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 September 30,
      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___  (NOTE:  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
October 26, 2009, 86,673,174 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 26, 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 October 26, 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
            3PART
      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 (Loss)
            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 (Loss)
            26NOTES TO CONDENSED CONSOLIDATED
      FINANCIAL STATEMENTS
            27ITEM
      2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
      CONDITION
            72AND
      RESULTS OF OPERATIONSITEM
      3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
      RISK
            95ITEM
      4.  CONTROLS AND PROCEDURES
            100PART
      II.  OTHER INFORMATIONITEM
      1.  LEGAL PROCEEDINGS
            101ITEM
      1A.  RISK FACTORS
            102ITEM
      6.  EXHIBITS
            102SIGNATURE
            104








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
      CornersBART
            Best
      Available Retrofit TechnologyBoard
            Board
      of Directors of PNMRBTU
            British
      Thermal UnitCAIR
            Clean
      Air Interstate RuleCal
      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 ProjectEnergyCo
            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 CommissionFIP
            Federal
      Implementation PlanFirst
      Choice
            First
      Choice Enterprises, Inc. and SubsidiariesFour
      Corners
            Four
      Corners Power PlantFPPAC
            Fuel
      and Purchased Power Adjustment ClauseGAAP
            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 LBHLBCS
            Lehman
      Brothers Commodity Services, 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 CircuitNMED
            New
      Mexico Environment DepartmentNMGC
            New
      Mexico Gas Company, a subsidiary of Continental  4
 NMPRC
            New
      Mexico Public Regulation CommissionNOX
            Nitrogen
      OxidesNOI
            Notice
      of InquiryNRC
            United
      States Nuclear Regulatory CommissionOCI
            Other
      Comprehensive IncomeOptim
      Energy
            Optim
      Energy, LLC, a limited liability company, owned 50% by each of PNMR and
      ECJV; formerly known as EnergyCoPCRBs
            Pollution
      Control Revenue BondsPG&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
            Purchased
      Power AgreementPRP
            Potential
      Responsible PartyPUCT
            Public
      Utility Commission of TexasPVNGS
            Palo
      Verde Nuclear Generating StationRCT
            Reasonable
      Cost ThresholdREC
            Renewable
      Energy CertificatesREP
            Retail
      Electricity ProviderRFP
            Request
      for ProposalRMC
            Risk
      Management CommitteeSEC
            United
      States Securities and Exchange CommissionSJCC
            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 Risk


5


PART
I. FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS


PNM
RESOURCES, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)


(Unaudited)





Three
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30,
            
            
            September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008(In thousands, except per shareamounts)Operating
      Revenues:Electric
            
            $
            477,665
            
            
            $
            607,023
            
            
            $
            1,264,503
            
            
            $
            1,551,668Other
            
            
            62
            
            
            
            53
            
            
            
            198
            
            
            
            221Total
      operating revenues
            
            
            477,727
            
            
            
            607,076
            
            
            
            1,264,701
            
            
            
            1,551,889Operating
      Expenses:Cost
      of energy
            
            
            199,648
            
            
            
            393,623
            
            
            
            556,149
            
            
            
            1,026,702Administrative
      and general
            
            
            67,774
            
            
            
            60,999
            
            
            
            191,461
            
            
            
            167,753Energy
      production costs
            
            
            40,130
            
            
            
            46,471
            
            
            
            135,821
            
            
            
            143,231Impairment
      of goodwill and other intangible assets
            
            
            -
            
            
            
            7,906
            
            
            
            -
            
            
            
            144,085Regulatory
      disallowances
            
            
            -
            
            
            
            -
            
            
            
            27,286
            
            
            
            30,248Depreciation
      and amortization
            
            
            38,050
            
            
            
            36,752
            
            
            
            111,067
            
            
            
            105,438Transmission
      and distribution costs
            
            
            16,029
            
            
            
            14,981
            
            
            
            46,444
            
            
            
            43,467Taxes
      other than income taxes
            
            
            14,560
            
            
            
            12,680
            
            
            
            40,156
            
            
            
            39,032Total
      operating expenses
            
            
            376,191
            
            
            
            573,412
            
            
            
            1,108,384
            
            
            
            1,699,956Operating
      income (loss)
            
            
            101,536
            
            
            
            33,664
            
            
            
            156,317
            
            
            
            (148,067
            )Other
      Income and Deductions:Interest
      income
            
            
            6,902
            
            
            
            7,248
            
            
            
            23,348
            
            
            
            17,190Gains
      (losses) on investments held by NDT
            
            
            3,936
            
            
            
            (5,697
            )
            
            
            2,023
            
            
            
            (10,079
            )Other
      income
            
            
            3,168
            
            
            
            2,834
            
            
            
            31,489
            
            
            
            4,950Equity
      in net earnings (loss) of Optim Energy
            
            
            6,902
            
            
            
            (1,485
            )
            
            
            944
            
            
            
            (29,091
            )Other
      deductions
            
            
            (2,325
            )
            
            
            (1,785
            )
            
            
            (6,957
            )
            
            
            (8,866
            )Net
      other income (deductions)
            
            
            18,583
            
            
            
            1,115
            
            
            
            50,847
            
            
            
            (25,896
            )Interest
      Charges:Interest
      on long-term debt
            
            
            29,198
            
            
            
            29,518
            
            
            
            83,488
            
            
            
            72,622Other
      interest charges
            
            
            1,337
            
            
            
            9,634
            
            
            
            7,813
            
            
            
            26,384Total
      interest charges
            
            
            30,535
            
            
            
            39,152
            
            
            
            91,301
            
            
            
            99,006Earnings
      (Loss) before Income Taxes
            
            
            89,584
            
            
            
            (4,373
            )
            
            
            115,863
            
            
            
            (272,969
            )Income
      Taxes (Benefit)
            
            
            31,361
            
            
            
            (3,109
            )
            
            
            37,814
            
            
            
            (55,587
            )Earnings
      (Loss) from Continuing Operations
            
            
            58,223
            
            
            
            (1,264
            )
            
            
            78,049
            
            
            
            (217,382
            )Earnings
      (Loss)  from Discontinued Operations, net of
    IncomeTaxes
      (Benefit) of $(785), $820, $41,196 and $16,299
            
            
            (1,362
            )
            
            
            (638
            )
            
            
            77,702
            
            
            
            24,622Net
      Earnings (Loss)
            
            
            56,861
            
            
            
            (1,902
            )
            
            
            155,751
            
            
            
            (192,760
            )Earnings
      Attributable to Valencia Non-controlling Interest
            
            
            (2,536
            )
            
            
            (3,451
            )
            
            
            (7,890
            )
            
            
            (4,452
            )Preferred
      Stock Dividend Requirements of Subsidiary
            
            
            (132
            )
            
            
            (132
            )
            
            
            (396
            )
            
            
            (396
            )Net
      Earnings (Loss) Attributable to PNMR
            
            $
            54,193
            
            
            $
            (5,485
            )
            
            $
            147,465
            
            
            $
            (197,608
            )Earnings
      (Loss) from Continuing Operations Attributable to PNMR per Common
      Share:Basic
            
            $
            0.61
            
            
            $
            (0.06
            )
            
            $
            0.76
            
            
            $
            (2.72
            )Diluted
            
            $
            0.60
            
            
            $
            (0.06
            )
            
            $
            0.76
            
            
            $
            (2.72
            )Net
      Earnings (Loss) Attributable to PNMR per Common Share:Basic
            
            $
            0.59
            
            
            $
            (0.06
            )
            
            $
            1.61
            
            
            $
            (2.42
            )Diluted
            
            $
            0.59
            
            
            $
            (0.06
            )
            
            $
            1.61
            
            
            $
            (2.42
            )Dividends
      Declared per Common Share
            
            $
            0.125
            
            
            $
            0.125
            
            
            $
            0.375
            
            
            $
            0.480





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)





September
      30,
            
            
            December
      31,2009
            
            
            2008(In
      thousands)ASSETSCurrent
      Assets:Cash
      and cash equivalents
            
            $
            70,255
            
            
            $
            140,619Special
      deposits
            
            
            52
            
            
            
            3,480Accounts
      receivable, net of allowance for uncollectible accounts of $16,350 and
      $21,466
            
            
            136,196
            
            
            
            119,174Unbilled
      revenues
            
            
            70,064
            
            
            
            81,126Other
      receivables
            
            
            75,902
            
            
            
            73,083Materials,
      supplies, and fuel stock
            
            
            49,061
            
            
            
            49,397Regulatory
      assets
            
            
            1,208
            
            
            
            1,541Derivative
      instruments
            
            
            44,959
            
            
            
            51,250Income
      taxes receivable
            
            
            -
            
            
            
            49,584Current
      assets of discontinued operations
            
            
            -
            
            
            
            107,986Other
      current assets
            
            
            61,642
            
            
            
            75,393Total
      current assets
            
            
            509,339
            
            
            
            752,633Other
      Property and Investments:Investment
      in PVNGS lessor notes
            
            
            137,853
            
            
            
            168,729Equity
      investment in Optim Energy
            
            
            232,537
            
            
            
            239,950Investments
      held by NDT
            
            
            130,354
            
            
            
            111,671Other
      investments
            
            
            29,332
            
            
            
            32,966Non-utility
      property, net of accumulated depreciation of $3,532 and
    $2,582
            
            
            8,169
            
            
            
            9,135Total
      other property and investments
            
            
            538,245
            
            
            
            562,451Utility
      Plant:Electric
      plant in service
            
            
            4,471,390
            
            
            
            4,329,169Common
      plant in service and plant held for future use
            
            
            159,659
            
            
            
            147,5764,631,049
            
            
            
            4,476,745Less
      accumulated depreciation and amortization
            
            
            1,591,806
            
            
            
            1,545,9503,039,243
            
            
            
            2,930,795Construction
      work in progress
            
            
            166,764
            
            
            
            202,556Nuclear
      fuel, net of accumulated amortization of $21,482 and
    $16,018
            
            
            74,248
            
            
            
            58,674Net
      utility plant
            
            
            3,280,255
            
            
            
            3,192,025Deferred
      Charges and Other Assets:Regulatory
      assets
            
            
            505,394
            
            
            
            629,141Goodwill
            
            
            321,310
            
            
            
            321,310Other
      intangible assets, net of accumulated amortization of $5,122 and
      $4,672
            
            
            26,717
            
            
            
            27,167Derivative
      instruments
            
            
            13,139
            
            
            
            25,620Non-current
      assets of discontinued operations
            
            
            -
            
            
            
            561,915Other
      deferred charges
            
            
            67,802
            
            
            
            75,720Total
      deferred charges and other assets
            
            
            934,362
            
            
            
            1,640,873$
            5,262,201
            
            
            $
            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)





September
      30,
            
            
            December
      31,2009
            
            
            2008(In
      thousands, except share information)LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Short-term
      debt
            
            $
            193,000
            
            
            $
            744,667Current
      installments of long-term debt
            
            
            2,004
            
            
            
            205,694Accounts
      payable
            
            
            87,896
            
            
            
            174,068Accrued
      interest and taxes
            
            
            89,904
            
            
            
            51,618Regulatory
      liabilities
            
            
            2,326
            
            
            
            1,746Derivative
      instruments
            
            
            23,271
            
            
            
            33,951Current
      liabilities of discontinued operations
            
            
            -
            
            
            
            77,082Other
      current liabilities
            
            
            129,541
            
            
            
            139,562Total
      current liabilities
            
            
            527,942
            
            
            
            1,428,388Long-term
      Debt
            
            
            1,531,170
            
            
            
            1,379,011Deferred
      Credits and Other Liabilities:Accumulated
      deferred income taxes
            
            
            471,782
            
            
            
            572,719Accumulated
      deferred investment tax credits
            
            
            21,163
            
            
            
            23,834Regulatory
      liabilities
            
            
            353,197
            
            
            
            327,175Asset
      retirement obligations
            
            
            69,537
            
            
            
            63,492Accrued
      pension liability and postretirement benefit cost
            
            
            241,791
            
            
            
            246,136Derivative
      instruments
            
            
            4,944
            
            
            
            6,934Non-current
      liabilities of discontinued operations
            
            
            -
            
            
            
            94,615Other
      deferred credits
            
            
            145,648
            
            
            
            149,237Total
      deferred credits and other liabilities
            
            
            1,308,062
            
            
            
            1,484,142Total
      liabilities
            
            
            3,367,174
            
            
            
            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 86,673,174 and 86,531,644 shares)
            
            
            1,289,625
            
            
            
            1,288,168Accumulated
      other comprehensive income (loss), net of income taxes
            
            
            (36,815
            )
            
            
            30,948Retained
      earnings
            
            
            440,464
            
            
            
            327,290Total
      PNMR common stockholders’ equity
            
            
            1,693,274
            
            
            
            1,646,406Non-controlling
      interest in Valencia
            
            
            90,224
            
            
            
            98,506Total
      equity
            
            
            1,883,498
            
            
            
            1,844,912$
            5,262,201
            
            
            $
            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)





Nine
      Months Ended September 30,2009
            
            
            2008(In
      thousands)Cash
      Flows From Operating Activities:Net
      earnings (loss)
            
            $
            155,751
            
            
            $
            (192,760
            )Adjustments
      to reconcile net earnings (loss) to net cash flows from operating
      activities:Depreciation
      and amortization
            
            
            131,247
            
            
            
            116,797Amortization
      of pre-payments on PVNGS firm-sales contracts
            
            
            (19,426
            )
            
            
            (10,313
            )Bad
      debt expense
            
            
            35,383
            
            
            
            28,258Deferred
      income tax expense (benefit)
            
            
            (46,008
            )
            
            
            (26,056
            )Equity
      in net (earnings) loss of Optim Energy
            
            
            (944
            )
            
            
            29,091Net
      unrealized (gains) losses on derivatives
            
            
            (7,223
            )
            
            
            14,222(Gains)
      losses on investments held by NDT
            
            
            (2,023
            )
            
            
            10,079Impairment
      of goodwill and other intangible assets
            
            
            -
            
            
            
            144,085Gain
      on sale of PNM Gas
            
            
            (108,936
            )
            
            
            -Gain
      on reacquired debt
            
            
            (7,316
            )
            
            
            -Stock-based
      compensation expense
            
            
            1,844
            
            
            
            2,810Regulatory
      disallowances
            
            
            27,286
            
            
            
            30,248Increase
      in legal reserve
            
            
            26,200
            
            
            
            -Other,
      net
            
            
            (824
            )
            
            
            (4,597
            )Changes
      in certain assets and liabilities:Accounts
      receivable and unbilled revenues
            
            
            (84,574
            )
            
            
            (20,752
            )Materials,
      supplies, and fuel stock
            
            
            486
            
            
            
            (9,486
            )Other
      current assets
            
            
            29,899
            
            
            
            (31,346
            )Other
      assets
            
            
            (2,114
            )
            
            
            (29,440
            )Accounts
      payable
            
            
            (94,075
            )
            
            
            1,624Accrued
      interest and taxes
            
            
            87,779
            
            
            
            2,016Other
      current liabilities
            
            
            (19,703
            )
            
            
            10,750Other
      liabilities
            
            
            (17,831
            )
            
            
            (783
            )Net
      cash flows from operating activities
            
            
            84,878
            
            
            
            64,447Cash Flows From Investing Activities:Utility plant additions
            
            
            (194,598
            )
            
            
            (235,672
            )Proceeds from sales of investments held by NDT
            
            
            88,858
            
            
            
            105,055Purchases of investments held by NDT
            
            
            (90,921
            )
            
            
            (106,437
            )Proceeds from sale of PNM Gas
            
            
            653,095
            
            
            
            -Return of principal on PVNGS lessor notes
            
            
            26,726
            
            
            
            22,164Reduction in restricted special deposits
            
            
            359
            
            
            
            6,581Other, net
            
            
            (15,303
            )
            
            
            (1,595
            )Net
      cash flows from investing activities
            
            
            468,216
            
            
            
            (209,904
            )





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)





Nine
      Months Ended September 30,2009
            
            
            2008(In
      thousands)Cash
      Flows From Financing Activities:Short-term
      borrowings (repayments), net
            
            
            (551,667
            )
            
            
            112,767Long-term
      borrowings
            
            
            309,242
            
            
            
            452,750Repayment
      of long-term debt
            
            
            (350,079
            )
            
            
            (448,935
            )Issuance
      of common stock
            
            
            1,245
            
            
            
            250,231Proceeds
      from stock option exercise
            
            
            -
            
            
            
            86Purchase
      of common stock to satisfy stock awards
            
            
            (940
            )
            
            
            (1,355
            )Excess
      tax (shortfall) from stock-based payment arrangements
            
            
            (692
            )
            
            
            (618
            )Dividends
      paid
            
            
            (34,666
            )
            
            
            (46,954
            )Payments
      received on PVNGS firm-sales contracts
            
            
            23,059
            
            
            
            80,858Other,
      net
            
            
            (18,985
            )
            
            
            (4,022
            )Net
      cash flows from financing activities
            
            
            (623,483
            )
            
            
            394,808Change
      in Cash and Cash Equivalents
            
            
            (70,389
            )
            
            
            249,351Cash
      and Cash Equivalents at Beginning of Period
            
            
            140,644
            
            
            
            17,791Cash
      and Cash Equivalents at End of Period
            
            $
            70,255
            
            
            $
            267,142Supplemental
      Cash Flow Disclosures:Interest
      paid, net of capitalized interest
            
            $
            64,143
            
            
            $
            91,715Income
      taxes paid (refunded), net
            
            $
            68,809
            
            
            $
            (1,702
            )





Supplemental
      schedule of noncash investing and financing activities:Activities
      related to the consolidation of Valencia as of May 30, 2008
      (see
              Note
      16):Utility
      plant additions
            
            $
            87,310Increase
      in short-term borrowings
            
            $
            82,468Non-controlling
      interest transactions as of July 10, 2008:Reduction
      in short-term borrowings
            
            $
            88,059Increase
      in non-controlling interest in Valencia
            
            $
            90,148








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
            
            
            -
            
            
            
            (940
            )
            
            
            -
            
            
            
            -
            
            
            
            (940
            )Tax
      shortfall from stock-based compensation arrangements
            
            
            -
            
            
            
            (692
            )
            
            
            -
            
            
            
            -
            
            
            
            (692
            )Stock-based
      compensation expense
            
            
            -
            
            
            
            1,844
            
            
            
            -
            
            
            
            -
            
            
            
            1,844Sale
      of common stock
            
            
            93,328
            
            
            
            818
            
            
            
            -
            
            
            
            -
            
            
            
            818Common
      stock issued to ESPP
            
            
            48,202
            
            
            
            427
            
            
            
            -
            
            
            
            -
            
            
            
            427Net
      earnings attributable to PNMR
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            147,465
            
            
            
            147,465Total
      other comprehensive income (loss)
            
            
            -
            
            
            
            -
            
            
            
            (67,763
            )
            
            
            -
            
            
            
            (67,763
            )Dividends
      declared on common stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (34,291
            )
            
            
            (34,291
            )Balance
      at September 30, 2009
            
            
            86,673,174
            
            
            $
            1,289,625
            
            
            $
            (36,815
            )
            
            $
            440,464
            
            
            $
            1,693,274





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 September 30,
            
            
            Nine
      Months Ended September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008(In
      thousands)Net
      Earnings (Loss)
            
            $
            56,861
            
            
            $
            (1,902
            )
            
            $
            155,751
            
            
            $
            (192,760
            )Other
      Comprehensive Income (Loss):Unrealized Gain (Loss) on
      Investment Securities:Unrealized
      holding gains (losses) arising duringthe
      period, net of income tax (expense) benefitof
      $(3,201), $1,196, $(6,235), and $1,608
            
            
            4,885
            
            
            
            (1,825
            )
            
            
            9,514
            
            
            
            (2,454
            )Reclassification
      adjustment for (gains) included innet
      earnings (loss), net of income tax expenseof
      $193, $1,051, $506, and $2,777
            
            
            (295
            )
            
            
            (1,603
            )
            
            
            (773
            )
            
            
            (4,237
            )Pension
      liability adjustment, net of income tax benefitof
      $0, $0, $42,487, and $0
            
            
            -
            
            
            
            -
            
            
            
            (64,830
            )
            
            
            -Fair
      Value Adjustment for Designated Cash Flow Hedges:Change
      in fair value, net of income tax (expense) benefitof
      $2,025, $(34,281), $(8,081), and $(13,423)
            
            
            (3,151
            )
            
            
            51,583
            
            
            
            10,947
            
            
            
            21,153Reclassification
      adjustment for (gains) losses included innet
      earnings (loss), net of income tax expense (benefit)of
      $5,274, $(1,986),  $15,929, and $(583)
            
            
            (7,195
            )
            
            
            1,946
            
            
            
            (22,621
            )
            
            
            (156
            )Total
      Other Comprehensive Income (Loss)
            
            
            (5,756
            )
            
            
            50,101
            
            
            
            (67,763
            )
            
            
            14,306Comprehensive
      Income (Loss)
            
            
            51,105
            
            
            
            48,199
            
            
            
            87,988
            
            
            
            (178,454
            )Comprehensive
      Income Attributable to Valencia Non-controlling Interest
            
            
            (2,536
            )
            
            
            (3,451
            )
            
            
            (7,890
            )
            
            
            (4,452
            )Preferred
      Stock Dividend Requirements of Subsidiary
            
            
            (132
            )
            
            
            (132
            )
            
            
            (396
            )
            
            
            (396
            )Comprehensive
      Income (Loss) Attributable to PNMR
            
            $
            48,437
            
            
            $
            44,616
            
            
            $
            79,702
            
            
            $
            (183,302
            )





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
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008(In
      thousands)Electric
      Operating Revenues
            
            $
            275,025
            
            
            $
            356,397
            
            
            $
            733,521
            
            
            $
            995,119Operating
      Expenses:Cost
      of energy
            
            
            97,231
            
            
            
            194,478
            
            
            
            289,888
            
            
            
            577,762Administrative
      and general
            
            
            36,751
            
            
            
            27,900
            
            
            
            96,814
            
            
            
            86,134Energy
      production costs
            
            
            40,764
            
            
            
            48,808
            
            
            
            141,230
            
            
            
            150,365Impairment
      of goodwill
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            51,143Regulatory
      disallowances
            
            
            -
            
            
            
            -
            
            
            
            26,615
            
            
            
            30,248Depreciation
      and amortization
            
            
            23,455
            
            
            
            21,666
            
            
            
            68,808
            
            
            
            63,532Transmission
      and distribution costs
            
            
            10,219
            
            
            
            9,743
            
            
            
            30,021
            
            
            
            28,247Taxes
      other than income taxes
            
            
            7,653
            
            
            
            6,417
            
            
            
            21,149
            
            
            
            20,522Total
      operating expenses
            
            
            216,073
            
            
            
            309,012
            
            
            
            674,525
            
            
            
            1,007,953Operating
      income (loss)
            
            
            58,952
            
            
            
            47,385
            
            
            
            58,996
            
            
            
            (12,834
            )Other
      Income and Deductions:Interest
      income
            
            
            7,000
            
            
            
            7,227
            
            
            
            25,518
            
            
            
            18,197Gains
      (losses) on investments held by NDT
            
            
            3,936
            
            
            
            (5,697
            )
            
            
            2,023
            
            
            
            (10,079
            )Other
      income
            
            
            1,100
            
            
            
            912
            
            
            
            4,934
            
            
            
            2,068Other
      deductions
            
            
            (937
            )
            
            
            (587
            )
            
            
            (2,799
            )
            
            
            (4,018
            )Net
      other income and deductions
            
            
            11,099
            
            
            
            1,855
            
            
            
            29,676
            
            
            
            6,168Interest
      Charges:Interest
      on long-term debt
            
            
            17,609
            
            
            
            17,628
            
            
            
            52,638
            
            
            
            42,924Other
      interest charges
            
            
            (788
            )
            
            
            2,687
            
            
            
            (1,219
            )
            
            
            9,117Total
      interest charges
            
            
            16,821
            
            
            
            20,315
            
            
            
            51,419
            
            
            
            52,041Earnings
      (Loss) before Income Taxes
            
            
            53,230
            
            
            
            28,925
            
            
            
            37,253
            
            
            
            (58,707
            )Income
      Taxes (Benefit)
            
            
            19,783
            
            
            
            9,540
            
            
            
            11,295
            
            
            
            (5,108
            )Earnings
      (Loss) from Continuing Operations
            
            
            33,447
            
            
            
            19,385
            
            
            
            25,958
            
            
            
            (53,599
            )Earnings
      (Loss) from Discontinued Operations, net of IncomeTaxes
      of $(785), $820, $41,196 and $16,299
            
            
            (1,362
            )
            
            
            (638
            )
            
            
            77,702
            
            
            
            24,622Net
      Earnings (Loss)
            
            
            32,085
            
            
            
            18,747
            
            
            
            103,660
            
            
            
            (28,977
            )Earnings
      Attributable to Valencia Non-controlling Interest
            
            
            (2,536
            )
            
            
            (3,451
            )
            
            
            (7,890
            )
            
            
            (4,452
            )Net
      Earnings (Loss) Attributable to PNM
            
            
            29,549
            
            
            
            15,296
            
            
            
            95,770
            
            
            
            (33,429
            )Preferred
      Stock Dividend Requirements
            
            
            (132
            )
            
            
            (132
            )
            
            
            (396
            )
            
            
            (396
            )Net
      Earnings (Loss) Available for PNM Common Stock
            
            $
            29,417
            
            
            $
            15,164
            
            
            $
            95,374
            
            
            $
            (33,825
            )





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)





September
      30,
            
            
            December
      31,2009
            
            
            2008(In thousands)ASSETSCurrent
      Assets:Cash
      and cash equivalents
            
            $
            2,642
            
            
            $
            46,596Special
      deposits
            
            
            2
            
            
            
            3,430Accounts
      receivable, net of allowance for uncollectible accounts of $1,383 and
      $1,345
            
            
            81,248
            
            
            
            74,257Unbilled
      revenues
            
            
            32,203
            
            
            
            37,350Other
      receivables
            
            
            72,269
            
            
            
            72,096Materials,
      supplies, and fuel stock
            
            
            46,792
            
            
            
            47,254Regulatory
      assets
            
            
            1,208
            
            
            
            1,541Derivative
      instruments
            
            
            25,790
            
            
            
            28,852Current
      assets of discontinued operations
            
            
            -
            
            
            
            107,986Other
      current assets
            
            
            41,244
            
            
            
            49,690Total
      current assets
            
            
            303,398
            
            
            
            469,052Other
      Property and Investments:Investment
      in PVNGS lessor notes
            
            
            137,853
            
            
            
            200,711Investments
      held by NDT
            
            
            130,354
            
            
            
            111,671Other
      investments
            
            
            8,591
            
            
            
            9,951Non-utility
      property
            
            
            976
            
            
            
            976Total
      other property and investments
            
            
            277,774
            
            
            
            323,309Utility
      Plant:Electric
      plant in service
            
            
            3,645,820
            
            
            
            3,430,818Common
      plant in service and plant held for future use
            
            
            17,619
            
            
            
            17,4003,663,439
            
            
            
            3,448,218Less
      accumulated depreciation and amortization
            
            
            1,251,555
            
            
            
            1,204,4242,411,884
            
            
            
            2,243,794Construction
      work in progress
            
            
            125,310
            
            
            
            156,997Nuclear
      fuel, net of accumulated amortization of $21,482 and
    $16,018
            
            
            74,248
            
            
            
            58,674Net
      utility plant
            
            
            2,611,442
            
            
            
