| **UNITED  STATES**                                                               |
|----------------------------------------------------------------------------------|
| **SECURITIES  AND EXCHANGE COMMISSION**                                          |
| Washington, D.C.   20549                                                    |
|                                                                             |
| **FORM 10-Q**                                                                    |
| (Mark One)                                                                       |
|  [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE               |
| SECURITIES EXCHANGE ACT OF 1934                                                  |
|                                                                             |
| **For the quarterly period ended September****30,  2005**                        |
|                                                                             |
| - OR -                                                                           |
|                                                                             |
| [  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE             |
| SECURITIES EXCHANGE ACT OF 1934                                                  |
|                                                                             |
| For the transition period from _______________  to   _________________ |
|                                                                             |
|  ****                                                                       |   |  ****
 

 

**Commission**

 

**Name of Registrants,  State of Incorporation,**
 

**I.R.S. Employer**

**File Number**

 

**Address  and Telephone Number**

 

**Identification No.**

333-32170

 

PNM Resources, Inc.

 

85-0468296

 

 

(A New Mexico Corporation)

 

 

 

 

Alvarado Square

 

 

 

 

Albuquerque, New Mexico  87158

 

 

 

 

(505) 241-2700

 

 

 

 

 

 

 

1-6986

 

Public Service Company of New Mexico

 

85-0019030

 

 

(A New Mexico Corporation)

 

 

 

 

Alvarado Square

 

 

 

 

Albuquerque, New Mexico  87158

 

 

 

 

(505) 241-2700

 

 

 

 

 

 

 

2-97230

 

Texas-New Mexico Power Company

 

75-0204070

 

 

(A Texas Corporation)

 

 

 

 

4100 International Plaza, 

 

 

 

 

P.O. Box 2943

 

 

 

 

Fort Worth, Texas   76113

 

 

 

 

(817) 731-0099
 

 

 

Indicate by check mark whether the  registrants (1) have filed all reports required to be filed by Section 13 or  15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") during the  preceding 12 months (or for such shorter period that the registrants were  required to file such reports), and (2) have been subject to such filing  requirements for the past 90 days.   YES   X    NO      	

 

Indicate by check mark whether each  Registrant is an accelerated filer (as defined in Rule 12b-2 of the  Act).  

PNM Resources, Inc. ("PNMR")                                                    YES  	X    NO      	             Public Service Company of New Mexico  ("PNM")                      YES          NO   X               Texas-New Mexico Power Company  ("TNMP")                            YES         NO   X  

 

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

 

As of October 31, 2005, 68,763,951  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 

October 31, 2005 was 39,117,799 all  held by PNMR.

The total number of shares of Common  Stock of TNMP outstanding as of

October 31, 2005 was 9,615 all held  indirectly by PNMR.

This Form 10-Q  represents separate filings by PNMR, PNM and TNMP.  Information herein relating to an individual registrant is  filed by that registrant on its own behalf.   PNM makes no representations as to the information relating to PNMR  and its subsidiaries other than PNM.   TNMP makes no representations as to the information relating to PNMR  and its subsidiaries other than TNMP.   When this Form 10-Q is incorporated by reference into any filing with  the SEC made by PNM or TNMP, the portions of this Form 10-Q that relate to  PNMR and its subsidiaries other than PNM or TNMP, respectively are not  incorporated by reference therein.             On June 6, 2005, PNMR completed itsacquisition of TNP Enterprises, Inc. and Subsidiaries.  See Note 2 - "TNP Acquisition," in the Notesto Consolidated Financial Statements under Part I, Item 1, of this report forfurther information.  Commencing withthe Form 10-Q for the quarter ended June 30, 2005, TNMP was included in thefiling of PNMR and PNM.

 

ii

**PNM RESOURCES, INC. AND SUBSIDIARIESPUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARYTEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES**

 **INDEX**

 

**Page No.**

GLOSSARY

**1**

 

 ****

**PART I.  FINANCIAL INFORMATION:**

 ****

 

 ****

ITEM 1.  FINANCIAL STATEMENTS  (Unaudited)

 ****

 

 ****

PNM Resources, Inc. and Subsidiaries

 ****

Consolidated Statements of Earnings

 ****

Three and Nine Months Ended September 30, 2005 and 2004

**4**

Consolidated Balance Sheets

 ****

September 30, 2005 and December 31, 2004

**5**

Consolidated Statements of Cash Flows

 ****

Nine Months Ended September 30, 2005 and 2004

**7**

Consolidated Statements of Comprehensive Income

 ****

Three and Nine Months Ended September 30, 2005 and 2004

**9**

Public Service Company of New Mexico and  Subsidiary

 ****

Consolidated Statements of Earnings

 ****

Three and Nine Months Ended September 30, 2005 and 2004

**10**

Consolidated Balance Sheets

 ****

September 30, 2005 and December 31, 2004

**11**

Consolidated Statements of Cash Flows

 ****

Nine Months Ended September 30, 2005 and 2004

**13**

Consolidated Statements of Comprehensive Income

 ****

Three and Nine Months Ended September 30, 2005 and 2004

**15**

Texas-New Mexico Power Company and  Subsidiaries

 ****

Consolidated Statements of Earnings

 ****

Three and Nine Months Ended September 30, 2005 and 2004

**16**

Consolidated Balance Sheets

 ****

September 30, 2005 and December 31, 2004

**18**

Consolidated Statements of Cash Flows

 ****

Nine Months Ended September 30, 2005 and 2004

**20**

Consolidated Statements of Comprehensive Income (Loss)

 ****

Three and Nine Months Ended September 30, 2005 and 2004

**22**

 Notes to the Consolidated Financial Statements

**24**

 

 ****

ITEM 2.  MANAGEMENT'S DISCUSSION  AND ANALYSIS OF

 ****

                  FINANCIAL  CONDITION AND RESULTS OF OPERATIONS

**88**

 

 ****

ITEM 3.  QUANTITATIVE AND  QUALITATIVE DISCLOSURES ABOUT

 ****

                  MARKET RISK

**167**

 

 ****

ITEM 4.  CONTROLS AND PROCEDURES

**167**

iii

 

 ****

**PART II.  OTHER INFORMATION:**

 ****

 

 ****

ITEM 1.  LEGAL PROCEEDINGS

**167**

 

 ****

ITEM 5.  OTHER INFORMATION

**168**

 

 ****

ITEM 6.  EXHIBITS

**169**

 

 ****

Signature

**171**

    iv  

**GLOSSARY**

Afton................................... 

Afton  Generating Station

ALJ...................................... 

Administrative  Law Judge

APB..................................... 

Accounting  Principles Board

APS..................................... 

Arizona  Public Service Company

ARO.................................... 

Asset  Retirement Obligation

AR  Securitization............... 

Accounts  Receivable Securitization

BLM..................................... 

U.S.  Department of the Interior Bureau of Land Management

Board................................... 

Board  of Directors

BTU..................................... 

British  Thermal Unit

Cal  PX................................. 

California  Power Exchange

Cal  ISO................................ 

California  Independent System Operator

Cascade............................... 

Cascade Investment, LLC

CCN.................................... 

Certificate  of Public Convenience and Necessity

Congress............................. 

United  States Congress

Constellation....................... 

Constellation Energy Commodities Group, Inc. 

CPUC.................................. 

California Public Utilities Commission

Decatherm.......................... 

1,000,000  BTUs

Delta.................................... 

Delta-Person  Limited Partnership

DOJ..................................... 

United  States Department of Justice

EaR...................................... 

Earnings  at Risk

EIP....................................... 

Eastern  Interconnection Project

EITF..................................... 

Emerging  Issues Task Force

EPE...................................... 

El  Paso Electric Company

EPA..................................... 

United  States Environmental Protection Agency

ERCOT................................ 

Electric Reliability Council of Texas

FASB................................... 

Financial  Accounting Standards Board

FCPSP................................. 

First  Choice Power Special Purpose, L.P.

FERC................................... 

Federal  Energy Regulatory Commission

First  Choice......................... 

First  Choice Power, L. P. and Subsidiaries

FIP....................................... 

Federal  Implementation Plan

Four  Corners....................... 

Four  Corners Power Plant

GAAP.................................. 

Generally  Accepted Accounting Principles in the United

 

   States of America

Gathering  Company.......... 

Sunterra  Gas Gathering Company, a wholly‐owned 

 

   subsidiary of PNM Resources, Inc.

GCT..................................... 

Grand  Canyon Trust

Global  Electric Agreement. 

Signed  by PNMR and other parties in 2003; provided for a five-year rate path for New  Mexico jurisdictional customers beginning in September 2003

Great  Southwestern........... 

Great  Southwestern Construction, Inc.

IBLA.................................... 

IRS....................................... 

Interior  Board of Land Appeals

United  States Internal Revenue Service

Laurel  Hill........................... 

Laurel  Hill Capital Partners

LIBOR................................. 

London  Interbank Offered Rate

Lordsburg........................... 

Lordsburg  Generating Station

1

Luna.................................... 

Luna  Energy Facility

MMBTUs............................. 

Million  British Thermal Units

Moody's............................... 

Moody's  Investor Services, Inc.

MW..................................... 

Megawatt

MWh................................... 

Megawatt  Hour

Navajo  Acts........................ 

Navajo  Nation Air Pollution Prevention and Control Act, the

 

   Navajo Nation Safe Drinking Water Act,  and the Navajo

 

   Nation Pesticide Act

Ninth  Circuit...................... 

United  States Court of Appeals for the Ninth Circuit

NMED................................. 

New  Mexico Environment Department

NMPRC............................... 

New  Mexico Public Regulation Commission, successor to the 

 

   New Mexico Public Utility Commission

NNHPD.............................. 

Navajo  Nation Historic Preservation Department

NRC.................................... 

United  States Nuclear Regulatory Commission

NSPS................................... 

New  Source Performance Standards

NSR..................................... 

New  Source Review

OATT.................................. 

Open  Access Transmission Tariff

O&M................................... 

Operations  and Maintenance Expense

PGAC.................................. 

Purchased  Gas Adjustment Clause

PG&E.................................. 

Pacific  Gas and Electric Co.

PNM.................................... 

Public  Service Company of New Mexico and Subsidiary

PNMR................................. 

PNM  Resources, Inc. and Subsidiaries

PPA..................................... 

Power  Purchase Agreement

PSA..................................... 

Power  Supply Agreement

PSD..................................... 

Prevention  of Significant Deterioration

Processing  Company.......... 

Sunterra  Gas Processing Company, a wholly‐owned 

 

   subsidiary of PNM Resources, Inc.

PUCT.................................. 

Public  Utility Commission of Texas

PUHCA............................... 

The Public Utility Holding Company Act of  1935

PURPA................................ 

Public Utility Regulatory Policy Act of  1978

PVNGS................................ 

Palo  Verde Nuclear Generating Station

Reeves................................. 

Reeves  Generating Station

REP...................................... 

Retail  Electricity Provider

Restructuring  Act............... 

