk Exposure


March
31, 2009





Number
            
            
            Exposure(b)
            
            
            of
            
            
            ofCredit
            
            
            Counter
            
            
            Counter-Risk
            
            
            -parties
            
            
            partiesRating
      (a)
            
            Exposure
            
            
            >10%
            
            
            >10%(Dollars
      in thousands)PNMRExternal
      ratings:Investment
      grade
            
            $
            123,863
            
            
            
            3
            
            
            $
            101,064Non-investment
      grade
            
            
            3,650
            
            
            
            -
            
            
            
            -Internal
      ratings:Investment
      grade
            
            
            2,829
            
            
            
            -
            
            
            
            -Non-investment
      grade
            
            
            599
            
            
            
            -
            
            
            
            -Total
            
            $
            130,941
            
            
            
            
            
            
            $
            101,064







(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
      Credit Risk Exposure is the gross credit exposure, including long-term
      contracts, forward sales and short-term sales. The exposure captures the
      amounts 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 but are not reduced by available credit
      collateral.  Credit collateral includes cash deposits, letters
      of credit, and parental guarantees received from
      counterparties.  Amounts are presented before the application of
      such credit collateral instruments.  At March 31, 2009 the
      Company held credit collateral of $3.2 million to offset its gross
      non-investment grade credit
exposure.




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





Maturity
      of Credit Risk Exposure


March
31, 2009





GreaterLess
      than
            
            
            
            
            
            than
            
            
            TotalRating
            
            2
      Years
            
            
            2-5
      Years
            
            
            5
      Years
            
            
            Exposure(In
      thousands)PNMRExternal
      ratings:Investment
      grade
            
            $
            122,989
            
            
            $
            767
            
            
            $
            107
            
            
            $
            123,863Non-investment
      grade
            
            
            3,650
            
            
            
            -
            
            
            
            -
            
            
            
            3,650Internal
      ratings:Investment
      grade
            
            
            2,829
            
            
            
            -
            
            
            
            -
            
            
            
            2,829Non-investment
      grade
            
            
            599
            
            
            
            -
            
            
            
            -
            
            
            
            599Total
            
            $
            130,067
            
            
            $
            767
            
            
            $
            107
            
            
            $
            130,941





The
Company provides for losses due to market and credit risk.  Credit
risk for PNMR's and PNM’s largest counterparty as of March 31, 2009 and December
31, 2008 was $ 48.9 million and $52.3 million.





87


Interest
Rate Risk





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
3.38%, if interest rates were to decline by 50 basis points from their levels at
March 31, 2009.  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.  As described in Note 7, TNMP has long-term debt of
$50.0 million that bears interest at a variable rate.  However, TNMP
has also entered into a hedging arrangement that effectively results in this
debt bears interest at a fixed rate, thereby eliminating interest rate
risk.  At April 30, 2009, the PNMR has $139.1 million of consolidated
short-term debt outstanding under its revolving credit facilities and local
lines of credit, which allow for a maximum aggregate borrowing capacity of
$1,093.5 million.  These facilities bear interest at variable rates,
which averaged 1.94% of April 30, 2009 borrowings, and the Company is exposed to
interest rate risk to the extent of future increases in variable interest
rates.





The
securities held by PNM in the NDT and in trusts for pension and other
post-employment benefits had an estimated fair value of $456.0 million at March
31, 2009, of which 32.9% were fixed-rate debt securities that subject PNM to
risk of loss of fair value with movements in market interest
rates.  If interest rates were to increase by 50 basis points from
their levels at December 31, 2008, the decrease in the fair value of the
fixed-rate securities would be 3.1%, or $4.7 million.  PNM does not
currently recover or return through rates any losses or gains on these
securities.  The securities held by TNMP in trusts for pension and
other post-employment benefits had an estimated fair value of $53.4 million at
March 31, 2009, of which 26.2% were fixed-rate debt securities that subject TNMP
to risk of loss of fair value with movements in market interest
rates.  If interest rates were to increase by 50 basis points from
their levels at March 31, 2009, the decrease in the fair value of the fixed-rate
securities would be 3.5%, or $0.5 million.  PNM, therefore, is at risk
for shortfalls in its funding of its obligations due to investment losses,
included those from the equity market and alternatives investment risks
discussed below.