            2,459,465Deferred
      Charges and Other Assets:Regulatory
      assets
            
            
            355,650
            
            
            
            494,481Derivative
      instruments
            
            
            6,013
            
            
            
            17,744Goodwill
            
            
            51,632
            
            
            
            51,632Non-current
      assets of discontinued operations
            
            
            -
            
            
            
            561,915Other
      deferred charges
            
            
            52,398
            
            
            
            51,137Total
      deferred charges and other assets
            
            
            465,693
            
            
            
            1,176,909$
            3,658,307
            
            
            $
            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)





September
      30,
            
            
            December
      31,2009
            
            
            2008(In
      thousands, except share information)LIABILITIES
      AND STOCKHOLDER’S EQUITYCurrent
      Liabilities:Short-term
      debt
            
            $
            108,000
            
            
            $
            340,000Current
      installments of long-term debt
            
            
            -
            
            
            
            36,000Accounts
      payable
            
            
            49,674
            
            
            
            90,502Affiliate
      accounts payable
            
            
            13,589
            
            
            
            17,607Accrued
      interest and taxes
            
            
            77,873
            
            
            
            50,125Regulatory
      liabilities
            
            
            2,326
            
            
            
            1,746Derivative
      instruments
            
            
            3,084
            
            
            
            7,884Current
      liability of discontinued operations
            
            
            -
            
            
            
            77,082Other
      current liabilities
            
            
            74,476
            
            
            
            93,131Total
      current liabilities
            
            
            329,022
            
            
            
            714,077Long-term
      Debt
            
            
            1,019,728
            
            
            
            1,019,717Deferred
      Credits and Other Liabilities:Accumulated
      deferred income taxes
            
            
            319,759
            
            
            
            414,995Accumulated
      deferred investment tax credits
            
            
            21,163
            
            
            
            23,834Regulatory
      liabilities
            
            
            319,847
            
            
            
            292,146Asset
      retirement obligations
            
            
            68,690
            
            
            
            62,696Accrued
      pension liability and postretirement benefit cost
            
            
            226,836
            
            
            
            229,683Derivative
      instruments
            
            
            298
            
            
            
            569Non-current
      liabilities of discontinued operations
            
            
            -
            
            
            
            94,615Other
      deferred credits
            
            
            121,069
            
            
            
            124,929Total
      deferred credits and liabilities
            
            
            1,077,662
            
            
            
            1,243,467Total
      liabilities
            
            
            2,426,412
            
            
            
            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)
            
            
            971,648
            
            
            
            932,523Accumulated
      other comprehensive income (loss), net of income taxes
            
            
            (47,056
            )
            
            
            17,746Retained
      earnings
            
            
            205,550
            
            
            
            391,170Total
      PNM common stockholder’s equity
            
            
            1,130,142
            
            
            
            1,341,439Non-controlling
      interest in Valencia
            
            
            90,224
            
            
            
            98,506Total
      equity
            
            
            1,220,366
            
            
            
            1,439,945$
            3,658,307
            
            
            $
            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)





Nine
      Months Ended September 30,2009
            
            
            2008(In
      thousands)Cash
      Flows From Operating Activities:Net
      earnings (loss)
            
            $
            103,660
            
            
            $
            (28,977
            )Adjustments
      to reconcile net earnings (loss) to net cash flows from operating
      activities:Depreciation
      and amortization
            
            
            81,822
            
            
            
            75,803Amortization
      of prepayments on PVNGS firm-sales contracts
            
            
            (19,426
            )
            
            
            (10,313
            )Deferred
      income tax expense (benefit)
            
            
            (45,353
            )
            
            
            (4,732
            )Net
      unrealized (gains) losses on derivatives
            
            
            (4,701
            )
            
            
            5,955(Gains)
      losses on investments held by NDT
            
            
            (2,023
            )
            
            
            10,079Gain
      on sale of PNM Gas
            
            
            (108,936
            )
            
            
            -Regulatory
      disallowances
            
            
            26,615
            
            
            
            30,248Increase
      in legal reserve
            
            
            26,200
            
            
            
            -Impairment
      of goodwill
            
            
            -
            
            
            
            51,143Other,
      net
            
            
            1,116
            
            
            
            3,084Changes
      in certain assets and liabilities:Accounts
      receivable and unbilled revenues
            
            
            (46,869
            )
            
            
            32,789Materials,
      supplies, and fuel stock
            
            
            612
            
            
            
            (9,486
            )Other
      current assets
            
            
            21,988
            
            
            
            (1,531
            )Other
      assets
            
            
            9,297
            
            
            
            (1,783
            )Accounts
      payable
            
            
            (48,732
            )
            
            
            (18,401
            )Accrued
      interest and taxes
            
            
            27,658
            
            
            
            30,738Other
      current liabilities
            
            
            (32,936
            )
            
            
            (15,536
            )Other
      liabilities
            
            
            (15,556
            )
            
            
            (2,238
            )Net
      cash flows from operating activities
            
            
            (25,564
            )
            
            
            146,842Cash
      Flows From Investing Activities:Utility
      plant additions
            
            
            (189,191
            )
            
            
            (200,983
            )Proceeds
      from sales of NDT investments
            
            
            88,858
            
            
            
            105,055Purchases
      of NDT investments
            
            
            (90,921
            )
            
            
            (106,437
            )Proceeds
      from sale of PNM Gas
            
            
            653,095
            
            
            
            -Return
      of principal on PVNGS lessor notes
            
            
            30,529
            
            
            
            25,735Reduction
      in restricted special deposits
            
            
            359
            
            
            
            6,581Other,
      net
            
            
            (15,656
            )
            
            
            553Net
      cash flows from investing activities
            
            
            477,073
            
            
            
            (169,496
            )





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)





Nine
      Months Ended September 30,2009
            
            
            2008(In
      thousands)Cash
      Flows From Financing Activities:Short-term
      borrowings (repayments), net
            
            
            (232,000
            )
            
            
            19,000Long-term
      borrowings
            
            
            -
            
            
            
            350,000Redemption
      of long-term debt
            
            
            (36,000
            )
            
            
            (300,000
            )Payments
      received on PVNGS firm-sales contracts
            
            
            23,059
            
            
            
            80,858Equity
      contribution from parent
            
            
            39,125
            
            
            
            -Dividends
      paid
            
            
            (281,390
            )
            
            
            (40,396
            )Other,
      net
            
            
            (8,282
            )
            
            
            5,095Net
      cash flows from financing activities
            
            
            (495,488
            )
            
            
            114,557Change
      in Cash and Cash Equivalents
            
            
            (43,979
            )
            
            
            91,903Cash
      and Cash Equivalents at Beginning of Period
            
            
            46,621
            
            
            
            4,331Cash
      and Cash Equivalents at End of Period
            
            $
            2,642
            
            
            $
            96,234Supplemental
      Cash Flow Disclosures:Interest
      paid, net of capitalized interest
            
            $
            38,078
            
            
            $
            49,354Income
      taxes paid (refunded), net
            
            $
            90,734
            
            
            $
            (1,855
            )Supplemental
      schedule of noncash investing and financing activities:Utility
      plant purchased through assumption of long-term debt (see Note
      10)
            
            $
            31,982Activities
      related to the consolidation of Valencia (see Note 16):Initial
      consolidation at May 30, 2008Utility
      plant additions
            
            
            
            
            
            $
            87,310Increase
      in short-term borrowings
            
            
            
            
            
            $
            82,468Non-controlling
      interest transactions as of July 10, 2008:Reduction
      in short-term borrowings
            
            
            
            
            
            $
            88,059Increase
      in non-controlling interest in Valencia
            
            
            
            
            
            $
            90,148








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
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            95,770
            
            
            
            95,770Total
      other comprehensive income (loss)
            
            
            -
            
            
            
            -
            
            
            
            (64,802
            )
            
            
            -
            
            
            
            (64,802
            )Equity
      contribution from parent
            
            
            -
            
            
            
            39,125
            
            
            
            -
            
            
            
            -
            
            
            
            39,125Dividends
      on preferred stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (396
            )
            
            
            (396
            )Dividends
      on common stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (280,994
            )
            
            
            (280,994
            )Balance
      at September 30, 2009
            
            
            39,117,799
            
            
            $
            971,648
            
            
            $
            (47,056
            )
            
            $
            205,550
            
            
            $
            1,130,142





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 September 30,
            
            
            Nine
      Months Ended September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008(In
      thousands)Net
      Earnings (Loss)
            
            $
            32,085
            
            
            $
            18,747
            
            
            $
            103,660
            
            
            $
            (28,977
            )Other
      Comprehensive Income (Loss):Unrealized Gain (Loss) on
      Investment Securities:Unrealized
      holding gains (losses) arising duringthe
      period, net of income tax (expense) benefitof
      $(3,201), $1,196, $(6,235), and $1,608
            
            
            4,885
            
            
            
            (1,825
            )
            
            
            9,514
            
            
            
            (2,454
            )Reclassification
      adjustment for (gains) included innet
      earnings (loss), net of income tax expenseof
      $193, $1,051, $506, and $2,777
            
            
            (295
            )
            
            
            (1,603
            )
            
            
            (773
            )
            
            
            (4,237
            )Pension
      liability adjustment, net of income tax benefitof
      $0, $0, $42,487 and $0
            
            
            -
            
            
            
            -
            
            
            
            (64,830
            )
            
            
            -Fair
      Value Adjustment for Designated Cash Flow Hedges:Change
      in fair value, net of income tax (expense)benefit
      of $984, $(18,619), $(5,957), and $(9,485)
            
            
            (1,501
            )
            
            
            28,411
            
            
            
            9,089
            
            
            
            14,474Reclassification
      adjustment for (gains) losses included innet
      earnings (loss), net of income tax expense (benefit)of
      $4,487, $(2,956), $11,667, and $(2,582)
            
            
            (6,849
            )
            
            
            4,511
            
            
            
            (17,802
            )
            
            
            3,940Total
      Other Comprehensive Income (Loss)
            
            
            (3,760
            )
            
            
            29,494
            
            
            
            (64,802
            )
            
            
            11,723Comprehensive
      Income (Loss)
            
            
            28,325
            
            
            
            48,241
            
            
            
            38,858
            
            
            
            (17,254
            )Comprehensive
      Income Attributable to Valencia Non-controlling Interest
            
            
            (2,536
            )
            
            
            (3,451
            )
            
            
            (7,890
            )
            
            
            (4,452
            )Comprehensive
      Income (Loss) Attributable to PNM
            
            $
            25,789
            
            
            $
            44,790
            
            
            $
            30,968
            
            
            $
            (21,706
            )





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 (LOSS)


(Unaudited)





Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008(In
      thousands)Electric
      Operating Revenues
            
            $
            55,665
            
            
            $
            51,097
            
            
            $
            143,709
            
            
            $
            140,442Operating
      Expenses:Cost
      of energy
            
            
            8,749
            
            
            
            8,423
            
            
            
            26,038
            
            
            
            24,170Administrative
      and general
            
            
            8,227
            
            
            
            7,000
            
            
            
            24,277
            
            
            
            20,643Impairment
      of goodwill
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            34,456Regulatory
      disallowances
            
            
            -
            
            
            
            -
            
            
            
            670
            
            
            
            -Depreciation
      and amortization
            
            
            10,303
            
            
            
            9,901
            
            
            
            27,816
            
            
            
            27,037Transmission
      and distribution costs
            
            
            5,809
            
            
            
            5,235
            
            
            
            16,419
            
            
            
            15,208Taxes,
      other than income taxes
            
            
            5,845
            
            
            
            5,032
            
            
            
            15,240
            
            
            
            14,402Total
      operating expenses
            
            
            38,933
            
            
            
            35,591
            
            
            
            110,460
            
            
            
            135,916Operating
      income
            
            
            16,732
            
            
            
            15,506
            
            
            
            33,249
            
            
            
            4,526Other
      Income and Deductions:Interest
      income
            
            
            -
            
            
            
            20
            
            
            
            9
            
            
            
            25Other
      income
            
            
            1,513
            
            
            
            1,726
            
            
            
            2,424
            
            
            
            2,746Other
      deductions
            
            
            (19
            )
            
            
            (18
            )
            
            
            (67
            )
            
            
            (46
            )Net
      other income and deductions
            
            
            1,494
            
            
            
            1,728
            
            
            
            2,366
            
            
            
            2,725Interest
      Charges:Interest
      on long-term debt
            
            
            7,081
            
            
            
            2,623
            
            
            
            15,159
            
            
            
            9,832Other
      interest charges
            
            
            897
            
            
            
            1,608
            
            
            
            4,852
            
            
            
            3,752Net
      interest charges
            
            
            7,978
            
            
            
            4,231
            
            
            
            20,011
            
            
            
            13,584Earnings
      (Loss) Before Income Taxes
            
            
            10,248
            
            
            
            13,003
            
            
            
            15,604
            
            
            
            (6,333
            )Income
      Taxes
            
            
            4,097
            
            
            
            4,910
            
            
            
            6,265
            
            
            
            10,597Net
      Earnings (Loss)
            
            $
            6,151
            
            
            $
            8,093
            
            
            $
            9,339
            
            
            $
            (16,930
            )





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)





September
      30,
            
            
            December
      31,2009
            
            
            2008(In
      thousands)ASSETSCurrent
      Assets:Cash
      and cash equivalents
            
            $
            48
            
            
            $
            124Special
      deposits
            
            
            50
            
            
            
            50Accounts
      receivable
            
            
            14,675
            
            
            
            11,457Unbilled
      revenues
            
            
            5,690
            
            
            
            6,421Other
      receivables
            
            
            1,006
            
            
            
            480Affiliate
      accounts receivable
            
            
            5,979
            
            
            
            7,110Materials
      and supplies
            
            
            2,172
            
            
            
            1,625Income
      taxes receivable
            
            
            -
            
            
            
            9Other
      current assets
            
            
            1,295
            
            
            
            958Total
      current assets
            
            
            30,915
            
            
            
            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
            
            
            825,570
            
            
            
            815,588Common
      plant in service and plant held for future use
            
            
            488
            
            
            
            488826,058
            
            
            
            816,076Less
      accumulated depreciation and amortization
            
            
            285,973
            
            
            
            291,228540,085
            
            
            
            524,848Construction
      work in progress
            
            
            29,168
            
            
            
            30,948Net
      utility plant
            
            
            569,253
            
            
            
            555,796Deferred
      Charges and Other Assets:Regulatory
      assets
            
            
            149,744
            
            
            
            134,660Goodwill
            
            
            226,665
            
            
            
            226,665Other
      deferred charges
            
            
            11,089
            
            
            
            23,982Total
      deferred charges and other assets
            
            
            387,498
            
            
            
            385,307$
            990,333
            
            
            $
            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)





September
      30,
            
            
            December
      31,2009
            
            
            2008(In
      thousands, except share information)LIABILITIES
      AND STOCKHOLDER’S EQUITYCurrent
      Liabilities:Short-term
      debt
            
            $
            -
            
            
            $
            150,000Short-term
      debt – affiliate
            
            
            36,200
            
            
            
            14,100Current
      installments of long-term debt
            
            
            -
            
            
            
            167,690Accounts
      payable
            
            
            4,968
            
            
            
            11,846Affiliate
      accounts payable
            
            
            30
            
            
            
            1,238Accrued
      interest and taxes
            
            
            46,305
            
            
            
            35,118Other
      current liabilities
            
            
            3,307
            
            
            
            3,111Total
      current liabilities
            
            
            90,810
            
            
            
            383,103Long-term
      Debt
            
            
            309,555
            
            
            
            -Deferred
      Credits and Other Liabilities:Accumulated
      deferred income taxes
            
            
            108,083
            
            
            
            111,193Regulatory
      liabilities
            
            
            33,350
            
            
            
            35,028Asset
      retirement obligations
            
            
            756
            
            
            
            711Accrued
      pension liability and postretirement benefit cost
            
            
            14,955
            
            
            
            16,453Other
      deferred credits
            
            
            3,096
            
            
            
            1,820Total
      deferred credits and other liabilities
            
            
            160,240
            
            
            
            165,205Total
      liabilities
            
            
            560,605
            
            
            
            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
            
            
            424,133
            
            
            
            427,320Accumulated
      other comprehensive income (loss), net of income taxes
            
            
            (256
            )
            
            
            (142
            )Retained
      earnings (deficit)
            
            
            5,787
            
            
            
            (3,552
            )Total
      common stockholder’s equity
            
            
            429,728
            
            
            
            423,690$
            990,333
            
            
            $
            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)





Nine
      Months Ended September 30,2009
            
            
            2008(In
      thousands)Cash
      Flows From Operating Activities:Net
      earnings (loss)
            
            $
            9,339
            
            
            $
            (16,930
            )Adjustments
      to reconcile net earnings (loss) tonet
      cash flows from operating activities:Depreciation
      and amortization
            
            
            32,123
            
            
            
            29,866Regulatory
      disallowances
            
            
            670
            
            
            
            -Impairment
      of goodwill
            
            
            -
            
            
            
            34,456Deferred
      income tax expense (benefit)
            
            
            (3,048
            )
            
            
            (4,386
            )Other,
      net
            
            
            190
            
            
            
            (1,895
            )Changes
      in certain assets and liabilities:Accounts
      receivable and unbilled revenues
            
            
            (2,487
            )
            
            
            (3,884
            )Materials
      and supplies
            
            
            (547
            )
            
            
            (117
            )Other
      current assets
            
            
            (1,005
            )
            
            
            (1,458
            )Other
      assets
            
            
            (3,966
            )
            
            
            (25,689
            )Accounts
      payable
            
            
            (6,879
            )
            
            
            22,010Accrued
      interest and taxes
            
            
            11,196
            
            
            
            7,838Other
      current liabilities
            
            
            122
            
            
            
            4,905Other
      liabilities
            
            
            (1,453
            )
            
            
            465Net
      cash flows from operating activities
            
            
            34,255
            
            
            
            45,181Cash
      Flows From Investing Activities-Utility
      plant additions
            
            
            (34,995
            )
            
            
            (33,073
            )Net
      cash flows from investing activities
            
            
            (34,995
            )
            
            
            (33,073
            )





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)





Nine
      Months Ended September 30,2009
            
            
            2008(In
      thousands)Cash
      Flow From Financing Activities:Short-term
      borrowings (repayments), net
            
            
            (150,000
            )
            
            
            150,000Short-term
      borrowings (repayments) – affiliate
            
            
            22,100
            
            
            
            (3,404
            )Long-term
      borrowings
            
            
            309,242
            
            
            
            -Repayment
      of long-term debt
            
            
            (167,690
            )
            
            
            (148,935
            )Dividends
      paid
            
            
            (3,187
            )
            
            
            -Other,
      net
            
            
            (9,801
            )
            
            
            (939
            )Net
      cash flows from financing activities
            
            
            664
            
            
            
            (3,278
            )Change
      in Cash and Cash Equivalents
            
            
            (76
            )
            
            
            8,830Cash
      and Cash Equivalents at Beginning of Period
            
            
            124
            
            
            
            187Cash
      and Cash Equivalents at End of Period
            
            $
            48
            
            
            $
            9,017Supplemental
      Cash Flow Disclosures:Interest
      paid, net of capitalized interest
            
            $
            10,473
            
            
            $
            16,724Income
      taxes paid (refunded), net
            
            $
            5,344
            
            
            $
            (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
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            9,339
            
            
            
            9,339Total
      other comprehensive income (loss)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (114
            )
            
            
            -
            
            
            
            (114
            )Dividends
      declared on common stock
            
            
            -
            
            
            
            -
            
            
            
            (3,187
            )
            
            
            -
            
            
            
            -
            
            
            
            (3,187
            )Balance
      at September 30, 2009
            
            
            6,358
            
            
            $
            64
            
            
            $
            424,133
            
            
            $
            (256
            )
            
            $
            5,787
            
            
            $
            429,728





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 (LOSS)


(Unaudited)





Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008(In
      thousands)Net
      Earnings (Loss)
            
            $
            6,151
            
            
            $
            8,093
            
            
            $
            9,339
            
            
            $
            (16,930
            )Other
      Comprehensive Income (Loss):Fair
      Value Adjustment for Designated Cash Flow Hedges:Change in
      fair value, net of income tax (expense)benefit
      of $407, $0, $209 and $0
            
            
            (739
            )
            
            
            -
            
            
            
            (382
            )
            
            
            -Reclassification
      adjustment for (gains) losses included innet
      earnings, net of income tax expense (benefit) of$(87),
      $0, $(147), and $0
            
            
            160
            
            
            
            -
            
            
            
            268
            
            
            
            -Total
      Other Comprehensive Income  (Loss)
            
            
            (579
            )
            
            
            -
            
            
            
            (114
            )
            
            
            -Comprehensive
      Income (Loss)
            
            $
            5,572
            
            
            $
            8,093
            
            
            $
            9,225
            
            
            $
            (16,930
            )





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 and Presentation





In the
opinion of management, the accompanying unaudited interim Condensed Consolidated
Financial Statements reflect all normal and recurring accruals and adjustments
that are necessary to present fairly the consolidated financial position at
September 30, 2009 and December 31, 2008, and the consolidated results of
operations and comprehensive income for the three months and nine months ended
September 30, 2009 and 2008, and cash flows for the nine months ended September
30, 2009 and 2008 in conformity with generally accepted accounting principles in
the United States.  The preparation of financial statements 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, as amended (with respect to PNMR and PNM) by
the Current Report on Form 8-K filed on May 19, 2009 (collectively, the “2008
Annual Reports”).





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.





GAAP
defines subsequent events as events or transactions that occur after the balance
sheet date but before financial statements are issued or are available to be
issued.  Based on their nature, magnitude, and timing, certain
subsequent events may be required to be reflected at the balance sheet date
and/or required to be disclosed in the financial statements.  The
Company has evaluated subsequent events through the date the financial
statements are issued, which is November 2, 2009, as required by
GAAP.





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.





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)


Dividends
on Common Stock





Dividends
on PNMR’s common stock are declared by its Board.  The timing of the
declaration of dividends is dependent on the timing of meetings and other
actions of the Board.  This has historically resulted in dividends
considered to be attributable to the second quarter of each year being declared
through actions of the Board during the third quarter of the
year.  The Board declared dividends on common stock considered to be
for the second quarter of $0.125 per share in July 2009 and August 2008, which
are reflected as being in the second quarter within “Dividends Declared per
Common Share” on the PNMR Condensed Consolidated Statements of Earnings
(Loss).  The Board declared dividends on common stock considered to be
for the third quarter of $0.125 per share in September 2009 and September 2008,
which are reflected as being in the third quarter within “Dividends Declared per
Common Share.”





In
addition to the dividend of $220.0 million paid by PNM to PNMR following the
sale of PNM Gas discussed in Note 2, PNM paid dividends of $46.0 million and
$61.0 million in the three months and nine months ended September 30,
2009.  Also, TNMP paid dividends of $1.8 million and $3.2 million in
the three months and nine months ended September 30, 2009 to its parent, which
then paid those amounts to PNMR.  The TNMP dividends were recorded as
a reduction of its paid-in-capital.





(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 $620.0 million in cash, subject to adjustment based on the
actual level of working capital at closing.  PNM received an
additional $20.6 million at closing and $12.5 million in July 2009 related to
working capital true-ups.  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 $71.7 million, after income taxes
of $37.2 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 to 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 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 terminated in July 2009 with the exception of
shared meter reading services, which will continue through 2010. 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


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)


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 its capacity 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.





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 REP 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
              
              
              CorporateElectric
              
              
              Electric
              
              
              Choice
              
              
              and
      Other
              
              
              ConsolidatedThree Months Ended September 30,
      2009
              
              
              
              
              
              
              
              (In
      thousands)Operating
      revenues
              
              $
              275,025
              
              
              $
              43,354
              
              
              $
              159,444
              
              
              $
              (96
              )
              
              $
              477,727Intersegment
      revenues
              
              
              -
              
              
              
              12,311
              
              
              
              -
              
              
              
              (12,311
              )
              
              
              -Total
      revenues
              
              
              275,025
              
              
              
              55,665
              
              
              
              159,444
              
              
              
              (12,407
              )
              
              
              477,727Cost
      of energy
              
              
              97,231
              
              
              
              8,749
              
              
              
              105,979
              
              
              
              (12,311
              )
              
              
              199,648Gross
      margin
              
              
              177,794
              
              
              
              46,916
              
              
              
              53,465
              
              
              
              (96
              )
              
              
              278,079Other
      operating expenses
              
              
              95,387
              
              
              
              19,881
              
              
              
              25,506
              
              
              
              (2,281
              )
              
              
              138,493Depreciation
      and amortization
              
              
              23,455
              
              
              
              10,303
              
              
              
              425
              
              
              
              3,867
              
              
              
              38,050Operating
      income (loss)
              
              
              58,952
              
              
              
              16,732
              
              
              
              27,534
              
              
              
              (1,682
              )
              
              
              101,536Interest
      income
              
              
              7,000
              
              
              
              -
              
              
              
              4
              
              
              
              (102
              )
              
              
              6,902Equity
      in net earnings of Optim Energy
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              6,902
              
              
              
              6,902Other
      income (deductions)
              
              
              4,099
              
              
              
              1,494
              
              
              
              (222
              )
              
              
              (592
              )
              
              
              4,779Net
      interest charges
              
              
              (16,821
              )
              
              
              (7,978
              )
              
              
              (610
              )
              
              
              (5,126
              )
              
              
              (30,535
              )Earnings
      (loss) before income taxes
              
              
              53,230
              
              
              
              10,248
              
              
              
              26,706
              
              
              
              (600
              )
              
              
              89,584Income
      taxes (benefit)
              
              
              19,783
              
              
              
              4,097
              
              
              
              9,654
              
              
              
              (2,173
              )
              
              
              31,361Earnings
      from continuing operations
              
              
              33,447
              
              
              
              6,151
              
              
              
              17,052
              
              
              
              1,573
              
              
              
              58,223Valencia
      non-controlling interest
              
              
              (2,536
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,536
              )Subsidiary
      preferred stock dividends
              
              
              (132
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (132
              )Segment
      earnings from continuing operations attributable to PNMR
              
              $
              30,779
              
              
              $
              6,151
              
              
              $
              17,052
              
              
              $
              1,573
              
              
              $
              55,555Nine Months Ended September 30,
      2009Operating
      revenues
              
              $
              733,510
              
              
              $
              111,917
              
              
              $
              419,568
              
              
              $
              (294
              )
              
              $
              1,264,701Intersegment
      revenues
              
              
              11
              
              
              
              31,792
              
              
              
              -
              
              
              
              (31,803
              )
              
              
              -Total
      revenues
              
              
              733,521
              
              
              
              143,709
              
              
              
              419,568
              
              
              
              (32,097
              )
              
              
              1,264,701Cost
      of energy
              
              
              289,888
              
              
              
              26,038
              
              
              
              272,015
              
              
              
              (31,792
              )
              
              
              556,149Gross
      margin
              
              
              443,633
              
              
              
              117,671
              
              
              
              147,553
              
              
              
              (305
              )
              
              
              708,552Other
      operating expenses
              
              
              315,829
              
              
              
              56,606
              
              
              
              80,919
              
              
              
              (12,186
              )
              
              
              441,168Depreciation
      and amortization
              
              
              68,808
              
              
              
              27,816
              
              
              
              1,412
              
              
              
              13,031
              
              
              
              111,067Operating
      income (loss)
              
              
              58,996
              
              
              
              33,249
              
              
              
              65,222
              
              
              
              (1,150
              )
              
              
              156,317Interest
      income
              
              
              25,518
              
              
              
