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 endedJune 30,
    2008Commission
            
            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)4100
      International PlazaP.O.
      Box 2943Fort
      Worth, Texas  76113(817)
      731-0099





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





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








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








Large
      accelerated filer ü
            Accelerated
      filer
            Non-accelerated
      filer





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





Large
      accelerated filer
            Accelerated
      filer
            Non-accelerated
      filer  ü





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





As of
August 4, 2008, 86,400,262 shares of common stock, no par value per share, of
PNMR were outstanding.





The total
number of shares of common stock of PNM outstanding as of August 4, 2008 was
39,117,799 all held by PNMR (and none held by non-affiliates).





The total
number of shares of common stock of TNMP outstanding as of August 4, 2008 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


PART
I.  FINANCIAL
INFORMATION                                                                                                                                                                                                                                
4


ITEM
1.  FINANCIAL STATEMENTS (Unaudited)


PNM
RESOURCES, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)6


CONDENSED
CONSOLIDATED BALANCE SHEETS7


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS9


CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS’
EQUITY11


CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)12


PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)13


CONDENSED
CONSOLIDATED BALANCE SHEETS14


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS16


CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDER’S
EQUITY18


CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)19


TEXAS-NEW
MEXICO POWER COMPANY AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF EARNINGS20


CONDENSED
CONSOLIDATED BALANCE SHEETS21


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS23


CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDER’S
EQUITY25


CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME26


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS27


ITEM
2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS70


ITEM
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK91


ITEM
4.  CONTROLS AND PROCEDURES                                                                                                                                                                                                               99


PART
II.  OTHER INFORMATION


ITEM
1.  LEGAL PROCEEDINGS100


ITEM
1A.  RISK FACTORS100


ITEM
6.  EXHIBITS102


SIGNATURE                                                                                                                                                                                                                                                                           
103








3


GLOSSARY





Definitions:Afton
            Afton
      Generating StationAG
            New
      Mexico Attorney GeneralALJ
            Administrative
      Law JudgeAltura
            Altura
      Power L.P.APB
            Accounting
      Principles BoardAPS
            Arizona
      Public Service CompanyBART
            Best
      Available Retrofit TechnologyBoard
            Board
      of Directors of PNMRBTU
            British
      Thermal UnitCAIR
            EPA’s
      Clean Air Interstate RuleCal
      PX
            California
      Power ExchangeCal
      ISO
            California
      Independent System OperatorCascade
            Cascade
      Investment, L.L.C.Constellation
            Constellation
      Energy Commodities Group, Inc.Continental
            Continental
      Energy Systems, LLCCRHC
            Cap
      Rock Holding Corporation, a subsidiary of ContinentalCTC
            Competition
      Transition ChargeDecatherm
            Million
      BTUsDelta
            Delta-Person
      Limited PartnershipEaR
            Earnings
      at RiskECJV
            ECJV
      Holdings, LLCEEI
            Edison
      Electric InstituteEIP
            Eastern
      Interconnection ProjectEITF
            Emerging
      Issues Task ForceEnergyCo
            EnergyCo,
      LLC, a limited liability corporation, owned 50% by each of PNMR and
      ECJVEPA
            United
      States Environmental Protection AgencyEPE
            El
      Paso ElectricERCOT
            Electric
      Reliability Council of TexasESPP
            Employee
      Stock Purchase PlanFASB
            Financial
      Accounting Standards BoardFCPSP
            First
      Choice Power Special Purpose, L.P.FERC
            Federal
      Energy Regulatory CommissionFIN
            FASB
      Interpretation NumberFIP
            Federal
      Implementation PlanFSP
            FASB
      Staff PositionFirst
      Choice
            First
      Choice Power, L. P. and SubsidiariesFour
      Corners
            Four
      Corners Power PlantFPPAC
            Fuel
      and Purchased Power Adjustment ClauseGAAP
            Generally
      Accepted Accounting Principles in the United States of
AmericaGWh
            Gigawatt
      hoursISO
            Independent
      System OperatorLIBOR
            London
      Interbank Offered RateLordsburgh
            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
            MegawattNavajo
      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 CircuitNMGC
            New
      Mexico Gas Company, Inc., a subsidiary of ContinentalNMED
            New
      Mexico Environment DepartmentNMPRC
            New
      Mexico Public Regulation CommissionNOPR
            Notice
      of Proposed RulemakingNOX
            Nitrogen
      OxidesNOI
            Notice
      of InquiryNRC
            United
      States Nuclear Regulatory CommissionNSPS
            New
      Source Performance Standards