New  Mexico Electric Utility Industry Restructuring Act of 1999, as amended

RMC.................................... 

Risk  Management Committee

RMRR.................................. 

Routine  Maintenance, Repair or Replacement

RTO..................................... 

Regional  Transmission Organization

SCE...................................... 

Southern  California Edison Company

SDG&E................................ 

San  Diego Gas and Electric Company

SEC...................................... 

United  States Securities and Exchange Commission

Senate  Bill 7........................ 

Legislation  that established retail competition in Texas

SESCO................................. 

San  Angelo Electric Service Company

SFAS................................... 

Statement  of Financial Accounting Standards

SJCC.................................... 

San  Juan Coal Company

SJGS..................................... 

San  Juan Generating Station

SO2...................................... 

Sulfur  Dioxide

2

S&P..................................... 

Standard  and Poor's Ratings Services

SW Acquisition................... 

SW Acquisition, L.P.

TCEQ.................................. 

Texas  Commission on Environmental Quality

TECA.................................. 

Texas  Electric Choice Act (also known as Senate Bill 7)

TNMP.................................. 

Texas‐New  Mexico Power Company and Subsidiaries

TNP..................................... 

TNP  Enterprises, Inc. and Subsidiaries

Throughput........................ 

Volumes  of gas delivered, whether or not owned by the

 

   Company

USBR................................... 

United  States Bureau of Reclamation

USFS.................................... 

United  States Forest Service

VaR..................................... 

Value  at Risk

Wood  River......................... 

Wood  River Partners, L.P.

WSPP.................................. 

Western  Systems Power Pool

 3

**ITEM 1. FINANCIAL STATEMENTS**

 ****

 ****

 ****

 ****

 

 

 ****

 ****

 ****

 ****

 ****

 ****

 ****

**PNM****RESOURCES, INC.  AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF EARNINGS**

(Unaudited)

 

 

 ****

 ****

 ****

 ****

 ****

 ****

 ****

 

 

**Three Months Ended**

 ****

**Nine Months Ended**

 

 

**September 30,**

 ****

**September 30,**

 

 

**2005**

 ****

**2004**

 ****

**2005**

 ****

**        2004**

 ****

 

(In thousands, except per share amounts)

**Operating Revenues:**

 

 

 

 

 

 

 

 

 Electric

 

$  518,529

	    

$ 313,147

 

$1,103,648

 

$ 863,783

 Gas

 

78,258

	    

73,530

 

325,752

 

330,290

 Other

 

330

	    

178

 

884

 

557

    Total operating revenues

 

597,117

	    

386,855

 

1,430,284

 

1,194,630

 

 

 

	    

 

 

 

 

 

**Operating Expenses:**

 

 

	    

 

 

 

 

 

 Cost of energy sold

 

362,863

	    

226,849

 

848,532

 

703,862

 Administrative and general

 

59,961

	    

37,537

 

153,457

 

120,486

 Energy production costs

 

36,526

	    

33,735

 

112,364

 

107,977

 Depreciation and amortization

 

36,847

	    

21,802

 

96,859

 

74,370

 Transmission and distribution costs

 

21,179

	    

14,755

 

50,292

 

44,397

 Taxes, other than income taxes

 

17,184

	    

8,178

 

36,626

 

25,924

 Income taxes

 

12,246

	    

11,784

	    

24,776

 

29,601

    Total operating expenses

 

546,806

	    

354,640

	    

1,322,906

 

1,106,617

    Operating income

 

50,311

	    

32,215

	    

107,378

 

88,013

 

 

 

	    

 

 

 

 

 

**Other Income and Deductions:**

 

 

	    

 

 

 

 

 

 Interest income

 

10,760

	    

9,270

 

31,682

 

28,035

 Other income

 

5,433

	    

1,513

 

11,777

 

4,926

 Carrying charges on regulatory assets

 

1,910

	    

-

 

2,435

 

-

 Other deductions

 

(7,557)

	    

(236)

 

(17,567)

 

(4,222)

 Other income taxes	

 

(3,693)

	    

(2,918)

 

(9,747)

 

(9,104)

    Net other income and deductions

 

6,853

	    

7,629

 

18,580

 

19,635

 

 

 

	    

 

 

 

 

 

**Interest Charges**

 

28,145

	    

12,280

 

62,689

 

38,164

 ****

 

 

	    

 

 

 

 

 

**Preferred Stock Dividend**

 

 

	    

 

 

 

 

 

**  Requirements**

 

536

	    

147

 

2,736

 

440

 ****

 

 

	    

 

 

 

 

 

**Net Earnings**

 ****

$   28,483

	    

$ 27,417

 

$    60,533

 

$  69,044

 ****

 ****

	    

	    

 

 

	    

 

	    

**Net Earnings per Common Share:**

 ****

	    

	    

 

 

	    

 

	    

 ****

 ****

	    

	    

 

	    

	    

 

	    

**  Basic**

 ****

$        0.41

	    

$      0.45

	    

$         0.93

 

$       1.14

 ****

 ****

 

	    

 

	    

 

 

 

**  Diluted**

 ****

$        0.41

	    

$      0.45

	    

$         0.92

 

$       1.13

 ****

 ****

 

	    

 

	    

 

 

 

 ****

 ****

 

	    

 

	    

 

 

 

**Dividends Declared per Common Share**

 ****

$      0.400

	    

$    0.160

	    

$       0.585

 

$     0.560

 

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

4

**PNM RESOURCES, INC. AND  SUBSIDIARIES**

**CONSOLIDATED BALANCE  SHEETS**

(Unaudited)

 ****

 ****

**September 30,**

 ****

**December 31,**

 ****

**2005**

 ****

**2004**

 

(In thousands)

**ASSETS**

 

 

 

**Utility Plant:**

 

 

 

 Electric plant in service

$3,269,524

 

$2,488,961

 Gas plant in service

699,294

 

680,487

 Common plant in service and plant held for  future use

156,387

 

140,818

 

4,125,205

 

3,310,266

 Less accumulated depreciation and  amortization

1,346,557

 

1,135,510

 

2,778,648

 

2,174,756

 Construction work in progress

155,042

 

124,381

 Nuclear fuel, net of accumulated  amortization of $17,669 and $16,448

28,919

 

25,449

 

 

 

 

     Net utility plant

2,962,609

 

2,324,586

 

 

 

 

**Other Property and Investments:**

 

 

 

 Investment in lessor notes

287,020

 

308,680

 Other investments

162,005

 

139,848

 Non-utility property, net of accumulated  depreciation of $6 and $1,773

4,815

 

1,437

 

 

 

 

     Total other property and investments

453,840

 

449,965

 

 

 

 

**Current Assets:**

 

 

 

 Cash and cash equivalents

144,799

 

17,195

 Special deposits

2,933

 

-

 Accounts receivable, net of allowance for  uncollectible accounts

 

 

 

     of $4,077 and  $1,329

119,258

 

96,600

 Unbilled revenues

110,983

 

104,708

 Other receivables

54,091

 

48,393

 Inventories

45,730

 

41,352

 Regulatory assets

14,147

 

3,339

 Other current assets

99,218

 

51,967

 

 

 

 

     Total  current assets

591,159

 

363,554

 

 

 

 

**Deferred charges:**

 

 

 

 Regulatory assets

427,090

 

217,196

 Prepaid pension cost

90,417

 

87,336

 Goodwill

492,693

 

-

 Other intangible assets

62,718

 

-

 Other deferred charges

56,033

 

44,998

 

 

 

 

     Total deferred charges

1,128,951

 

349,530

 

$5,136,559

 

$3,487,635

 

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

5

**PNM RESOURCES, INC. AND  SUBSIDIARIES**

**CONSOLIDATED BALANCE  SHEETS**

(Unaudited)

 

 

 

**September 30,**

 

**December 31,**

 

**2005**

 

**2004**

 

(In thousands)

**CAPITALIZATION AND LIABILITIES**

 

 

 

**Capitalization:**

 

 

 

 Common stockholders' equity:

 

 

 

    Common stock outstanding (no par value)

$  798,638

 

$  638,826

    Accumulated other comprehensive loss,  net of tax

(68,892)

 

(89,813)

    Retained earnings

571,678

 

550,566

 

 

 

 

       Total common stockholders' equity

1,301,424

 

1,099,579

 Cumulative preferred stock of subsidiary  without mandatory redemption 

 

 

 

       ($100 par value)	

11,529

 

11,529

 Long-term debt

1,647,077

 

987,823

 

 

 

 

     Total capitalization

2,960,030

 

2,098,931

 

 

 

 

**Current Liabilities:**

 

 

 

 Short-term debt

474,699

 

94,700

 Accounts payable

157,286

 

117,645

 Accrued interest and taxes

47,384

 

15,796

 Other current liabilities

214,641

 

128,476

 

 

 

 

     Total current liabilities

894,010

 

356,617

 

 

 

 

**Deferred Credits:**

 

 

 

 Accumulated deferred income taxes

417,590

 

284,528

 Accumulated deferred investment tax  credits

34,776

 

35,360

 Regulatory liabilities

377,899

 

327,419

 Asset retirement obligations

50,446

 

50,361

 Additional minimum pension liability

164,801

 

164,801

 Accrued pension liability

3,825

 

-

 Accrued postretirement benefit cost

20,816

 

16,102

 Other deferred credits

212,366

 

153,516

 

 

 

 

     Total deferred credits

1,282,519

 

1,032,087

 

 

 

 

Commitments  and Contingencies (see Note 8)

-

 

-

 

$5,136,559

 

$3,487,635

 

 

 

 

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

6

**PNM RESOURCES, INC. AND  SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH  FLOWS**

(Unaudited)

 ****

 

**Nine Months Ended**

 

**September 30,**

 

**2005**

 ****

**2004**

 

(In thousands)

**Cash Flows From Operating Activities:**

 

 

 

   Net earnings

$  60,533

 

$  69,044

   Adjustments to reconcile net earnings to net cash flows

 

 

 

     from operating activities:

 

 

 

Depreciation and  amortization

112,000

 

96,837

Allowance for  equity funds used during construction

(1,784)

 

(802)

Accumulated  deferred income tax

17,330

 

2,056

Net unrealized  (gains) losses on trading and investment contracts

380

 

(1,343)

Other

358

 

-

   Changes in certain assets and liabilities:

 

 

 

Accounts  receivable

10,236

 

9,936

Unbilled  revenues

27,499

 

10,704

Accrued  post-retirement benefit costs

(2,574)

 

(5,101)

Deferred charges

(10,326)

 

(2,893)

Other assets

(25,571)

 

17,942

Accounts payable

(3,724)

 

(20,083)

Accrued taxes

46,899

 

47,864

Accrued interest

(6,857)

 

1,434

Deferred credits

(15,482)

 

(3,132)

Other  liabilities

(38,309)

 

(9,830)

Net cash flows  from operating activities

170,608

 

212,633

 

 

 

 

**Cash Flows From Investing Activities:**

 

 

 

   Utility plant additions

(128,578)