              9
              
              
              
              53
              
              
              
              (2,232
              )
              
              
              23,348Equity
      in net earnings of Optim Energy
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              944
              
              
              
              944Other
      income (deductions)
              
              
              4,158
              
              
              
              2,357
              
              
              
              (303
              )
              
              
              20,343
              
              
              
              26,555Net
      interest charges
              
              
              (51,419
              )
              
              
              (20,011
              )
              
              
              (2,386
              )
              
              
              (17,485
              )
              
              
              (91,301
              )Earnings
      before income taxes
              
              
              37,253
              
              
              
              15,604
              
              
              
              62,586
              
              
              
              420
              
              
              
              115,863Income
      taxes (benefit)
              
              
              11,295
              
              
              
              6,265
              
              
              
              22,542
              
              
              
              (2,288
              )
              
              
              37,814Earnings
      from continuing operations
              
              
              25,958
              
              
              
              9,339
              
              
              
              40,044
              
              
              
              2,708
              
              
              
              78,049Valencia
      non-controlling interest
              
              
              (7,890
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (7,890
              )Subsidiary
      preferred stock dividends
              
              
              (396
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (396
              )Segment
      earnings from continuing operations attributable to PNMR
              
              $
              17,672
              
              
              $
              9,339
              
              
              $
              40,044
              
              
              $
              2,708
              
              
              $
              69,763
  At
      September 30, 2009:Total
      Assets
              
              $
              3,658,307
              
              
              $
              990,333
              
              
              $
              200,769
              
              
              $
              412,792
              
              
              $
              5,262,201Goodwill
              
              $
              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
              
              
              CorporateElectric
              
              
              Electric
              
              
              Choice
              
              
              and
      Other
              
              
              Consolidated(In
      thousands)Three Months Ended September 30,
      2008Operating
      revenues
              
              $
              356,367
              
              
              $
              35,865
              
              
              $
              215,009
              
              
              $
              (165
              )
              
              $
              607,076Intersegment
      revenues
              
              
              30
              
              
              
              15,232
              
              
              
              -
              
              
              
              (15,262
              )
              
              
              -Total
      revenues
              
              
              356,397
              
              
              
              51,097
              
              
              
              215,009
              
              
              
              (15,427
              )
              
              
              607,076Cost
      of energy
              
              
              194,478
              
              
              
              8,423
              
              
              
              205,954
              
              
              
              (15,232
              )
              
              
              393,623Gross
      margin
              
              
              161,919
              
              
              
              42,674
              
              
              
              9,055
              
              
              
              (195
              )
              
              
              213,453Operating
      expenses
              
              
              92,868
              
              
              
              17,267
              
              
              
              30,542
              
              
              
              2,360
              
              
              
              143,037Depreciation
      and amortization
              
              
              21,666
              
              
              
              9,901
              
              
              
              630
              
              
              
              4,555
              
              
              
              36,752Operating
      income (loss)
              
              
              47,385
              
              
              
              15,506
              
              
              
              (22,117
              )
              
              
              (7,110
              )
              
              
              33,664Interest
      income
              
              
              7,227
              
              
              
              20
              
              
              
              448
              
              
              
              (447
              )
              
              
              7,248Equity
      in net earnings (loss) of Optim Energy
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,485
              )
              
              
              (1,485
              )Other
      income (deductions)
              
              
              (5,372
              )
              
              
              1,708
              
              
              
              183
              
              
              
              (1,167
              )
              
              
              (4,648
              )Net
      interest charges
              
              
              (20,315
              )
              
              
              (4,231
              )
              
              
              (1,846
              )
              
              
              (12,760
              )
              
              
              (39,152
              )Earnings
      (loss) before income taxes
              
              
              28,925
              
              
              
              13,003
              
              
              
              (23,332
              )
              
              
              (22,969
              )
              
              
              (4,373
              )Income
      taxes (benefit)
              
              
              9,540
              
              
              
              4,910
              
              
              
              (6,796
              )
              
              
              (10,763
              )
              
              
              (3,109
              )Earnings
      (loss) from continuing operations
              
              
              19,385
              
              
              
              8,093
              
              
              
              (16,536
              )
              
              
              (12,206
              )
              
              
              (1,264
              )Valencia
      non-controlling interest
              
              
              (3,451
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (3,451
              )Subsidiary
      preferred stock dividends
              
              
              (132
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (132
              )Segment
      earnings (loss) from continuing operations attributable to
      PNMR
              
              $
              15,802
              
              
              $
              8,093
              
              
              $
              (16,536
              )
              
              $
              (12,206
              )
              
              $
              (4,847
              )Nine Months Ended September 30,
      2008Operating
      revenues
              
              $
              995,040
              
              
              $
              95,892
              
              
              $
              461,402
              
              
              $
              (445
              )
              
              $
              1,551,889Intersegment
      revenues
              
              
              79
              
              
              
              44,550
              
              
              
              -
              
              
              
              (44,629
              )
              
              
              -Total
      revenues
              
              
              995,119
              
              
              
              140,442
              
              
              
              461,402
              
              
              
              (45,074
              )
              
              
              1,551,889Cost
      of energy
              
              
              577,762
              
              
              
              24,170
              
              
              
              469,305
              
              
              
              (44,535
              )
              
              
              1,026,702Gross
      margin
              
              
              417,357
              
              
              
              116,272
              
              
              
              (7,903
              )
              
              
              (539
              )
              
              
              525,187Operating
      expenses
              
              
              366,659
              
              
              
              84,709
              
              
              
              118,800
              
              
              
              (2,352
              )
              
              
              567,816Depreciation
      and amortization
              
              
              63,532
              
              
              
              27,037
              
              
              
              1,679
              
              
              
              13,190
              
              
              
              105,438Operating
      income (loss)
              
              
              (12,834
              )
              
              
              4,526
              
              
              
              (128,382
              )
              
              
              (11,377
              )
              
              
              (148,067
              )Interest
      income
              
              
              18,197
              
              
              
              25
              
              
              
              1,318
              
              
              
              (2,350
              )
              
              
              17,190Equity
      in net earnings (loss) of Optim Energy
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (29,091
              )
              
              
              (29,091
              )Other
      income (deductions)
              
              
              (12,029
              )
              
              
              2,700
              
              
              
              110
              
              
              
              (4,776
              )
              
              
              (13,995
              )Net
      interest charges
              
              
              (52,041
              )
              
              
              (13,584
              )
              
              
              (2,459
              )
              
              
              (30,922
              )
              
              
              (99,006
              )Earnings
      (loss) before income taxes
              
              
              (58,707
              )
              
              
              (6,333
              )
              
              
              (129,413
              )
              
              
              (78,516
              )
              
              
              (272,969
              )Income
      taxes (benefit)
              
              
              (5,108
              )
              
              
              10,597
              
              
              
              (28,393
              )
              
              
              (32,683
              )
              
              
              (55,587
              )Earnings
      (loss) from continuing operations
              
              
              (53,599
              )
              
              
              (16,930
              )
              
              
              (101,020
              )
              
              
              (45,833
              )
              
              
              (217,382
              )Valencia
      non-controlling interest
              
              
              (4,452
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (4,452
              )Subsidiary
      preferred stock dividends
              
              
              (396
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (396
              )Segment  earnings
      (loss) from continuing operations attributable to PNMR
              
              $
              (58,447
              )
              
              $
              (16,930
              )
              
              $
              (101,020
              )
              
              $
              (45,833
              )
              
              $
              (222,230
              )At
      September 30, 2008:Total
      assets*
              
              $
              3,605,604
              
              
              $
              984,549
              
              
              $
              412,941
              
              
              $
              536,596
              
              
              $
              5,539,690Goodwill
              
              $
              51,632
              
              
              $
              226,665
              
              
              $
              82,310
              
              
              $
              -
              
              
              $
              360,607





*  Excludes
total assets of PNM Gas discontinued operations of $625,964.


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)





(4)
            Energy
      Related Derivative Contracts and Fair Value
  Disclosures





Note 8 of
Notes to Consolidated Financial Statements in the 2008 Annual Reports contains
information regarding energy related derivative contracts and fair value
disclosures.  See Note 7 for additional information regarding an
interest rate swap.





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,
which it ceased in the second quarter of 2008.  Effective January 1,
2009, the Company adopted amendments to GAAP, which enhanced disclosures for
derivative instruments and hedging activities.





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.  As discussed in Note 10, effective July 1, 2009,
additional resources that had been part of unregulated operations were included
in rates subject to the jurisdiction of the NMPRC pursuant to the Resource
Stipulation thereby mitigating PNM’s exposure to market risk.





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.





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)


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 GAAP 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 are not marked to market but
rather recorded in results of operations when the underlying transactions
settle.





For
derivative transactions meeting the definition of a cash flow 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 and nine months ended September 30, 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
September 30, 2009, after-tax gains of $12.0 million for PNMR and
$13.6 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 September 30,
2009, the maximum length of time over which the Company is hedging its exposure
to the variability in future cash flows is through December 2012.





The
contracts recorded at fair value that do not qualify or are not designated for
cash flow hedge accounting are classified as either economic hedges or trading
transactions.  Economic hedges are defined as derivative instruments,
including long-term power agreements, used to economically hedge generation
assets, purchased power and fuel costs, and customer load
requirements.  Changes in the fair value of economic hedges are
reflected in results of operations, with changes related to sales contracts
included in operating revenues and changes related to purchase contracts
included in cost of energy.  Trading transactions include speculative
transactions, which the Company ceased in 2008.  Also included in this
category are transactions that lock in margin with no forward market risk and
are not economic hedges; changes in the fair value of these transactions are
reflected on a net basis in operating revenues.





Fair
value is defined under GAAP as the 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 GAAP, 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
September 30, 2009, amounts recognized for the right to reclaim cash collateral
are $3.5 million for PNMR and $0.9 million for PNM.  PNMR and PNM had
no obligations to return cash collateral.





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)


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





Commodity
Derivatives





Commodity
derivative instruments are summarized as follows:





Economic
      Hedges
              
              
              Trading
      Transactions
              
              
              Qualified
      Cash Flow HedgesSeptember
      30, 2009
              
              
              December
      31, 2008
              
              
              September
      30, 2009
              
              
              December
      31, 2008
              
              
              September
      30, 2009
              
              
              December
      31, 2008(In
      thousands)PNMRCurrent
      assets
              
              $
              6,928
              
              
              $
              5,699
              
              
              $
              14,290
              
              
              $
              19,469
              
              
              $
              23,741
              
              
              $
              26,082Deferred
      charges
              
              
              2,873
              
              
              
              2,060
              
              
              
              3,907
              
              
              
              7,594
              
              
              
              6,359
              
              
              
              15,9669,801
              
              
              
              7,759
              
              
              
              18,197
              
              
              
              27,063
              
              
              
              30,100
              
              
              
              42,048Current
      liabilities
              
              
              (6,066
              )
              
              
              (12,630
              )
              
              
              (13,443
              )
              
              
              (18,142
              )
              
              
              (3,762
              )
              
              
              (3,179
              )Long-term
      liabilities
              
              
              (928
              )
              
              
              (551
              )
              
              
              (3,566
              )
              
              
              (6,365
              )
              
              
              (450
              )
              
              
              (18
              )(6,994
              )
              
              
              (13,181
              )
              
              
              (17,009
              )
              
              
              (24,507
              )
              
              
              (4,212
              )
              
              
              (3,197
              )Net
              
              $
              2,807
              
              
              $
              (5,422
              )
              
              $
              1,188
              
              
              $
              2,556
              
              
              $
              25,888
              
              
              $
              38,851
  PNMCurrent
      assets
              
              $
              3,037
              
              
              $
              2,976
              
              
              $
              177
              
              
              $
              347
              
              
              $
              22,576
              
              
              $
              25,529Deferred
      charges
              
              
              1,815
              
              
              
              2,060
              
              
              
              -
              
              
              
              -
              
              
              
              4,198
              
              
              
              15,6844,852
              
              
              
              5,036
              
              
              
              177
              
              
              
              347
              
              
              
              26,774
              
              
              
              41,213Current
      liabilities
              
              
              (2,956
              )
              
              
              (7,785
              )
              
              
              (111
              )
              
              
              (86
              )
              
              
              (17
              )
              
              
              (13
              )Long-term
      liabilities
              
              
              (298
              )
              
              
              (551
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (18
              )(3,254
              )
              
              
              (8,336
              )
              
              
              (111
              )
              
              
              (86
              )
              
              
              (17
              )
              
              
              (31
              )Net
              
              $
              1,598
              
              
              $
              (3,300
              )
              
              $
              66
              
              
              $
              261
              
              
              $
              26,757
              
              
              $
              41,182





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 September 30, 2009 and December 31, 2008,
the trading transactions column of the above table includes $14.1 million and
$19.1 million of current assets, $3.9 million and $7.6 million of deferred
charges, $13.3 million and $18.1 million of current liabilities, and $3.6
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)


The
following table presents the effect of PNMR’s and PNM’s commodity derivative
instruments, excluding qualified cash flow hedging instruments, on
earnings:





Gain
      (Loss) Recognized in EarningsThree
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30, 2009
            
            
            September
      30, 2009Location
            
            Economic
              Hedges
            
            
            Trading
      Transactions
            
            
            Economic
              Hedges
            
            
            Trading
      Transactions(In
      thousands)PNMR
            Electric
      operating revenues
            
            $
            1,263
            
            
            $
            26
            
            
            $
            5,052
            
            
            $
            121Cost
      of energy
            
            
            (1,646
            )
            
            
            -
            
            
            
            (11,616
            )
            
            
            -Total
      gain (loss)
            
            $
            (383
            )
            
            $
            26
            
            
            $
            (6,564
            )
            
            $
            121PNM
            Electric
      operating revenues
            
            $
            1,263
            
            
            $
            5
            
            
            $
            5,052
            
            
            $
            85Cost
      of energy
            
            
            733
            
            
            
            -
            
            
            
            (10,141
            )
            
            
            -Total
      gain (loss)
            
            $
            1,996
            
            
            $
            5
            
            
            $
            (5,089
            )
            
            $
            85





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:





Gain
      (Loss) Recognized in EarningsRecognized
              
              Reclassified
      from AOCI into Earningsin
      OCI
              
              Location
              
              Amount(In
      thousands)Three
      Months Ended
                September 30,
      2009PNMR
              
              
              
              $                            
        (4,970)
              
              Electric operating revenues
              
              $                     11,363Cost of Energy
              
              (8,346)Total
              
              $                   
         3,017PNM
              
              
              
              $                            
      (13,821)
              
              Electric operating revenues
              
              $                     11,363Cost of energy
              
              (27)Total
              
              $                  
        11,336Nine
      Months Ended
                September 30,
      2009PNMR
              
              
              
              $                           
      (11,215)
              
              Electric
      operating revenues
              
              $                   
       29,501Cost
      of Energy
              
              (16,554)Total
              
              $                   
       12,947PNM
              
              
              
              $                           
      (14,423)
              
              Electric
      operating revenues
              
              $                  
        29,501Cost
      of Energy
              
              (32)Total
              
              $                    
      29,469


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)


Commodity
contract volume positions are presented in Decatherms for gas related contracts
and in MWh for power related contracts.  The table below presents the
PNMR’s and PNM’s net buy (sell) volume positions at September 30,
2009:





Decatherms
            
            
            MWhEconomic
              Hedges
            
            
            Trading
              Transactions
            
            
            Qualified
      Cash Flow Hedges
            
            
            Economic
              Hedges
            
            
            Trading
              Transactions
            
            
            Qualified
      Cash Flow HedgesPNMR
            
            
            8,407,720
            
            
            
            (1,482,021
            )
            
            
            11,824,780
            
            
            
            887,865
            
            
            
            5
            
            
            
            (931,985
            )PNM
            
            
            6,610,000
            
            
            
            -
            
            
            
            -
            
            
            
            484,425
            
            
            
            5
            
            
            
            (987,210
            )





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 September 30,
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.





Contingent
      Feature
            
            Contractual
              Liability
            
            Existing
      Cash
              Collateral
            
            Net
      Exposure(In
      thousands)PNMRCredit
      rating downgrade
            
            $
      19,648
            
            $
      900
            
            $
      17,231PNMCredit
      rating downgrade
            
            $  2,022
            
            $
      900
            
            $       
         -





Non-Derivative
Financial Instruments





The
carrying amounts reflected on the Condensed Consolidated Balance Sheets
approximate fair value for cash, temporary investments, receivables, and
payables due to the short period of maturity.  Available-for-sale
securities are carried at fair value.  The carrying amount and fair
value of other non-derivative financial instruments (including current
maturities) are:


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)





September
      30, 2009
            
            
            December
      31, 2008Carrying
              Amount
            
            
            Fair
      Value
            
            
            Carrying
              Amount
            
            
            Fair
      Value(In
      thousands)PNMRLong-term
      debt
            
            $
            1,533,174
            
            
            $
            1,591,530
            
            
            $
            1,584,705
            
            
            $
            1,310,771Investment
      in PVNGS lessor notes
            
            $
            159,936
            
            
            $
            170,353
            
            
            $
            185,637
            
            
            $
            190,077Other
      investments
            
            $
            29,331
            
            
            $
            35,501
            
            
            $
            32,966
            
            
            $
            42,459PNMLong-term
      debt
            
            $
            1,019,728
            
            
            $
            1,003,171
            
            
            $
            1,055,717
            
            
            $
            834,157Investment
      in PVNGS lessor notes
            
            $
            159,936
            
            
            $
            170,353
            
            
            $
            221,422
            
            
            $
            225,987Other
      investments
            
            $
            8,590
            
            
            $
            9,851
            
            
            $
            9,951
            
            
            $
            10,949TNMPLong-term
      debt
            
            $
            309,555
            
            
            $
            375,345
            
            
            $
            167,690
            
            
            $
            167,690Other
      investments
            
            $
            556
            
            
            $
            556
            
            
            $
            550
            
            
            $
            550





The fair
value of long-term debt shown above was primarily determined using quoted market
values, as were certain items included in other investments.  To the
extent market values were not available, fair value was determined by
discounting the cash flows for the instrument using quoted interest rates for
comparable instruments.





Available-for-sale
securities for PNMR and PNM consist of PNM assets held in trust for its share of
decommissioning costs of PVNGS and PNM’s executive retirement
program.  The trusts hold equity and fixed income
securities.  The carrying value, gross unrealized gains and losses and
estimated fair value of investments in available-for-sale securities are as
follows:





Unrealized
      Gains
            
            
            Unrealized
      (Losses)
            
            
            Fair
      Value(In
      thousands)September
      30, 2009Equity
      securities
            
            $
            9,231
            
            
            $
            -
            
            
            $
            65,458Municipal
      bonds
            
            
            2,478
            
            
            
            -
            
            
            
            36,441U.S.
      Government securities
            
            
            52
            
            
            
            -
            
            
            
            13,958Corporate
      bonds
            
            
            348
            
            
            
            -
            
            
            
            6,561Foreign
      government bonds
            
            
            18
            
            
            
            -
            
            
            
            338Cash
      investments
            
            
            -
            
            
            
            -
            
            
            
            8,399$
            12,127
            
            
            $
            -
            
            
            $
            131,155December
      31, 2008Equity
      securities
            
            $
            1,181
            
            
            $
            -
            
            
            $
            50,941Municipal
      bonds
            
            
            708
            
            
            
            -
            
            
            
            31,509U.S.
      Government securities
            
            
            90
            
            
            
            -
            
            
            
            14,262Corporate
      bonds
            
            
            115
            
            
            
            -
            
            
            
            6,034Foreign
      government bonds
            
            
            29
            
            
            
            -
            
            
            
            391Cash
      investments
            
            
            -
            
            
            
            -
            
            
            
            9,345$
            2,123
            
            
            $
            -
            
            
            $
            112,482





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)


The
proceeds and gross realized gains and losses on the disposition of
available-for-sale securities for PNMR and PNM are shown in the following
table.  Realized gains and losses are determined by specific
identification of costs of securities sold.





Three
      Months Ended
              September
      30, 2009
            
            
            Nine
      Months Ended
              September
      30, 2009(In
      thousands)Proceeds
      from sales
            
            $
            12,939
            
            
            $
            87,846Gross
      realized gains
            
            $
            672
            
            
            $
            4,083Gross
      realized (losses)
            
            $
            (574
            )
            
            $
            (6,202
            )





Held-to-maturity
securities are those investments in debt securities that the Company has the
ability and intent to hold until maturity.  Held-to-maturity
securities consist of the investment in PVNGS lessor notes and certain items
within other investments, including the EIP lessor note.





The
Company has no significant available-for-sale or held-to-maturity securities for
which carrying value exceeds fair value.  There are no impairments
considered to be “other than temporary” that are included in AOCI and not
recognized in earnings.





At
September 30, 2009, the available-for-sale and held-to-maturity debt securities
had the following final maturities:





Fair
      ValueAvailable-for-Sale
            
            
            Held-to-MaturityPNMR
      and PNM
            
            
            PNMR
            
            
            PNM(In
      thousands)Within
      1 year
            
            $
            2,137
            
            
            $
            118
            
            
            $
            118After
      1 year through 5 years
            
            
            12,457
            
            
            
            72,114
            
            
            
            54,189After
      5 years through 10 years
            
            
            5,736
            
            
            
            130,629
            
            
            
            125,096Over
      10 years
            
            
            36,968
            
            
            
            -
            
            
            
            -$
            57,298
            
            
            $
            202,861
            
            
            $
            179,403





Other
      Fair Value Disclosures





The
Company determines the fair values of its derivative and other instruments based
on the hierarchy established in GAAP, which requires an entity to maximize the
use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. GAAP 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.  Level 3 inputs
used in determining fair values for the Company consist of internal valuation
models.  The fair value determinations of items recorded at fair value
on the Condensed Consolidated Balance sheet at September 30, 2009 and December
31, 2008 are as follows:


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





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)September 30, 2009
              
              
              
              
              (In
      thousands)PNMRAssetsCommodity
      derivatives
              
              $
              58,098
              
              
              $
              7,028
              
              
              $
              50,116
              
              
              $
              -NDT
              
              
              130,354
              
              
              
              82,598
              
              
              
              47,756
              
              
              
              -188,452
              
              
              
              89,626
              
              
              
              97,872
              
              
              
              -LiabilitiesCommodity
      derivatives
              
              
              (28,215
              )
              
              
              (5,366
              )
              
              
              (21,080
              )
              
              
              (815
              )Interest
      rate swap
              
              
              (176
              )
              
              
              -
              
              
              
              (176
              )
              
              
              -(28,391
              )
              
              
              (5,366
              )
              
              
              (21,256
              )
              
              
              (815
              )Net
              
              $
              160,061
              
              
              $
              84,260
              
              
              $
              76,616
              
              
              $
              (815
              )PNMAssetsCommodity
      derivatives
              
              $
              31,803
              
              
              $
              87
              
              
              $
              31,716
              
              
              $
              -NDT
              
              
              130,354
              
              
              
              82,598
              
              
              
              47,756
              
              
              
              -162,157
              
              
              
              82,685
              
              
              
              79,472
              
              
              
              -LiabilitiesCommodity
      derivatives
              
              
              (3,382
              )
              
              
              (361
              )
              
              
              (2,707
              )
              
              
              (314
              )Net
              
              $
              158,775
              
              
              $
              82,324
              
              
              $
              76,765
              
              
              $
              (314
              )
  December 31, 2008PNMRAssetsCommodity
      derivatives
              
              $
              76,870
              
              
              $
              9,390
              
              
              $
              66,953
              
              
              $
              13NDT
              
              
              111,671
              
              
              
              69,150
              
              
              
              42,521
              
              
              
              -Other
              
              
              811
              
              
              
              811
              
              
              
              -
              
              
              
              -189,352
              
              
              
              79,351
              
              
              
              109,474
              
              
              
              13LiabilitiesCommodity
      derivatives
              
              
              (40,885
              )
              
              
              (12,052
              )
              
              
              (27,897
              )
              
              
              (422
              )Net
              
              $
              148,467
              
              
              $
              67,299
              
              
              $
              81,577
              
              
              $
              (409
              )PNMAssetsCommodity
      derivatives
              
              $
              46,596
              
              
              $
              -
              
              
              $
              45,519
              
              
              $
              13NDT
              
              
              111,671
              
              
              
              69,150
              
              
              
              42,521
              
              
              
              -Other
              
              
              811
              
              
              
              811
              
              
              
              -
              
              
              
              -159,078
              
              
              
              69,961
              
              
              
              88,040
              
              
              
              13LiabilitiesCommodity
      derivatives
              
              
              (8,453
              )
              
              
              (510
              )
              
              
              (6,457
              )
              
              
              (422
              )Net
              
              $
              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 $1.0 million for PNMR and zero for PNM
      at September 30, 2009 and $0.5 million for PNMR and $1.1 million for PNM
      at December 31, 2008.


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)


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





Level
3 Fair Value Assets and Liabilities





Three
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30, 2009
            
            
            September
      30, 2009PNMR
            
            
            PNM
            
            
            PNMR
            
            
            PNM(In
      thousands)Balance
      at beginning of period
            
            $
            (1,636
            )
            
            $
            (1,129
            )
            
            $
            (409
            )
            
            $
            (409
            )Total
      gains (losses) included in earnings
            
            
            28
            
            
            
            28
            
            
            
            (2,073
            )
            
            
            (2,073
            )Total
      gains (losses) included in other comprehensive income
            
            
            (288
            )
            
            
            -
            
            
            
            (1,061
            )
            
            
            -Purchases,
      issuances, and settlements(1)
            
            
            1,081
            
            
            
            787
            
            
            
            2,728
            
            
            
            2,168Balance
      at end of period
            
            $
            (815
            )
            
            $
            (314
            )
            
            $
            (815
            )
            
            $
            (314
            )Total
      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
            
            $
            688
            
            
            $
            688
            
            
            $
            30
            
            
            $
            30








Three
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30, 2008
            
            
            September
      30, 2008PNMR
            
            
            PNM
            
            
            PNMR
            
            
            PNM(In
      thousands)Balance
      at December 31, 2007
            
            
            
            
            
            
            
            $
            2,061
            
            
            $
            2,679Adoption
      of  amendment to GAAP regarding fair value
      measurement
            
            
            
            
            
            
            
            
            16,407
            
            
            
            16,407Balance
      at beginning of period
            
            $
            19,863
            
            
            $
            19,666
            
            
            
            18,468
            
            
            
            19,086Total
      gains included in earnings
            
            
            (16,635
            )
            
            
            (16,713
            )
            
            
            (3,742
            )
            
            
            (4,513
            )Total
      gains included in other comprehensive income
            
            
            (60
            )
            
            
            -
            
            
            
            28
            
            
            
            -Purchases,
      issuances, and settlements(1)
            
            
            (3,613
            )
            
            
            (3,818
            )
            
            
            (15,199
            )
            
            
            (15,438
            )Transfers
      into Level 3 (2)
            
            
            (113
            )
            
            
            (113
            )
            
            
            (113
            )
            
            
            (113
            )Balance
      at September 30, 2008
            
            $
            (558
            )
            
            $
            (978
            )
            
            
            (558
            )
            
            
            (978
            )Total
      gains included in earnings attributable to the change in unrealized gains
      or losses relating to assets still held at the end of the
      period
            
            $
            (10,382
            )
            
            $
            (10,256
            )
            
            $
            (3,643
            )
            
            $
            (2,821
            )





(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, in 2008, the sale of PNM Electric wholesale
      contracts.


(2)
            Transfers
      into Level 3 from Level 2 are at fair values as of July 1,
      2008.