4


NSR
            New
      Source ReviewOATT
            Open
      Access Transmission TariffO&M
            Operations
      and MaintenancePGAC
            Purchased
      Gas Adjustment ClausePG&E
            Pacific
      Gas and Electric Co.PNM
            Public
      Service Company of New Mexico and SubsidiariesPNM
      Facility
            PNM’s
      $400 Million Unsecured Revolving Credit FacilityPNMR
            PNM
      Resources, Inc. and SubsidiariesPNMR
      Facility
            PNMR’s
      $600 Million Unsecured Revolving Credit FacilityPPA
            Power
      Purchase AgreementPRP
            Potential
      Responsible PartyPSA
            Power
      Supply AgreementPSD
            Prevention
      of Significant DeteriorationPUCT
            Public
      Utility Commission of TexasPVNGS
            Palo
      Verde Nuclear Generating StationPyramid
            Tri-State
      Pyramid Unit 4REC
            Renewable
      Energy CertificatesREP
            Retail
      Electricity ProviderRMC
            Risk
      Management CommitteeRTO
            Regional
      Transmission OrganizationSCE
            Southern
      Cal Edison CompanySDG&E
            Diego
      Gas and Electric CompanySEC
            United
      States Securities and Exchange CommissionSFAS
            FASB
      Statement of Financial Accounting StandardsSJCC
            San
      Juan Coal CompanySJGS
            San
      Juan Generating StationSOAH
            State
      Office of Administrative HearingsSO2
            Sulfur
      DioxideSPS
            Southwestern
      Public Service CompanySRP
            Salt
      River ProjectS&P
            Standard
      and Poors Ratings ServicesTECA
            Texas
      Electric Choice ActTNMP
            Texas-New
      Mexico Power Company and SubsidiariesTNMP
      Facility
            TNMP’s
      $200 Million Unsecured Revolving Credit FacilityTNP
            TNP
      Enterprises, Inc. and SubsidiariesTri-State
            Tri-State
      Generation and Transmission Association, Inc.Twin
      Oaks
            Assets
      of Twin Oaks Power, L.P. and Twin Oaks Power III, L.P.Valencia
            Valencia
      Energy FacilityVaR
            Value
      at RiskAccounting
      Pronouncements (as amended and interpreted):EITF
      02-3
            EITF
      Issue No. 02-3 “Issues
      Involved in Accounting for Derivative Contracts Held for Trading Purposes
      and Contracts Involved in Energy Trading and Risk Management
      Activities”FIN
      46R
            FIN
      46R “Consolidation of
      Variable Interest Entities an Interpretation of ARB No.
    51”FSP
      FIN 39-1
            FASB
      Staff Position FIN 39-1 – “Amendment of FASB
      Interpretation No. 39”SFAS
      5
            SFAS
      No. 5 “Accounting for
      Contingencies”SFAS
      57
            SFAS
      No. 57 “Related Party
      Disclosures”SFAS
      112
            SFAS
      No. 112 “Employers’
      Accounting for Postemployment Benefits – an amendment of FASB Statements
      No. 5 and 43”SFAS
      115
            SFAS
      No. 115 “Accounting for
      Certain Investments in Debt and Equity Securities”SFAS
      128
            SFAS
      No. 128 “Earnings per
      Share”SFAS
      133
            SFAS
      No. 133 “Accounting for
      Derivative Instruments and Hedging Activities”SFAS
      141
            SFAS
      No. 141 “Business
      Combinations”SFAS
      142
            SFAS
      No. 142 “Goodwill and
      Other Intangible Assets”SFAS
      144
            SFAS
      No. 144 “Accounting for
      the Impairment or Disposal of Long-Lived Assets”SFAS
      157
            SFAS
      No. 157 “Fair Value
      Measurements”SFAS
      159
            SFAS
      No. 159 “The Fair Value
      Option for Financial Assets and Financial Liabilities—Including an
      amendment of FASB Statement No. 115”SFAS
      161
            SFAS
      No. 161 “Disclosure
      about Derivative Instruments and Hedging Activities – an Amendment of FASB
      Statement No. 133”SFAS
      162
            SFAS
      No. 162 “The Hierarchy
      of Generally Accepted Accounting
Principles”





5


PART
I. FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS


PNM
RESOURCES, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(LOSS)


(Unaudited)





Three
      Months Ended
            
            Six
      Months EndedJune
      30,
            
            June
      30,2008
            
            2007
            
            2008
            
            2007(In thousands, except per shareamounts)Operating
      Revenues:Electric
            $  580,243
            
            $  505,400
            
            $  944,645
            
            $   942,234Other
            67
            
            169
            
            167
            
            379Total
      operating revenues
            580,310
            
            505,569
            
            944,812
            
            942,613Operating
      Expenses:Cost
      of energy
            398,698
            
            311,465
            
            633,079
            
            528,277Administrative
      and general
            59,392
            
            50,600
            
            106,754
            
            108,927Energy
      production costs
            45,557
            
            51,674
            
            96,761
            
            99,056Impairment
      of goodwill and other intangible assets
            136,179
            
            -
            
            136,179
            
            -Regulatory
      disallowances
            -
            
            -
            
            30,248
            
            -Depreciation
      and amortization
            34,650
            
            34,222
            
            68,686
            
            69,063Transmission
      and distribution costs
            15,110
            
            14,953
            
            28,486
            
            29,608Taxes
      other than income taxes
            13,484
            
            16,759
            
            26,350
            
            33,331Total
      operating expenses
            703,070
            
            479,673
            
            1,126,543
            
            868,262Operating
      income (loss)
            (122,760)
            
            25,896
            
            (181,731)
            
            74,351Other
      Income and Deductions:Interest
      income
            4,412
            
            7,583
            
            9,942
            
            17,375Gains
      (losses) on investments held by NDT
            (677)
            
            2,957
            
            (4,382)
            
            3,001Other
      income
            226
            
            1,817
            
            1,116
            
            3,722Equity
      in net earnings (loss) of EnergyCo
            (2,523)
            