 

(83,880)

   Nuclear fuel additions

(10,349)

 

(5,820)

   Utility plant additions related to allowance for borrowed funds 

 

 

 

      used during construction and capitalized interest

(2,176)

 

(2,251)

   Return of principal of PVNGS lessor notes

21,091

 

20,292

   Cash acquired from purchase of TNP, net of cash paid

34,531

 

-

   Other 

1,039

 

(8,207)

            Net  cash flows from investing activities

(84,442)

 

(79,866)

 

The accompanying notes, as they relate to PNMR, are an integral part    of these financial statements.
7

**PNM RESOURCES, INC. AND  SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH  FLOWS**

(Unaudited)

 ****

 

**Nine Months Ended**

 

**September 30,**

 

**2005**

 ****

**2004**

 

(In thousands)

 ****

 

 

 

**Cash Flows From Financing  Activities:**

 

 

 

 Short-term debt borrowings  (repayments), net

380,000

 

(98,742)

 Long-term debt borrowings

239,832

 

-

 Long-term debt repayments

(399,626)

 

-

 Issuance of common stock

101,231

 

-

 Redemption of TNP preferred stock

(224,564)

 

-

 Exercise of employee stock  options

(16,064)

 

(9,578)

 Dividends paid

(39,583)

 

(29,031)

 Other	

212

 

490

            Net  cash flows generated (used) by financing activities

41,438

 

(136,861)

Increase (decrease) in cash and cash  equivalents

127,604

 

(4,094)

Beginning of period

17,195

 

12,694

End of period

$144,799

 

$   8,600

**Supplemental Cash Flow Disclosures:**

 

 

 

   Interest paid, net of capitalized interest

$  55,396

 

$ 33,942

   Income taxes (refunded), net

$(16,176)

 

$ (5,508)

 

 

 

 

**Supplemental schedule of noncash investing and financing activities**:

 

 

 

      PNMR purchased all of the outstanding  common shares of TNP for $107.6 million in cash

      and $87.4 million in PNMR common  stock.  In conjunction with the  acquisition, liabilities were

      assumed as follows:

Fair value of  assets acquired

$1,494,744

 

 

Cash paid for  TNP common shares

(107,602)

 

 

PNMR common  stock exchanged for TNP common stock

(87,392)

 

 

Liabilities  assumed

$1,299,750

 

 

 

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

8

**PNM  RESOURCES, INC. AND SUBSIDIARIES**

**CONSOLIDATED  STATEMENTS OF COMPREHENSIVE INCOME**

(Unaudited)

 ****

 

 

 

 

 

 

 

 ****

**Three  Months Ended**

 

**Nine  Months Ended**

 ****

**September  30,**

 

**September  30,**

 ****

**2005**

 ****

**2004**

 

**2005**

 ****

**2004**

 ****

(In  thousands)

 ****

 

 

 

 

 

 

 

**Net Earnings**

$  28,483

 

$  27,417

 

$  60,533

 

$  69,044

Other Comprehensive Income,  net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Unrealized gain  (loss) on securities:**

 

 

 

 

 

 

 

Unrealized holding gains  (losses)

 

 

 

 

 

 

 

during  the period, net of income

 

 

 

 

 

 

 

tax  (expense) benefit of $(297), 

 

 

 

 

 

 

 

$(205),  $(1,792) and $(477)

452

 

313

 

2,733

 

728

Reclassification adjustment  for 

 

 

 

 

 

 

 

amounts  included in net income,

 

 

 

 

 

 

 

net  of income tax (expense)

 

 

 

 

 

 

 

benefit  of $64, $319, 

 

 

 

 

 

 

 

        $1,819 and $701

(97)

 

(487)

 

(2,775)

 

(1,069)

 

 

 

 

 

 

 

 

**Additional minimum  pension liability**

 

 

 

 

 

 

 

**  adjustment, net of income tax expense**

 

 

 

 

 

 

 

**  of $(12)**

-

 

-

 

-

 

19

 

 

 

 

 

 

 

 

**Mark-to-market  adjustment for**

 

 

 

 

 

 

 

**certain derivative  transactions:**

 

 

 

 

 

 

 

Change in fair market value  of 

 

 

 

 

 

 

 

designated  cash flow hedges,

 

 

 

 

 

 

 

net  of income tax (expense)

 

 

 

 

 

 

 

benefit  of $(9,116), $290, 

17,162

 

(442)

 

22,004

 

3,222

        $(12,189) and $(2,112)

 

 

 

 

 

 

 

Reclassification for amounts  in net

 

 

 

 

 

 

 

income,  net of income tax

 

 

 

 

 

 

 

(expense)  benefit of $669, $329

 

 

 

 

 

 

 

$682  and $261

(1,021)

 

(502)

 

(1,041)

 

(399)

 

 

 

 

 

 

 

 

**Total Other Comprehensive Income (Loss)**           	

16,496

 

(1,118)

 

20,921

 

2,501

 

 

 

 

 

 

 

 

**Total Comprehensive Income**

$  44,979

 

$  26,299

 

$  81,454

 

$  71,545

 

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

9

**PUBLIC SERVICE COMPANY OF NEW  MEXICO AND SUBSIDIARY**

**A WHOLLY OWNED SUBSIDIARY OF PNM  RESOURCES, INC.**

**CONSOLIDATED STATEMENTS OF EARNINGS**

(Unaudited)

 

 

 ****

 ****

 ****

 ****

 ****

 ****

 ****

 

 

**Three Months Ended**

 ****

**Nine Months Ended**

 

 

**September 30,**

 ****

**September 30,**

 

 

**2005**

 ****

**2004**

 ****

**2005**

 ****

**2004**

 ****

 

(In thousands)

 ****

 

 

 

 

 

 

 

 

**Operating Revenues:**

 

 

 

 

 

 

 

 

 Electric

 

$ 325,274

 

$  313,147

 

$ 857,722

 

$   863,783

 Gas

 

78,258

 

73,530

 

325,752

 

330,290

    Total operating revenues

 

403,532

 

386,677

 

1,183,474

 

1,194,073

 

 

 

 

 

 

 

 

 

**Operating Expenses:**

 

 

 

 

 

 

 

 

 Cost of energy sold

 

249,660

 

226,811

 

703,776

 

703,751

 Administrative and general

 

45,695

 

37,056

 

128,102

 

121,075

 Energy production costs

 

36,484

 

33,735

 

112,364

 

107,977

 Depreciation and amortization

 

27,406

 

21,157

 

83,315

 

72,597

 Transmission and distribution costs

 

15,532

 

14,755

 

43,546

 

44,397

 Taxes, other than income taxes

 

7,913

 

7,523

 

23,664

 

23,805

 Income taxes

 

2,433

 

12,074

 

17,458

 

30,095

    Total operating expenses

 

385,123

 

353,111

 

1,112,225

 

1,103,697

    Operating income

 

18,409

 

33,566

 

71,249

 

90,376

 

 

 

 

 

 

 

 

 

**Other Income and Deductions:**

 

 

 

 

 

 

 

 

 Interest income

 

9,697

 

9,230

 

28,000

 

27,746

 Other income

 

3,963

 

2,028

 

9,222

 

5,297

 Other deductions

 

(2,677)

 

(1,225)

 

(9,704)

 

(2,816)

 Other income taxes

 

(3,987)

 

(2,715)

 

(9,989)

 

(9,693)

    Net other income and deductions

 

6,996

 

7,318

 

17,529

 

20,534

 

 

 

 

 

 

 

 

 

**Interest Charges**

 

14,139

 

13,189

 

40,896

 

39,774

 ****

 

 

 

 

 

 

 

 

**Net Earnings**

 

11,266

 

27,695

 

47,882

 

71,136

 ****

 

 

 

 

 

 

 

 

**Preferred Stock Dividend**

 

 

 

 

 

 

 

 

**  Requirements**

 

132

 

147

 

396

 

440

 ****

 

 

 

 

 

 

 

 

**Net Earnings Available for**

 ****

 

 ****

 

 

 

 

 

**  Common Stock**

 ****

$  11,134

 ****

$  27,548

 

$  47,486

 

$  70,696

 ****

 ****

 

 ****

 

 

 

 

 

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

10

**PUBLIC SERVICE COMPANY OF NEW  MEXICO AND SUBSIDIARY******

**A WHOLLY OWNED SUBSIDIARY OF PNM  RESOURCES, INC.******

**CONSOLIDATED BALANCE  SHEETS**

(Unaudited)

 ****

 ****

**September 30,**

 ****

**December 31,**

 ****

**2005**

 ****

**2004**

 

(In thousands)

**ASSETS**

 

 

 

**Utility Plant:**

 

 

 

 Electric plant in service

$2,541,812

 

$2,488,961

 Gas plant in service

699,294

 

680,487

 Common plant in service and plant held for  future use

98,797

 

97,369

 

3,339,903

 

3,266,817

 Less accumulated depreciation and  amortization

1,185,966

 

1,125,444

 

2,153,937

 

2,141,373

 Construction work in progress

101,510

 

110,406

 Nuclear fuel, net of accumulated  amortization of $17,669 and $16,448

28,919

 

25,449

 

 

 

 

     Net utility plant

2,284,366

 

2,277,228

 

 

 

 

**Other Property and Investments:**

 

 

 

 Investment in lessor notes

287,020

 

308,680

 Other investments

151,404

 

116,134

 Non-utility property

966

 

966

 

 

 

 

     Total other property and investments

439,390

 

425,780

 

 

 

 

**Current Assets:**

 

 

 

 Cash and cash equivalents

12,855

 

16,448

 Special deposits

247

 

-

 Accounts receivable, net of allowance for  uncollectible accounts

 

 

 

     of $1,353 and  $1,329

78,898

 

96,600

 Unbilled revenues

74,529

 

104,708

 Other receivables

46,123

 

45,717

 Inventories

44,209

 

41,246

 Regulatory assets

14,147

 

3,339

 Other current assets

50,849

 

39,933

 

 

 

 

     Total  current assets

321,857

 

347,991

 

 

 

 

**Deferred charges:**

 

 

 

 Regulatory assets

281,360

 

217,196

 Prepaid pension cost

90,417

 

87,336

 Other deferred charges

39,217

 

38,199

 

 

 

 

     Total deferred charges

410,994

 

342,731

 

$3,456,607

 

$3,393,730

 

 

 

 

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

11

**PUBLIC SERVICE COMPANY OF NEW  MEXICO AND SUBSIDIARY**

**A WHOLLY OWNED SUBSIDIARY OF PNM  RESOURCES, INC.**

**CONSOLIDATED BALANCE SHEETS**

(Unaudited)

 

 

 

**September 30,**

 

**December 31,**

 

**2005**

 

**2004**

 

(In thousands)

**CAPITALIZATION AND LIABILITIES**

 

 

 

**Capitalization:**

 

 

 

 Common stockholder's equity:

 

 

 

    Common stock outstanding ($5 par value)	

$   195,589

 

$   195,589

    Paid-in-capital

556,761

 