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)


Gains and
losses (realized and unrealized) for Level 3 fair value measurements included in
earnings are reported in operating revenues and cost of energy as
follows:





Three
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30, 2009
            
            
            September
      30, 2009Operating
      Revenues
            
            
            Cost
      of
              Energy
            
            
            Operating
      Revenues
            
            
            Cost
      of
              EnergyPNMR
            
            (In
      thousands)Total
      gains (losses) included in earnings
            
            $
            -
            
            
            $
            28
            
            
            $
            237
            
            
            $
            (2,310
            )Change
      in unrealized gains or (losses)relating
      to assets still held at reporting date
            
            $
            -
            
            
            $
            688
            
            
            $
            -
            
            
            $
            30





PNMTotal
      gains (losses) included in earnings
            
            $
            -
            
            
            $
            28
            
            
            $
            237
            
            
            $
            (2,310
            )Change
      in unrealized gains or (losses)relating
      to assets still held at reporting date
            
            $
            -
            
            
            $
            688
            
            
            $
            -
            
            
            $
            30





Three
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30, 2008
            
            
            September
      30, 2008Operating
              Revenues
            
            
            Cost
      of
              Energy
            
            
            Operating
              Revenues
            
            
            Cost
      of
              EnergyPNMR
            
            (In
      thousands)Total
      gains (losses) included in earnings
            
            $
            299
            
            
            $
            (16,934
            )
            
            $
            11,761
            
            
            $
            (15,503
            )Change
      in unrealized gains (losses) relating to assets still held at reporting
      date
            
            $
            262
            
            
            $
            (10,644
            )
            
            $
            (544
            )
            
            $
            (3,099
            )PNMTotal
      gains (losses) included in earnings
            
            $
            (77
            )
            
            $
            (16,636
            )
            
            $
            10,782
            
            
            $
            (15,295
            )Change
      in unrealized gains (losses) relating to assets still held at reporting
      date
            
            $
            2
            
            
            $
            (10,258
            )
            
            $
            2
            
            
            $
            (2,823
            )


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)





(5)
            Earnings
      Per Share





In
accordance with GAAP, 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
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008(In
      thousands, except per share amounts)Earnings
      (Loss) Attributable to PNMR:Earnings
      (loss) from continuing operations
            
            $
            58,223
            
            
            $
            (1,264
            )
            
            $
            78,049
            
            
            $
            (217,382
            )Earnings
      from continuing operations attributable to Valencia non-controlling
      Interest
            
            
            (2,536
            )
            
            
            (3,451
            )
            
            
            (7,890
            )
            
            
            (4,452
            )Preferred
      stock dividend requirements of subsidiary
            
            
            (132
            )
            
            
            (132
            )
            
            
            (396
            )
            
            
            (396
            )Earnings
      (loss) from continuing operations attributable to PNMR
            
            
            55,555
            
            
            
            (4,847
            )
            
            
            69,763
            
            
            
            (222,230
            )Earnings
      (loss) from discontinued operations
            
            
            (1,362
            )
            
            
            (638
            )
            
            
            77,702
            
            
            
            24,622Net
      Earnings (Loss) Attributable to PNMR
            
            $
            54,193
            
            
            $
            (5,485
            )
            
            $
            147,465
            
            
            $
            (197,608
            )Average
      Number of Common Shares:Outstanding
      during period
            
            
            86,673
            
            
            
            86,408
            
            
            
            86,620
            
            
            
            81,669Equivalents
      from convertible preferred stock
            
            
            4,778
            
            
            
            -
            
            
            
            4,778
            
            
            
            -Average
      Shares - Basic
            
            
            91,451
            
            
            
            86,408
            
            
            
            91,398
            
            
            
            81,669Dilutive
      Effect of Common Stock Equivalents (a)-Stock
      options and restricted stock
            
            
            380
            
            
            
            -
            
            
            
            205
            
            
            
            -Average
      Shares - Diluted
            
            
            91,831
            
            
            
            86,408
            
            
            
            91,603
            
            
            
            81,669Per
      Share of Common Stock – Basic:Earnings
      (loss) from continuing operations
            
            $
            0.61
            
            
            $
            (0.06
            )
            
            $
            0.76
            
            
            $
            (2.72
            )Earnings
      (loss) from discontinued operations
            
            
            (0.02
            )
            
            
            -
            
            
            
            0.85
            
            
            
            0.30Net
      Earnings (Loss)
            
            $
            0.59
            
            
            $
            (0.06
            )
            
            $
            1.61
            
            
            $
            (2.42
            )Per
      Share of Common Stock – Diluted:Earnings
      (loss) from continuing operations
            
            $
            0.60
            
            
            $
            (0.06
            )
            
            $
            0.76
            
            
            $
            (2.72
            )Earnings
      (loss) from discontinued operations
            
            
            (0.01
            )
            
            
            -
            
            
            
            0.85
            
            
            
            0.30Net
      Earnings (Loss)
            
            $
            0.59
            
            
            $
            (0.06
            )
            
            $
            1.61
            
            
            $
            (2.42
            )





(a)
            Excludes
      the effect of anti-dilutive common stock equivalents related to
      out-of-the-money stock options of 3,327,481 at September 30,
      2009.  Due to losses in the three months and nine months ended
      September 30, 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.





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)


(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.





Stock
Options





The
following table represents stock option activity for the nine months ended
September 30, 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
            
            
            790,064
            
            
            $
            8.23Exercised
            
            
            -
            
            
            $
            -Forfeited
            
            
            (174,236
            )
            
            $
            20.40Outstanding
      at end of period
            
            
            4,341,735
            
            
            $
            19.17
            
            
            $
            3,058
            
            
            
            6.30Options
      exercisable at end of period
            
            
            3,085,006
            
            
            $
            22.07
            
            
            $
            151
            
            
            
            5.25Options
      available for future grant
            
            
            5,240,182





The
following table provides additional information concerning stock option
activity:





Nine
      Months Ended
              September
      30,Options
      for PNMR Common Stock
            
            2009
            
            
            2008(In
      thousands,
              except
      per share amounts)Weighted-average
      grant date fair value per share of options granted
            
            $
            1.63
            
            
            $
            1.39Total
      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 nine months ended September 30, 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.





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)


Restricted
Stock





The
following table summarizes nonvested restricted stock activity for the nine
months ended September 30, 2009:





Weighted-AverageNonvested
      Restricted
            
            
            
            
            Grant-DatePNMR
      Common Stock
            
            Shares
            
            
            Fair
      ValueNonvested
      at beginning of period
            
            
            195,626
            
            
            $
            17.43Granted
            
            
            102,000
            
            
            $
            7.81Vested
            
            
            (99,349
            )
            
            $
            19.13Forfeited
            
            
            -
            
            
            $
            -Nonvested
      at end of period
            
            
            198,277
            
            
            $
            11.63





The total
fair value of shares of restricted stock that vested during the nine months
ended September 30, 2009 was $0.9 million.  During the three months
ended June 30, 2009, the Company issued restricted stock agreements to certain
executives that are based upon the Company achieving specified performance
targets, partly for 2009 and partly for the 2009 through 2011
period.  The determination of the number of restricted shares
ultimately issued depends on the levels at which the performance criteria are
achieved and cannot be determined until after the performance periods end. The
Company would issue a maximum of 172,200 shares if all of the performance
criteria are achieved at the optimal level and all the executives remain
eligible.  The Company records compensation cost for these awards
based upon periodic estimates of the levels that the performance targets will be
achieved.





(7)
            Capitalization





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





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.  In addition, PNMR and PNM each have a local line of
credit of $5.0 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 $75.0 million TNMP Revolving Credit Facility
described under Financing Activities below and the TNMP Facility
terminated.  PNMR and PNM had commercial paper programs under which
they could have issued up to $400.0 million and $300.0 million of commercial
paper.  The Company suspended the commercial paper programs due to
market conditions and no commercial paper has been issued since March 11,
2008.  The revolving credit facilities served as support for the
commercial paper programs.  Operationally, this meant the aggregate
borrowings under the commercial paper program and the revolving credit facility
for each of PNMR and PNM could not exceed the maximum amount of the revolving
credit facility for that entity.  The commercial paper programs were
terminated on July 2, 2009.  At September 30, 2009,
the weighted average interest rates were 1.5% and 0.9% for the PNMR Facility and
the PNM Facility.  Short-term debt outstanding consists
of:





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)





September
      30,
            
            
            December
      31,Short-term
      Debt
            
            2009
            
            
            2008(In
      thousands)PNMCommercial
      paper
            
            $
            -
            
            
            $
            -Revolving
      credit facility
            
            
            108,000
            
            
            
            340,000Local
      lines of credit
            
            
            -
            
            
            
            -108,000
            
            
            
            340,000TNMP
      – Revolving credit facility
            
            
            -
            
            
            
            150,000PNMRCommercial
      paper
            
            
            -
            
            
            
            -Revolving
      credit facility
            
            
            85,000
            
            
            
            254,667Local
      lines of credit
            
            
            -
            
            
            
            -$
            193,000
            
            
            $
            744,667





At
October 26, 2009, PNMR, PNM, and TNMP had $501.4 million, $298.7 million, and
$53.5 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 October 26,
2009, on a consolidated basis, was $853.6 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 $29.7 million that represents the
unfunded portion of the PNMR Facility attributable to LBB.  At October
26, 2009, PNMR had cash investments of $15.5 million and PNM and TNMP had no
such investments.





As of
September 30, 2009, TNMP had outstanding borrowings of $36.2 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 $7.3 million, net of related transaction costs and
write-off of the proportionate amount of 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
(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.


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)


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 for the 2009 Term Loan Agreement 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 September 30, 2009 pre-tax fair value of $(0.2)
million is included in other deferred credits on the Condensed Consolidated
Balance Sheets and in AOCI.  Amounts reclassified from AOCI are
included in other interest expense.  The fair value determination was
made using Level 2 inputs under GAAP.





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 (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 TNMP first mortgage bonds
(the “Series 2009C Bonds”).  The TNMP Revolving Credit Facility will
expire in April 2011.




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.





On May
23, 2003, PNM issued $36.0 million of 4.00% PCRB senior unsecured notes, which
have a scheduled maturity in 2038, but were subject to mandatory repurchase and
remarketing on July 1, 2009.  PNM repurchased these notes for $36.0
million on July 1, 2009 utilizing available cash balances and borrowings under
the PNM Facility.  PNM intends to hold these bonds (without legally
canceling them) and anticipates remarketing the bonds at some point in the
future depending upon market conditions. For financial reporting purposes, the
debt is considered extinguished and removed from the balance
sheets.





Common
Stock





PNMR
offers new shares of PNMR common stock through the PNMR Direct
Plan.  PNMR had offered new shares of its common stock through an
equity distribution agreement, which was terminated in July 2009. On July 15,
2009, PNMR began purchasing shares of its common stock on the open market rather
than issuing additional shares to satisfy subscriptions under the PNMR Direct
Plan.  During the period from January 1, 2009 to July 15, 2009, PNMR
sold 93,328 shares of its common stock through the PNMR Direct Plan for net
proceeds of $0.8 million.  PNMR also issued 48,202 shares of its
common stock for $0.4 million through its ESPP during the six months ended June
30, 2009.  The ESPP was terminated effective June 30,
2009.





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)


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 ofliquidation 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 preferred stock result in it being
substantially equivalent to common stock.  Therefore, for earnings per
share purposes the number of common shares into which the Series A convertible
preferred stock is convertible is included in the weighted average number of
common shares outstanding for periods after the Series A convertible preferred
stock was issued.  Similarly, dividends on the Series A convertible
preferredstock are
considered to be common dividends in the accompanying Condensed Consolidated
Financial Statements.





(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 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 September 30,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
            
            
            
            3Net
      periodic benefit cost (income)
            
            $
            (47
            )
            
            $
            (1,459
            )
            
            $
            250
            
            
            $
            514
            
            
            $
            309
            
            
            $
            314





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)





Nine
      Months Ended September 30,Pension
      Plan
            
            
            Other
      Postretirement
              Benefits
            
            
            Executive
      Retirement
              Program2009
            
            
            2008
            
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008(In
      thousands)Components
      of Net PeriodicBenefit
      Cost (Income)Service
      cost
            
            $
            -
            
            
            $
            -
            
            
            $
            313
            
            
            $
            535
            
            
            $
            44
            
            
            $
            42Interest
      cost
            
            
            25,830
            
            
            
            24,951
            
            
            
            5,541
            
            
            
            6,258
            
            
            
            852
            
            
            
            852Expected
      long-term return on assets
            
            
            (29,073
            )
            
            
            (31,009
            )
            
            
            (4,374
            )
            
            
            (4,597
            )
            
            
            -
            
            
            
            -Amortization
      of net loss
            
            
            2,864
            
            
            
            1,443
            
            
            
            2,467
            
            
            
            3,612
            
            
            
            20
            
            
            
            39Amortization
      of prior service cost
            
            
            238
            
            
            
            238
            
            
            
            (3,196
            )
            
            
            (4,265
            )
            
            
            8
            
            
            
            10Curtailment
      (gain) (1)
            
            
            -
            
            
            
            -
            
            
            
            (2,943
            )
            
            
            -
            
            
            
            -
            
            
            
            -Net
      periodic benefit cost (income)
            
            $
            (141
            )
            
            $
            (4,377
            )
            
            $
            (2,192
            )
            
            $
            1,543
            
            
            $
            924
            
            
            $
            943





(1)
            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 GAAP and resulted in a curtailment gain
      in the first quarter 2009, which is included in the gain on sale of PNM
      Gas.





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
$19.5 million in 2010 and a total of $185.7 million for
2011-2013.  These anticipated contributions were developed using a
probabilistically weighted average discount rate of 6.2% to determine the
projected benefit obligation under the pension plan.  Actual amounts
to be funded in the future will be dependent on the actuarial assumptions at
that time, including the appropriate discount rate.  PNM contributed
$0.3 million and $1.0 million to trusts for other postretirement benefits for
the three months ended September 30, 2009 and 2008 and $2.4 million and $3.9
million for the nine months ended September 30, 2009 and 2008.  PNM
expects to make contributions totaling $2.7 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 September 30, 2009 and 2008, were $1.1
million for the nine months ended September 30, 2009 and 2008, and are expected
to total $1.5 million during 2009.  PNM anticipates the net periodic
benefit cost under its pension plan, other postretirement benefits, and
executive retirement program will be $4.7 million, $3.6 million, and $1.1
million in 2010 and will total $30.8 million, $26.5 million, and $3.3 million
for 2011-2013.


TNMP
Plans





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





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


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)





Nine
      Months Ended September 30,Pension
      Plan
            
            
            Other
      Postretirement
              Benefits
            
            
            Executive
      Retirement
              Program2009
            
            
            2008
            
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008(In
      thousands)Components
      of Net PeriodicBenefit
      Cost (Income)Service
      cost
            
            $
            -
            
            
            $
            -
            
            
            $
            195
            
            
            $
            213
            
            
            $
            -
            
            
            $
            -Interest
      cost
            
            
            3,297
            
            
            
            3,182
            
            
            
            550
            
            
            
            536
            
            
            
            57
            
            
            
            57Expected
      long-term return on assets
            
            
            (4,570
            )
            
            
            (4,976
            )
            
            
            (371
            )
            
            
            (365
            )
            
            
            -
            
            
            
            -Amortization
      of net gain
            
            
            -
            
            
            
            (109
            )
            
            
            (198
            )
            
            
            (203
            )
            
            
            -
            
            
            
            -Amortization
      of prior service cost
            
            
            -
            
            
            
            -
            
            
            
            45
            
            
            
            45
            
            
            
            -
            
            
            
            -Net
      Periodic Benefit Cost (Income)
            
            $
            (1,273
            )
            
            $
            (1,903
            )
            
            $
            221
            
            
            $
            226
            
            
            $
            57
            
            
            $
            57





TNMP made
no contributions to its pension plan trust in either the nine months ended
September 30, 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
$0.3 million in 2010 and a total of $8.0 million for 2011-2013.  These
anticipated contributions were developed using a probabilistically weighted
average discount rate of 6.0% to determine the projected benefit obligation
under the pension plan.  Actual amounts to be funded in the future
will be dependent on the actuarial assumptions at that time, including the
appropriate discount rate.  TNMP contributed zero and less than $0.1
million to the trust for other postretirement benefits for the three months
ended September 30, 2009 and 2008 and $0.3 million for the nine months ended
September 30, 2009 and 2008.   TNMP 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
September 30, 2009 and 2008, were $0.1 million in the nine months ended
September 30, 2009 and 2008, and are expected to total $0.2 million during
2009.  TNMP anticipates the net periodic benefit cost (income) under
its pension plan, other postretirement benefits, and executive retirement
program will be $(1.6) million, $0.6 million, and $0.1 million in 2010 and will
total $(3.2) million, $1.6 million, and $0.3 million for
2011-2013.


(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.  The Company
is also involved in various legal proceedings in the normal course of its
business.  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 liabilities in accordance with GAAP, when it is
probable that a liability has been incurred and the amount to be incurred is
reasonably estimable.  The Company cannot make any assurances that the
amount of reserves or potential insurance coverage will be sufficient to cover
the cash obligations that might be incurred as a result of litigation or
regulatory proceedings.   Outside legal costs for these and
regulatory matters are recorded when the 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.





With
respect to some of the items listed below, the Company has determined that a
loss is not probable or that, to the extent probable, is not reasonably
estimable.  In some cases, the Company is not able to predict with any
degree of certainty the range of possible loss that could be
incurred.  Notwithstanding these facts, the Company has assessed these
matters based on current information and made judgments concerning their
potential outcome, giving


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)


due
consideration to the nature of the claim, the amount and nature of damages
sought, and the probability of success.  Such judgments are made
subject to the known uncertainty of litigation.  The Company has
established appropriate reserves for matters where it is probable a loss has
been incurred and the amount of loss is reasonably estimable.  During
the three months and nine months ended September 30, 2009, such reserves were
increased by $13.6 million and $26.2 million, which were recorded as reductions
of operating revenues.  The actual outcomes of the items listed below
could ultimately differ from the judgments made and the differences could be
material.





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 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 are currently pursuing those damages claims. 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 and
closing arguments were heard in late May.  The court has not indicated
when it will reach its decision in the matter.  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
September 30, 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
planned at that time, the installation of which was recently
completed.  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.


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)




The
EPA previously requested APS to perform a BART analysis for Four
Corners.  APS submitted an analysis to the EPA concluding that certain
combustion control equipment constitutes BART for Four Corners.  Based
on the analyses and comments received through EPA’s rulemaking process, the EPA
will determine what it believes constitutes BART for Four
Corners.  The EPA recently issued an Advanced Notice of Proposed
Rulemaking (“ANPR”) seeking public comments on its BART
determination.  The public comment period expired on October 28,
2009.  APS anticipates the EPA will issue a proposed determination in
early 2010.  Once the EPA issues its proposed determination, it will
provide a second comment period prior to issuing its final
determination.  The participant owners of Four Corners will have five
years after the EPA issues its final determination to achieve compliance with
their respective BART requirements.  APS’ recommended plan for Four
Corners includes the installation of combustion control equipment with an
estimated cost to PNM, based on preliminary engineering estimates, of
approximately $6.8 million.  If the EPA determines that
post-combustion controls are required, PNM’s total costs could be up to
approximately $69.0 million for Four Corners.  The obligation to
comply with the EPA’s final BART determinations, coupled with the financial
impact of future climate change legislation, other environmental regulations and
other business considerations, could jeopardize the economic viability of the
Four Corners plant due to the significant costs involved.  In order to
coordinate with Four Corners’ other scheduled activities, APS is currently
implementing portions of its recommended plan on a voluntary
basis.  Costs related to the implementation of these portions of the
recommended plan are included in PNM’s 2009, 2010 and 2011 construction
expenditure estimates.




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.





Ozone
Non-Attainment





In March
2009, the NMED 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.  On September 16, 2009, the EPA announced that it
would re-consider the 2008 ozone ambient air quality standard. The
reconsideration is expected to result in a lower standard which would increase
the number of ozone non-attainment areas in the country. 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 Environmental Protection Agency 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.


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)


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 challenged two key provisions of the
FIP:  a 20% opacity limit on certain fugitive dust emissions and a 20%
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.  APS filed a petition for rehearing related to
the stack opacity limit finding because APS did not believe that EPA properly
established that limit.  The court denied APS’s petition on July 24,
2009, and APS does not intend to appeal the matter further.  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 submitted its response to the EPA on August 21,
2009.  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 extraction well and
two additional 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
City of Santa Fe municipal water well located at the site continues to operate
and meets federal drinking water standards.  PNM is not able to assess
the duration of this project.


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
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
has advised that the proposal for the regulation of coal combustion byproducts
(“CCBs”) was sent to the Office of Management and Budget for inter-agency review
on October 16, 2009. The proposal appears to outline options for treating CCBs
as hazardous waste or non-hazardous waste or a combination of the two. EPA
anticipates issuing the draft rule by the end of 2009.  One of the
EPA's primary objectives in the rulemaking appears to be to ensure that the EPA
has direct federal enforcement authority over the final regulations by
classifying CCBs as a hazardous waste.





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





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 September 30,
2009 and December 31, 2008, $28.3 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 September
30, 2009 and December 31, 2008, the balance on PNM’s Consolidated Balance Sheets
for the reclamation liability related to underground mining activities was $1.9
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


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)


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 appealed this
decision to the New Mexico Supreme Court, which on September 1, 2009 issued its
ruling that the NMPRC had properly denied recovery of these
costs.  PNM has filed a motion with the court seeking rehearing of
this issue.  See Note 10.  The Company cannot predict the
outcome of this matter.





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
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.





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)


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 was 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.




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.





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)


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 have expired or will 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.  If rights-of-way on Native American lands are renewed, it
is likely they will be renewed at prices that are higher than historical levels,
based on current renewal experience.  With respect to non-tribal
government land and private land, PNM may have condemnation rights.
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’ 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.





The
federal government appealed this matter to the U.S. Court of Appeals for the
Federal Circuit and Plaintiffs cross-appealed.  On October 21, 2009,
the Federal Circuit issued its opinion, affirming in part and reversing in part
the decision of the Court of Claims, resulting in an award to the Plaintiffs of
$9.1 million.  The Federal Circuit’s opinion is subject to possible
motions for rehearing before the matter may be remanded to the Court of Claims
for entry of judgment.  Any amount ultimately received will be
recorded, net of legal expenses, upon receipt.





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.


56
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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)


In 2005,
PNM filed a "cost offset" claim at FERC, seeking to reduce its liability for
refunds based on its costs of securing and/or providing the power sold to
California.  In doing so, PNM sought treatment as a power marketer, rather
than a vertically integrated utility, based on its configuration at the time as
a "merchant utility."  FERC's orders on cost-offsets prior to that time
allowed marketers, but not utilities, to earn a margin above costs and claim all
energy purchases as costs (whereas utilities were severely limited in their
ability to claim purchases as costs).  FERC rejected PNM's treatment as a
marketer in an order issued in late 2005 and PNM sought rehearing.  In
June 2009, FERC denied PNM’s request for rehearing.  PNM has appealed
this matter to the Ninth Circuit.





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.





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.  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.  PNM and the other
defendants have filed motions to dismiss this action.  PNM is unable
to determine the outcome of this case but intends to defend it
vigorously.





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)


(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 had intervened in this
appeal.   On August 31, 2009, the Texas District Court dismissed
this matter for lack of prosecution thereby affirming the PUCT decision as
requested by First Choice and TNMP.





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 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. 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
appealed the NMPRC’s treatment of coal mine decommissioning and the RECs to the
New Mexico Supreme Court.  Under the terms of the stipulation in the
2008 Electric Rate Case described below, PNM dismissed its appeal of the
treatment of the REC costs shortly after that stipulation was
approved.  If the appeal of the coal mine decommissioning costs is
successful, those costs will be restored to PNM’s balance sheet. The New Mexico


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)


Supreme
Court affirmed the NMPRC order on September 1, 2009.  PNM has filed a
motion for rehearing.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 2007 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 implemented the Emergency FPPAC from June 2, 2008 through
the effective date of the 2008 Electric Rate Case described
below.  The actual fuel and purchased power costs did not exceed the
annual cap during the period the Emergency FPPAC was in effect.  The
Emergency FPPAC provided that if PNM’s base load generating units subject to
NMPRC jurisdiction did not operate at or above a specified capacity factor and
PNM was required to obtain replacement power to serve jurisdictional customers,
PNM would be required to make a filing with the NMPRC seeking approval of the
replacement power costs.  In its required filing, PNM has stated that
the costs of the replacement power amounting to $8.0 million were prudently
incurred and made a motion that they be approved.  The NMPRC staff
filed opposition to PNM’s motion and recommended that PNM be required to refund
the amount collected.  To date, the NMPRC has not addressed the
motion.  Although PNM intends to continue to vigorously assert its
right to recover the replacement power costs and does not consider that staff’s
objections have merit, it is unable to predict the outcome of this
matter.





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.  Oral argument before the New Mexico Supreme Court was
held October 13, 2009.  PNM is unable to predict the 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.  Costs of the audit incurred by PNM
will be recoverable through future rate proceedings.  The NMPRC has
selected an auditor and the audit has begun.  Results of the audit 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 were
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 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 March
6, 2009, PNM, the NMPRC staff and most of the intervening parties filed a
stipulation to resolve all issues in the case, including the approval of the
Resource Stipulation described below. No party opposed the
stipulation.   The stipulation provided for an increase in annual
non-fuel revenues of $77.3 million, of which 65% ($50.2 million) would be
implemented for bills beginning on July 1, 2009 and the remaining 35% ($27.1
million) to be implemented in rates as of April 1, 2010.  The
stipulation was amended to reduce the rate increase to $77.1 million and was
approved by the NMPRC on June 18, 2009. The new rates went into effect for bills
rendered beginning July 1, 2009.  As an offset to the non-fuel revenue
increase, PNM implemented 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.  PNM recorded a regulatory


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)


disallowance
expense and a regulatory liability for the $26.3 million to be credited to
ratepayers. The stipulation also provides that a revised FPPAC 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.





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. The NMPRC
approved the Stipulation on May 26, 2009.  The Resource Stipulation
allows recovery in rates of costs related to and resolves 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, including carrying
costs of $2.1 million, and 3) the application to own and operate Lordsburg and
PNM’s interest in Luna as jurisdictional assets.





In June
2007, a wholly-owned subsidiary of PNMR purchased 100% of a trust, which owns a
2.26% undivided interest, representing 29.8 MW, in PVNGS Unit 2 and a 0.76%
undivided interest in certain PVNGS common facilities, as well as a lease under
which such facilities are leased to PNM.  The Resource Stipulation
allows the Unit 2 interest to be transferred to PNM and the acquisition costs to
be recovered beginning with the 2008 Electric Rate Case.  On July 24,
2009, PNM purchased the trust from the other PNMR subsidiary for $39.1 million
in cash.  The purchase price was equal to the book value of the
underlying assets less deferred taxes and miscellaneous accruals. The other PNMR
subsidiary paid a dividend of that same amount to PNMR.  PNMR then
made an equity contribution of that amount to PNM.  The trust has
$32.0 million of debt owing to the PVNGS Capital Trust, which is consolidated by
PNM.  The transfer has no impact on the financial statements of PNMR.
The impacts on the financial statements of PNM were to increase net plant in
service by $73.7 million, increase common stock by $39.1 million, reduce
investment in the PVNGS lessor notes by $32.0 million, reflecting the
elimination of the debt owed by the trust to the PVNGS Capital Trust, and
increase deferred income taxes and other accruals by $2.6 million.