Equity
Market Risk





The NDT
and trusts established for PNM’s pension and post-employment benefits hold
certain equity securities at March 31, 2009.  These equity securities
expose PNM to losses in fair value should the market values of the underlying
securities decline.  Equity securities comprised 48.4% of the
securities held by the various PNM trusts as of March 31, 2009.  PNM
does not recover or earn a return through rates on any losses or gains on these
equity securities.  The trusts established for TNMP’s pension and
post-employment benefits hold certain equity securities.  These equity
securities expose TNMP to losses in fair value should the market values of the
underlying securities decline.  Equity securities comprised 46.4% of
the securities held by the TNMP trusts as of March 31, 2009.  TNMP
does not recover or earn a return through rates on any losses or gains on these
equity securities.  There has been a significant decline in the
general price levels of marketable equity securities in late 2008 and in early
2009. The impacts of these declines were considered in the funding and expense
valuations performed for 2009, which resulted in reduced amounts of income
related to the pension plans being recorded in 2009 and will likely require
increased levels of funding beginning in 2010.  See Note
8.





Alternatives
Investment Risk





The
Company has a target of investing 20% of its pension assets in the alternatives
asset class and was 28.5% as of March 31, 2009.  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.  The valuation of the alternative asset class has also
been impacted by the significant decline in the general price levels of
marketable equity securities.





88


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 conclude 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 change in internal controls occurred during the first quarter
of 2009:





·
            PNM
      sold its natural gas operations to NMGC effective January 30, 2009,
      resulting in elimination of internal controls that were relevant only to
      gas operations.





Otherwise,
there have been no changes in PNMR’s internal controls over financial reporting
for the quarter ended March 31, 2009, 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 conclude 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





The
following material change in internal controls occurred during the first quarter
of 2009:





·
            PNM
      sold its natural gas operations to NMGC effective January 30, 2009,
      resulting in elimination of internal controls that were relevant only to
      gas operations.





Otherwise,
there have been no changes in PNM’s internal controls over financial reporting
for the quarter ended March 31, 2009, that have materially affected, or are
reasonably likely to materially affect, PNM’s internal control over financial
reporting.





TNMP





Disclosure
of controls and procedures





TNMP
maintains disclosure controls and procedures designed to ensure that it is able
to collect the information it is required to disclose in the reports it files
with the SEC, and to process, summarize and disclose this information within the
time periods specified in the rules of the SEC.  Based on an
evaluation of its disclosure controls and procedures as of the end of the period
covered by this report conducted by management, with the participation of the
Chief Executive and Chief Financial Officer, the Chief Executive and Chief
Financial Officer




89


conclude
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 March 31, 2009, that have materially affected, or are
reasonably likely to materially affect, TNMP’s internal control over financial
reporting.





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.





·
            Navajo
      Nation Environmental Issues


·
            Four
      Corners Federal Implementation Plan
Litigation


·
            Santa
      Fe Generating Station


·
            Gila
      River Indian Reservation Superfund
Site


·
            PVNGS
      Water Supply Litigation


·
            San
      Juan River Adjudication


·
            Western
      United States Wholesale Power
Market


·
            PNM
      - 2007 Electric Rate Case


·
            PNM
      – Emergency FPPAC


·
            TNMP
      Competitive Transition Charge True-Up
Proceeding




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, 2008.