556,761

    Accumulated other comprehensive loss,  net of tax

(88,193)

 

(89,813)

    Retained earnings

338,934

 

371,455

 

 

 

 

       Total common stockholder's equity

1,003,091

 

1,033,992

 Cumulative preferred stock of subsidiary  without mandatory redemption 

 

 

 

       ($100 par value)	

11,529

 

11,529

 Long-term debt

987,206

 

987,676

 

 

 

 

     Total capitalization

2,001,826

 

2,033,197

 

 

 

 

**Current Liabilities:**

 

 

 

 Short-term debt

114,000

 

60,400

 Accounts payable

78,082

 

116,763

 Intercompany accounts payable

22,615

 

38,700

 Accrued interest and taxes

46,386

 

28,783

 Other current liabilities

155,647

 

91,765

 

 

 

 

     Total current liabilities

416,730

 

336,411

 

 

 

 

**Deferred Credits:**

 

 

 

 Accumulated deferred income taxes

286,150

 

278,907

 Accumulated deferred investment tax  credits

33,039

 

35,360

 Regulatory liabilities

338,728

 

327,419

 Asset retirement obligations

50,446

 

50,361

 Additional minimum pension liability

164,801

 

164,801

 Accrued postretirement benefit cost

14,010

 

16,102

 Other deferred credits

150,877

 

151,172

 

 

 

 

     Total deferred credits

1,038,051

 

1,024,122

Commitments  and Contingencies (see Note 8)

-

 

-

 

$3,456,607

 

$3,393,730

 

 

 

 

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

12

**PUBLIC SERVICE COMPANY OF NEW  MEXICO AND SUBSIDIARY**

**A WHOLLY OWNED SUBSIDIARY OF PNM  RESOURCES, INC.**

**CONSOLIDATED STATEMENTS OF CASH  FLOWS**

(Unaudited)

 ****

 

**Nine Months Ended**

 

**September 30,**

 

**2005**

 ****

**2004**

 

(In thousands)

**Cash Flows From Operating Activities:**

 

 

 

   Net earnings

$   47,882

 

$   71,136

   Adjustments to reconcile net earnings to net cash flows

 

 

 

     from operating activities:

 

 

 

Depreciation and  amortization

99,155

 

95,047

Allowance for  equity funds used during construction

(1,701)

 

(774)

Accumulated  deferred income tax 

3,433

 

2,056

Net unrealized  (gains) losses on trading and investment contracts

380

 

(1,343)

   Changes in certain assets and liabilities:

 

 

 

Accounts  receivable

17,703

 

9,936

Unbilled  revenues

30,179

 

10,704

Accrued  post-retirement benefit costs

(5,173)

 

(5,101)

Other assets

(21,444)

 

11,899

Accounts payable

(43,709)

 

(12,644)

Accrued interest  and taxes

17,603

 

47,622

Deferred credits

(14,358)

 

(2,033)

Other  liabilities

(34,940)

 

(9,403)

Net cash flows  from operating activities

95,010

 

217,102

**Cash Flows From Investing Activities:**

 

 

 

   Utility plant additions

(78,507)

 

(83,626)

   Nuclear fuel additions

(10,349)

 

(5,820)

   Utility plant additions related to allowance for borrowed funds used

 

 

 

      during construction and capitalized interest

(1,476)

 

(2,024)

   Purchase of bond investments

-

 

(12,247)

   Return of principal of PVNGS lessor notes

21,091

 

20,292

   Other 

(1,844)

 

(2,569)

            Net  cash flows from investing activities

(71,085)

 

(85,994)

 

 

 

 

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

13

**PUBLIC SERVICE COMPANY OF NEW  MEXICO AND SUBSIDIARY**

**A WHOLLY OWNED SUBSIDIARY OF PNM  RESOURCES, INC.**

**CONSOLIDATED STATEMENTS OF CASH  FLOWS**

(Unaudited)

 ****

 

**Nine Months Ended**

 

**September 30,**

 

**2005**

 ****

**2004**

 

(In thousands)

 ****

 

 

 

**Cash Flows From Financing  Activities:**

 

 

 

 Short-term debt borrowings  (repayments), net

53,600

 

(97,700)

 Dividends paid

(80,396)

 

(440)

 Other financing

(422)

 

(240)

 Change in intercompany  accounts

(300)

 

(36,273)

            Net  cash flows from financing activities

(27,518)

 

(134,653)

Decrease in cash and cash equivalents

(3,593)

 

(3,545)

Beginning of period

16,448

 

11,607

End of period

$12,855

 

$     8,062

**Supplemental Cash Flow Disclosures:**

 

 

 

   Interest paid, net of capitalized interest

$45,379

 

$   35,890

   Income taxes paid (refunded), net

$          3

 

$    (2,749)

 

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

14

**PUBLIC  SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**

**A WHOLLY OWNED SUBSIDIARY OF PNM  RESOURCES, INC.**

**CONSOLIDATED  STATEMENTS OF COMPREHENSIVE INCOME**

(Unaudited)

 ****

 

 

 

 

 

 

 

 ****

**Three  Months Ended**

 

**Nine  Months Ended**

 ****

**September  30,**

 

**September  30,**

 ****

**2005**

 ****

**2004**

 

**2005**

 

**2004**

 ****

(In  thousands)

 

 ****

 

 

 

 

 

 

 

**Net Earnings**

$  11,134

 

$  27,548 

 

$  47,486

 

$  70,696

Other Comprehensive Income,  net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Unrealized gain  (loss) on securities:**

 

 

 

 

 

 

 

Unrealized holding gains  (losses) during

 

 

 

 

 

 

 

the period, net of income  tax

 

 

 

 

 

 

 

(expense) benefit of $(297),  $(205), 

 

 

 

 

 

 

 

$(1,792)  and $(477)

452

 

313

 

2,733

 

728

Reclassification adjustment  for amounts

 

 

 

 

 

 

 

included  in net income, net of 

 

 

 

 

 

 

 

Income  tax (expense) benefit of $64

 

 

 

 

 

 

 

$319,  $1,819 and $701

(97)

 

(487)

 

(2,775)

 

(1,069)

 

 

 

 

 

 

 

 

**Additional minimum  pension liability**

 

 

 

 

 

 

 

**  adjustment, net of income tax expense**

 

 

 

 

 

 

 

**  of $(12)**

-

 

-

 

-

 

19

 

 

 

 

 

 

 

 

**Mark-to-market  adjustment for certain**

 

 

 

 

 

 

 

**   derivative transactions:**

 

 

 

 

 

 

 

Change in fair market value  of 

 

 

 

 

 

 

 

designated  cash flow hedges, net of

 

 

 

 

 

 

 

$841,  $290, $(1,771) 

 

 

 

 

 

 

 

and  $(2,112)

(1,283)

 

(442)

 

2,703

 

3,222

Reclassification for amounts  in net 

 

 

 

 

 

 

 

income,  net of income tax (expense)

 

 

 

 

 

 

 

benefit  of $669, $329, $682 and $261

(1,021)

 

(502)

 

(1,041)

 

(399)

 

 

 

 

 

 

 

 

**Total Other Comprehensive Income (Loss)**

(1,949)

 

(1,118)

 

1,620

 

2,501

 

 

 

 

 

 

 

 

**Total Comprehensive Income**

$  9,185

 

$  26,430

 

$  49,106

 

$  73,197

 ****

 

 

 

 

 

 

 

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

 15

**TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES**

**A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.**

**CONSOLIDATED STATEMENTS OF EARNINGS**

(Unaudited)

 ****

 

 

 ****

 

 

 ****

**Post-Acquisition**

 

**Pre-Acquisition**

 

 ****

 ****

**Three Months Ended**

 

 ****

 ****

**September 30,**

 

 ****

 ****

**2005**

 ****

**2004**

 

 ****

 ****

(In thousands)

 

 

**Operating Revenues:**

 

 

 

 

 

 Electric

$71,441

 

$74,732

 

 

     Total operating revenues 

71,441

 

74,732

 

 

 

 

 

 

 

 

**Operating Expenses:**

 

 

 

 

 

 Cost of energy sold

25,764

 

25,956

 

 

 Administrative and general

5,970

 

7,552

 

 

 Depreciation and amortization

7,814

 

7,433

 

 

 Transmission and distribution costs

5,670

 

4,442

 

 

 Taxes, other than income taxes

6,597

 

6,509

 

 

 Income taxes

4,412

 

5,760

 

 

    Total operating expenses

56,227

 

57,652

 

 

    Operating income

15,214

 

17,080

 

 

 

 

 

 

 

 

**Other Income and Deductions:**

 

 

 

 

 

 Interest income

660

 

128

 

 

 Other income

202

 

237

 

 

 Carrying charges on regulatory assets

1,910

 

928

 

 

 Other deductions

(43)

 

(157)

 

 

 Other income taxes

(1,050)

 

(436)

 

 

     Net other income and deductions

1,679

 

700

 

 

 

 

 

 

 

 

**Interest Charges**

7,250

 

6,971

 

 

 ****

 

 

 

 

 

**Net Earnings**

$  9,643

 

$10,809

 

 

 

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

16

**TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES**

**A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.**

**CONSOLIDATED STATEMENTS OF EARNINGS**

**(**Unaudited)****

 ****

 

 

 

 

 

 ****

**Post-Acquisition**

 

**Pre-Acquisition**

 

**Pre-Acquisition**

 ****

**For the period**

 

**For the period**

 

**For the period**

 ****

**June 6-**

 

**January 1-**

 

**January 1-**

 ****

**September 30, 2005**

 

**June 6, 2005**

 

**September 30, 2004**

 ****

 

 

(In  thousands)

 

 

**Operating Revenues:**

 

 

 

 

 

 Electric

$90,676

 

$ 112,820

 

$ 201,454

     Total operating revenues 

90,676

 

112,820

 

201,454

 

 

 

 

 

 

**Operating Expenses:**

 

 

 

 

 

 Cost of energy sold

32,466

 

43,885

 

73,601

 Administrative and general

8,153

 

11,048

 

22,115

 Depreciation and amortization

9,899

 

12,954

 

22,186

 Transmission and distribution costs

6,820

 

9,111

 

14,371

 Taxes, other than income taxes

8,482

 

9,228

 

17,700

 Income taxes

5,537

 

5,055

 

10,454

    Total operating expenses

71,357

 

91,281

 

160,427

    Operating income

19,319

 

21,539

 

41,027

 

 

 

 

 

 

**Other Income and Deductions:**

 

 

 

 

 

 Interest income

747

 

650

 

435

 Other income

313

 

523

 

925

 Carrying charges on regulatory assets

2,435

 

(1,407)

 

928

 Other deductions

(54)

 

(79)

 

(266)

 Other income taxes

(1,364)

 

154

 

(791)

     Net other income and deductions

2,077

 

(159)

 

1,231

 

 

 

 

 

 

**Interest Charges**

9,206

 

12,120

 

21,105

 ****

 

 

 

 