Renewable
Portfolio Standard





The
Renewable Energy Act of 2004 was enacted to encourage the development of
renewable energy in New Mexico.  The act, as amended, establishes a
mandatory renewable energy portfolio standard requiring a utility to acquire a
renewable energy portfolio equal to 5% of retail electric sales by January 1,
2006, increasing to 10% by 2011, 15% by 2015 and 20% by 2020.  The
NMPRC requires renewable energy portfolios to be “fully diversified” beginning
in 2011 when no less than 20% of the renewable portfolio requirement must be met
by wind energy, no less than 20% by solar energy, no less than 10% by other
renewable technologies, and no less than 1.5% by distributed generation. The act
provides for streamlined proceedings for approval of utilities’ renewable energy
procurement plans, assures utilities recovery of costs incurred consistent with
approved procurement plans and requires the NMPRC to establish a RCT for the
procurement of renewable resources to prevent excessive costs being added to
rates. The NMPRC has established a RCT that began at 1% of all customers’
aggregated overall annual electric charges, increasing by 0.2% annually until
2011, at which time it will be 2%, and then increasing by 0.25% annually until
reaching 3% in 2015.





On July
1, 2009, PNM filed its annual Renewable Energy Portfolio Procurement Plan for
2010 with the NMPRC.  Under the plan, which requires NMPRC
approval, PNM would rely on a mixture of solar, wind, biogas and the
purchase of RECs to meet its renewable energy requirements for 2010,
which is set at 6% of retail energy sales by NMPRC rule, provided that
renewable resource costs are below the RCT, which is 1.8% of overall average
retail rates for 2010 and 2% for 2011.  The plan describes that PNM will
meet its renewable energy requirements in 2010, but will require additional
resources in 2011.  However, to be compliant with the RCT, the plan
explained that PNM will not be able to fully meet the resource diversity
requirements of the NMPRC’s rules, particularly the solar resource diversity
requirements, and the plan proposed caps to certain previously approved
net-metered,


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)


photovoltaic
distributed generation programs.  The plan also committed PNM to file
for additional projects later this year.





In
September 2009, PNM entered into settlement discussions with various parties to
address issues related to the distributed generation programs, the RCT, and
PNM’s prospective additional projects.  In recognition of these
settlement negotiations, the NMPRC issued an order on September 22, 2009 that
rejected PNM’s July 1st
plan, with the exception of two projects concerning the acquisition of RECs from
a wind resource and from future dairy-farm based biogas resources, and ordered
that PNM file a modified plan by the earlier of three weeks after notifying the
NMPRC that the negotiations had terminated, whether successfully or
unsuccessfully, or by January 4, 2010.  A public hearing on the
acquisition of RECs from the wind resource and biogas projects was held in
October and an order by the NMPRC on these projects is anticipated by December
31, 2009.  PNM cannot predict the outcome of the on-going settlement
discussions or the NMPRC’s future actions on any modified plan.





NMPRC Inquiry on
Fuel and Purchased Power Adjustment Clauses





In
October 2007, the NMPRC voted to open a notice of inquiry
that could 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
FPPACs, streamlining FPPACs, and whether a single methodology would be
beneficial and should be applied to all of the utilities.  Workshops
to discuss the comments filed by PNM and others and proposed changes have been
held. The workshop process has concluded and the Hearing Examiner will draft and
provide a proposed revised rule to the NMPRC for its consideration.





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 address those disincentives,
including specific rate making alternatives and appointed a Hearing Examiner to
conduct workshops to develop proposals for possible rule
changes.  Based on the workshops  amendments were proposed
to the NMPRC energy efficiency rule that would allow utilities to collect $0.01
per KWh for energy savings and $10 per kilowatt for demand savings related to
energy efficiency programs and an alternative proposal that would add a
decoupling mechanism to the rule.  PNM filed comments and testimony
addressing the proposed rule and response comments and rebuttal testimony have
been filed.  A public hearing was held on June 26, 2009 and a decision
is pending.  PNM is unable to predict the outcome of this
proceeding.





PNM
Electric Energy Efficiency and Load Management Programs





The NMPRC
requires public utilities to obtain approval 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 a plan, which included
new programs, modifications to existing programs and a request to recover
program costs.  After proceedings before the NMPRC, a final order
approving the programs was issued on May 19, 2009.  The costs of the
programs will be recovered through a rate rider amounting to 1.881% of
customers’ bills, before taxes and franchise fees based on program costs of
$14.1 million beginning in August 2009. The new programs are being
implemented.





On July
7, 2009, the NMPRC ordered an investigation into whether it is
prudent for PNM to continue certain load management programs initiated in 2008,
considering its recent addition of supply-side resources.  PNM
offers these programs through contracts with third-party
vendors that contain substantial fees for
early termination.  PNM filed testimony addressing the
prudence of continuing these programs and a public hearing is
scheduled for January 12, 2010.  The projected budget for
these programs in 2010 is $5.7 million.  PNM is unable to predict the
outcome of this proceeding.


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)


Investigation
on Establishing a Policy Linking Utility Earnings to Quality of Customer
Service





On May
28, 2009, the NMPRC ordered an investigation to consider the development of a
service quality incentive mechanism for utilities in New Mexico, including PNM.
The parties are to look at quality of service mechanisms established in other
NMPRC orders, as well as the mechanisms that have been implemented in other
states. The parties are free to propose alternative types of mechanisms that are
more appropriately suited to the utilities. PNM is an active participant in the
case. The Hearing Examiner has conducted a series of workshops and a final
report to the NMPRC is planned to be completed in December 2009. PNM is unable
to predict the outcome of this proceeding.





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.  Discussions are ongoing.  No date has been set
for completion of this process.  PNM cannot predict the outcome of
this matter.





Third-Party
Arrangements for Renewable Distributed Generation





On June 16, 2009, the NMPRC initiated a
proceeding and requested legal briefs on the topic of whether third-party
arrangements for renewable generation are permissible under New Mexico
law.  Initial briefs and response briefs have been filed by utilities,
the NMPRC staff and intervenors.  In its initial brief, PNM
stated that third-party arrangements that involve the sale of electricity to
retail customers in the service territory of existing utilities were not legally
permissible.  Other utilities’ and the NMPRC staff’s briefs reached
similar conclusions.  Certain intervenors argued in their briefs that
such arrangements were generally permissible.  The Hearing Examiner
issued a recommended decision on October 23, 2009 analyzing a number of
different scenarios.  Among her findings, the Hearing Examiner
recommends that the NMPRC rule that developers who sell electricity to a single
host or to multiple hosts from different systems without transporting
electricity from one location to another, are not public utilities under New
Mexico law.  PNM believes there are flaws in the legal analysis
utilized by the Hearing Examiner to reach these conclusions.  The
Hearing Examiner also recommends that the NMPRC rule that transportation of
electricity by a developer from one location to another is unlawful under New
Mexico law.  PNM agrees with her analysis on these
scenarios.  PNM will file exceptions to those portions of the
recommended decision with which it disagrees and will support those portions
with which it agrees.  Currently, exceptions to the recommended
decision are due November 5, 2009 and replies to exceptions are due November 13,
2009.  The NMPRC is not bound by a recommended
decision.  PNM cannot predict the outcome of this
proceeding.





Application
to Hedge Fuel and Purchased Power Costs





In August
2009, PNM filed an application for approval of a plan to manage fuel and
purchased power costs by entering into certain forward market transactions
relating to the procurement of fuel and purchased power and the sale of excess
electrical energy in the wholesale market.  PNM’s application seeks
NMPRC authorization to conduct these activities, which involve hedging
practices, and to pass through the costs and benefits of the transactions to
jurisdictional customers using PNM’s FPPAC.  A hearing is scheduled
for February 23, 2010.  PNM cannot predict the outcome of this
proceeding.





62
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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





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.  On May 1, 2009, the Court of Appeals affirmed the
decisions of the lower court as requested by TNMP. No party appealed the matter
to the Texas Supreme Court and it is now concluded.





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.  In 2006, the PUCT issued a signed
order which would allow TNMP to begin collecting its true-up balance, which
includes carrying charges, over a 14-year period.  The order also
allows TNMP to collect expenses associated with several cases over a three-year
period.  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. On August 31, 2009, the
Texas District Court dismissed this matter for lack of prosecution thereby
affirming the PUCT decision as requested by First Choice and TNMP.





2008
Rate Case





On August
29, 2008, TNMP filed with the PUCT for an $8.7 million increase in revenues,
requesting that new rates 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.


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)


Catastrophe
funds help pay for a utility system’s recovery from natural disasters and acts
of terrorism.  On October 10, 2008, the PUCT issued a preliminary
order permitting TNMP to file supplemental testimony on costs caused by
Hurricane Ike.




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 increased
financing costs.  In March 2009, TNMP filed its supplemental testimony,
requesting an additional revenue increase of $15.7 million annually. In
June  2009, TNMP and the other parties in the rate case announced that
a unanimous settlement had been reached. The settlement resolves all issues in
the rate case and permits TNMP to increase revenues by $12.7 million annually.
 This increase reflects interest and other costs associated with its March
2009 debt refinancing and the settlement adjusts the interest rate TNMP is
allowed to collect on its CTC to reflect those costs.  The rate
increase includes recovery of $17.6 million of Hurricane Ike restoration costs
plus carrying costs over five years although $0.7 million of the costs incurred
by TNMP were not included and were written off in the three months ended June
30, 2009.  The settlement authorizes a catastrophe reserve of $1.0
million funded over an eight year period. The settlement was approved by the
PUCT in August 2009 and rates went into effect for bills rendered on or after
September 1, 2009. No party appealed the decision and the matter is
concluded.




TNMP now
has the ability to 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.




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. Appropriately incurred
costs can be approved in any 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.  PNMR
has no commitments or guarantees with respect to Optim Energy.





Optim
Energy jointly developed a 550 MW combined-cycle natural gas unit with NRG
Energy, Inc. at the existing NRG Cedar Bayou Generating Station near Houston,
which was completed in June 2009.   Optim Energy’s share of this
unit is 275 MW.  Optim Energy financed its portion of the Cedar Bayou
construction with borrowings under its existing credit facility and operating
cash flows.





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.





In June
2009, Optim Energy notified the lender under the above bank financing agreement,
Cascade and ECJV of a default or potential default under the credit agreement
and certain other agreements entered into between Optim Energy and various of
the above parties.  The default or potential default arose from the
construction of the substation at the Cedar Bayou facility, which was built or
partially built on land not under lease to the
facility.   Waivers were obtained from the lender, Cascade and
ECJV. The waivers required Optim Energy to obtain a release


64
 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 lease
amendment. The release and lease amendment have been obtained and the potential
default has been cured.





Summarized
financial information for Optim Energy is as follows:





Results
of Operations





Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008(In
      thousands)Operating
      revenues
            
            $
            100,855
            
            
            $
            212,372
            
            
            $
            237,735
            
            
            $
            430,445Cost
      of sales
            
            
            57,098
            
            
            
            156,091
            
            
            
            147,125
            
            
            
            352,721Gross
      margin
            
            
            43,757
            
            
            
            56,281
            
            
            
            90,610
            
            
            
            77,724Non-fuel
      operations and maintenance expenses
            
            
            3,616
            
            
            
            7,614
            
            
            
            13,435
            
            
            
            17,217Administrative
      and general expenses
            
            
            7,690
            
            
            
            6,075
            
            
            
            27,483
            
            
            
            19,876Impairment
      of intangible assets
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            21,795Write
      off of emission allowances
            
            
            -
            
            
            
            31,739
            
            
            
            -
            
            
            
            31,739Depreciation
      and amortization expense
            
            
            10,027
            
            
            
            7,659
            
            
            
            25,949
            
            
            
            22,886Taxes
      other than income tax
            
            
            2,470
            
            
            
            1,772
            
            
            
            9,043
            
            
            
            9,041Operating
      income (loss)
            
            
            19,954
            
            
            
            1,422
            
            
            
            14,700
            
            
            
            (44,830
            )Other
      income and (deductions)
            
            
            (23
            )
            
            
            (4
            )
            
            
            78
            
            
            
            702Net
      interest charges
            
            
            (4,100
            )
            
            
            (3,662
            )
            
            
            (9,574
            )
            
            
            (15,019
            )Earnings
      (loss) before income taxes
            
            
            15,831
            
            
            
            (2,244
            )
            
            
            5,204
            
            
            
            (59,147
            )Income
      taxes (benefit)(1)
            
            
            255
            
            
            
            64
            
            
            
            368
            
            
            
            (229
            )Net
      earnings (loss)
            
            $
            15,576
            
            
            $
            (2,308
            )
            
            $
            4,836
            
            
            $
            (58,918
            )50
      percent of net earnings (loss)
            
            $
            7,788
            
            
            $
            (1,154
            )
            
            $
            2,418
            
            
            $
            (29,459
            )Plus
      amortization of basis difference in Optim Energy
            
            
            (886
            )
            
            
            (331
            )
            
            
            (1,474
            )
            
            
            368PNMR
      equity in net earnings (loss) of Optim Energy
            
            $
            6,902
            
            
            $
            (1,485
            )
            
            $
            944
            
            
            $
            (29,091
            )





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





Financial
Position





September
      30,
            
            
            December
      31,2009
            
            
            2008(In
      thousands)Current
      assets
            
            $
            147,361
            
            
            $
            151,677Net
      property plant and equipment
            
            
            952,570
            
            
            
            946,420Deferred
      assets
            
            
            198,976
            
            
            
            224,776Total
      assets
            
            
            1,298,907
            
            
            
            1,322,873Current
      liabilities
            
            
            67,326
            
            
            
            104,826Long-term
      debt
            
            
            760,000
            
            
            
            730,778Other
      long-term liabilities
            
            
            6,953
            
            
            
            7,763Total
      liabilities
            
            
            834,279
            
            
            
            843,367Owners’
      equity
            
            $
            464,628
            
            
            $
            479,50650
      percent of owners’ equity
            
            $
            232,314
            
            
            $
            239,753Unamortized
      PNMR basis difference in Optim Energy
            
            
            223
            
            
            
            197PNMR
      equity investment in Optim Energy
            
            $
            232,537
            
            
            $
            239,950





65
 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 GAAP are
derivative instruments that are required to be
marked-to-market.  Extreme ERCOT market volatility in 2008, which did
not recur in 2009, resulted in significant changes in the fair value of economic
hedges including an increase in net earnings of $28.3 million in the three
months ended September 30, 2008 and a reduction of net earnings of $10.7 million
in the nine months ended September 30, 2008. 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.  Optim Energy recorded mark-to-market losses of $1.1 million and
$7.1 million on economic hedges during the three months and nine months ended
September 30, 2009.





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 and nine months ended
September 30, 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 amount
due from LCC as ofSeptember30, 2009 is immaterial to
Optim Energy’s results and has been fully reserved.  LCC has continued
to perform under the above described contracts since its bankruptcyfiling.





The
assets of Altura transferred to Optim Energy included the development rights for
a possible expansion of the Twin Oaks plant, which was classified as an
intangible asset.  In the three months ended June 30, 2008, Optim
Energy made a strategic decision not to pursue the Twin Oaks expansion and wrote
off the development rights as an impairment of intangible assets amounting to
$21.8 million.





Optim
Energy has inventory of emissions allowances from the purchase of the Altura
Cogen plant and contribution of the Twin Oaks plant.  In July 2008, a
ruling by the U.S. Court of Appeals for the District of Columbia Circuit Court
invalidated CAIR.  This ruling appeared to remove the need for
emissions allowance credits under the CAIR program.  However in
December 2008, CAIR was temporarily reinstated by the courts.  CAIR
will remain in effect while the EPA conducts a rulemaking to modify CAIR to
comply with the Court’s opinion.  This rulemaking is in process and is
not expected to be completed until early 2011.  During the three
months ended September 30, 2008, Optim Energy recorded a pre-tax write off of
$31.7 million for all inventory held under the CAIR program.   As
of September 30, 2009 and December 31, 2008, Optim Energy had $112.3 and $115.9
million remaining in inventory for emission allowances not granted under the
CAIR program.





(12)
            Related
      Party Transactions





PNMR,
PNM, TNMP, and Optim Energy are considered related parties as defined in
GAAP.  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.





See Note
10 regarding PNM’s purchase of a portion of PVNGS Unit 2 from PNMR and 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:


66
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008(In
      thousands)Electricity,
      transmission and related services billings:TNMP
      to PNMR
            
            $
            12,311
            
            
            $
            15,232
            
            
            $
            31,792
            
            
            $
            44,550Services
      billings:PNMR
      to PNM*
            
            
            22,896
            
            
            
            22,138
            
            
            
            56,769
            
            
            
            67,004PNMR
      to TNMP
            
            
            6,012
            
            
            
            4,887
            
            
            
            16,314
            
            
            
            14,484PNM
      to TNMP
            
            
            271
            
            
            
            44
            
            
            
            537
            
            
            
            103TNMP
      to PNMR
            
            
            159
            
            
            
            248
            
            
            
            503
            
            
            
            745PNMR
      to Optim Energy
            
            
            2,128
            
            
            
            2,079
            
            
            
            5,058
            
            
            
            7,043Optim
      Energy to PNMR
            
            
            57
            
            
            
            41
            
            
            
            273
            
            
            
            147Income
      tax sharing payments:PNM
      to (from) PNMR
            
            
            44,994
            
            
            
            -
            
            
            
            90,733
            
            
            
            (1,855
            )TNMP
      to (from) PNMR
            
            
            751
            
            
            
            -
            
            
            
            3,779
            
            
            
            (858
            )Interest
      payments:TNMP
      to PNMR
            
            
            153
            
            
            
            13
            
            
            
            754
            
            
            
            130





* PNM
shared services include billings to PNM Gas of zero and $5.7 million for the
three months ended September 30, 2009 and 2008, and $0.9 and $17.3 for the nine
months ended September 30, 2009 and 2008.





(13)
            New
      Accounting Pronouncements





Note 21
of Notes to Consolidated Financial Statements in the 2008 Annual Reports
contains information regarding recently issued accounting pronouncements that
could have a material impact on the Company.





In June
2009, the FASB amended GAAP to require entities to perform an analysis of the
Company’s variable interest entities to determine whether a controlling interest
exists and therefore require consolidation.  This amendment provides
additional guidance and ongoing reassessments of the status of variable interest
entities and is effective for interim and annual reporting periods beginning
after November 15, 2009.  The Company is assessing the impact of this
amendment, but does not believe it will have a material impact on the Company’s
financial statements.





Effective
September 15, 2009, the FASB Accounting Standards Codification combines all of
the FASB’s, and its predecessors', technical accounting pronouncements into a
single source of authoritative GAAP.  As a result, references are no
longer made to prior technical accounting pronouncements.





(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 GAAP, no depreciation is recorded on assets held for sale in
2008 or 2009.  Summarized financial information for PNM Gas is as
follows:


67
 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)


Results
of Operations





Three
      Months Ended September 30,
            
            
            Nine
      Months Ended September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008(In
      thousands)Operating
      revenues
            
            $
            -
            
            
            $
            63,301
            
            
            $
            65,695
            
            
            $
            379,325Cost
      of energy
            
            
            -
            
            
            
            37,498
            
            
            
            44,698
            
            
            
            263,244Gross
      margin
            
            
            -
            
            
            
            25,803
            
            
            
            20,997
            
            
            
            116,081Operating
      expenses
            
            
            356
            
            
            
            22,852
            
            
            
            10,365
            
            
            
            67,286Depreciation
      and amortization
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Operating
      income
            
            
            (356
            )
            
            
            2,951
            
            
            
            10,632
            
            
            
            48,795Other
      income (deductions)
            
            
            -
            
            
            
            614
            
            
            
            292
            
            
            
            2,057Net
      interest charges
            
            
            -
            
            
            
            (3,383
            )
            
            
            (962
            )
            
            
            (9,931
            )Gain
      on disposal
            
            
            (1,791
            )
            
            
            -
            
            
            
            108,936
            
            
            
            -Segment
      earnings (loss) before income taxes
            
            
            (2,147
            )
            
            
            182
            
            
            
            118,898
            
            
            
            40,921Income
      taxes (benefit)
            
            
            (785
            )
            
            
            820
            
            
            
            41,196
            
            
            
            16,299Segment
      earnings (loss)
            
            $
            (1,362
            )
            
            $
            (638
            )
            
            $
            77,702
            
            
            $
            24,622





In
connection with the sale of the gas operations, PNM retained obligations for
certain liabilities related to the period preceding the sale. At the date of the
sale, PNM recorded liabilities for these items that were probable of being
incurred and for which amounts were reasonably estimable.  In the
three months and nine months ended September 30, 2009, PNM expensed $0.4 million
and $4.5 million associated with the settlement of certain of these retained
liabilities.





(15)
            Business
      Improvement Plan





As
discussed in Note 24 of the Notes to Consolidated Financial Statements in the
2008 Annual Reports, the Company undertook 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 included 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.  Activities contemplated
under the business improvement plan have been completed and no significant costs
were incurred during the three months and nine months ended September 30,
2009.





The
Company has existing plans providing severance benefits to employees who are
involuntarily terminated due to elimination of their positions.  Under
GAAP, 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.  During the three months and nine
months ended September 30, 2008, the Company recorded pre-tax severance benefits
payable of $1.3 million and $1.8 million and other costs, primarily consulting
fees, related to the business improvement plan of $2.5 million and $5.7
million.  Substantially all of these costs were recorded by
PNMR.





68
 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)


(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 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 charges and variable charges under this PPA.  For the three
months and nine months ended September 30, 2009, PNM paid $4.1 million and $12.1
million for fixed charges and $0.4 million and $0.5 million for variable
charges.  For the three months ended September 30, 2008 and the period
from May 30, 2008 through September 30, 2008, PNM paid $4.0 million and $5.4
million for fixed charges and $0.3 million 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 GAAP 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 an amendment to GAAP beginning January 1, 2009 that 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,
this results in non-controlling interests being reflected in stockholders’
equity rather than as a liability.  On the income statement, earnings
attributable to non-controlling 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.





Summarized
financial information for Valencia is as follows:





Results
of Operations





Three
      Months Ended
            
            
            Nine
      Months
              Ended
            
            
            May
      30, 2008 toSeptember
      30,
            
            
            September
      30,
            
            
            September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008(In
      thousands)Operating
      revenues
            
            $
            4,034
            
            
            $
            4,641
            
            
            $
            12,586
            
            
            $
            6,058Operating
      expenses
            
            
            (1,498
            )
            
            
            (1,190
            )
            
            
            (4,696
            )
            
            
            (1,381
            )Interest
      expense
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (225
            )Earnings
      attributable to non-
              controlling
      interest
            
            $
            2,536
            
            
            $
            3,451
            
            
            $
            7,890
            
            
            $
            4,452





69
 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)


Financial
Position





September
      30,
            
            
            December
      31,2009
            
            
            2008(In
      thousands)Current
      assets
            
            $
            4,999
            
            
            $
            9,925Net
      property, plant and equipment
            
            
            87,056
            
            
            
            89,011Total
      assets
            
            
            92,055
            
            
            
            98,936Current
      liabilities
            
            
            1,831
            
            
            
            430Owners’
      equity – non-controlling interest
            
            $
            90,224
            
            
            $
            98,506





Changes
in Owners Equity – Non-controlling Interest





Nine
      Months EndedSeptember
      30, 2009(In
      thousands)Balance
      at beginning of period
            
            $
            98,506Earnings
      attributable to non-controlling interest
            
            
            7,890Net
      equity transactions with Valencia’s owner
            
            
            (16,172
            )Balance
      at end of period
            
            $
            90,224





(17)
            Goodwill
      and Other Intangible Assets





As
required by GAAP, the Company evaluates its goodwill and non-amortizing
intangible assets for impairment annually at the reporting unit level or more
frequently if circumstances indicate that the goodwill or intangible assets may
be impaired.  The goodwill and other intangible assets were recorded
upon PNMR’s acquisition of TNP and were pushed down to the businesses
acquired.  In connection with the transfer of TNMP’s New Mexico
operations to PNM in 2007, $102.8 million of goodwill was transferred to
PNM.





The
Company performs its required annual testing of these assets as of April
1.  Application of the impairment test requires judgment, including
the identification of reporting units, assignment of assets and liabilities to
reporting units and determination of the fair value of each reporting
unit.    The fair value of each reporting unit is estimated
using a discounted cash flow methodology.  This analysis requires
significant judgments, including estimation of future cash flows, which is
dependent on internal forecasts, estimation of long-term growth rates for the
business and determination of appropriate weighted average cost of capital for
each reporting unit.  Changes in these estimates and assumptions could
materially affect the determination of fair value and the conclusion of
impairment for each reporting unit.





As a
result of its annual testing in 2008, goodwill impairments of $43.2 million at
First Choice, $51.1 million at PNM, and $34.5 million at TNMP were recorded
during the three months ended June 30, 2008.  In addition, First
Choice recorded a $7.4 million impairment of its trade name.  During
the remainder of 2008, First Choice recorded additional impairments of goodwill
of $45.5 million, trade name of $35.2 million, and customer list of $4.8
million, including impairments of goodwill of $6.3 million and trade name of
$1.6 million in the three months ended September 30, 2008.  The
impairments resulted from many economic factors, including the decline of the
market capitalization of PNMR’s common stock, which was significantly below book
value, and the significant challenges First Choice faced in the ERCOT market
during 2008, including the impacts of Hurricane Ike and depressed economic
conditions.  In addition, the general economic downturn significantly
impacted the weighted average cost of capital applied in determining the fair
values of PNMR’s reporting units.  See Note 25 of Notes to
Consolidated Financial Statements in the 2008 Annual Reports.


70
 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 2009
annual evaluation did not indicate impairments at any of PNMR’s reporting
units.  While the market capitalization of PNMR’s common stock was
still significantly below book value at April 1, 2009, PNMR’s stock price has
increased since that date.  In addition, improved regulatory treatment
has been experienced by PNM in New Mexico and by TNMP in
Texas.  Furthermore, the First Choice business has stabilized in 2009,
primarily due to more predictable power and fuel price patterns in the ERCOT
market.  These factors have resulted in more predictable earnings and
increased fair values of the reporting units. Since the annual evaluation, there
have been no indications that the fair values of the reporting units with
recorded goodwill have decreased below the carrying values.





71





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 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 electric businesses.





Critical
to PNMR’s success for the foreseeable future is the financial health of PNM,
PNMR’s largest subsidiary, which is highly dependent on continued favorable
regulatory treatment.  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 were designed to increase annual
operating revenue by $123.3 million. PNM also proposed a more customary
FPPAC.  In June 2009, the NMPRC approved a stipulation resolving all
issues in the rate case, including the inclusion of additional sources of power
in determining rates.  The approved stipulation allows for an increase
in annual non-fuel revenues of $77.1 million, 65% of which was implemented for
bills rendered beginning July 1, 2009 and the remainder of which will be
implemented April 1, 2010.  As an offset to the non-fuel revenue
increase, PNM implemented a credit to customers totaling $26.3 million,
representing the amount of revenues from past sales of SO2
allowances.  This amount is being credited to customers over 21 months
beginning July 1, 2009.  During the three months ended June 30, 2009,
PNM recorded an expense for the regulatory disallowance and recorded a
regulatory liability for the amount to be credited to customers. The stipulation
also provided for a more customary FPPAC that went into effect with the new
rates.  The new FPPAC has an annual rather than a monthly adjustment
mechanism, but is based on forecasted fuel and purchased power
costs.  The stipulation provides that 100% of off-systems sales
margins be credited against fuel and purchased power costs in the
FPPAC.