            2,272
            
            (27,606)
            
            1,610Other
      deductions
            (3,199)
            
            (5,506)
            
            (7,081)
            
            (6,482)Net
      other income and deductions
            (1,761)
            
            9,123
            
            (28,011)
            
            19,226Interest
      Charges:Interest
      on long-term debt
            24,197
            
            15,836
            
            43,105
            
            36,899Other
      interest charges
            7,823
            
            11,158
            
            16,750
            
            24,996Total
      interest charges
            32,020
            
            26,994
            
            59,855
            
            61,895Earnings
      (Loss) before Income Taxes
            (156,541)
            
            8,025
            
            (269,597)
            
            31,682Income
      Taxes (Benefit)
            (10,425)
            
            (13,935)
            
            (52,477)
            
            (5,554)Preferred
      Stock Dividend Requirements of Subsidiary
            132
            
            132
            
            264
            
            264Earnings
      (Loss) from Continuing Operations
            (146,248)
            
            21,828
            
            (217,384)
            
            36,972Earnings
      (Loss) from Discontinued Operations, net of IncomeTaxes
      (Benefit) of $1,824, $(1,040), $15,479 and $8,477
            2,762
            
            (1,588)
            
            25,261
            
            12,934Net
      Earnings (Loss)
            $(143,486)
            
            $    20,240
            
            $(192,123)
            
            $    49,906Earnings
      (Loss) from Continuing Operations per Common Share:Basic
            $     (1.79)
            
            $       0.28
            
            $     (2.74)
            
            $       0.48Diluted
            $     (1.79)
            
            $       0.28
            
            $     (2.74)
            
            $       0.47Net
      Earnings (Loss) per Common Share:Basic
            $     (1.76)
            
            $       0.26
            
            $     (2.42)
            
            $       0.65Diluted
            $     (1.76)
            
            $       0.26
            
            $     (2.42)
            
            $       0.64Dividends
      Declared per Common Share
            $    0.125
            
            $     0.230
            
            $    0.355
            
            $       0.46





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)





June
      30,
            
            
            December
      31,2008
            
            
            2007(In
      thousands)ASSETSCurrent
      Assets:Cash
      and cash equivalents
            
            $
            137,877
            
            
            $
            17,763Special
      deposits
            
            
            3,354
            
            
            
            1,717Accounts
      receivable, net of allowance for uncollectible accounts of $7,017 and
      $6,021
            
            
            149,644
            
            
            
            134,325Unbilled
      revenues
            
            
            96,564
            
            
            
            74,896Other
      receivables
            
            
            66,816
            
            
            
            90,002Materials,
      supplies, and fuel stock
            
            
            44,330
            
            
            
            41,312Regulatory
      assets
            
            
            249
            
            
            
            157Derivative
      instruments
            
            
            245,613
            
            
            
            49,257Income
      taxes receivable
            
            
            46,818
            
            
            
            39,189Current
      assets of discontinued operations
            
            
            77,686
            
            
            
            120,061Other
      current assets
            
            
            71,134
            
            
            
            37,198Total
      current assets
            
            
            940,085
            
            
            
            605,877Other
      Property and Investments:Investment
      in PVNGS lessor notes
            
            
            183,884
            
            
            
            192,226Equity
      investment in EnergyCo
            
            
            175,057
            
            
            
            248,094Investments
      held by NDT
            
            
            130,806
            
            
            
            139,642Other
      investments
            
            
            40,348
            
            
            
            47,749Non-utility
      property, net of accumulated depreciation of $1,946 and
    $1,570
            
            
            9,876
            
            
            
            6,968Total
      other property and investments
            
            
            539,971
            
            
            
            634,679Utility
      Plant:Electric
      plant in service
            
            
            4,240,902
            
            
            
            3,920,071Common
      plant in service and plant held for future use
            
            
            141,619
            
            
            
            128,1194,382,521
            
            
            
            4,048,190Less
      accumulated depreciation and amortization
            
            
            1,502,790
            
            
            
            1,464,6252,879,731
            
            
            
            2,583,565Construction
      work in progress
            
            
            164,877
            
            
            
            299,574Nuclear
      fuel, net of accumulated amortization of $15,454 and
    $15,395
            
            
            59,609
            
            
            
            52,246Net
      utility plant
            
            
            3,104,217
            
            
            
            2,935,385Deferred
      Charges and Other Assets:Regulatory
      assets
            
            
            442,756
            
            
            
            481,872Pension
      asset
            
            
            21,965
            
            
            
            17,778Goodwill
            
            
            366,856
            
            
            
            495,664Other
      intangible assets, net of accumulated amortization of $4,017 and
      $3,362
            
            
            67,866
            
            
            
            75,892Derivative
      instruments
            
            
            39,363
            
            
            
            45,694Non-current
      assets of discontinued operations
            
            
            541,428
            
            
            
            526,539Other
      deferred charges
            
            
            62,286
            
            
            
            52,756Total
      deferred charges and other assets
            
            
            1,542,520
            
            
            
            1,696,195$
            6,126,793
            
            
            $
            5,872,136





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)





June
      30,
            
            
            December
      31,2008
            
            
            2007(In
      thousands, except share information)LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Short-term
      debt
            
            $
            426,651
            
            
            $
            665,900Current
      installments of long-term debt
            
            
            470,334
            
            
            