 

**Net Earnings Before Extraordinary Item**

12,190

 

9,260

 

21,153

 ****

 

 

 

 

 

 Extraordinary item - disallowance

 

 

 

 

 

     of stranded costs, net of taxes

-

 

-

 

(97,836)

 ****

 

 

 

 

 

**Net Earnings (Loss)**

$12,190

 

$     9,260

 

$  (76,683)

 

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

17

**TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES******

**A WHOLLY OWNED SUBSIDIARY  OF PNM RESOURCES, INC.**

**CONSOLIDATED BALANCE  SHEETS**

(Unaudited)

 ****

 ****

**September 30,**

 ****

**December 31,**

 ****

**2005**

 ****

**2004**

 

(In thousands)

**ASSETS**

 

 

 

**Utility Plant:**

 

 

 

 Electric plant in service

$  869,877

 

$ 845,900

 Construction work in progress

7,014

 

4,261

 Common plant in service and plant held for  future use

589

 

589

 

877,480

 

850,750

 Less accumulated depreciation and  amortization

292,760

 

276,081

     Net utility plant

584,720

 

574,669

 

 

 

 

**Other Property and Investments:**

 

 

 

 Other investments	

531

 

530

 Non-utility property, net of accumulated  depreciation of $3 and $3

2,121

 

343

 

 

 

 

     Total other property and investments

2,652

 

873

 

 

 

 

**Current Assets:**

 

 

 

 Cash and cash equivalents

30,027

 

65,759

 Special deposits

2,417

 

3,086

 Accounts receivable, net of allowance for  uncollectible accounts 

 

 

 

     of $100 and $191

13,395

 

12,739

 Federal income tax refund

40,483

 

22,912

 Unbilled revenues

7,133

 

7,576

 Other receivables

11,142

 

10,083

 Inventories

1,249

 

1,505

 Other current assets

884

 

7,526

     Total current assets

106,730

 

131,186

 

 

 

 

**Deferred charges:**

 

 

 

** **Stranded costs

87,316

 

87,316

 Carrying charges on stranded costs

55,797

 

48,130

 Other regulatory assets

2,617

 

8,105

 Goodwill

457,109

 

-

 Other deferred charges

21,995

 

22,227

     Total deferred charges

624,834

 

165,778

 

 

 

 

Commitments and Contingencies (see Note 8)

-

 

-

 

$1,318,936

 

$ 872,506

 

 

 

 

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

18

**TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES**

**A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES,  INC.**

**CONSOLIDATED BALANCE SHEETS**

(Unaudited)

 

 

 

**September 30,**

 

**December 31,**

 

**2005**

 

**2004**

 

(In thousands)

**CAPITALIZATION AND LIABILITIES**

 

 

 

**Capitalization:**

 

 

 

 Common stockholder's equity:

 

 

 

    Common stock outstanding ($10 par value)  

$            96

 

$         107

    Paid-in-capital

596,710

 

197,751

    Accumulated other comprehensive loss,  net of tax

-

 

(1,761)

    Retained earnings

12,190

 

(6,795)

 

 

 

 

       Total common stockholder's equity

608,996

 

189,302

 Long-term debt

415,790

 

415,569

 

 

 

 

     Total capitalization

1,024,786

 

604,871

 

 

 

 

**Current Liabilities:**

 

 

 

 Accounts payable

32,379

 

15,649

 Accrued interest and taxes

24,605

 

22,647

 Accrued payroll and benefits

4,462

 

1,583

 Other current liabilities

5,368

 

5,155

 

 

 

 

     Total current liabilities

66,814

 

45,034

 

 

 

 

**Deferred Credits:**

 

 

 

 Accumulated deferred income taxes

135,222

 

138,249

 Accumulated deferred investment tax  credits

1,736

 

2,326

 Regulatory liabilities

39,171

 

40,729

 Accrued pension liability

3,825

 

4,844

 Accrued postretirement benefit cost

6,806

 

2,693

 Other deferred credits

40,576

 

33,760

 

 

 

 

     Total deferred credits

227,336

 

222,601

 

$1,318,936

 

$ 872,506

 

 

 

 

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

19

**TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES**

**A WHOLLY OWNED SUBSIDIARY OF PNM  RESOURCES, INC.**

**CONSOLIDATED STATEMENTS OF CASH  FLOWS**

(Unaudited)

 ****

 

 ****

 ****

 ****

 ****

 ****

 

**Post-Acquisition**

 ****

**Pre-Acquisition**

 ****

**Pre-Acquisition**

 

**For the period**

 ****

**For the period**

 ****

**For the period**

 

**June 6-**

 ****

**January 1-June 6,**

 ****

**January 1-**

 

**September 30, 2005**

 ****

**2005**

 ****

**September 30, 2004**

**Cash Flows From Operating  Activities:**

 

 

(In thousands)

 

 

 Net earnings (loss)****

$  12,190

 

$   9,260

 

$ (76,683)

 Adjustments to reconcile net  earnings to net cash flows****

 

 

 

 

 

    from operating activities:****

 

 

 

 

 

Depreciation and amortization****

10,498

 

14,042

 

24,131

Allowance for equity funds used during construction****

(59)

 

(60)

 

(336)

Accumulated deferred income tax****

18,447

 

(1,411)

 

26,717

Carrying charges on deferred stranded cost

(2,435)

 

1,407

 

(928)

Disallowance of stranded costs, net of taxes

-

 

-

 

97,836

 Changes in certain assets and  liabilities:****

 

 

 

 

 

Accounts  receivable

(1,371)

 

(344)

 

(3,397)

Unbilled revenues

549

 

(106)

 

1,566

Accounts payable

13,549

 

(3,931)

 

(1,015)

Accrued interest and taxes

(5,732)

 

(3,998)

 

(17,296)

Other assets and liabilities

(1,253)

 

2,066

 

76

Net cash flows from operating activities

44,383

 

16,925

 

50,671

**Cash Flows From Investing  Activities:**

 

 

 

 

 

 Utility plant additions****

(12,604)

 

(19,270)

 

(32,602)

 Acquisition costs****

(3,742)

 

-

 

-

 Utility plant additions  related to allowance for borrowed funds used****

 

 

 

 

 

     during construction and  capitalized interest****

(67)

 

(73)

 

(325)

 Other	****

882

 

(166)

 

(522)

            Net  cash flows from investing activities****

(15,531)

 

(19,509)

 

(33,449)

 ****

 ****

 ****

 ****

 ****

 ****

    ****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.**

**CONSOLIDATED STATEMENTS OF CASH  FLOWS**

(Unaudited)

 ****

 

 ****

 ****

 ****

 ****

 ****

 

**Post-Acquisition**

 ****

**Pre-Acquisition**

 ****

**Pre-Acquisition**

 

**For the period**

 ****

**For the period**

 ****

**For the period**

 

**June 6-**

 ****

**January 1-June 6,**

 ****

**January 1-**

 

**September 30, 2005**

 ****

**2005**

 ****

**September 30, 2004**

 ****

 

 

(In thousands)

 

 

**Cash Flows From Financing  Activities:**

 

 

 

 

 

 Long-term debt	costs and repayments****

-

 

-

 

(9,296)

 Redemption of common stock	

(62,000)

 

-

 

-

 Dividends paid

-

 

-

 

(6,000)

            Net  cash flows from financing activities

(62,000)

 

-

 

(15,296)

Increase (decrease) in cash and cash equivalents

(33,148)

 

(2,584)

 

1,926

Beginning of period

63,175

 

65,759

 

56,907

End of period

$  30,027

 

$   63,175

 

$  58,833

**Supplemental Cash Flow Disclosures:**

 

 

 

 

 

 Interest paid, net of  capitalized interest

$    5,681

 

$   12,868

 

$  18,461

 Income	taxes paid

$    3,241

 

$     2,456

 

$    3,526
                  
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**

**CONSOLIDATED  STATEMENTS OF COMPREHENSIVE INCOME**

(Unaudited)

** ******

 ****

**Post-Acquisition**

 

**Pre-Acquisition**

 

 ****

 ****

**Three  Months Ended**

 

 ****

 ****

**September  30,**

 

 ****

 ****

**2005**

 

**2004**

 

 ****

 

(In thousands)

 

 

**Net Earnings**

$  9,643

 

$10,809

 

 

Other Comprehensive Income,  net of tax:

 

 

 

 

 

 

 

 

 

 

 

**Cash flow hedges, net  of tax:**

 

 

 

 

 

Interest rate hedge, net of  reclassification

 

 

 

 

 

   adjustment net of income tax benefit

 

 

 

 

 

   of $0, and $79

-

 

129

 

 

 

 

 

 

 

 

Total  cash flow hedges

-

 

129

 

 

 

 

 

 

 

 

**Total Comprehensive  Income**

$  9,643

 

$10,938

 

 

 

 

 

 

 

 

In conjunction  with the acquisition of TNP by PNMR, the interest rate hedge was fair valued  and

was charged to  goodwill.

 

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.**

**CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME**

(Unaudited)

 ****

 ****

 ****

 

 

 

 

 

 ****

**Post-Acquisition**

 ****

**Pre-Acquisition**

 ****

**Pre-Acquisition**

 ****

**For the period**

 ****

**For the period**

 ****

**For the period**

 ****

**June 6-**

 ****

**January 1-June 6,**

 ****

**January 1-**

 ****

**September 30, 2005**

 ****

**2005**

 ****

**September 30, 2004**

 ****

 

 

(In thousands)

 

 

**Net Earnings**

$  12,190

 

$   9,260

 

$(76,683)

Other Comprehensive Income,  net of tax:

 

 

 

 

 

 

 

 

 

 

 

**Cash flow hedges, net  of tax:**

 

 

 

 

 

Interest rate hedge, net of  reclassification

 

 

 

 

 

   adjustment net of income tax benefit

 

 

 

 

 

   of $0, $1,084 and $238

-

 

1,761

 

387

 

 

 

 

 

 

Total  cash flow hedges

-

 

1,761

 

387

 

 

 

 

 

 

**Total Comprehensive  Income (Loss)**

$  12,190

 

$ 11,021

 

$(76,296)

 

 

 

 

 

 

In conjunction  with the acquisition of TNP by PNMR, the interest rate hedge was fair valued  and was

charged to  goodwill.