PNM
anticipates a trend toward increasing costs of providing electric service and a
period of plant expansion, primarily from renewable energy sources under the
renewable energy portfolio requirements established pursuant to New Mexico’s
Renewable Energy Act and related regulations of the NMPRC.  PNM also
anticipates increases in costs related to renewals of right of way on Native
American lands, pension and benefits, and depreciation at SJGS.  PNM
will seek to recover these increased costs of providing service to regulated
customers through future rate filings, which may occur more frequently than in
the past.  The impact that rate increases may have on customers’ usage
and their ability to pay is unknown.





On April
6, 2009, the Governor of New Mexico signed Senate Bill 477 (“SB 477”) into law,
which became 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 requirement.  A future test period is defined as a
twelve month period beginning no later than the date a proposed rate change is
expected  to take effect.  Traditionally, the NMPRC has used
a historical test period, adjusted for known and measurable changes occurring
within five to six 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.  It is possible, however, that NMPRC staff or intervenors
would argue that continued use of a historical test period, adjusted for known
and measurable changes, best meets





72


the
requirement.  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 them in rate base, so long as the projects
will be in service no later than two years after the filing date of the rate
case.





PNM
anticipates filing a rate case with the NMPRC in the second quarter of 2010
using a future test period as allowed by SB 477.  The magnitude of
amounts to be requested is unknown, as is the amount that the NMPRC will
allow.





The use
of a future test year should help to mitigate the adverse effects of regulatory
lag, which is inherent when using a historical test year, by focusing on what
costs are likely to be when new rates go into effect rather than what they were
in the past.  The mitigation of the adverse effects of regulatory lag
should result in PNM’s earnings more closely approximating the rate of return
allowed by the NMPRC.  PNMR believes that achieving earnings that
approximate its allowed rate of return is an important factor in attracting
equity investors, as well as being an important metric utilized by credit rating
agencies and financial analysts.  PNM’s debt securities are currently
rated below investment grade by S&P, although Moody’s still rates PNM’s debt
at the lowest level of investment grade.  PNM will need to access the
capital markets in order to finance the anticipated construction expenditures
discussed in Capital Requirements under Liquidity and Capital Resources
below.  To the extent such financing includes the issuance of debt
securities that are rated below investment grade, the debt would carry a higher
interest rate than if the securities were investment grade.  Those
higher interest costs would then be included in requests for rate relief,
placing additional upward pressure on rates charged to customers.





As with
any forward looking financial information, utilizing a future test year in a
rate filing presents challenges that are inherent in the forecasting
process.  PNM will need to forecast both operating and capital
expenditures that will necessitate reliance on many assumptions concerning
future conditions.  Among others, these would include assumptions
about future economic conditions in PNM’s service territory, levels of
employment, load growth and conservation, weather, usage patterns of customers,
availability and technology regarding renewable energy sources, interest rates,
access to capital markets, inflation, and impacts of regulatory
actions.  In the rate making process PNM’s assumptions will be subject
to challenge by regulators and intervenors who may assert different
interpretations or assumptions.





PNM has
completed the separation of its merchant operations from its regulated
operations to comply with a 2003 NMPRC order.  The separation of
merchant operations was accomplished in several steps.  Afton was
transferred from merchant plant status and was included in retail rates in PNM’s
2007 Electric Rate Case.  In June 2008, PNM completed the sale of
certain merchant wholesale power, natural gas and transmission
contracts.  In addition, Luna and Lordsburg were required to be
separated by January 1, 2010 under the NMPRC order.  In June 2009, the
NMPRC approved PNM’s request in its 2008 Electric Rate Case that Luna and
Lordsburg be included in retail rates and no longer be considered merchant
plant.  See Note 10. This approval completed the separation required
by the NMPRC.  The NMPRC did not require that PNM’s interest in PVNGS
Unit 3 be separated from 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.





PNM also
serves customers in New Mexico formerly served by TNMP.  When PNMR
acquired TNMP, PNM was required to maintain the former TNMP customers under
rates separate from the rest of PNM.  Pursuant to a stipulation
approved by the NMPRC, PNM was prohibited from consolidating the cost of service
for the two areas until January 1, 2015, unless the consolidation would not
result in shifting more than $1.5 million in revenue requirements from the
former TNMP customers to other PNM customers.  In addition, the
stipulation provided that PNM would not seek rate changes for the TNMP customers
that would go into effect before January 1, 2011.  Earlier this year
the NMPRC requested the parties to the stipulation meet to discuss ways and
means of mitigating possible large rate increases to the former TNMP
customers that may occur when the rate moratorium expires.  The
parties have been meeting periodically under the direction of a NMPRC Hearing
Examiner, who was appointed by the NMPRC to serve as mediator for the
discussions.   See Note 10.





73




TNMP’s
financial health is also highly dependent on continued favorable regulatory
treatment.  On August 29, 2008, TNMP filed with the PUCT for an $8.7
million increase in revenues.  Subsequently, TNMP supplemented its
filing to request an additional revenue increase of $15.7 million to recover
costs caused by Hurricane Ike and costs related to the financing completed in
March 2009. In June 2009, TNMP and the other parties in the rate case reached a
unanimous settlement resolving all issues in the rate case and permitting TNMP
to increase its rates by $12.7 million annually.  This increase reflects
interest and other costs associated with debt refinancing in March 2009 and the
settlement adjusts the interest rate TNMP is allowed to collect on its CTC to
reflect those costs.  The rate increase includes recovery of Hurricane
Ike restoration costs plus carrying costs over five years.  The
settlement was approved by the PUCT in August 2009.  TNMP now has the
ability to update its transmission rates annually to reflect changes in its
invested capital.  Updated rates will 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.




Although
New Mexico and Texas do not seem to be impacted as greatly as some other areas
of the United States, with unemployment rates that are somewhat lower than the
rest of the nation, the territories served by the Company’s electric businesses
have been impacted by the recent recession and general economic
downturn.  As a result, the weather-adjusted volume of electric sales
has decreased in 2009 compared to 2008. The Company believes that load growth
will be flat for the immediate future.





The focus
on the electric businesses also includes environmental sustainability
efforts.  These efforts include environmental upgrades, improving
energy efficiency, expanding the renewable energy portfolio of generation
resources, and proactively addressing climate change. In early 2009, PNM
completed environmental upgrades to each of the four units at
SJGS.  PNM’s share of the costs of these upgrades, which reduced the
levels of NOX, SO2, and
mercury emissions, amounted to $161 million.  As described in Note 10,
PNM is subject to the renewable portfolio standard established by New Mexico’s
Renewable Energy Act and related regulations issued by the NMPRC, which requires
utilities to achieve certain levels of energy sales from renewable sources
within its generation mix, including wind, solar, distributed generation, and
other sources.  PNM is actively engaged in activities to meet the
NMPRC standard.  PNM has also established various programs to promote
energy efficiency, subject to the approval of the NMPRC.  The Company
monitors initiatives regarding legislation or regulation regarding climate
change, including GHG, and participates in organizations and forums concerning
climate change. The Company has expressed support for the Waxman-Markey bill and
is generally supportive of an economy-wide system of limitations on GHG that
would include a cap and trade provision and a system of allowances and offsets
designed to mitigate rate increases to utility customers.  The Company
is exploring various methods to mitigate its GHG in anticipation of climate
change legislation or regulation, including increasing energy efficiency
programs and increased reliance on renewable energy resources.  See
Climate Change Issues under Other Issues Facing the Company below for additional
discussion of climate change matters.  All of these efforts involve
costs that the Company believes should be recoverable through rates charged to
customers to the extent the costs are attributable to regulated
operations.  However, recovery of these costs is subject to the
approval of regulators and will cause upward pressure on rates.





As a REP,
First Choice operates in the highly competitive Texas retail market, which
experienced extreme price volatility and transmission congestion in
2008.  ERCOT controls the transmission of power in the areas that
First Choice supplies.  ERCOT historically has operated through a
series of geographic zones, which has led to congestion of the transmission
system when large volumes of power were being transmitted between zones.
Congestion tends to drive prices up in the spot market. These situations caused
First Choice to incur losses in its speculative trading portfolio and led First
Choice to exit its speculative activities in the second quarter of
2008.  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.  ERCOT has made
changes in its control protocols and is scheduled to change from the zonal
system to a nodal system in December 2010, both of which should reduce
congestion and price volatility.  During 2009, the Texas retail market
has been more stable and First Choice does not anticipate the levels of
congestion and price volatility will reoccur in the near future.  In
addition, both power and natural gas prices decreased significantly, resulting
in a substantial increase in margins realized by First Choice.  These
factors and increased focus on growing commercial accounts, customer credit
standards, and improved customer service have contributed to an improvement in
the results of operations at First Choice. However, similar to how the ERCOT
market conditions - along with First Choice's buying and selling positions
within that market - had a negative impact on the business in 2008, those same
drivers





74


are
working in First Choice’s favor in 2009.  For 2010, First Choice
expects market conditions to continue to be a key driver for the business and
believes margins will return to more historic levels.





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, which resulted in reduced usage of
electricity by the Company’s customers.  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.





The
unprecedented disruption in the credit markets in late 2008 and early 2009 had a
significant adverse impact on numerous financial institutions, including several
of the financial institutions that have dealings with the Company. 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’s
revolving credit facilities expire in 2011 and 2012 and will need to be
renegotiated or replaced in order to provide sufficient liquidity to finance
operations and construction expenditures.  The availability of such
credit facilities and their terms and conditions will depend on the credit
markets at that time, as well as the Company’s credit ratings and operating
results. The Company is closely monitoring its liquidity and the credit
markets.  In late 2008 and early 2009, there was also 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.  Although the general price levels of
marketable equity securities has recovered somewhat, the stock market decline
will likely result in increased levels of funding and expense applicable to
these trusts.





Optim
Energy





PNMR has
previously reported that it intended to capitalize on growth opportunities in
its unregulated business through its participation and ownership in Optim
Energy.  PNMR’s 50 percent ownership of Optim Energy allows it to
participate in the operation of Optim Energy’s assets and business and the
formulation of Optim Energy’s business strategy.  Optim Energy owns
electric generating assets in one of the nation’s growing power markets, and its
strategy has been focused on acquiring or developing additional assets in that
market.  Consistent with this strategy, Optim Energy acquired the Twin
Oaks plant in June 2007 and the Altura Cogen plant in August 2007 and completed
co-developing an electric generation unit at Cedar Bayou in June
2009.





Recently,
however, Optim Energy has been affected by continuing adverse market conditions,
primarily low natural gas and power prices.  In response to those
adverse conditions, Optim Energy has changed its current strategy and near-term
focus. Until there is an improvement in some of these adverse market conditions,
Optim Energy will focus on utilizing cash flow from operations to reduce debt
and optimizing its current generation assets as a stand-alone independent power
producer.  The change has resulted in staff positions being eliminated
at Optim Energy, as well as integration of certain operations.  The
goal is to position Optim Energy to optimize its performance under current
market conditions with the expectation of being able to take advantage of any
economic recovery in the power and gas markets over the next several
years.





Any
decisions in the future to grow capacity will be subject to the approval of both
of Optim Energy’s members and will be based on many then-existing market and
other factors, including the cost to acquire or construct capacity, the
anticipated demand for power, the anticipated market prices for power, the
ability and cost to deliver power to the anticipated markets, and Optim Energy’s
financial resources.





75


RESULTS
OF OPERATIONS





Executive
Summary





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





Three
      Months Ended September 30,
            
            
            Nine
      Months Ended September 30,2009
            
            
            2008
            
            
            Change
            
            
            2009
            
            
            2008
            
            
            Change(In
      millions, except earnings per share)Earnings
      (loss) from continuing operations
            
            $
            55.6
            
            
            $
            (4.8
            )
            
            $
            60.4
            
            
            $
            69.8
            
            
            $
            (222.2
            )
            
            $
            292.0Earnings
      (loss) from discontinued operations, net of income taxes
            
            
            (1.4
            )
            
            
            (0.6
            )
            
            
            (0.8
            )
            
            
            77.7
            
            
            
            24.6
            
            
            
            53.1Net
      earnings (loss)
            
            $
            54.2
            
            
            $
            (5.5
            )
            
            $
            59.7
            
            
            $
            147.5
            
            
            $
            (197.6
            )
            
            $
            345.1Average
      diluted common and common equivalent shares
            
            
            91.8
            
            
            
            86.4
            
            
            
            5.4
            
            
            
            91.6
            
            
            
            81.7
            
            
            
            9.9Earnings
      (loss) from continuing operations per diluted share
            
            $
            0.60
            
            
            $
            (0.06
            )
            
            $
            0.66
            
            
            $
            0.76
            
            
            $
            (2.72
            )
            
            $
            3.48Net
      earnings (loss) per diluted share
            
            $
            0.59
            
            
            $
            (0.06
            )
            
            $
            0.65
            
            
            $
            1.61
            
            
            $
            (2.42
            )
            
            $
            4.03





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





Three
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30, 2009
            
            
            September
      30, 2009(In
      millions)PNM
      Electric
            
            $
            15.0
            
            
            $
            76.1TNMP
      Electric
            
            
            (1.9
            )
            
            
            26.2First
      Choice
            
            
            33.6
            
            
            
            141.0Corporate
      and Other
            
            
            8.6
            
            
            
            30.6Optim
      Energy
            
            
            5.1
            
            
            
            18.1Net
      change
            
            $
            60.4
            
            
            $
            292.0





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 additional shares of PNMR common stock issued in May 2008 and PNMR’s
convertible preferred stock.  See Note 5 and Note 6 of Notes to
Consolidated Financial Statements in the 2008 Annual Reports.





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.





76


PNM
Electric





The table
below summarizes operating results for PNM Electric:





Three
      Months Ended September 30,
            
            
            Nine
      Months Ended September 30,2009
            
            
            2008
            
            
            Change
            
            
            2009
            
            
            2008
            
            
            Change(In
      millions)Total
      revenues
            
            $
            275.0
            
            
            $
            356.4
            
            
            $
            (81.4
            )
            
            $
            733.5
            
            
            $
            995.1
            
            
            $
            (261.6
            )Cost
      of energy
            
            
            97.2
            
            
            
            194.5
            
            
            
            (97.3
            )
            
            
            289.9
            
            
            
            577.8
            
            
            
            (287.9
            )Gross
      margin
            
            
            177.8
            
            
            
            161.9
            
            
            
            15.9
            
            
            
            443.6
            
            
            
            417.4
            
            
            
            26.3Other
      operating expenses
            
            
            95.4
            
            
            
            92.9
            
            
            
            2.5
            
            
            
            315.8
            
            
            
            366.7
            
            
            
            (50.9
            )Depreciation
      and amortization
            
            
            23.5
            
            
            
            21.7
            
            
            
            1.8
            
            
            
            68.8
            
            
            
            63.5
            
            
            
            5.3Operating
      income (loss)
            
            
            59.0
            
            
            
            47.4
            
            
            
            11.6
            
            
            
            59.0
            
            
            
            (12.8
            )
            
            
            71.8Other
      income (deductions)
            
            
            11.1
            
            
            
            1.9
            
            
            
            9.2
            
            
            
            29.7
            
            
            
            6.2
            
            
            
            23.5Net
      interest charges
            
            
            (16.8
            )
            
            
            (20.3
            )
            
            
            3.5
            
            
            
            (51.4
            )
            
            
            (52.0
            )
            
            
            0.6Earnings
      (loss) before income taxes
            
            
            53.2
            
            
            
            28.9
            
            
            
            24.3
            
            
            
            37.3
            
            
            
            (58.7
            )
            
            
            96.0Income
      (taxes) benefit
            
            
            (19.8
            )
            
            
            (9.5
            )
            
            
            (10.3
            )
            
            
            (11.3
            )
            
            
            5.1
            
            
            
            (16.4
            )Valencia
      non-controlling interest
            
            
            (2.5
            )
            
            
            (3.5
            )
            
            
            1.0
            
            
            
            (7.9
            )
            
            
            (4.5
            )
            
            
            (3.4
            )Preferred
      stock dividend requirements
            
            
            (0.1
            )
            
            
            (0.1
            )
            
            
            -
            
            
            
            (0.4
            )
            
            
            (0.4
            )
            
            
            -Segment
      earnings (loss)
            
            $
            30.8
            
            
            $
            15.8
            
            
            $
            15.0
            
            
            $
            17.7
            
            
            $
            (58.4
            )
            
            $
            76.1





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





2009/2008
      Change`
            
            Three
      Months Ended September 30,
            
            
            Nine
      Months Ended September 30,Total
            
            
            Cost
      of
            
            
            Gross
            
            
            Total
            
            
            Cost
      of
            
            
            GrossRevenues
            
            
            Energy
            
            
            Margin
            
            
            Revenues
            
            
            Energy
            
            
            Margin(In
      millions)Retail
      rate increases
            
            $
            17.1
            
            
            $
            9.7
            
            
            $
            7.4
            
            
            $
            26.2
            
            
            $
            9.7
            
            
            $
            16.5Retail
      load
            
            
            (2.5
            )
            
            
            -
            
            
            
            (2.5
            )
            
            
            (16.8
            )
            
            
            (5.0
            )
            
            
            (11.8
            )Regulated
      fuel and transmission
            
            
            (16.3
            )
            
            
            (24.0
            )
            
            
            7.7
            
            
            
            (37.6
            )
            
            
            (80.6
            )
            
            
            43.0Unregulated
            
            
            (64.6
            )
            
            
            (46.2
            )
            
            
            (18.4
            )
            
            
            (176.9
            )
            
            
            (144.3
            )
            
            
            (32.6
            )Sale
      of merchant portfolio
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (56.4
            )
            
            
            (51.3
            )
            
            
            (5.1
            )Net
      unrealized economic hedges
            
            
            (15.1
            )
            
            
            (37.4
            )
            
            
            22.3
            
            
            
            (0.1
            )
            
            
            (9.9
            )
            
            
            9.8Consolidation
      of Valencia PPA
            
            
            -
            
            
            
            0.6
            
            
            
            (0.6
            )
            
            
            -
            
            
            
            (6.5
            )
            
            
            6.5Total
      increase (decrease)
            
            $
            (81.4
            )
            
            $
            (97.3
            )
            
            $
            15.9
            
            
            $
            (261.6
            )
            
            $
            (287.9
            )
            
            $
            26.3





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





Three
      Months Ended September 30,
            
            
            Nine
      Months Ended September 30,2009
            
            
            2008
            
            
            Change
            
            
            2009
            
            
            2008
            
            
            Change(In
      millions, except customers)Residential
            
            $
            99.1
            
            
            $
            89.3
            
            
            $
            9.8
            
            
            $
            242.7
            
            
            $
            227.1
            
            
            $
            15.6Commercial
            
            
            98.1
            
            
            
            98.9
            
            
            
            (0.8
            )
            
            
            250.7
            
            
            
            248.1
            
            
            
            2.6Industrial
            
            
            21.3
            
            
            
            27.3
            
            
            
            (6.0
            )
            
            
            59.4
            
            
            
            78.4
            
            
            
            (19.0
            )Public
      authority
            
            
            6.0
            
            
            
            6.1
            
            
            
            (0.1
            )
            
            
            15.2
            
            
            
            14.1
            
            
            
            1.1Transmission
            
            
            10.8
            
            
            
            10.1
            
            
            
            0.7
            
            
            
            25.9
            
            
            
            25.1
            
            
            
            0.8Firm
      requirements wholesale
            
            
            7.5
            
            
            
            12.3
            
            
            
            (4.8
            )
            
            
            21.2
            
            
            
            35.7
            
            
            
            (14.5
            )Other
      sales for resale
            
            
            31.0
            
            
            
            92.5
            
            
            
            (61.5
            )
            
            
            109.4
            
            
            
            298.6
            
            
            
            (189.2
            )Mark-to-market
      activity
            
            
            (1.0
            )
            
            
            13.2
            
            
            
            (14.2
            )
            
            
            0.3
            
            
            
            55.2
            
            
            
            (54.9
            )Other
            
            
            2.2
            
            
            
            6.7
            
            
            
            (4.5
            )
            
            
            8.7
            
            
            
            12.8
            
            
            
            (4.1
            )$
            275.0
            
            
            $
            356.4
            
            
            $
            (81.4
            )
            
            $
            733.5
            
            
            $
            995.1
            
            
            $
            (261.6
            )Average
      retail customers (thousands)
            
            
            499.3
            
            
            
            495.7
            
            
            
            3.5
            
            
            
            498.6
            
            
            
            494.8
            
            
            
            3.8





77


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





Three
      Months Ended September 30,
            
            
            Nine
      Months Ended September 30,2009
            
            
            2008
            
            
            Change
            
            
            2009
            
            
            2008
            
            
            Change(Gigawatt
      hours)Residential
            
            
            927.8
            
            
            
            898.8
            
            
            
            29.0
            
            
            
            2,450.7
            
            
            
            2,474.7
            
            
            
            (24.0
            )Commercial
            
            
            1,101.5
            
            
            
            1,142.9
            
            
            
            (41.4
            )
            
            
            2,933.2
            
            
            
            3,070.1
            
            
            
            (136.9
            )Industrial
            
            
            377.0
            
            
            
            408.1
            
            
            
            (31.1
            )
            
            
            1,094.6
            
            
            
            1,260.4
            
            
            
            (165.8
            )Public
      authority
            
            
            73.3
            
            
            
            73.9
            
            
            
            (0.6
            )
            
            
            189.7
            
            
            
            190.1
            
            
            
            (0.4
            )Firm
      requirements wholesale
            
            
            169.5
            
            
            
            283.0
            
            
            
            (113.5
            )
            
            
            509.5
            
            
            
            842.2
            
            
            
            (332.7
            )Other
      sales for resale
            
            
            960.0
            
            
            
            1,222.2
            
            
            
            (262.2
            )
            
            
            3,192.1
            
            
            
            4,209.4
            
            
            
            (1,017.3
            )3,609.1
            
            
            
            4,028.9
            
            
            
            (419.8
            )
            
            
            10,369.8
            
            
            
            12,046.9
            
            
            
            (1,677.1
            )





The
results of operations of PNM Electric are primarily driven by the rate making
decisions and other actions of the NMPRC.  On July 1, 2009, PNM
Electric implemented the first phase of a $77.1 non-fuel base rate increase for
retail customers except those formerly served by TNMP.  The first
phase allowed PNM to increase customer bills for 65% of the annual base rate
increase or $50.1 million.  PNM will implement the second phase, or
the remaining 35% of the annual base rate increase, beginning April 1,
2010.  PNM Electric was also granted a more customary FPPAC, which
replaced the existing Emergency FPPAC that terminated on June 30,
2009.  PNM Electric revenues are further increased because of a rate
increase that was implemented in the second quarter of 2008.





Decreases
in retail loads were driven by overall lower usage per customer and reduced
operations of a major industrial customer. In 2009, lower natural gas and
economy purchase costs improved regulated margins for those customers without a
FPPAC, which more than offset the decreases in retail loads.





Prior to
May 2009, the revenues and costs associated with Luna, Lordsburg, and the
Valencia PPA were included in unregulated margins.  Upon approval of
the Resource Stipulation (see Note 10), the costs of the Valencia PPA and Luna
and Lordsburg, net of off-system revenues, are recovered through the regulatory
process, which reduces unregulated margins.  For the three months
ended September 30, 2009, unregulated margins were also lower due to favorable
pricing from hedge positions recognized in the third quarter
2008.  For the three months and nine months ended September 30, 2009,
unregulated margins increased due to favorable pricing terms under the forward
sales agreement for power from PNM’s interest in PVNGS Unit 3. For the three
months and nine months ended September 30, 2009, unregulated margins decreased
due to pre-tax charges to revenues of $13.6 million and $26.2 million associated
with increases in legal reserves and decreased margins due to lower market
prices for power from unregulated assets and the costs incurred under the
Valencia PPA, prior to inclusion in retail rates.





PNM
Electric completed the sale of the merchant portfolio in second quarter
2008.  PNM’s merchant portfolio included certain wholesale power,
natural gas and transmission contracts that reflected a significant portion of
unregulated activity at PNM.





Net
unrealized economic hedges reflect changes in fair value on open derivative
instruments at PNM Electric.  Lower forward natural gas and power
prices resulted in a favorable net change in fair value during
2009.





PNM
Electric analyzes results associated with the Valencia PPA as costs of energy,
which prior to the approval of the Resource Stipulation were reflected in
unregulated margins. As discussed above, beginning in May 2009, the Valencia PPA
will be recovered through regulated rates.  Under GAAP, the Valencia
PPA is consolidated, which results in costs being reflected as operating
expenses and non-controlling interest that would have been included in cost of
energy if the Valencia PPA was not consolidated.





For the
three months and nine months ended September 30, 2009 operating expenses
decreased due to timing of planned maintenance and outages at SJGS and Four
Corners and labor savings, which were more than offset by increases in
administrative and general expenses associated with higher pension, benefit, and
corporate overhead costs.  For the nine months ended September 30,
2008, operating expenses included a $51.1 million impairment of goodwill
recognized in the second quarter of 2008.  No impairment was recorded
in 2009.  In the second quarter of 2009, PNM recorded a pre-tax
expense for regulatory disallowances of $26.3 million relating to prior sales of
SO2emission
allowances and $0.3 million of deferred rate case expenses that resulted from
the settlement of the 2008 Electric Rate Case.  In the second quarter
of 2008, PNM wrote-off $10.6 million of deferred





78


costs for
RECs and $19.6 million for coal mine decommissioning costs, both of which were
disallowed in PNM’s 2007 Electric Rate Case.





Increases
in depreciation expense are primarily driven by the completion of the
environmental upgrades on all four units at SJGS and increases in distribution
and transmission plant.





For the
three months ended September 30, 2009, interest charges decreased due to lower
interest rates and lower outstanding balances on short-term
borrowings.  For the nine months ended September 30, 2009, higher
long-term interest costs on debt issued in May 2008 were partially offset by
lower outstanding balances and lower rates on short-term
borrowings.





For the
three months and nine months ended September 30, 2009, PNM recognized interest
income related to certain income tax positions associated with changes in book
to tax differences on capitalization, compared to a reduction in interest income
in 2008.  In addition, other income increased due to improved
performance of the NDT assets.   In the second quarter of 2009,
PNM recorded a credit to other income to reflect recovery of carrying costs
associated with the transfer of an ownership interest in PVNGS Unit 2 to PNM
pursuant to the Resource Stipulation.