            449,219Accounts
      payable
            
            
            158,850
            
            
            
            148,955Accrued
      interest and taxes
            
            
            50,714
            
            
            
            57,766Regulatory
      liabilities
            
            
            4,885
            
            
            
            -Derivative
      instruments
            
            
            263,238
            
            
            
            53,832Current
      liabilities of discontinued operations
            
            
            42,722
            
            
            
            96,003Other
      current liabilities
            
            
            134,873
            
            
            
            112,394Total
      current liabilities
            
            
            1,552,267
            
            
            
            1,584,069Long-term
      Debt
            
            
            1,517,007
            
            
            
            1,231,859Deferred
      Credits and Other Liabilities:Accumulated
      deferred income taxes
            
            
            560,334
            
            
            
            600,187Accumulated
      deferred investment tax credits
            
            
            25,330
            
            
            
            26,825Regulatory
      liabilities
            
            
            337,471
            
            
            
            332,372Asset
      retirement obligations
            
            
            69,753
            
            
            
            66,466Accrued
      pension liability and postretirement benefit cost
            
            
            57,789
            
            
            
            60,022Derivative
      instruments
            
            
            40,769
            
            
            
            55,206Non-current
      liabilities of discontinued operations
            
            
            89,314
            
            
            
            89,848Other
      deferred credits
            
            
            164,278
            
            
            
            121,342Total
      deferred credits and other liabilities
            
            
            1,345,038
            
            
            
            1,352,268Total
      liabilities
            
            
            4,414,312
            
            
            
            4,168,196Commitments
      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
            
            
            
            11,529Common
      Stockholders’ Equity:Common
      stock outstanding (no par value, 120,000,000 shares authorized:
      issuedand
      outstanding 86,390,701 and 76,814,491 shares)
            
            
            1,286,708
            
            
            
            1,042,974Accumulated
      other comprehensive income (loss), net of income tax
            
            
            (24,587
            )
            
            
            11,208Retained
      earnings
            
            
            438,831
            
            
            
            638,229Total
      common stockholders’ equity
            
            
            1,700,952
            
            
            
            1,692,411$
            6,126,793
            
            
            $
            5,872,136





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)





Six
      Months Ended June 30,2008
            
            
            2007(In
      thousands)Cash
      Flows From Operating Activities:Net
      earnings (loss)
            
            $
            (192,123
            )
            
            $
            49,906Adjustments
      to reconcile net earnings (loss) to net cash flows from operating
      activities:Depreciation
      and amortization
            
            
            79,991
            
            
            
            97,093Amortization
      of prepayments on PVNGS firm-sales contracts
            
            
            (4,084
            )
            
            
            -Deferred
      income tax expense (benefit)
            
            
            (23,498
            )
            
            
            13,062Equity
      in net (earnings) loss of EnergyCo
            
            
            27,606
            
            
            
            (1,610
            )Net
      unrealized losses on derivatives
            
            
            5,174
            
            
            
            7,940Realized
      (gains) losses on investments held by NDT
            
            
            4,382
            
            
            
            (3,001
            )Realized
      loss on Altura contribution
            
            
            -
            
            
            
            3,637Impairment
      of goodwill and other intangible assets
            
            
            136,179
            
            
            
            3,380Amortization
      of fair value of acquired Twin Oaks sales contract
            
            
            -
            
            
            
            (35,073
            )Stock
      based compensation expense
            
            
            2,431
            
            
            
            5,250Regulatory
      disallowances
            
            
            30,248
            
            
            
            -Other,
      net
            
            
            (1,140
            )
            
            
            (1,958
            )Changes
      in certain assets and liabilities:Accounts
      receivable and unbilled revenues
            
            
            (900
            )
            
            
            40,247Materials,
      supplies, fuel stock, and natural gas stored
            
            
            (5,936
            )
            
            
            (5,337
            )Other
      current assets
            
            
            (17,909
            )
            
            
            (908
            )Other
      assets
            
            
            (4,482
            )
            
            
            1,701Accounts
      payable
            
            
            (41,485
            )
            
            
            (42,325
            )Accrued
      interest and taxes
            
            
            (15,559
            )
            
            
            (14,709
            )Other
      current liabilities
            
            
            32,953
            
            
            
            (7,987
            )Other
      liabilities
            
            
            428
            
            
            
            (22,116
            )Net
      cash flows from operating activities
            
            
            12,276
            
            
            
            87,192Cash
      Flows From Investing Activities:Utility
      plant additions
            
            
            (162,005
            )
            
            
            (213,070
            )Proceeds
      from sales of investments held by NDT
            
            
            77,047
            
            
            
            62,697Purchases
      of investments held by NDT
            
            
            (77,650
            )
            
            
            (66,903
            )Proceeds
      from sales of utility plant
            
            
            1,184
            
            
            
            25,041Return
      of principal on PVNGS lessor notes
            
            
            10,986
            
            
            
            11,953Change
      in restricted special deposits
            
            
            3,696
            
            
            
            (12,240
            )Investments
      in EnergyCo
            
            
            -
            
            
            
            (2,540
            )Distributions
      from EnergyCo
            
            
            -
            
            
            
            362,275Other,
      net
            
            
            (3,332
            )
            