 

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

 23

**PNM RESOURCES, INC. AND SUBSIDIARIESPUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARYTEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

**(1)         Accounting Policies and Responsibilityfor Financial Statements**

 In the opinion of the management of PNM Resources,Inc. and Subsidiaries ("PNMR" or the "Company"), the accompanying unauditedinterim consolidated financial statements reflect all normal and recurringaccruals and adjustments which are necessary to present fairly the Company'sfinancial position at September 30, 2005 and December 31, 2004, theconsolidated results of its operations and comprehensive income for the threeand nine months ended September 30, 2005 and 2004 and the consolidatedstatements of cash flows for the nine months ended September 30, 2005 and2004.  These consolidated financialstatements are unaudited, and certain information and note disclosures normallyincluded in the Company's annual consolidated financial statements have beencondensed or omitted, as permitted under the applicable rules andregulations.  The Company's threeprimary subsidiaries are Public Service Company of New Mexico and Subsidiary("PNM"), Texas-New Mexico Power Company and Subsidiaries ("TNMP") and FirstChoice Power, L.P. and Subsidiaries ("First Choice").  Readers of these financial statements should refer to PNMR's,PNM's and TNMP's audited consolidated financial statements and notes theretofor the year ended December 31, 2004 that are included in the respective AnnualReports on Form 10-K for the year ended December 31, 2004.  In addition, readers should refer to PNMR's Current Report on Form 8-Kfiled on September 26, 2005 that conformed its presentation of segmentinformation in the 2004 Annual Report on Form 10-K to reflect its revisedsegment presentation (see Note 3).  Theresults of operations presented in the accompanying financial statements arenot necessarily representative of operations for an entire year.  

*TNP Acquisition* 

As discussed in Note 2, on June 6, 2005, PNMRcompleted the previously announced acquisition of TNP Enterprises, Inc. ("TNP")effective at 8:00 AM Central Daylight Time. Prior to the consummation of the acquisition, TNP was a privately ownedholding company based in Fort Worth, Texas. TNP's principal subsidiaries are TNMP, a regulated utility operating inTexas and New Mexico, and First Choice, a certified retail electric provideroperating in Texas.  

The acquisition was accounted for using thepurchase method of accounting.  Underthis method, the purchase price was allocated to the fair market value of theassets acquired and the liabilities assumed. The excess purchase price over the fair value of the assets acquired andthe liabilities assumed was allocated to goodwill at TNMP and goodwill andother intangible assets at First Choice. As a result, TNMP and First Choice have recorded purchase accountingfair value adjustments to their respective assets and liabilities, includingdeferred assets, regulatory assets and pension and postretirementliabilities.  At the date ofacquisition, the excess of the purchase price over net assets acquired wasallocated preliminarily to goodwill in the amount of $482.8 million and otherintangible assets in the amount of $63.1 million.  During the third quarter of2005, an adjustment of $9.9 million was recorded to goodwill and the balance ingoodwill at September 30, 2005 was $492.7 million.  PNMR is in the process of completing

24

**PNM RESOURCES, INC. AND SUBSIDIARIESPUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARYTEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

valuations of acquiredproperty and intangible assets; therefore, the allocation of the purchase priceto the acquired net assets is subject to adjustment. 

TNP's largest subsidiary, TNMP, isa regulated utility; therefore, the valuations of the majority of the assetsand liabilities were determined within the context of SFAS No. 71, *"Accountingfor the Effects of Certain Types of Regulation,"* and did not changesignificantly. 

The purchase accounting entries are reflectedon PNMR's financial statements as of the purchase date.  PNMR "pushed down" the effects of purchaseaccounting to the financial statements of TNMP and First Choice.  Accordingly, TNMP's post-acquisition financialstatements reflect a new basis of accounting, and separate financial statementsare presented for pre-acquisition and post-acquisition periods, separated by aheavy black line.   

*Goodwill and OtherIntangible Assets* 

The excess purchase price over the fair valueof the assets acquired and the liabilities assumed by PNMR for its June 6, 2005acquisition of TNP was allocated to goodwill and other intangible assets.  Under the provisions of SFAS No. 142*,"Goodwill and Other Intangible Assets"* ("SFAS 142"), PNMR does not amortizegoodwill.  Certain intangible assets areamortized over their estimated useful lives. Goodwill and intangible assets are evaluated for impairment at leastannually, on December 31, or more frequently if events and circumstancesindicate that the goodwill or other intangible assets might be impaired. 

Of the$63.1 million of acquired intangible assets, $53.2 million was assigned to thetrade name "First Choice."  The tradename has an indefinite useful life; therefore, no amortization will berecognized, but the asset will be evaluated for impairment each reportingperiod.  The other $9.9 millionintangible asset was assigned to the First Choice customer list.  The useful life of the customer list isestimated to be approximately eight years; therefore the asset will beamortized on a straight-line basis over an eight-year period. 

Aspart of the acquisition of TNP, PNMR determined the fair value of a FirstChoice contractual obligation to purchase power.  In comparing the pricing terms of the contractual obligationagainst the forward price of electricity in the relevant market, First Choiceconcluded that the contract was above market. In accordance with SFAS No. 141, as amended, *"Business Combinations"* ("SFAS 141"), at June 6, 2005, the contractwas recorded at fair value and a deferred liability of $3.8 million wasrecorded that will be amortized as a reduction in cost of energy over the contractlife, or approximately three years.  The amortization matches the differencebetween the forward price curve and the contractual obligation for each monthin accordance with the contract as of the acquisition date. 

PNMR also determined thefair value of a First Choice contractual obligation to sell power to certaincommercial and industrial customers. This contractual obligation was fair valued in accordance with SFAS141.  The valuation was based on thedifference between the 

25

**PNM RESOURCES, INC. AND SUBSIDIARIESPUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARYTEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

current market rates charged by First Choice forthese customers compared to the contractual rate embedded in the customeragreement.  As a result of the analysis,First Choice determined that its rates for these contractual customers arebelow market rates and at June 6, 2005, recorded a deferred liability of $3.5million that will be amortized into revenues over the contract life, orapproximately three years.  Theamortization matches the difference between the retail market rate and thecontractual obligation for each month as of the date of acquisition.

*Presentation* 

The Notesto Consolidated Financial Statements include disclosures for PNMR, PNM andTNMP.  For discussion purposes, this reportwill use the term "Company" when discussing matters of common applicability toPNMR, PNM and TNMP.  Discussionsregarding only PNMR, PNM or TNMP will be clearly indicated as such.   

PNMR wasestablished as a holding company in 2001. On December 30, 2004, PNMR became a registered holding company underPUHCA.  As a result of the requirementto register as a holding company, PNMR created PNMR Services Company, awholly-owned services company, which began operation on January 1, 2005,subject to final approval of a services company application filed with the SECin January 2005.  

PNMRperformed substantially all of the corporate activities of PNM from 2001 to2004.  These activities were billed toPNM on a cost basis and were allocated to the business units.  The service functions previously performedby PNMR were assumed by PNMR Services Company effective January 1, 2005.  

Until June6, 2005, TNMP provided First Choice and TNP with corporate support services,including accounting, finance, information services, legal and human resources,under a shared services agreement with First Choice dated March 1, 2001 and asimilar agreement with TNP dated June 6, 1997. These services were billed at TNMP's cost and, in return, TNP and FirstChoice compensated TNMP for the services provided.  These agreements were in effect through June 6, 2005 when theywere replaced by a new shared services arrangement with PNMR Services Company. 

Effectivewith the close of the acquisition of TNP on June 6, 2005, all TNMP employeeswho were providing corporate support to TNP and First Choice became employeesof PNMR Services Company.  PNMR ServicesCompany provides corporate services to all of PNMR's business units, includingPNM, Avistar, Inc., TNP, TNMP and First Choice per shared servicesagreements.  These services are billedat cost on a monthly basis and allocated to the business units. 

Certain amounts in the 2004 Consolidated FinancialStatements and Notes thereto for PNMR, PNM and TNMP have been reclassified toconform to the 2005 financial statement presentation.  Specifically, certain amounts in the 2004 Consolidated FinancialStatements and

26

**PNM RESOURCES, INC. AND SUBSIDIARIESPUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARYTEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

 

 Notes thereto of TNMP have been reclassified to conform toPNMR's presentation for comparability. 

In addition, in the PNMR and TNMP Consolidated Statements ofCash Flows for the nine months ended September 30, 2005, PNMR and TNMP presentthe classification of changes in restricted cash balances as an investingactivity.  PNMR and TNMP presented suchchanges as an operating activity prior to the quarter ended June 30, 2005.  In the accompanying PNMR and TNMPConsolidated Statements of Cash Flows for the nine months ended September 30,2004, the changes in these cash balances were reclassified to be consistentwith the 2005 presentation.  Thisreclassification resulted in a $1.5 million increase to PNMR investing cashflows and a corresponding decrease to PNMR operating cash flows from theamounts previously reported.  Thisreclassification resulted in less than a $0.1 million increase to TNMPinvesting cash flows and a corresponding decrease to TNMP operating cash flowsfrom the amounts previously reported. 

PNMR* *

*StockBased Compensation* 

The Company accounts for stock-basedcompensation using the intrinsic value method prescribed in AccountingPrinciples Board Opinion No. 25, "*Accounting for Stock Issued to Employees*"("APB 25").  Compensation cost for stockoptions, if any, is measured as the excess of the quoted market price of PNMR'sstock at the date of grant over the exercise price of the granted stockoption.  Restricted stock is recorded ascompensation cost over the requisite vesting periods based on the market valueon the date of grant.

27
**
AtSeptember 30, 2005, PNMR had three stock-based employee compensationplans.  Stock options continue to begranted under only two of the plans. Had compensation expense for PNMR's stock options been recognized basedon the fair value on the grant date under the methodology prescribed by SFASNo. 123, *"Accounting for Stock-Based Compensation"* ("SFAS 123"), theeffect on PNMR's pro forma net earnings and pro forma diluted earnings pershare would be as follows (in thousands, except per share data): 

 

**Three****Months Ended**

 

**Nine  Months Ended**
 

**September 30,**

 

**September 30,**

 

**2005**

 ****

**2004**

 ****

**2005**

 ****

**2004**

 

 

 

 

 

 

 

 

Net earnings

$28,483

 

$27,417

 

$60,533

 

$69,044

Deduct:  Total stock-based employee

 

 

 

 

 

 

 

    compensation expense determined

 

 

 

 

 

 

 

    under fair value based method for all

 

 

 

 

 

 

 

    awards, net of related tax effects

(303)

 

(704)

 

(996)

 

(2,111)

Pro forma net earnings

$28,180

 

$26,713

 

$59,537

 

$66,933

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

     Basic - as reported

$    0.41

 

$    0.45

 

$   0.93

 

$    1.14

 

 

 

 

 

 

 

 

     Basic  - pro forma

$    0.41

 

$    0.44

 

$   0.92

 

$    1.11

 

 

 

 

 

 

 

 

     Diluted - as reported

$    0.41

 

$    0.45

 

$   0.92

 

$    1.13

 

 

 

 

 

 

 

 

     Diluted - pro forma

$    0.41

 

$    0.44

 

$   0.91

 

$    1.09

 SFAS No. 123 (revised 2004), "*Share Based Payment*" ("SFAS 123R"),supersedes APB 25.  SFAS 123R requiresthe recognition of compensation expense, over the requisite service period, inan amount equal to the fair value of share-based payments granted toemployees.  The fair value of theshare-based payments, excluding liability awards, is computed at the date ofgrant and will not be remeasured.  Thefair value of liability awards will be remeasured at each reporting datethrough the settlement date with the change in fair value recognized ascompensation expense over that period. SFAS 123R applies to all transactions involving the issuance, by acompany, of its own equity in exchange for goods or services.  SFAS 123R does not change the accountingguidance for share-based payment transactions with parties other than employeesprovided in SFAS 123 as originally issued and EITF Issue No. 96-18, "*Accounting for Equity Instruments That AreIssued to Other Than Employees for Acquiring, or in Conjunction with Selling,Goods or Services*."  SFAS 123R willbe effective for PNMR beginning January 1, 2006.  For options issued on or prior to December 31, 2005, PNMR expectsthat the effect of SFAS 123R on PNMR's results of operations will not bematerially different from the pro forma amounts presented in the table abovefor the applicable time period.  PNMR anticipatesthat the calculation of the fair value of any options issued after December 31,2005 

28

**PNM RESOURCES, INC. AND SUBSIDIARIESPUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARYTEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

will not be materially different from the fair value estimated in the proforma amounts presented in the table above.