90


ITEM
6.  EXHIBITS





3.1
            PNMR
            Articles
      of Incorporation of PNM Resources, as amended to date (incorporated by
      reference to Exhibit 3.1 to PNMR’s Current Report on Form 8-K filed
      November 21, 2008)3.2
            PNM
            Restated
      Articles of Incorporation of PNM, as amended through May 31, 2002
      (incorporated by reference to Exhibit 3.1.1 to the Company’s Quarterly
      Report on Form 10-Q for the quarter ended June 30,
2002)3.3
            TNMP
            Articles
      of Incorporation of TNMP, as amended through July 7, 2005 (incorporated by
      reference to Exhibit 3.1.2 to the Company’s Quarterly Report on Form 10-Q
      for the quarter ended June 30, 2005)3.4
            PNMR
            Bylaws
      of PNM Resources, Inc. with all amendments to and including February 17,
      2009 (incorporated by reference to Exhibit 3.1 to PNMR’s Current Report on
      Form 8-K filed February 20, 2009)3.5
            PNM
            Bylaws
      of PNM with all amendments to and including May 31, 2002 (incorporated by
      reference to Exhibit 3.1.2 to the Company’s Report on Form 10-Q for the
      fiscal quarter ended June 30, 2002)3.6
            TNMP
            Bylaws
      of TNMP as adopted on August 4, 2005 (incorporated by reference to Exhibit
      3.2.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
      June 30, 2005)4.1
            TNMP
            The
      First Mortgage Indenture dated as of March 23, 2009, between Texas-New
      Mexico Power Company and The Bank of New York Mellon Trust Company, N.A.,
      as Trustee (incorporated by reference to Exhibit 4.1 to TNMP’s Current
      Report on Form 8-K filed March 27, 2009)4.2
            TNMP
            The
      First Supplemental Indenture dated as of March 23, 2009, between Texas-New
      Mexico Power Company and The Bank of New York Mellon Trust Company, N.A.,
      as Trustee (incorporated by reference to Exhibit 4.2 to TNMP’s Current
      Report on Form 8-K filed March 27, 2009)4.3
            TNMP
            The
      Second Supplemental Indenture dated as of March 25, 2009, between
      Texas-New Mexico Power Company and The Bank of New York Mellon Trust
      Company, N.A., as Trustee (incorporated by reference to Exhibit 4.3 to
      TNMP’s Current Report on Form 8-K filed March 27, 2009)10.1
            PNMR
            Third
      Amendment to Credit Agreement, dated as of March 11, 2009, among PNM
      Resources, Inc., First Choice Power, L.P.,  the lenders party
      thereto, and  Bank of America, N.A., as Administrative Agent for
      the Lenders  (incorporated by reference to Exhibit 10.1 to
      PNMR’s Current Report on Form 8-K filed March 13, 2009)10.2
            TNMP
            Amendment
      No. 2 to Credit Agreement, dated as of March 10, 2009, by and among
      Texas-New Mexico Power Company, as Borrower, the institutions from time to
      time parties thereto as Lenders, and JPMorgan Chase Bank, N.A., in its
      capacity as Administrative Agent for itself and the other
      Lenders10.3
            TNMP
            Term
      Loan Credit Agreement among Texas-New Mexico Power Company, the lenders
      identified therein and Union Bank, N.A., as administrative agent, dated as
      of March 25, 2009  (incorporated by reference to Exhibit 10.1 to
      TNMP’s Current Report on Form 8-K filed March 27, 2009)12.1
            PNMR
            Ratio
      of Earnings to Fixed Charges12.2
            PNM
            Ratio
      of Earnings to Fixed Charges12.3
            TNMP
            Ratio
      of Earnings to Fixed Charges




91




31.1
            PNMR
            Chief
      Executive Officer Certification Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
            PNMR
            Chief
      Financial Officer Certification Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.3
            PNM
            Chief
      Executive Officer Certification Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.4
            PNM
            Chief
      Financial Officer Certification Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.5
            TNMP
            Chief
      Executive Officer Certification Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.6
            TNMP
            Chief
      Financial Officer Certification Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
            PNMR
            Chief
      Executive Officer Certification Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.2
            PNMR
            Chief
      Financial Officer Certification Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.3
            PNM
            Chief
      Executive Officer Certification Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.4
            PNM
            Chief
      Financial Officer Certification Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.5
            TNMP
            Chief
      Executive Officer Certification Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.6
            TNMP
            Chief
      Financial Officer Certification Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002





92


SIGNATURE





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





PNM
      RESOURCES, INC.
              PUBLIC
      SERVICE COMPANY OF NEW MEXICO
              TEXAS-NEW
      MEXICO POWER COMPANY(Registrants)Date:   May
      6, 2009
            /s/
      Thomas G. SategnaThomas
      G. SategnaVice
      President and Corporate Controller(Officer
      duly authorized to sign this
report)








93