            
            5,263Net
      cash flows from investing activities
            
            
            (150,074
            )
            
            
            172,476





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)





Six
      Months Ended June 30,2008
            
            
            2007(In thousands)Cash
      Flows From Financing Activities:Short-term
      borrowings (repayments), net
            
            
            (321,717
            )
            
            
            (204,675
            )Long-term
      borrowings
            
            
            452,750
            
            
            
            20,000Redemption
      of long-term debt
            
            
            (148,935
            )
            
            
            (100,500
            )Issuance
      of common stock
            
            
            249,547
            
            
            
            2,127Proceeds
      from stock option exercise
            
            
            86
            
            
            
            10,773Purchase
      of common stock to satisfy stock awards
            
            
            (1,245
            )
            
            
            (17,693
            )Excess
      tax benefits (tax shortfall) from stock-based payment
      arrangements
            
            
            (513
            )
            
            
            8Dividends
      paid
            
            
            (35,625
            )
            
            
            (34,766
            )Payments
      received on PVNGS firm-sales contracts
            
            
            73,173
            
            
            
            -Other,
      net
            
            
            (9,612
            )
            
            
            (311
            )Net
      cash flows from financing activities
            
            
            257,909
            
            
            
            (325,037
            )Change
      in Cash and Cash Equivalents
            
            
            120,111
            
            
            
            (65,369
            )Cash
      and Cash Equivalents at Beginning of Period
            
            
            17,791
            
            
            
            123,419Cash
      and Cash Equivalents at End of Period
            
            $
            137,902
            
            
            $
            58,050Supplemental
      Cash Flow Disclosures:Interest
      paid, net of capitalized interest
            
            $
            62,639
            
            
            $
            58,323Income
      taxes paid (refunded), net
            
            $
            (4,702
            )
            
            $
            -




Supplemental
      schedule of noncash investing and financing activities:As
      of June 1, 2007, PNMR contributed its ownership of Altura to EnergyCo at a
      fair value of $549.6 million after an adjustment for working capital
      changes. In conjunction with the contribution, PNMR removed Altura’s
      assets and liabilities from its balance sheet as
  follows:Current
      assets
            
            $
            22,529Utility
      plant, net
            
            
            575,906Deferred
      charges
            
            
            46,018Total
      assets contributed
            
            
            644,453Current
      liabilities
            
            
            63,268Deferred
      credits and other liabilities
            
            
            38,095Total
      liabilities contributed
            
            
            101,363Other
      comprehensive income
            
            
            (12,651
            )Total
      liabilities and OCI contributed
            
            
            88,712Net
      contribution to EnergyCo
            
            $
            555,741Utility
      plant purchased through assumption of long-term debt that offsets a
      portion of investment in PVNGS lessor notes and is eliminated in
      consolidation. See Note 2.$
            41,152Activities
      related to the consolidation of Valencia as of May 30, 2008 (seeNote
      16):Utility
      plant additions
            $    87,310Increase in short-term
      borrowings
            $    82,468





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 COMMON STOCKHOLDERS’ EQUITY


(Unaudited)





AccumulatedCommon
      Stock
            
            Other
            
            
            
            Total
      CommonNumber
      of
            
            Aggregate
            
            Comprehensive
            
            Retained
            
            Stockholders’Shares
            
            Value
            
            Income
      (Loss)
            
            Earnings
            
            Equity(Dollars
      in thousands)Balance
      at December 31, 2007
            76,814,491
            
            $1,042,974
            
            $   11,208
            
            $  638,229
            
            $1,692,411Adoption
      of SFAS 157
            -
            
            -
            
            -
            
            10,422
            
            10,422Exercise
      of stock options
            -
            
            (1,130)
            
            -
            
            -
            
            (1,130)Tax
      shortfall from stock-based compensation arrangements
            -
            
            (513)
            
            -
            
            -
            
            (513)Stock
      based compensation expense
            -
            
            2,431
            
            -
            
            -
            
            2,431Sale
      of common stock
            9,531,589
            
            242,427
            
            -
            
            -
            
            242,427Common
      stock issued to ESPP
            44,621
            
            519
            
            -
            
            -
            
            519Net
      earnings (loss)
            -
            
            -
            
            -
            
            (192,123)
            
            (192,123)Total
      other comprehensive income (loss)
            -
            
            -
            
            (35,795)
            
            -
            
            (35,795)Dividends
      declared on common stock
            -
            
            -
            
            -
            
            (17,697)
            
            (17,697)Balance
      at June 30, 2008
            86,390,701
            
            $1,286,708
            
            $
      (24,587)
            
            $  438,831
            
            $1,700,952





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 June 30,
            
            
            Six
      Months Ended June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007(In
      thousands)Net
      Earnings (Loss)
            
            $
            (143,486
            )
            
            $
            20,240
            
            
            $
            (192,123
            )
            
            $
            49,906Other
      Comprehensive Income (Loss):Unrealized Gain (Loss) on
      Investment Securities:Unrealized
      holding gains (losses) arising duringthe
      period, net of income tax (expense) benefitof
      $(1,089), $(2,230), $412, and $(3,486)
            
            
            1,662
            
            
            
            3,403
            
            
            
            (629
            )
            
            
            5,320Reclassification
      adjustment for (gains) included innet
      earnings (loss), net of income tax expenseof
      $824, $787, $1,726, and $1,058
            