PNM

*DecommissioningCosts*

Accountingfor decommissioning costs for nuclear and fossil-fuel generation involvessignificant estimates related to costs to be incurred many years in the futureafter plant closure.  Changes in theseestimates could significantly impact the Company's financial position, resultsof operations and cash flows.  PNM ownsand leases nuclear and fossil-fuel facilities that are within and outside ofits retail service areas.  PNM adoptedthe accounting requirements of SFAS No. 143, *"Accounting for AssetRetirement Obligations"* (*"*SFAS 143*"*), on January 1,2003.  Under SFAS 143, PNM is onlyrequired to recognize and measure decommissioning liabilities for tangiblelong-lived assets for which a legal obligation exists.  Adoption of the statement changed the methodof accounting for both nuclear generation decommissioning and fossil-fuelgeneration decommissioning. Nuclear decommissioning costs are based onsite-specific estimates of the costs for removing all radioactive and otherstructures at the site.  PVNGS Unit 3 isexcluded from PNM's retail rates while PVNGS Units 1 and 2 are included.  PNM collects a provision for ultimatedecommissioning of PVNGS Units 1 and 2 in its rates and recognizes acorresponding expense and liability for these amounts.  Fossil-fuel decommissioning costs are alsoapproved by the NMPRC as a component of PNM's depreciation rates.  PNM believes that it will continue to beable to collect in rates for its legal asset retirement obligations for nuclearand fossil-fuel generation activities included in the ratemaking process.  

Inaddition, PNM has a contractual obligation with the PVNGS participants to fundseparately the nuclear decommissioning cost at a level in excess of what PNMhas identified as its legal asset retirement obligation under SFAS 143.  The contractual funding obligation is basedon a site-specific estimate prepared by a third party.  PNM's most recent site-specific estimatesfor nuclear decommissioning costs were developed in 2004, using 2004 costfactors, and are based on prompt dismantlement decommissioning, reflecting thecosts of removal discussed above, with such removal occurring shortly afteroperating license expiration.  PNM'sshare of the contractual funding obligation through the end of the licensingterms is approximately $216.7 million (measured in 2004 dollars).  The estimates are subject to change based ona variety of factors, including cost escalation, changes in technologyapplicable to nuclear decommissioning and changes in federal, state or localregulations.  The operating licenses forPVNGS Units 1, 2 and 3 will expire in 2025, 2026, and 2027, respectively.  PNM does not have a similar contractualfunding obligation related to its fossil-fuel plants.

 29

**PNM RESOURCES, INC. AND SUBSIDIARIESPUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARYTEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

 TNMP

*Extraordinary Item*

In the secondquarter of 2004, TNMP recorded a loss of $97.8 million related to the PUCT true-up proceeding regarding TNMP'sstranded costs.  The purpose of the true-up proceeding was to quantify and reconcile theamount of stranded costs that TNMP may recover from its transmission anddistribution customers.  The PUCTdecision established $128.4 million as TNMP's stranded costs and allowed TNMPto recover $87.3 million of the $266.5 million that TNMP requested for itstrue-up balance.  This decisionresulted in a loss of $155.2 million before tax ($97.8 million after tax).  TNMP recorded the  $97.8 million after tax loss as an extraordinary item inaccordance with the requirements of SFAS No. 101, "*Regulated Enterprises -Accounting for the Discontinuance of the Application of FASB Statement No. 71." *

**(2)     TNPAcquisition **

OnJune 6, 2005, PNMR acquired all of the outstanding common shares of TNP,including its principal subsidiaries, TNMP and First Choice.  The results of TNP's operations have beenincluded in the consolidated financial statements of PNMR from that date.  PNMR acquired TNP in order to complement itsexisting New Mexico electric operations and to expand into the retail andwholesale markets in Texas. 

Theaggregate purchase price was $1,277 million, including a payment to theprevious owner of $175.0 million consisting of $87.6 million of cash and commonstock valued at $87.4 million.  Inaddition, the aggregate purchase price included $1,034 million of TNP debt andpreferred stock and incurred transaction and other costs of $67.7 million.  The value of the 4,326,337 common sharesissued was determined based on $20.20 per common share as provided for in theStock Purchase Agreement.  The purchaseprice was based on an estimated purchase price in accordance with the StockPurchase Agreement, dated as of July 24, 2004 by and between PNMR and SWAcquisition.  PNMR is in the process ofcompleting valuations of acquired property and intangible assets; thus, theallocation of the purchase price is subject to adjustment and will be finalizedwithin one year of the acquisition.   

Pursuantto the Stock Purchase Agreement, PNMR provided SW Acquisition its proposedfinal purchase price, reflecting a reduction from the estimated purchase priceof approximately $37 million.  SWAcquisition has objected to PNMR's proposed final purchase price.  There is a mechanism established in theStock Purchase Agreement for resolving disputes regarding the final purchaseprice.  However, in August 2005, SWAcquisition filed a petition against PNMR in Texas state district court, inwhich SW Acquisition alleged, among other things, that PNMR had breached theStock Purchase Agreement.  The petitionseeks a declaration of the parties' rights and duties under the Stock PurchaseAgreement, including the final purchase price, and also seeks damages in an unspecifiedamount.  In September 2005, PNMR filed an answer to the petition generallydenying SW Acquisition's claims and a counterclaim seeking damages for 

30

**PNM RESOURCES, INC. AND SUBSIDIARIESPUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARYTEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

SWAcquisition's breaches of contract including its early termination of thenegotiation period provided for in the Stock Purchase Agreement and its breachof the provisions in the Stock Purchase Agreement regarding alternate disputeresolution.  PNMR also filed a motion tocompel arbitration consistent with the Stock Purchase Agreement and a motionfor a preliminary injunction that would force SW Acquisition to choose anaccountant to resolve the purchase price dispute.  The court has scheduled a hearing on the motion to compelarbitration for November 2005.  PNMRbelieves the SW Acquisition petition is without merit and intends to vigorouslydefend itself and otherwise protect its rights under the Stock PurchaseAgreement. 

The following unaudited pro forma financialinformation presents a summary of PNMR's consolidated results of operations forthe three and nine months ended September 30, 2005 and 2004 assuming theacquisition of TNP had been completed as of January 1, 2004, includingadjustments, which are based upon preliminary estimates, to reflect theallocation of the purchase price to the acquired net assets.  The pro forma financial information does notinclude synergy savings that may result from the business combination and isnot necessarily indicative of the results of operations if the acquisition had beeneffective as of these dates.   

 

**For the ThreeMonths Ended**

 ****

**For the NineMonths Ended**

 

**September 30,**

 ****

**September 30,**

 

**2005**

 ****

**2004**

 ****

**2005**

 ****

**2004**

 

(In thousands)

Operating revenues

$ 597,117

 

$ 593,341

 

$1,654,807

 

$1,723,530

Operating expenses

$ 546,255

 

$ 526,066

 

$1,520,815

 

$1,557,614

Earnings before  extraordinary item

$    27,710

 

$    50,129

 

$      66,142

 

$    109,080

Net earnings

$    27,710

 

$    50,129

 

$      66,142

 

$      11,244

Net earnings per common  share

 

 

 

 

 

 

 

 before extraordinary item:

 

 

 

 

 

 

 

 Basic

$        0.40

 

$       0.73

 

$          0.96

 

$          1.59

 Diluted

$        0.40

 

$       0.71

 

$          0.95

 

$          1.57

Net earnings per common  share:

 

 

 

 

 

 

 

 Basic

$        0.40

 

$        0.73

 

$          0.96

 

$          0.16

 Diluted

$        0.40

 

$        0.71

 

$         0.95

 

$          0.16

* *** (3)    Segment Information** 

PNMR is an investor-owned holding company of energyand energy related businesses.  Itsthree primary subsidiaries are PNM, TNMP and First Choice.  PNM is an integrated public utility withregulated operations primarily engaged in the generation, transmission anddistribution of electricity, transmission, distribution and sale of natural gaswithin New Mexico, and unregulated operations primarily focused on the sale andmarketing of electricity in the Western United States.  TNMP is a regulated utility operating inTexas and New Mexico.  In

31

**PNM RESOURCES, INC. AND SUBSIDIARIESPUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARYTEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

 Texas, TNMPprovides regulated transmission and distribution services.  In New Mexico, TNMP provides integratedelectric services that include thetransmission, distribution, purchase and sale of electricity to its New Mexicocustomers.  First Choice is acompetitive retail electric provider operating in Texas.  In addition, PNMR provides energy andtechnology related services through its wholly owned subsidiary, Avistar, Inc. 

The following segmentpresentation is based on the methodology that the Company's management uses formaking operating decisions and assessing performance of its various businessactivities.  The following presentationreports operating results without regard to the effect of accounting orregulatory changes and similar non-recurring items not related to normaloperations.  A reconciliation from thesegment presentation to the GAAP financial statements is provided. 

In conjunction with the TNP acquisition, managementchanged its business segment reporting. As it currently operates, PNMR's principal businesses include regulatedoperations and unregulated operations.    Regulated Operations include the segmentsPNM Electric, TNMP Electric and PNM Gas. Unregulated Operations include the segments PNM Wholesale and FirstChoice.  Company management has combinedtwo segments previously reported separately, Transmission and Electric, to formone reportable segment, PNM Electric. The prior year amounts have been conformed to reflect this change forcomparison purposes.  As required by SECregulations, PNMR filed a Current Report on Form 8-K on September 26, 2005 thatconformed its presentation of segment information in the 2004 Annual Report onForm 10-K to reflect the revised segment presentation. 

**REGULATEDOPERATIONS** 

**PNM Electric** 

PNM Electricis an integrated electric utility that consists of the generation, transmissionand distribution of electricity for retail electric customers in New Mexico andthe sale of transmission to third parties as well as to PNM Wholesale andTNMP.  PNM Electric provides retailelectric service to a large area of north central New Mexico, including thecities of Albuquerque and Santa Fe, and certain other areas of New Mexico.  Customer rates for retail electric serviceare set by the NMPRC based on the provisions of the Global Electric Agreement(see Note 9).  PNM Electric owns orleases transmission lines, interconnected with other utilities in New Mexico,and south and east into Texas, west into Arizona, and north into Colorado andUtah.