TNMP
Electric





The table
below summarizes the operating results for TNMP Electric:





Three
      Months Ended September 30,
            
            
            Nine
      Months Ended September 30,2009
            
            
            2008
            
            
            Change
            
            
            2009
            
            
            2008
            
            
            Change(In
      millions)Total
      revenues
            
            $
            55.7
            
            
            $
            51.1
            
            
            $
            4.6
            
            
            $
            143.7
            
            
            $
            140.4
            
            
            $
            3.3Cost
      of energy
            
            
            8.7
            
            
            
            8.4
            
            
            
            0.3
            
            
            
            26.0
            
            
            
            24.2
            
            
            
            1.9Gross
      margin
            
            
            46.9
            
            
            
            42.7
            
            
            
            4.2
            
            
            
            117.7
            
            
            
            116.3
            
            
            
            1.4Other
      operating expenses
            
            
            19.9
            
            
            
            17.3
            
            
            
            2.6
            
            
            
            56.6
            
            
            
            84.7
            
            
            
            (28.1
            )Depreciation
      and amortization
            
            
            10.3
            
            
            
            9.9
            
            
            
            0.4
            
            
            
            27.8
            
            
            
            27.0
            
            
            
            0.8Operating
      income (loss)
            
            
            16.7
            
            
            
            15.5
            
            
            
            1.2
            
            
            
            33.2
            
            
            
            4.5
            
            
            
            28.7Other
      income (deductions)
            
            
            1.5
            
            
            
            1.7
            
            
            
            (0.2
            )
            
            
            2.4
            
            
            
            2.7
            
            
            
            (0.3
            )Net
      interest charges
            
            
            (8.0
            )
            
            
            (4.2
            )
            
            
            (3.8
            )
            
            
            (20.0
            )
            
            
            (13.6
            )
            
            
            (6.4
            )Earnings
      (loss) before income taxes
            
            
            10.2
            
            
            
            13.0
            
            
            
            (2.8
            )
            
            
            15.6
            
            
            
            (6.3
            )
            
            
            21.9Income
      (taxes)
            
            
            (4.1
            )
            
            
            (4.9
            )
            
            
            0.8
            
            
            
            (6.3
            )
            
            
            (10.6
            )
            
            
            4.3Segment
      earnings (loss)
            
            $
            6.2
            
            
            $
            8.1
            
            
            $
            (1.9
            )
            
            $
            9.3
            
            
            $
            (16.9
            )
            
            $
            26.2





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


2009/2008
      ChangeThree
      Months Ended September 30,
            
            
            Nine
      Months Ended September 30,Total
            
            
            Cost
      of
            
            
            Gross
            
            
            Total
            
            
            Cost
      of
            
            
            GrossRevenues
            
            
            Energy
            
            
            Margin
            
            
            Revenues
            
            
            Energy
            
            
            Margin(In
      millions)Rate
      increase
            
            $
            1.5
            
            
            $
            -
            
            
            $
            1.5
            
            
            $
            1.5
            
            
            $
            -
            
            
            $
            1.5Customer
      usage/load
            
            
            0.8
            
            
            
            -
            
            
            
            0.8
            
            
            
            (0.2
            )
            
            
            -
            
            
            
            (0.2
            )Hurricane
      Ike
            
            
            1.6
            
            
            
            -
            
            
            
            1.6
            
            
            
            1.6
            
            
            
            -
            
            
            
            1.6Other
            
            
            0.7
            
            
            
            0.3
            
            
            
            0.3
            
            
            
            0.4
            
            
            
            1.9
            
            
            
            (1.5
            )Total
      increase (decrease)
            
            $
            4.6
            
            
            $
            0.3
            
            
            $
            4.2
            
            
            $
            3.3
            
            
            $
            1.9
            
            
            $
            1.4





79


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





Three
      Months Ended September 30,
            
            
            Nine
      Months Ended September 30,2009
            
            
            2008
            
            
            Change
            
            
            2009
            
            
            2008
            
            
            Change(In
      millions, except customers)Residential
            
            $
            25.5
            
            
            $
            22.3
            
            
            $
            3.2
            
            
            $
            57.2
            
            
            $
            55.4
            
            
            $
            1.8Commercial
            
            
            18.7
            
            
            
            18.0
            
            
            
            0.7
            
            
            
            53.8
            
            
            
            53.5
            
            
            
            0.3Industrial
            
            
            3.0
            
            
            
            3.5
            
            
            
            (0.5
            )
            
            
            9.1
            
            
            
            10.0
            
            
            
            (0.9
            )Other
            
            
            8.5
            
            
            
            7.3
            
            
            
            1.2
            
            
            
            23.6
            
            
            
            21.5
            
            
            
            2.1$
            55.7
            
            
            $
            51.1
            
            
            $
            4.6
            
            
            $
            143.7
            
            
            $
            140.4
            
            
            $
            3.3Average
      customers (thousands) (1)
            
            
            231.9
            
            
            
            230.3
            
            
            
            1.6
            
            
            
            230.9
            
            
            
            229.0
            
            
            
            1.9





(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 85,681 and 111,017 customers of TNMP
      Electric for the three months ended September 30, 2009 and 2008, and
      88,045 and 118,288 customers for the nine months ended September 30, 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 September 30,
            
            
            Nine
      Months Ended September 30,2009
            
            
            2008
            
            
            Change
            
            
            2009
            
            
            2008
            
            
            Change(Gigawatt
      hours(1))Residential
            
            
            910.8
            
            
            
            811.3
            
            
            
            99.5
            
            
            
            2,038.5
            
            
            
            1,987.2
            
            
            
            51.3Commercial
            
            
            644.7
            
            
            
            618.6
            
            
            
            26.1
            
            
            
            1,689.4
            
            
            
            1,679.5
            
            
            
            9.9Industrial
            
            
            517.7
            
            
            
            482.9
            
            
            
            34.8
            
            
            
            1,471.4
            
            
            
            1,542.5
            
            
            
            (71.1
            )Other
            
            
            29.1
            
            
            
            28.8
            
            
            
            0.3
            
            
            
            81.2
            
            
            
            81.5
            
            
            
            (0.3
            )2,102.3
            
            
            
            1,941.6
            
            
            
            160.7
            
            
            
            5,280.5
            
            
            
            5,290.7
            
            
            
            (10.2
            )





(1)
            The
      GWh sales reported above include 372.3 and 467.2 GWhs for the three months
      ended September 30, 2009 and 2008 and 901.6 and 1,295.2 GWhs for the nine
      months ended September 30, 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.





On
September 1, 2009, TNMP implemented a $6.8 million base rate
increase.  In addition to the base rate increase, TNMP was allowed to
increase the cost of debt on its competitive transition charge as well as to
recover Hurricane Ike system restoration costs and rate case expenses through
additional rate riders.  For the three months ended September 30,
2009, revenues and margin increased due to higher retail loads resulting from
warmer weather and increased average customers. Revenues in 2008 were negatively
impacted due to Hurricane Ike, which struck the Gulf Cost area in the third
quarter of 2008.  Other changes to revenues, cost of energy and margin
relate to transmission charges to and from other transmission and distribution
providers.  For the nine months ended September 30, 2009, increases in
average customer count were more than offset by lower demand and per-customer
usage.  A reduction in the interest rate allowed on TNMP's competitive
transition charge beginning in 2009 reduced other revenues and
margin.





For the
three months ended September 30, 2009, increases in operating expenses related
to higher distribution maintenance costs for tree-trimming, increased
administrative and general costs for pension and benefit costs, and higher
property and street rental taxes, were partially offset by the approval of
recovery of costs related to achieve savings associated with the Company’s
business improvement plan in the TNMP rate case.  The recovery allowed
for the establishment of a regulatory asset, with an offsetting credit to
administrative and general expenses of $1.1 million in the third quarter of
2009. For the nine months ended September 30, 2009, the decrease in operating
expenses primarily relates to a $34.5 million impairment of goodwill recognized
in the second quarter of 2008.  There was no impairment of goodwill in
2009.  Other than the impairment, operating expenses increased in 2009
related to higher pension, benefit, labor, and administrative
costs.  In addition, TNMP expensed $0.7 million of Hurricane Ike
restoration costs that had previously been deferred in the second quarter of
2009.





80


Increases
in depreciation and amortization expenses reflect increases in plant assets and
include one-month amortization of Hurricane Ike and rate case
costs.  These costs are recovered through rate riders as discussed
above.





In the
third quarter of 2009, TNMP recorded carrying costs on the Hurricane Ike
restoration costs, which increased other income by $1.3 million.  This
was offset by lower income associated with contributions in aid of construction
and the gain on disposal of assets in 2008.





For the
three months and nine months ended September 30, 2009, increases in interest
charges are due to higher interest rates on long-term debt issued in March 2009,
which repaid short-term borrowings that were at lower interest
rates.





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 September 30,
            
            
            Nine
      Months Ended September 30,2009
            
            
            2008
            
            
            Change
            
            
            2009
            
            
            2008
            
            
            Change(In
      millions)Total
      revenues
            
            $
            -
            
            
            $
            63.3
            
            
            $
            (63.3
            )
            
            $
            65.7
            
            
            $
            379.3
            
            
            $
            (313.6
            )Cost
      of energy
            
            
            -
            
            
            
            37.5
            
            
            
            (37.5
            )
            
            
            44.7
            
            
            
            263.2
            
            
            
            (218.5
            )Gross
      margin
            
            
            -
            
            
            
            25.8
            
            
            
            (25.8
            )
            
            
            21.0
            
            
            
            116.1
            
            
            
            (95.1
            )Other
      operating expenses
            
            
            0.4
            
            
            
            22.9
            
            
            
            (22.6
            )
            
            
            10.4
            
            
            
            67.3
            
            
            
            (57.0
            )Depreciation
      and amortization
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Operating
      income
            
            
            (0.4
            )
            
            
            3.0
            
            
            
            (3.3
            )
            
            
            10.6
            
            
            
            48.8
            
            
            
            (38.1
            )Other
      income (deductions)
            
            
            -
            
            
            
            0.6
            
            
            
            (0.6
            )
            
            
            0.3
            
            
            
            2.1
            
            
            
            (1.8
            )Net
      interest charges
            
            
            -
            
            
            
            (3.4
            )
            
            
            3.4
            
            
            
            (1.0
            )
            
            
            (9.9
            )
            
            
            8.9Gain
      on disposal
            
            
            (1.8
            )
            
            
            -
            
            
            
            (1.8
            )
            
            
            108.9
            
            
            
            -
            
            
            
            108.9Earnings
      (loss) before income taxes
            
            
            (2.1
            )
            
            
            0.2
            
            
            
            (2.3
            )
            
            
            118.9
            
            
            
            40.9
            
            
            
            78.0Income
      (taxes) benefit
            
            
            0.8
            
            
            
            (0.8
            )
            
            
            1.6
            
            
            
            (41.2
            )
            
            
            (16.3
            )
            
            
            (24.9
            )Segment
      earnings (loss)
            
            $
            (1.4
            )
            
            $
            (0.6
            )
            
            $
            (0.8
            )
            
            $
            77.7
            
            
            $
            24.6
            
            
            $
            53.1





PNM
completed the sale of PNM Gas 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 PNM Gas from January 1, 2009 through January 30,
2009, compared to full periods of operations in 2008.  In the three
months and nine months ended September 30, 2009, PNM expensed $0.4 million and
$4.5 million associated with retained liabilities from discontinued operations
and adjusted the pre-tax gain on sale by $1.8 million and $2.1 million to
reflect working capital adjustments and inclusion of certain items previously
excluded from the gain calculation.





81


First
Choice





The table
below summarizes the operating results for First
Choice:


Three
      Months Ended September 30,
              
              
              Nine
      Months Ended September 30,2009
              
              
              2008
              
              
              Change
              
              
              2009
              
              
              2008
              
              
              Change(In
      millions)Total
      revenues
              
              $
              159.4
              
              
              $
              215.0
              
              
              $
              (55.6
              )
              
              $
              419.6
              
              
              $
              461.4
              
              
              $
              (41.8
              )Cost
      of energy
              
              
              106.0
              
              
              
              206.0
              
              
              
              (100.0
              )
              
              
              272.0
              
              
              
              469.3
              
              
              
              (197.3
              )Gross
      margin
              
              
              53.5
              
              
              
              9.1
              
              
              
              44.4
              
              
              
              147.6
              
              
              
              (7.9
              )
              
              
              155.5Other
      operating expenses
              
              
              25.5
              
              
              
              30.5
              
              
              
              (5.0
              )
              
              
              80.9
              
              
              
              118.8
              
              
              
              (37.9
              )Depreciation
      and amortization
              
              
              0.4
              
              
              
              0.6
              
              
              
              (0.2
              )
              
              
              1.4
              
              
              
              1.7
              
              
              
              (0.3
              )Operating
      income (loss)
              
              
              27.5
              
              
              
              (22.1
              )
              
              
              49.6
              
              
              
              65.2
              
              
              
              (128.4
              )
              
              
              193.6Other
      income (deductions)
              
              
              (0.2
              )
              
              
              0.6
              
              
              
              (0.8
              )
              
              
              (0.3
              )
              
              
              1.4
              
              
              
              (1.7
              )Net
      interest charges
              
              
              (0.6
              )
              
              
              (1.8
              )
              
              
              1.2
              
              
              
              (2.4
              )
              
              
              (2.5
              )
              
              
              0.1Earnings
      (loss) before income taxes
              
              
              26.7
              
              
              
              (23.3
              )
              
              
              50.0
              
              
              
              62.6
              
              
              
              (129.4
              )
              
              
              192.0Income
      (taxes) benefit
              
              
              (9.7
              )
              
              
              6.8
              
              
              
              (16.5
              )
              
              
              (22.5
              )
              
              
              28.4
              
              
              
              (50.9
              )Segment
      earnings (loss)
              
              $
              17.1
              
              
              $
              (16.5
              )
              
              $
              33.6
              
              
              $
              40.0
              
              
              $
              (101.0
              )
              
              $
              141.0


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





2009/2008
      ChangeThree
      Months Ended September 30,
            
            
            Nine
      Months Ended September 30,Total
            
            
            Cost
      of
            
            
            Gross
            
            
            Total
            
            
            Cost
      of
            
            
            GrossRevenues
            
            
            Energy
            
            
            Margin
            
            
            Revenues
            
            
            Energy
            
            
            Margin(In
      millions)Weather
            
            $
            8.2
            
            
            $
            6.9
            
            
            $
            1.3
            
            
            $
            3.1
            
            
            $
            2.5
            
            
            $
            0.6Customer
      growth/usage
            
            
            (23.3
            )
            
            
            (20.5
            )
            
            
            (2.8
            )
            
            
            (60.4
            )
            
            
            (48.4
            )
            
            
            (12.0
            )Retail
      margins
            
            
            (44.6
            )
            
            
            (75.6
            )
            
            
            31.0
            
            
            
            (37.6
            )
            
            
            (144.0
            )
            
            
            106.4LBCS
      Bankruptcy
            
            
            -
            
            
            
            (3.9
            )
            
            
            3.9
            
            
            
            -
            
            
            
            (3.9
            )
            
            
            3.9Hurricane
      Ike
            
            
            4.2
            
            
            
            0.9
            
            
            
            3.3
            
            
            
            4.2
            
            
            
            0.9
            
            
            
            3.3Trading
      margins
            
            
            (0.1
            )
            
            
            -
            
            
            
            (0.1
            )
            
            
            48.9
            
            
            
            -
            
            
            
            48.9Unrealized
      economic hedges
            
            
            -
            
            
            
            (7.8
            )
            
            
            7.8
            
            
            
            -
            
            
            
            (4.4
            )
            
            
            4.4Total
      increase (decrease)
            
            $
            (55.6
            )
            
            $
            (100.0
            )
            
            $
            44.4
            
            
            $
            (41.8
            )
            
            $
            (197.3
            )
            
            $
            155.5





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





Three
      Months Ended September 30,
            
            
            Nine
      Months Ended September 30,2009
            
            
            2008
            
            
            Change
            
            
            2009
            
            
            2008
            
            
            Change(In
      millions, except customers)Residential
            
            $
            110.3
            
            
            $
            144.9
            
            
            $
            (34.6
            )
            
            $
            279.0
            
            
            $
            331.3
            
            
            $
            (52.3
            )Mass-market
            
            
            6.6
            
            
            
            16.7
            
            
            
            (10.1
            )
            
            
            21.3
            
            
            
            46.3
            
            
            
            (25.0
            )Mid-market
            
            
            37.3
            
            
            
            42.7
            
            
            
            (5.4
            )
            
            
            103.2
            
            
            
            116.1
            
            
            
            (12.9
            )Trading
      gains (losses)
            
            
            -
            
            
            
            0.1
            
            
            
            (0.1
            )
            
            
            -
            
            
            
            (48.9
            )
            
            
            48.9Other
            
            
            5.2
            
            
            
            10.6
            
            
            
            (5.4
            )
            
            
            16.1
            
            
            
            16.6
            
            
            
            (0.5
            )$
            159.4
            
            
            $
            215.0
            
            
            $
            (55.6
            )
            
            $
            419.6
            
            
            $
            461.4
            
            
            $
            (41.8
            )Actual
      customers (thousands) (1,2)
            
            
            232.1
            
            
            
            233.8
            
            
            
            (1.7
            )
            
            
            232.1
            
            
            
            233.8
            
            
            
            (1.7
            )





(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 September 30 is presented in the table above as a more
      representative business indicator than the average customers that are
      shown in the table for TNMP
customers.





82


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





Three
      Months Ended September 30,
            
            
            Nine
      Months Ended September 30,2009
            
            
            2008
            
            
            Change
            
            
            2009
            
            
            2008
            
            
            Change(Gigawatt
      hours) (1)Residential
            
            
            781.2
            
            
            
            772.9
            
            
            
            8.3
            
            
            
            1,927.1
            
            
            
            2,045.8
            
            
            
            (118.7
            )Mass-market
            
            
            38.3
            
            
            
            73.1
            
            
            
            (34.8
            )
            
            
            117.5
            
            
            
            236.1
            
            
            
            (118.6
            )Mid-market
            
            
            304.7
            
            
            
            340.8
            
            
            
            (36.1
            )
            
            
            827.2
            
            
            
            924.1
            
            
            
            (96.9
            )Other
            
            
            2.1
            
            
            
            2.7
            
            
            
            (0.6
            )
            
            
            7.5
            
            
            
            12.5
            
            
            
            (5.0
            )1,126.3
            
            
            
            1,189.5
            
            
            
            (63.2
            )
            
            
            2,879.3
            
            
            
            3,218.5
            
            
            
            (339.2
            )





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





A
decrease in the average sales price, lower MWh sales, and a reduction in the
number of customers resulted in decreased operating revenues for both the three
months and nine months ended September 30, 2009.  However,
significantly lower purchased power costs in 2009 resulted in an increase in
retail margins.  Margins were also higher
in 2009 due to the impacts of Hurricane Ike and the LBCS bankruptcy in the third
quarter of 2008 that did not recur in 2009.





First
Choice entered into a series of speculative forward trades that arbitraged basis
differentials among certain ERCOT delivery zones that decreased trading margins
by $48.9 million in the nine months ended September 30, 2008.  This
decrease includes a speculative loss position of $3.3 million related to the
LBCS bankruptcy.  The LBCS contracts were subsequently replaced with
other counterparty contracts resulting in no material net change in First
Choice’s future position.  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.  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.





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 early 2009 were significantly above historic
levels.  As a result, bad debt expense increased $10.6 million in the
nine months ended September 30, 2009 compared to 2008.  However, bad
debt expense decreased by $1.2 million in the third quarter of 2009 compared to
2008, which can be partially attributed to lower sales prices in
2009.  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 and increased focus on
identifying new customer prospects that are more likely to demonstrate desired
payment behavior.  To accomplish these initiatives, First Choice is
focusing its marketing efforts on commercial customers and customers with
established payment patterns.  In addition, First Choice is increasing
the credit score required to become a customer and expanding the circumstances
where customers are required to provide advance deposits to obtain service, or
both.  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.





Total operating expenses
decreased for the nine months ended September 30, 2009 due to impairments
of goodwill of $49.5 million and the First Choice trade name of $9.0 million
pre-tax ($5.8 million after-tax) recorded in 2008 as a result of the annual
impairment assessment, including impairments of goodwill of $6.3 million and the
First Choice trade name of $1.6 million, pre-tax ($1.1 million after-tax) in the
three months ended September 30, 2008.  No impairments have been
recorded in 2009.  These decreases were partially offset by increased operational costs
in 2009, largely attributable to customer acquisition and support
expenses.





83


Corporate
and Other





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





Three
      Months Ended September 30,
            
            
            Nine
      Months Ended September 30,2009
            
            
            2008
            
            
            Change
            
            
            2009
            
            
            2008
            
            
            Change(In
      millions)Total
      revenues
            
            $
            (12.4
            )
            
            $
            (15.4
            )
            
            $
            3.0
            
            
            $
            (32.1
            )
            
            $
            (45.1
            )
            
            $
            13.0Cost
      of energy
            
            
            (12.3
            )
            
            
            (15.2
            )
            
            
            2.9
            
            
            
            (31.8
            )
            
            
            (44.5
            )
            
            
            12.7Gross
      margin
            
            
            (0.1
            )
            
            
            (0.2
            )
            
            
            0.1
            
            
            
            (0.3
            )
            
            
            (0.5
            )
            
            
            0.2Other
      operating expenses
            
            
            (2.3
            )
            
            
            2.4
            
            
            
            (4.7
            )
            
            
            (12.2
            )
            
            
            (2.4
            )
            
            
            (9.8
            )Depreciation
      and amortization
            
            
            3.9
            
            
            
            4.6
            
            
            
            (0.7
            )
            
            
            13.0
            
            
            
            13.2
            
            
            
            (0.2
            )Operating
      income (loss)
            
            
            (1.7
            )
            
            
            (7.1
            )
            
            
            5.4
            
            
            
            (1.2
            )
            
            
            (11.4
            )
            
            
            10.2Equity
      in net earnings (loss) of
              Optim
      Energy
            
            
            6.9
            
            
            
            (1.5
            )
            
            
            8.4
            
            
            
            0.9
            
            
            
            (29.1
            )
            
            
            30.0Other
      income (deductions)
            
            
            (0.7
            )
            
            
            (1.6
            )
            
            
            0.9
            
            
            
            18.1
            
            
            
            (7.1
            )
            
            
            25.2Net
      interest charges
            
            
            (5.1
            )
            
            
            (12.8
            )
            
            
            7.7
            
            
            
            (17.5
            )
            
            
            (30.9
            )
            
            
            13.4Earnings
      (loss) before income
              taxes
            
            
            (0.6
            )
            
            
            (23.0
            )
            
            
            22.4
            
            
            
            0.4
            
            
            
            (78.5
            )
            
            
            78.9Income
      (taxes) benefit
            
            
            2.2
            
            
            
            10.8
            
            
            
            (8.6
            )
            
            
            2.3
            
            
            
            32.7
            
            
            
            (30.4
            )Segment
      earnings (loss)
            
            $
            1.6
            
            
            $
            (12.2
            )
            
            $
            13.8
            
            
            $
            2.7
            
            
            $
            (45.8
            )
            
            $
            48.5





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 due to $3.2 million and $7.9 million of costs,
primarily severances and consulting charges related to the business improvement
plan that were incurred in the three months and nine months ended September 30,
2008 but not in 2009.  Other operating expenses also decreased due to
reduced consulting expenses and an overall reduction in labor due to the
business improvement plan and synergies from the divestiture of PNM Gas, offset
by an increase in incentive compensation expense.  The decrease
includes an offset to depreciation expense described below.





Depreciation
expense increased in the three months and nine months ended September 30, 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 provided below.





Other
income and deductions increased in the nine months ended September 30, 2009
primarily due to a $15.0 million fee received upon termination of the CRHC
acquisition agreement and a gain of $7.3 million on the repurchase of $157.4
million of PNMR’s 9.25% senior unsecured notes, both of which occurred in the
first quarter of 2009.  See Note 2 and Note 7.





Interest
charges decreased by $4.6 million and $9.2 million in the three months and nine
months ended September 30, 2009 primarily due to lower long-term
borrowings.  Interest charges also decreased by $1.5 million and $7.8
million due to lower short-term borrowings at lower short-term borrowing
rates.  These decreases are partially offset by higher long term
interest rates on senior unsecured notes that were re-marketed in 2008 resulting
in increased expense of $4.0 million in the nine month period ended September
30, 2009, after reflecting the re-acquisition of $157.4 million of that debt in
February 2009.





84


Optim
Energy





The table
below summarizes the operating results for Optim Energy:





Three
      Months Ended September 30,
            
            
            Nine
      Months Ended September 30,2009
            
            
            2008
            
            
            Change
            
            
            2009
            
            
            2008
            
            
            Change(In
      millions)Total
      revenues
            
            $
            100.9
            
            
            $
            212.4
            
            
            $
            (111.5
            )
            
            $
            237.7
            
            
            $
            430.4
            
            
            $
            (192.7
            )Cost
      of energy
            
            
            57.1
            
            
            
            156.1
            
            
            
            (99.0
            )
            
            
            147.1
            
            
            
            352.7
            
            
            
            (205.6
            )Gross
      margin
            
            
            43.8
            
            
            
            56.3
            
            
            
            (12.5
            )
            
            
            90.6
            
            
            
            77.7
            
            
            
            12.9Other
      operating expenses
            
            
            13.8
            
            
            
            47.2
            
            
            
            (33.4
            )
            
            
            50.0
            
            
            
            99.7
            
            
            
            (49.7
            )Depreciation
      and amortization
            
            
            10.0
            
            
            
            7.7
            
            
            
            2.3
            
            
            
            25.9
            
            
            
            22.9
            
            
            
            3.0Operating
      income (loss)
            
            
            20.0
            
            
            
            1.4
            
            
            
            18.6
            
            
            
            14.7
            
            
            
            (44.8
            )
            
            
            59.5Other
      income (deductions)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            0.1
            
            
            
            0.7
            
            
            
            (0.6
            )Net
      interest charges
            
            
            (4.1
            )
            
            
            (3.7
            )
            
            
            (0.4
            )
            
            
            (9.6
            )
            
            
            (15.0
            )
            
            
            5.4Earnings
      (loss) before income taxes
            
            
            15.8
            
            
            
            (2.2
            )
            
            
            18.0
            
            
            
            5.2
            
            
            
            (59.1
            )
            
            
            64.3Income
      (tax) benefit on margin
            
            
            (0.3
            )
            
            
            (0.1
            )
            
            
            (0.2
            )
            
            
            (0.4
            )
            
            
            0.2
            
            
            
            (0.6
            )Net
      earnings (loss)
            
            $
            15.6
            
            
            $
            (2.3
            )
            
            $
            17.9
            
            
            $
            4.8
            
            
            $
            (58.9
            )
            
            $
            63.750
      percent of net earnings (loss)
            
            $
            7.8
            
            
            $
            (1.2
            )
            
            $
            9.0
            
            
            $
            2.4
            
            
            $
            (29.5
            )
            
            $
            31.9Plus
      amortization of basis difference in
              Optim
      Energy
            
            
            (0.9
            )
            
            
            (0.3
            )
            
            
            (0.6
            )
            
            
            (1.5
            )
            
            
            0.4
            
            
            
            (1.9
            )PNMR
      equity in net earnings (loss)
              of
      Optim Energy
            
            $
            6.9
            
            
            $
            (1.5
            )
            
            $
            8.4
            
            
            $
            0.9
            
            
            $
            (29.1
            )
            
            $
            30.0





Altura
(Twin Oaks), Altura Cogen, and Cedar Bayou 4 generating stations comprise Optim
Energy’s core business.  Cedar Bayou 4, which was completed in June
2009 ahead of schedule and slightly under budget, contributed $3.8 million and
$7.6 million to gross margin for the three months and nine months ended
September 30, 2009.   Alternative fuel use and price savings on
lignite have reduced the Twin Oaks fuel costs by $1.8 million and $4.2 million
in the three months and nine months ended September 30,
2009.  Generation increased from 1,281 GWh in the three months ended
September 30, 2008 to 1,802 GWh in the three months ended September 30, 2009,
primarily due to the addition of Cedar Bayou 4.