            
            (1,257
            )
            
            
            (1,201
            )
            
            
            (2,634
            )
            
            
            (1,614
            )Fair
      Value Adjustment for Designated Cash Flow Hedges:Change
      in fair market value, net of income tax (expense)benefit
      of $14,069, $(1,387), $20,858, and $10,795
            
            
            (20,224
            )
            
            
            1,996
            
            
            
            (30,430
            )
            
            
            (16,578
            )Reclassification
      adjustment for (gains) losses included innet
      earnings (loss), net of income tax expense (benefit)of
      $(848) $288, $1,403, and $(962)
            
            
            1,250
            
            
            
            (454
            )
            
            
            (2,102
            )
            
            
            1,562Total
      Other Comprehensive Income (Loss)
            
            
            (18,569
            )
            
            
            3,744
            
            
            
            (35,795
            )
            
            
            (11,310
            )Comprehensive
      Income (Loss)
            
            $
            (162,055
            )
            
            $
            23,984
            
            
            $
            (227,918
            )
            
            $
            38,596





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 June 30,
            
            Six
      Months Ended June 30,2008
            
            2007
            
            2008
            
            2007(In
      thousands)Electric
      Operating Revenues
            $  386,058
            
            $  300,331
            
            $  638,723
            
            $  540,683Operating
      Expenses:Cost
      of energy
            247,589
            
            185,346
            
            383,284
            
            288,519Administrative
      and general
            31,409
            
            29,125
            
            58,236
            
            60,628Energy
      production costs
            47,974
            
            42,748
            
            101,556
            
            83,135Impairment
      of goodwill
            51,143
            
            -
            
            51,143
            
            -Regulatory
      disallowances
            -
            
            -
            
            30,248
            
            -Depreciation
      and amortization
            20,896
            
            20,729
            
            41,866
            
            41,484Transmission
      and distribution costs
            9,598
            
            10,003
            
            18,505
            
            19,732Taxes
      other than income taxes
            7,086
            
            7,777
            
            14,105
            
            14,415Total
      operating expenses
            415,695
            
            295,728
            
            698,943
            
            507,913Operating
      income (loss)
            (29,637)
            
            4,603
            
            (60,220)
            
            32,770Other
      Income and Deductions:Interest
      income
            4,878
            
            7,192
            
            10,969
            
            14,898Gains
      (losses) on investments held by NDT
            (677)
            
            2,957
            
            (4,382)
            
            3,001Other
      income
            (392)
            
            999
            
            156
            
            2,020Other
      deductions
            (1,116)
            
            (1,883)
            
            (3,430)
            
            (2,480)Net
      other income and deductions
            2,693
            
            9,265
            
            3,313
            
            17,439Interest
      Charges:Interest
      on long-term debt
            14,766
            
            9,058
            
            25,296
            
            18,549Other
      interest charges
            2,857
            
            3,683
            
            6,430
            
            7,338Total
      interest charges
            17,623
            
            12,741
            
            31,726
            
            25,887Earnings
      (Loss) before Income Taxes
            (44,567)
            
            1,127
            
            (88,633)
            
            24,322Income
      Taxes (Benefit)
            2,441
            
            350
            
            (14,648)
            
            9,187Earnings
      (Loss) from Continuing Operations
            (47,008)
            
            777
            
            (73,985)
            
            15,135Earnings
      (Loss) from Discontinued Operations, net of IncomeTaxes
      (Benefit) of $1,824, $(1,040), $15,479 and $8,477
            2,762
            
            (1,588)
            
            25,261
            
            12,934Net
      Earnings (Loss)
            (44,246)
            
            (811)
            
            (48,724)
            
            28,069Preferred
      Stock Dividends Requirements
            132
            
            132
            
            264
            
            264Net
      Earnings (Loss) Available for Common Stock
            $  (44,378)
            
            $       (943)
            
            $  (48,988)
            
            $    27,805





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)





June
      30,
            
            
            December
      31,2008
            
            
            2007(In
      thousands)ASSETSCurrent
      Assets:Cash
      and cash equivalents
            
            $
            44,499
            
            
            $
            4,303Special
      deposits
            
            
            3,034
            
            
            
            1,397Accounts
      receivable, net of allowance for uncollectible accounts of $1,061 and
      $729
            
            
            88,365
            
            
            
            78,094Unbilled
      revenues
            
            
            38,280
            
            
            
            32,039Other
      receivables
            
            
            53,703
            
            
            
            79,842Affiliate
      accounts receivable
            
            
            -
            
            
            
            271Materials,
      supplies, and fuel stock
            
            
            42,925
            
            
            
            39,771Regulatory
      assets
            
            
            249
            
            
            
            157Derivative
      instruments
            
            
            30,653
            
            
            
            14,859Current
      assets of discontinued operations
            
            
            77,686
            
            
            
            120,061Other
      current assets
            
            
            43,169
            
            
            
            28,926Total
      current assets
            
            
            422,563
            
            
            
            399,720Other
      Property and Investments:Investment
      in PVNGS lessor notes
            
            
            217,902
            
            
            
            231,582Investments
      held by NDT
            
            
            130,806
            
            
            
            139,642Other
      investments
            
            
            15,424
            
            
            
            20,733Non-utility
      property
            
            
            976
            
            
            