32

**PNM RESOURCES, INC. AND SUBSIDIARIESPUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARYTEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

**TNMP Electric**** **

TNMP Electric consists of the operations ofTNMP.  TNMP is a regulated utilityoperating in Texas and New Mexico.  InTexas, TNMP provides regulated transmission and distribution services under theprovisions of TECA, the legislation that established retail competition inTexas (Senate Bill 7).  In New Mexico,TNMP provides integrated electricity servicesthat include the transmission, distribution, purchase and sale of electricityto its New Mexico customers as well as transmission to third parties and toPNM.  TNMP's Texas and New Mexicooperations are subject to traditional cost-of-service regulation.  ** **

**PNM Gas** 

PNM Gas distributesnatural gas to most of the major communities in New Mexico, including two ofNew Mexico's three largest metropolitan areas, Albuquerque and Santa Fe.  The customer base of PNM Gas includes bothsales-service customers and transportation-service customers.  PNM Gas purchases natural gas in the openmarket and resells it at cost to its distribution customers.  As a result, increases or decreases in gasrevenues resulting from wholesale gas price fluctuations do not impact PNMR'sor PNM's consolidated gross margin or earnings.

**UNREGULATED OPERATIONS** 

**PNMWholesale** 

PNM Wholesale consists ofthe generation and sale of electricity into the wholesale market based on twoproduct lines that include long-term contracts and short-term sales.  The source of these sales is supply createdby selling the unused capacity of jurisdictional assets as well as the capacityof the Company's wholesale plants excluded from retail rates.  Both regulated and unregulated generation isjointly dispatched in order to improve reliability, provide the most economicpower to retail customers, and maximize profits on any wholesale transactions. 

Long-term contractsinclude sales to firm-requirements and other wholesale customers withmulti-year arrangements.  Short-termsales generally include transactions entered into for up to two years.  They also include spot market, hour ahead,day ahead, week ahead and forward market opportunities in which PNM Wholesaleutilizes its asset backed strategy. Also included in short-term sales are sales of any excess generation notrequired to fulfill PNM Electric's retail load and contractualcommitments.  Short-term sales alsocover the revenue credit to retail customers as specified in the GlobalElectric Agreement.  PNM Wholesale alsosells transmission services to TNMP. 

Inaddition, adjustments related to EITF Issue 03-11, "*Reporting Realized Gainsand Losses on Derivative Instruments that are subject to FASB statement No. 133and Not Held for Trading Purposes,*" are included in Corporate andOther.  These accounting pronouncementsrequire a net presentation of trading gains and losses and realized gains andlosses for certain non-

33

**PNM RESOURCES, INC. AND SUBSIDIARIESPUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARYTEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

trading derivatives. Management evaluates PNM Wholesale operations on a gross presentationbasis due to its primarily net asset-backed marketing strategy and the importanceit places on the Company's ability to repurchase and remarket previously soldcapacity.   

**FirstChoice **

First Choice is acertified retail electric provider operating in Texas, which allows it toprovide electricity to residential, small and large commercial, industrial andinstitutional customers.  First Choiceperforms all activities in Texas with Texas retail customers, includingacquiring new retail customers, setting up retail accounts, handling customerinquiries and complaints, and acting as a liaison between the transmission anddistribution companies and retail customers. First Choice was organized in 2000 to act as TNMP's affiliated retailelectric provider, as required by TECA, the legislation that established retailcompetition in Texas (also known as Senate Bill 7).   

**CORPORATEAND OTHER** 

On December 30, 2004, PNMR became a registeredholding company under PUHCA.  As aresult of the requirement to register as a holding company, PNMR created PNMRServices Company, a services company, which began operation on January 1, 2005,subject to final approval of a services company application filed with the SECin January 2005.  The comprehensiveenergy legislation enacted in August 2005 resulted in the repeal of PUHCA on adelayed basis.  PNMR is in the processof evaluating the effects of that repeal, along with the other provisions ofthe legislation.  (See Note 9.) 

PNMR provides energy and technology relatedservices through its wholly owned subsidiary, Avistar, Inc., and those resultsare included in the Corporate and Other segment. 

 34

**PNM RESOURCES, INC. AND SUBSIDIARIESPUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARYTEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

PNMR Segment Information 

Summarized financial information for PNMR bybusiness segment for the three months ended September 30, 2005 is as follows(in thousands): 

 

**Regulated**

 ****

**Unregulated**

 ****

 ****

 ****

 ****

Segments  of Business

**PNM**

 ****

** TNMP**

 ****

**PNM**

 ****

**PNM**

 ****

**First**

 ****

**Corporate**

 ****

 ****

 

**Electric**

 ****

**Electric**

 ****

**Gas**

 ****

**Wholesale**

 ****

**Choice**

 ****

**& Other**

 ****

**Consolidated**

**2005:**

** **
** **
** **
** **
** **
** **
** **
** **
** **
** **
** **
** **

** **

Operating  revenues:

$   161,258
 

$ 49,373
 

$  78,258

 

$168,384
    
$155,479
    
$(15,635)
(a)

$597,117

   Intersegment revenues

1,687
    
22,068
    
429
    
11,471
    
-
    
(35,655)
 

-

**Total  revenues**

162,945
    
71,441
    
78,687
    
179,855
    
155,479
 
(51,290)
 

597,117

   Less:  Cost of energy
57,958
    
25,764
    
53,512
    
156,024
    
120,751
 
(51,146)
(a)

362,863

   Intersegment energy

    
    
    
    
    
    
    
    
    
 
    
 

 

Transfer

(7,205)
    
-
    
-
    
7,205
    
-
 
-
 

-

**Gross  margin**

112,192
    
45,677
    
25,175
    
16,626
    
34,728
 
(144)
 

234,254

Operating  expenses

66,441
    
17,958
    
25,778
    
11,581
    
11,800
 
1,292
(b)

134,850

Depreciation  and 

    
    
    
    
    
    
    
    
    
 
    
 

 

     amortization

17,276
    
7,814
    
5,630
    
3,667
    
480
 
1,980
 

36,847

Income  taxes

7,998
    
4,476
    
(3,595)
    
(1,027)
    
7,826
 
(3,432)
(b,d)

12,246

**Operating  income**

20,477
    
15,429
    
(2,638)
    
2,405
    
14,622
 
16
 

50,311

 

    
    
    
    
    
    
    
    
    
 
    
 

 

Interest  Income

7,103
    
660
    
938
    
1,322
    
612
 
125
 

10,760

Other  

    
    
    
    
    
    
    
    
    
 
    
 

 

 income/(deductions)

1,111
    
2,070
    
(131)
    
376
    
(36)
 
(4,140)
(c)

(750)

Other  income taxes

(3,252)
    
(1,093)
    
(319)
    
(672)
    
(208)
 
1,851
 

(3,693)

Interest  charges

(8,273)
    
(7,250)
    
(2,848)
    
(3,971)
    
(434)
 
(5,369)
(d)

(28,145)

**Segment net income (loss)**

$     17,166
    
$   9,816
    
$  (4,998)
    
$     (540)
    
$  14,556
 
$  (7,517)
 

$     28,483

 

    
    
    
    
    
    
    
    
    
 
    
 

 

**Total assets at**

    
    
    
    
    
    
    
    
    
 
    
 

 

**  September 30, 2005**

$1,811,181
    
$1,252,071
    
$634,161
    
$430,385
    
$281,693
 
$727,068
 

$5,136,559

**Goodwill**

$               -
    
$   457,109
    
$            -
    
$            -
    
$  35,584
 
$            -
 

$   492,693

**Gross  property additions**

$     22,627
    
$     10,986
    
$    9,422
    
$    2,909
    
$         98
 
$  15,112
 

$     61,154

 

(a)      Reflects EITF 03-11 impact, underwhich wholesale revenues and the associated cost of energy of $16.0 million arereclassified to a net margin basis in accordance with GAAP.

(b)      Includes TNP acquisition relatedcosts of $4.6 million in operating expenses and an income tax benefit of $1.8million in income taxes.

(c)      Includes TNP debt refinancingcosts of $0.4 million in other income/(deductions).

(d)     Includes TNP debt refinancingcosts of $0.4 million in interest charges and an income tax benefit of $0.1million in income taxes.

35

**PNM RESOURCES, INC. AND SUBSIDIARIESPUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARYTEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

Summarizedfinancial information for PNMR by business segment for the three months endedSeptember 30, 2004 is as follows (in thousands): 

 

**Regulated**

 ****

**Unregulated**

 ****

 ****

 ****

 ****

Segments  of Business

**PNM**

 ****

**TNMP**

 ****

**PNM**

 ****

**PNM**

 ****

**First**

 ****

**Corporate **

 ****

 ****

 

**Electric**

 ****

**Electric**

 ****

**Gas**

 ****

**Wholesale**

 ****

**Choice**

 ****

**& Other**

 ****

**Consolidated**

**2004:**

    
    
    
    
    
    
    
    
    
 ****

    
 

 

Operating  revenues:

$  150,961
 

$         -
 

$   72,880

 

  $ 184,239
    
$          -
    
$  (23,327)
(a)

$     384,753

   Intersegment revenues

1,452
    
-
    
650
    
-
    
-
    
-
 

2,102

**Total  revenues**

152,413
    
-
    
73,530
    
184,239
    
-
    
(23,327)
 

386,855

   Less:  Cost of energy
50,675
    
-
    
48,127
    
151,514
    
-
    
(23,467)
(a)

226,849

   Intersegment energy

    
    
    
    
    
    
    
    
-
    
    
 

 

Transfer

(9,838)
    
-
    
-
    
9,838
    
-
    
-
 

-

**Gross  margin**

111,576
    
-
    
25,403
    
22,887
    
-
    
140
 

160,006

Operating  expenses

60,652
    
-
    
22,460
    
9,898
    
-
    
1,195
 

94,205

Depreciation  and 

    
    
    
    
    
    
    
    
    
    
    
 

 

     amortization

12,568
    
-
    
4,574
    
3,077
    
-
    
1,583
 

21,802

Income  taxes

11,757
    
-
    
(1,740)
    
2,582
    
-
    
(815)
 

11,784

**Operating  income**

26,599
    
-
    
109
    
7,330
    
-
    
(1,823)
 

32,215

 

    
    
    
    
    
    
    
    
    
    
    
 

 

Interest  Income

7,155
    
-
    
203
    
1,366
    
-
    
546
 

9,270

Other  

    
    
    
    
    
    
    
    
    
    
    
 

 

 Income/(deductions)

429
    
-
    
4
    
366
    
-
    
331
 

1,130

Other  income taxes

(3,003)
    
-
    
(82)
    
(686)
    
-
    
853
 

(2,918)

Interest  charges

(8,659)
    
-
    
(2,765)
    
(3,391)
    
-
   |