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.  For the three months ended September 30, 2009,
Optim’s hedging program increased gross margin by $10.0
million.  Economic hedges that do not qualify for or are not
designated as cash flow hedges or normal purchases/sales under GAAP are
derivative instruments that are required to be
marked-to-market.  Extreme ERCOT market volatility in 2008, which has
not occurred in 2009, resulted in significant changes in the fair value of
economic hedges including an increase in net earnings of $28.3 million in the
three months ended September 30, 2008 and a reduction of net earnings of $10.7
million in the nine months ended September 30, 2008.  Due to the
extreme market volatility discussed above, Optim Energy made the decision to
exit its speculative trading business and close out its speculative trading
positions in early 2008.  Optim Energy incurred speculative losses of
$2.4 million in the first quarter of 2008 and has since settled all speculative
positions.  Optim Energy recorded mark-to-market losses of $1.1
million and $7.1 million on economic hedges during the three months and nine
months ended September 30, 2009.




Other operating expenses for the three
months and nine months ended September 30, 2009 are lower than in 2008 due to a
$21.8 million intangible impairment charge in the second quarter of 2008 and a
$31.7 million pre-tax write off of emissions allowances in the third quarter of
2008 that did not recur in 2009.  Excluding the impact of these items,
operating expenses were lower in 2009 due to improved plant performance at Twin
Oaks and reduced build out expenditures at Optim Energy.





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 net earnings 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





85


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
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 amount due from
LCC as of September 30, 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.





As
discussed under Business and Strategy above, Optim Energy has changed its
current strategy and near-term focus due to current adverse market conditions.
Optim Energy will focus on utilizing cash flow from operations to reduce debt
and optimizing its current generation assets as a stand-alone independent power
producer.  The goal is to position Optim Energy to optimize its
performance under current market with the expectation of being able to take
advantage of any economic recovery in the power and gas markets over the next
several years.





LIQUIDITY
AND CAPITAL RESOURCES





Statements
of Cash Flows





The
changes in PNMR’s cash flows for the nine months ended September 30, 2009
compared to 2008 are summarized as follows:





Nine
      Months Ended September 30,2009
            
            
            2008
            
            
            Change(In
      millions)Net
      cash flows from:Operating
      activities
            
            $
            84.9
            
            
            $
            64.4
            
            
            $
            20.5Investing
      activities
            
            
            468.2
            
            
            
            (209.9
            )
            
            
            678.1Financing
      activities
            
            
            (623.5
            )
            
            
            394.8
            
            
            
            (1,018.3
            )Net
      change in cash and cash equivalents
            
            $
            (70.4
            )
            
            $
            249.4
            
            
            $
            (319.8
            )





The
changes in PNMR’s cash flows from operating activities relate primarily to
increased margins and reduced collateral requirements at First Choice and
reduced interest payments at PNMR, PNM, and TNMP. PNMR also received a $9.1
million after-tax settlement in 2009 due to the termination of the CRHC
acquisition agreement. Increases were partially offset by the payment of taxes
related to earnings and the sale of PNM Gas in 2009 compared to a tax refund in
2008. The sale of PNM Gas also contributed a decrease to cash flows from
operating activities as the Company benefited from only one month of operations
in 2009 versus nine months in 2008.





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





The
changes in cash flows from financing activities relate 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. The receipt of
prepayments on PVNGS firm-sales contracts in 2008 and reduced common stock
dividend payments in 2009 also contributed to the changes. 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 nine
months ended September 30, 2009.  Additional information on the
Company’s financing activities is contained in Note 6 of Notes to Consolidated
Financial Statements in the 2008 Annual Report.





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





86


stock.  The
main focus of PNMR’s current construction program is upgrading generation
resources, upgrading and expanding the electric transmission and distribution
systems, and purchasing nuclear fuel.  Projections, including amounts
expended through September 30, 2009, for total capital requirements for 2009 are
$326.6 million, including construction expenditures of $280.4
million.  Total capital requirements for the years 2009-2013 are
projected to be $1,592.7 million, including construction expenditures of
$1,362.1 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 or possible construction expenditures for renewable energy
resources that may be owned by PNM.  These estimates are under
continuing review and subject to on-going adjustment, as well as to board review
and approval.





During
the first nine months of 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 co-developed a generating unit, which was
completed in June 2009. Optim Energy’s share of the construction costs was
$209.4 million, including financing costs, and was financed through Optim
Energy’s credit facility and operating cash flows.  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.  These credit facilities will
need to be renegotiated or replaced prior to their expiration in order to
provide sufficient liquidity to finance operations and construction
expenditures.  The availability of such credit facilities and their
terms and conditions will depend on the credit markets at that time, as well as
the Company’s credit ratings and operating results.Both PNMR and PNM also
have lines of credit with local financial institutions.





PNM had
long-term debt aggregating $36.0 million that was scheduled for mandatory
repurchase and remarketing on July 1, 2009.  PNM repurchased these
bonds on July 1, 2009 utilizing available cash balances and borrowings under the
PNM Facility.  PNM intends to hold these bonds (without legally
canceling them) and anticipates remarketing the bonds at some point in the
future depending upon market conditions.





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 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 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 with comparable amounts and terms
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.





87


A summary
of these arrangements as of October 26, 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
            
            
            5.0
            
            
            
            5.0
            
            
            
            -
            
            
            
            10.0Total
      financing capacity
            
            $
            605.0
            
            
            $
            405.0
            
            
            $
            75.0
            
            
            $
            1,085.0Amounts
      outstanding as of October 26, 2009:Revolving
      credit facility
            
            $
            40.0
            
            
            $
            83.0
            
            
            $
            20.0
            
            
            $
            143.0Local
      lines of credit
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      short-term debt outstanding
            
            
            40.0
            
            
            
            83.0
            
            
            
            20.0
            
            
            
            143.0Letters
      of credit
            
            
            63.6
            
            
            
            23.3
            
            
            
            1.5
            
            
            
            88.4Total
      short-term debt and letters of credit
            
            $
            103.6
            
            
            $
            106.3
            
            
            $
            21.5
            
            
            $
            231.4Remaining
      availability as of October 26, 2009
            
            $
            501.4
            
            
            $
            298.7
            
            
            $
            53.5
            
            
            $
            853.6Cash
      investments as of October 26, 2009
            
            $
            15.5
            
            
            $
            -
            
            
            $
            -
            
            
            $
            15.5





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 $29.7 million that represents the
unfunded portion of the PNMR Facility attributable to LBB.





For
offerings of debt securities registered with the SEC, PNMR has an effective
shelf registration statement expiring in April 2011.  This shelf
registration statement has unlimited availability and can be amended to include
additional securities, subject to certain restrictions and
limitations.  Due to market conditions, PNMR suspended the offering of
new shares of common stock through an equity distribution agreement and the
program was terminated in July 2009.  PNMR can offer new shares of
PNMR common stock through the PNM Resources Direct Plan under a separate SEC
shelf registration statement that expires in August 2012.  In April
2008, PNM filed a new shelf registration statement for the issuance of up to
$750.0 million of senior unsecured notes that expires in
April  2011.  As of October 26, 2009, PNM had $600.0 million
of remaining unissued securities registered under this and a prior shelf
registration statement.





Recent
disruption in the 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.





88


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.





Contingent
Provisions of Certain Obligations





As
discussed in the 2008 Annual
Reports, 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.











September
      30,
            
            
            December
      31,2009
            
            
            2008PNMRPNMR
      common stockholders’ equity
            
            
            50.7
            %
            
            
            49.3
            %Convertible
      preferred stock
            
            
            3.0
            %
            
            
            3.0
            %Preferred
      stock of subsidiary
            
            
            0.3
            %
            
            
            0.3
            %Long-term
      debt
            
            
            46.0
            %
            
            
            47.4
            %Total
      capitalization
            
            
            100.0
            %
            
            
            100.0
            %





PNMPNM
      common stockholder’s equity
            
            
            52.3
            %
            
            
            55.7
            %Preferred
      stock
            
            
            0.5
            %
            
            
            0.5
            %Long-term
      debt
            
            
            47.2
            %
            
            
            43.8
            %Total
      capitalization
            
            
            100.0
            %
            
            
            100.0
            %





TNMPCommon
      equity
            
            
            58.1
            %
            
            
            71.6
            %Long-term
      debt
            
            
            41.9
            %
            
            
            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.





89


In July
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 the Company
expects the EPA to adopt regulations relating to GHG.





In April
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 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.  Although the EPA has
not released the final endangerment finding, the EPA has proposed several rules
regulating GHG in anticipation of the final endangerment
finding.   In September 2009, the EPA proposed GHG motor vehicle
standards and expects to finalize the rule in March
2010.  Promulgation of the motor vehicle standards will trigger the
applicability of Prevention of Significant Deterioration (“PSD”) and operating
permit requirements for stationary sources that emit GHG.   With
respect to PSD and operating permit requirements, the EPA’s proposed rule
focuses on large facilities emitting over 25,000 metric tons of GHG per
year.  These facilities would be required to obtain air permits that
demonstrate they are using the best available control technology to minimize
GHG.  Each of the Company’s fossil-fueled electric generating plants
emit over 25,000 metric tons of GHG per year.  At this time, the
Company cannot predict what the impact of the proposed rule will be on the
operation of our fossil-fueled power plants.





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.





In June
2009, the United States House of Representatives passed H.R. 2454, the American
Clean Energy and Security Act of 2009.  This bill, commonly referred
to as the Waxman-Markey Bill, if ultimately passed into legislation, would
establish an economy-wide program, with cap and trade as its cornerstone,
regulating GHG.  The bill defines specific emissions reductions
requirements and timelines, provides for the allocation of free allowances to
electric utilities in the early years of the program to help mitigate cost
impacts to ratepayers and allows for compliance flexibility through cost control
mechanisms including the establishment of an offset program that will further
help mitigate costs to consumers.





In
September 2009, Senators Barbara Boxer and John Kerry introduced S.
1733, the “Clean Energy Jobs and America’s Power Act.”  While
this  bill is broadly similar to the climate change framework in
 H.R. 2454,  it includes a more aggressive GHG reduction
target for 2020.  A new, more complete version of the bill, known as
the Chairman’s mark-up, was recently released and voting by the Senate
committee is expected in the near future.





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
filed with the NMPRC in September 2008 showed that incorporation of the NMPRC
required carbon emissions costs did not significantly change the dispatch of
existing facilities or 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.





90


Seven
western states, including New Mexico, and three Canadian provinces have entered
into an accord, called the Western Regional Climate Action Initiative (the
“WCI”), to reduce GHG from automobiles and certain industries, including
utilities.   The WCI released design recommendations for elements of a
regional cap and trade program in September 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 and province.  In
New Mexico, the Company believes this will require new legislation and
rulemaking.  The Company will not be able to fully assess the
implications of the recommendations until implementing legislation and rules
have been enacted.  In the event federal cap and trade legislation is
adopted, it may replace state and regional initiatives.





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
proposal 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, NEE agreed to amend
its proposal to be a cap and trade program.  At the EIB meeting held
on July 7, 2009, the NMED outlined its proposed schedule for the adoption and
implementation of regulations necessary to implement the proposals under the
WCI. PNM and other interested parties filed a motion to temporarily stay further
action on the NEE petition pending introduction of the NMED’s WCI regulatory
proposals so that the NMED proposal could be considered together with the NEE
proposal.  In August 2009, the EIB denied the motion for the temporary
stay.  The EIB will commence a hearing on the NEE proposal beginning
in May 2010.  NEE and the NMED sought to bifurcate the proceeding to
consider the “science of climate change” at an initial hearing and proposals to
implement regulation to reduce GHG at a subsequent hearing.  The EIB
took the issue of bifurcation under advisement and decided against bifurcating
the hearing.




In February
2009, a bill 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.





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 forecasts, 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 utilize 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 PNM
expects to be entitled to recover that cost through 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 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.





91


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 advocate for federal action to address this
challenging environmental issue that is closely linked with the U.S. economy,
energy supply, and energy security. The basic framework of the part of the
Waxman-Markey Bill described above that addresses global warming is consistent
with the framework proposed by USCAP in its Blueprint for Legislative
Action.





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 2007, the latest year for which the EPA has compiled this data, were
approximately 7.2 billion metric tons, of which approximately 6.1 billion metric
tons were carbon dioxide.  Electricity generation accounted for
approximately 2.4 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, which approved the programs in May 2009.  See Note
10.  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 estimate 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.  In December 2008, the Board established a new
stand-alone committee, the Public Policy and Sustainability Committee. This
committee monitors Company practices and procedures to assess the sustainability
impacts of our operations and products on the environment.  This
committee also has 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 the use of
renewable energy resources.  The committee will report to the Board on
a periodic basis regarding the Company’s activities and initiatives in these
areas.





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.





Economic
Stimulus Projects





Through
the American Recovery and Reinvestment Act of 2009 (“ARRA”), the Federal
government made a number of funding and financing programs available for
utilities to develop renewable resources, improve reliability and create
jobs.  PNM and TNMP are eligible for several of the ARRA programs and
have applied or are considering applying for certain programs to the extent
deemed to be viable and prudent.





TNMP
submitted its application to the DOE for a grant under DOE’s Smart Grid
Investment Grant Program (“SGIG”) to support TNMP’s smart grid
program.  TNMP sought funding to deploy smart meters, utilize
supervisory control and data acquisition systems, and automate substations and
distribution circuits.  On October 27, 2009, the DOE notified TNMP
that it had not been selected to receive a grant under SGIG.  TNMP had
also considered applying for DOE loan guarantees under ARRA for a transmission
line storm hardening project in Texas,





92


but
subsequently determined not to pursue that project upon further analysis of the
DOE’s filing and project requirements.





PNM may
seek federal loan guarantees under the ARRA for wind and solar renewable
generation projects it is considering in New Mexico. Furthermore, PNM submitted
a request for federal financial assistance in the form of a grant of up to 50
percent of the costs of an energy storage solar project in New Mexico under the
DOE’s Smart Grid Demonstrations program.  Costs are still under review
for the potential PNM projects.  PNM is unable to predict if its Smart
Grid Demonstrations program application will be approved or when approval would
be received.





Other
Matters





As
discussed under Employees in Item 1. Business in the 2008 Annual Reports, 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 tentative agreement was ratified by the  IBEW on May
13, 2009.





See Notes
9 and 10 herein and Notes 16, 17 and 18 in the 2008 Annual Reportsfor a discussion of commitments and contingencies, rate and regulatory
matters and environmental issues facing the Company.





CRITICAL
ACCOUNTING POLICIES AND ESTIMATES





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





As of
September 30, 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 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.





93


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
      appeals of prior regulatory
proceedings,


·
            The
      ability of PNM to meet the renewable energy requirements established by
      the NMPRC, including the resource diversity requirement, within the
      specified cost parameters, and the Company’s
      ability to obtain federal and/or state funding and incentives for the
      development of alternative or renewable
  energy,


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


·
            The
      risk that Optim Energy desires to expand its generation capacity but is
      unable to identify and implement profitable acquisitions 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,


·
            Collections
      experience,


·
            Insurance
      coverage available for claims made in
  litigation,


·
            Fluctuations
      in interest rates,


·
            Weather,


·
            Water
      supply,


·
            Changes
      in fuel costs,


·
            Availability
      of fuel supplies,


·
            Uncertainty
      regarding the requirements and related costs of decommissioning power
      plants owned or partially owned by PNM and Optim Energy and coal mines
      supplying certain PNM power plants, as well as the ability to recover
      decommissioning costs through charges to
  customers,


·
            The
      risk that replacement power costs incurred by PNM related to not meeting
      the specified capacity factor for its generating units under its Emergency
      FPPAC will not be approved by the
NMPRC,


·
            The
      risk that PNM may not be able to renew rights-of-way on Native American
      lands or that the costs of rights-of-way are not allowed to be recovered
      through rates charged to customers,


·
            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,


·
            The
      risk that the resolution of the bankruptcy of LCC results in significant
      adverse impacts on the operations of the Altura Cogen facility and Optim
      Energy,


·
            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,


94


·
            The
      risks associated with completion of generation, 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 Reports 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.





WEB
SITE







The PNMR
website, www.pnmresources.com,
is an important source of Company information
and PNMR encourages investors, analysts and other interested
parties to visit the website frequently. PNMR keeps the site updated and
routinely posts new information or updated information for public
consumption. PNMR encourages analysts, investors and other interested
parties to register on the website to automatically receive Company financial
information by email. Once registered, participants can choose from a menu to
automatically receive requested information, including news releases, notices of
webcasts and filings with the SEC. Participants can unsubscribe at any time and
will not receive information that was not requested.  The contents of
the website are not part of this Form 10-Q.







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.





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;





95


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 related derivative contracts
included in the Condensed Consolidated Balance Sheets.





The
following table details the changes in the net asset or liability balance sheet
position of PNMR for mark-to-market energy transactions other than cash flow
hedges:





Trading
            
            
            Economic
              Hedges
            
            
            TotalNine
      Months Ended September 30,  2009
            
            (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
            
            
            (1,489
            )
            
            
            15,155
            
            
            
            13,666Changes
      in fair value
            
            
            121
            
            
            
            (6,564
            )
            
            
            (6,443
            )Net
      change recorded as mark-to-market
            
            
            (1,368
            )
            
            
            8,591
            
            
            
            7,223Unearned/prepaid
      option premiums
            
            
            -
            
            
            
            (362
            )
            
            
            (362
            )Net fair value at end of period
            
            $
            1,188
            
            
            $
            2,807
            
            
            $
            3,995





Nine
      Months Ended September 30, 2008Sources
      of fair value gain (loss):Net
      fair value at beginning of period
            
            $
            (1,577
            )
            
            $
            (13,136
            )
            
            $
            (14,713
            )Adoption
      of amendment to GAAP regarding fair value measurement
            
            
            -
            
            
            
            17,253
            
            
            
            17,253Adjusted
      beginning fair value
            
            
            (1,577
            )
            
            
            4,117
            
            
            
            2,540Amount
      realized on contracts delivered during period
            
            
            37,539
            
            
            
            12,985
            
            
            
            50,524Changes
      in fair value
            
            
            (45,048
            )
            
            
            (18,338
            )
            
            
            (63,386
            )Net
      change recorded as mark-to-market
            
            
            (7,509
            )
            
            
            (5,353
            )
            
            
            (12,862
            )Unearned/prepaid
      option premiums
            
            
            (4,377
            )
            
            
            (636
            )
            
            
            (5,013
            )Net fair value at end of period
            
            $
            (13,463
            )
            
            $
            (1,872
            )
            
            $
            (15,335
            )








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





Fair
Value of Mark-to-Market Instruments at September 30, 2009





Less
      than1
      year
            
            
            1-3
      Years
            
            
            4+
      Years
            
            
            TotalPNMR
            
            
            
            
            (In
      thousands)Trading
      transactions
            
            $
            847
            
            
            $
            341
            
            
            $
            -
            
            
            $
            1,188Economic
      hedges
            
            
            862
            
            
            
            1,753
            
            
            
            192
            
            
            
            2,807Total
            
            $
            1,709
            
            
            $
            2,094
            
            
            $
            192
            
            
            $
            3,995





The fair
value of PNMR’s commodity derivative instruments designated as cash flow hedging
instruments decreased $13.0 million for the nine months ended September 30, 2009
and increased $27.7 million for the nine months ended September 30,
2008.





96


Risk
Management Activities





PNM
measures the market risk of its long-term contracts and wholesale activities
using a VaR calculation to measure price movements.  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 VaR simulation model.  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 and cross-commodity 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% (99% was utilized in 2008).  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 nine months ended September 30, 2009, the
average, high, and low VaR amounts for these transactions were less than $0.1
million.  The VaR amount for these transactions at September 30, 2009
was less than $0.1 million.  For the nine months ended September 30,
2008, the average VaR amount for these transactions was $0.3 million with high
and low VaR amounts for the period of $0.9 million and zero.  The
total VaR amount for these transactions at September 30, 2008 was less than $0.1
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 the GEaR 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
nine months ended September 30, 2009, the average GEaR amount was $5.6 million,
with high and low GEaR amounts for the period of $11.4 million and $2.2
million.  The total GEaR amount at September 30, 2009 was $3.6
million.  For the nine months ended September 30, 2008, the average
GEaR amount for these transactions was $18.1 million, with high and low GEaR
amounts for the period of $44.3 million and $6.1 million.  The total
GEaR amount for these transactions at September 30, 2008 was $6.5
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





97


amount
for these transactions was $0.3 million at September 30, 2009.  For
the nine months ended September 30, 2009, the high, low and average
mark-to-market VaR amounts were $2.0 million, $0.2 million and $0.9
million.  The VaR amount for these transactions was $1.2 million at
September 30, 2008.  For the nine months ended September 30, 2008, the
high, low and average mark-to-market VaR amounts were $12.1 million, $1.1
million and $4.6 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, which contributed to the decision to exit the basis
transactions and speculative trading.  There were no such exceedences
in the first nine months 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 September
30, 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.





Schedule
of Credit Risk Exposure


September
30, 2009





Number
            
            
            Exposure(b)
            
            
            of
            
            
            ofCredit
            
            
            Counter-
            
            
            Counter-Risk
            
            
            parties
            
            
            partiesRating
      (a)
            
            Exposure
            
            
            >10%
            
            
            >10%(Dollars
      in thousands)PNMRExternal
      ratings:Investment
      grade
            
            $
            67,076
            
            
            
            3
            
            
            $
            25,515Split
      ratings
            
            
            113
            
            
            
            -
            
            
            
            -Non-investment
      grade
            
            
            1,892
            
            
            
            -
            
            
            
            -Internal
      ratings:Investment
      grade
            
            
            247
            
            
            
            -
            
            
            
            -Non-investment
      grade
            
            
            383
            
            
            
            -
            
            
            
            -Total
            
            $
            69,711
            
            
            
            3
            
            
            $
            25,515





(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.


98


(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 advance payments, cash
      deposits, letters of credit, and parental guarantees received from
      counterparties.  Amounts are presented before the application of
      such credit collateral instruments.  At September 30, 2009, the
      Company held advance payments of $34.5 million and credit collateral of
      $1.8 million to offset its 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


September
30, 2009





GreaterLess
      than
            
            
            
            
            
            than
            
            
            TotalRating
            
            2
      Years
            
            
            2-5
      Years
            
            
            5
      Years
            
            
            Exposure(In
      thousands)PNMRExternal
      ratings:Investment
      grade
            
            $
            66,896
            
            
            $
            -
            
            
            $
            180
            
            
            $
            67,076Split
      ratings
            
            
            113
            
            
            
            -
            
            
            
            -
            
            
            
            113Non-investment
      grade
            
            
            1,892
            
            
            
            -
            
            
            
            -
            
            
            
            1,892Internal
      ratings:Investment
      grade
            
            
            247
            
            
            
            -
            
            
            
            -
            
            
            
            247Non-investment
      grade
            
            
            383
            
            
            
            -
            
            
            
            -
            
            
            
            383Total
            
            $
            69,531
            
            
            $
            -
            
            
            $
            180
            
            
            $
            69,711





The
Company provides for losses due to market and credit risk.  Credit
risk for PNMR's and PNM’s largest counterparty as of September 30, 2009 and
December 31, 2008 was $11.4 million and $52.3 million.





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 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 3.92%, if
interest rates were to decline by 50 basis points from their levels at September
30, 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
bearing interest at a fixed rate, thereby eliminating interest rate
risk.  At October 26, 2009, PNMR has $143.0 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
$1,085.0 million.  These facilities bear interest at variable rates,
which averaged 1.46% of October 26, 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 $547.1 million at
September 30, 2009, of which 29.3% 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 September 30, 2009, the decrease in the fair value of the
fixed-rate securities would be 4.6%, or $7.4 million.  The securities
held by TNMP in trusts for pension and other post-employment benefits had an
estimated fair value of $64.2 million at September 30, 2009, of which 24.5% 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 September 30, 2009, the
decrease in the fair value of the fixed-rate securities would be 6.2%, or $1.0
million.





99


PNM and
TNMP do not directly recover or return through rates any losses or gains on the
securities in the trusts for nuclear decommissioning or pension and other
post-employment benefits.  However, the overall performance of these
trusts does enter into the periodic determinations of expense and funding
levels, which are factored into the rate making process to the extent applicable
to regulated operations.  PNM and TNMP are at risk for shortfalls in
funding of obligations due to investment losses, including those from the equity
market and alternatives investment risks discussed below to the extent not
ultimately recovered through rates charged to customers.





Equity
Market Risk





The NDT
and trusts established for PNM’s pension and post-employment benefits hold
certain equity securities at September 30, 2009.  These equity
securities expose PNM to losses in fair value should the market values of the
underlying securities decline.  Equity securities comprised 56.9% of
the securities held by the various PNM trusts as of September 30,
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 56.2% of the securities held by
the TNMP trusts as of September 30, 2009.  There was 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, which amounted to 21.3% as of September 30,
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.





ITEM
4.  CONTROLS AND PROCEDURES





PNMR





Evaluation
of disclosure controls and procedures





As of the
end of the period covered by this quarterly report, PNMR conducted an evaluation
under the supervision and with the participation of PNMR’s management, including
the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and operation of the disclosure controls and
procedures (as defined in Regulation 13A, Sections 13a-15(e) and 15d-15(e) of
the SEC Act of 1934).  Based upon this evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that the disclosure controls
and procedures are effective.





Changes
in internal controls over financial reporting





There
have been no changes in PNMR’s internal control over financial reporting (as
such term is defined in Rules13a-15(f) and 15d-15(f) under the SEC Act of 1934)
during the quarter ended September 30, 2009 that have materially affected, or
are reasonably likely to materially affect, PNMR’s internal control over
financial reporting.





100


PNM





Evaluation
of disclosure controls and procedures





As of the
end of the period covered by this quarterly report, PNM conducted an evaluation
under the supervision and with the participation of PNM’s management, including
the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and operation of the disclosure controls and
procedures (as defined in Regulation 13A, Sections 13a-15(e) and 15d-15(e) of
the SEC Act of 1934).  Based upon this evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that the disclosure controls
and procedures are effective.





Changes
in internal controls over financial reporting





There
have been no changes in PNM’s internal control over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the SEC Act of 1934)
during the quarter ended September 30, 2009 that have materially affected, or
are reasonably likely to materially affect, PNM’s internal control over
financial reporting.





TNMP





Evaluation
of  disclosure controls and procedures





As of the
end of the period covered by this quarterly report, TNMP conducted an evaluation
under the supervision and with the participation of TNMP’s management, including
the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and operation of the disclosure controls and
procedures (as defined in Regulation 13A, Sections 13a-15(e) and 15d-15(e) of
the SEC Act of 1934).  Based upon this evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that the disclosure controls
and procedures are effective.





Changes
in internal controls over financial reporting





There
have been no changes in TNMP’s internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the SEC Act of 1934)
during the quarter ended September 30, 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


·
            Begay
      v. PNM et al


·
            PNM
      – 2007 Electric Rate Case


·
            PNM
      – Emergency FPPAC


·
            TNMP
      – Competitive Transition Charge True-Up
  Proceeding


·
            TNMP
      – Interest Rate Compliance Tariff





101


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
for the year ended December 31, 2008.








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)12.1
            PNMR
            Ratio
      of Earnings to Fixed Charges12.2
            PNM
            Ratio
      of Earnings to Fixed Charges12.3
            TNMP
            Ratio
      of Earnings to Fixed Charges31.1
            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 2002


102





32.2
            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





103


SIGNATURE





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





PNM
      RESOURCES, INC.
              PUBLIC
      SERVICE COMPANY OF NEW MEXICO
              TEXAS-NEW
      MEXICO POWER COMPANY(Registrants)Date:  November
      2, 2009
            /s/
      Thomas G. SategnaThomas
      G. SategnaVice
      President and Corporate Controller(Officer
      duly authorized to sign this
report)








104