            976Total
      other property and investments
            
            
            365,108
            
            
            
            392,933Utility
      Plant:Electric
      plant in service
            
            
            3,359,109
            
            
            
            3,055,953Common
      plant in service and plant held for future use
            
            
            17,400
            
            
            
            18,2373,376,509
            
            
            
            3,074,190Less
      accumulated depreciation and amortization
            
            
            1,178,193
            
            
            
            1,157,7752,198,316
            
            
            
            1,916,415Construction
      work in progress
            
            
            131,326
            
            
            
            259,386Nuclear
      fuel, net of accumulated amortization of $15,454 and
    $15,395
            
            
            59,609
            
            
            
            52,246Net
      utility plant
            
            
            2,389,251
            
            
            
            2,228,047Deferred
      Charges and Other Assets:Regulatory
      assets
            
            
            314,438
            
            
            
            348,719Pension
      asset
            
            
            5,777
            
            
            
            2,859Derivative
      instruments
            
            
            6,961
            
            
            
            37,359Goodwill
            
            
            51,632
            
            
            
            102,775Non-current
      assets of discontinued operations
            
            
            541,428
            
            
            
            526,539Other
      deferred charges
            
            
            71,941
            
            
            
            64,449Total
      deferred charges and other assets
            
            
            992,177
            
            
            
            1,082,700$
            4,169,099
            
            
            $
            4,103,400





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)





June
      30,
            
            
            December
      31,2008
            
            
            2007(In
      thousands, except share information)LIABILITIES
      AND STOCKHOLDER’S EQUITYCurrent
      Liabilities:Short-term
      debt
            
            $
            86,651
            
            
            $
            321,000Current
      installments of long-term debt
            
            
            299,991
            
            
            
            299,969Accounts
      payable
            
            
            72,200
            
            
            
            72,864Affiliate
      accounts payable
            
            
            16,202
            
            
            
            19,948Accrued
      interest and taxes
            
            
            36,010
            
            
            
            26,385Regulatory
      liabilities
            
            
            4,885
            
            
            
            -Derivative
      instruments
            
            
            38,727
            
            
            
            17,896Current
      liability of discontinued operations
            
            
            42,722
            
            
            
            96,003Other
      current liabilities
            
            
            89,068
            
            
            
            59,468Total
      current liabilities
            
            
            686,456
            
            
            
            913,533Long-term
      Debt
            
            
            1,055,709
            
            
            
            705,701Deferred
      Credits and Other Liabilities:Accumulated
      deferred income taxes
            
            
            402,650
            
            
            
            409,430Accumulated
      deferred investment tax credits
            
            
            25,234
            
            
            
            26,634Regulatory
      liabilities
            
            
            289,857
            
            
            
            285,782Asset
      retirement obligations
            
            
            68,981
            
            
            
            65,725Accrued
      pension liability and postretirement benefit cost
            
            
            54,037
            
            
            
            56,101Derivative
      instruments
            
            
            10,122
            
            
            
            47,597Non-current
      liabilities of discontinued operations
            
            
            89,314
            
            
            
            89,848Other
      deferred credits
            
            
            138,322
            
            
            
            98,295Total
      deferred credits and liabilities
            
            
            1,078,517
            
            
            
            1,079,412Total
      liabilities
            
            
            2,820,682
            
            
            
            2,698,646Commitments
      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
            
            
            
            11,529Common
      Stockholder’s Equity:Common
      stock outstanding (no par value, 40,000,000 shares authorized:
      issuedand
      outstanding 39,117,799 shares)
            
            
            932,523
            
            
            
            932,523Accumulated
      other comprehensive income (loss), net of income tax
            
            
            (10,191
            )
            
            
            7,580Retained
      earnings
            
            
            414,556
            
            
            
            453,122Total
      common stockholder’s equity
            
            
            1,336,888
            
            
            
            1,393,225$
            4,169,099
            
            
            $
            4,103,400





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)





Six
      Months Ended June 30,2008
            
            
            2007(In
      thousands)Cash
      Flows From Operating Activities:Net
      earnings (loss)
            
            $
            (48,724
            )
            
            $
            28,069Adjustments
      to reconcile net earnings (loss) to net cash flows from operating
      activities:Depreciation
      and amortization
            
            
            49,662
            
            
            
            66,320Amortization
      of prepayments on PVNGS firm-sales contracts
            
            
            (4,084
            )
            
            
            -Deferred
      income tax expense
            
            
            (3,365
            )
            
            
            (138
            )Net
      unrealized (gains) losses on derivatives
            
            
            (8,832
            )
            
            
            10,896Realized
      (gains) losses on investments held by NDT
            
            
            4,382
            
            
            
            (3,001
            )Regulatory
      disallowances
            
            
            30,248
            
            
            
            -Impairment
      of goodwill
            
            
            51,143
            
            
            
            -Other,
      net
            
            
            (368
            )
            
            
            (1,188
            )Changes
      in certain assets and liabilities, net of amounts
acquired:Accounts
      receivable and unbilled revenues
            
            
            20,239
            
            
            
            64,405Materials,
      supplies, fuel stock, and natural gas stored
            
            
            (6,073
            )
            
            
            (5,121
            )Other
      current assets
            
            
            19,823
            
            
            
            12,130Other
      assets
            
            
            (1,208
            )
            
            
            456Accounts
      payable
            
            
            (50,553
            )
            
            
            (59,844
            )Accrued
      interest and taxes
            
            
            9,124
            
            
            
            16,975Other
      current liabilities
            
            
            (6,240
            )
            
            
            (5,076
            )Other
      liabilities
            
            
            (1,252
            )
            
            
            (20,221
            )Net
      cash flows from operating activities
            
            
            53,922
            
            
            
            104,662Cash
      Flows From Investing Activities:Utility
      plant additions
            
            
            (134,187
            )
            
            
            (149,648
            )Proceeds
      from sales of NDT investments
            
            
            77,047
            
            
            
            62,697Purchases
      of NDT investments
            
            
            (77,650
            )
            
            
            (66,903
            )Proceeds
      from sales of utility plant
            
            
            837
            
            
            
            25,041Return
      of principal on PVNGS lessor notes
            
            
            12,645
            
            
            
            11,953Change
      in restricted special deposits
            
            
            3,696
            
            
            
            (12,240
            )Other,
      net
            
            
            1,703
            
            
            
            1,466Net
      cash flows from investing activities
            
            
            (115,909
            )
            
            
            (127,634
            )





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)





Six
      Months Ended June 30,2008
            
            
            2007(In
      thousands)Cash
      Flows From Financing Activities:Short-term
      borrowings (repayments), net
            
            
            (316,817
            )
            
            
            (7,179
            )Long-term
      borrowings
            
            
            350,000
            
            
            
            20,000Payments
      received on PVNGS firm-sales contracts
            
            
            73,173
            
            
            
            -Dividends
      paid
            
            
            (264
            )
            
            
            (264
            )Other,
      net
            
            
            (3,912
            )
            
            
            (41
            )Net
      cash flows from financing activities
            
            
            102,180
            
            
            
            12,516Change
      in Cash and Cash Equivalents
            
            
            40,193
            
            
            
            (10,456
            )Cash
      and Cash Equivalents at Beginning of Period
            
            
            4,331
            
            
            
            11,886Cash
      and Cash Equivalents at End of Period
            
            $
            44,524
            
            
            $
            1,430Supplemental
      Cash Flow Disclosures:Interest
      paid, net of capitalized interest
            
            $
            33,175
            
            
            $
            29,758Income
      taxes paid (refunded), net
            
            $
            (1,855
            )
            
            $
            -




Supplemental
      schedule of noncash investing and financing activities:As
      of January 1, 2007, TNMP transferred its New Mexico operational assets and
      liabilities to PNMR through a redemption of TNMP’s common stock. PNMR
      contemporaneously contributed the TNMP New Mexico operational assets and
      liabilities to PNM.Current
      assets
            
            $
            15,444Other
      property and investments
            
            
            10Utility
      plant, net
            
            
            96,468Goodwill
            
            
            102,775Deferred
      charges
            
            
            1,377Total
      assets transferred from TNMP
            
            
            216,074Current
      liabilities
            
            
            17,313Long-term
      debt
            
            
            1,065Deferred
      credits and other liabilities
            
            
            30,673Total
      liabilities transferred from TNMP
            
            
            49,051Net
      assets transferred – increase in common stockholder’s
    equity
            
            $
            167,023Activities
      related to the consolidation of Valencia as of May 30, 2008
      (see
              Note
      16):Utility
      plant additions
            
            $
            87,310Increase
      in short-term borrowings
            
            $
            82,468





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 COMMON STOCKHOLDER’S EQUITY


(Unaudited)





AccumulatedCommon
      Stock
            
            
            Other
            
            
            
            
            
            Total
      CommonNumber
      of
            
            
            Aggregate
            
            
            Comprehensive
            
            
            Retained
            
            
            Stockholder’sShares
            
            
            Value
            
            
            Income
      (Loss)
            
            
            Earnings
            
            
            Equity(Dollars
      in thousands)Balance
      at December 31, 2007
            
            
            39,117,799
            
            
            $
            932,523
            
            
            $
            7,580
            
            
            $
            453,122
            
            
            $
            1,393,225Adoption
      of SFAS 157
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            10,422
            
            
            
            10,422Net
      earnings (loss)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (48,724
            )
            
            
            (48,724
            )Total
      other comprehensive income (loss)
            
            
            -
            
            
            
            -
            
            
            
            (17,771
            )
            
            
            -
            
            
            
            (17,771
            )Dividends
      on preferred stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (264
            )
            
            
            (264
            )Balance
      at June 30, 2008
            
            
            39,117,799
            
            
            $
            932,523
            
            
            $
            (10,191
            )
            
            $
            414,556
            
            
            $
            1,336,888





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 June 30,
            
            
            Six
      Months Ended June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007(In
      thousands)Net
      Earnings (Loss) Available for Common Stock
            
            $
            (44,378
            )
            
            $
            (943
            )
            
            $
            (48,988
            )
            
            $
            27,805Other
      Comprehensive Income (Loss):Unrealized Gain (Loss) on
      Investment Securities:Unrealized
      holding gains (losses) arising duringthe
      period, net of income tax (expense) benefitof
      $(1,089), $(2,230), $412 and $(3,486)
            
            
            1,662
            
            
            
            3,403
            
            
            
            (629
            )
            
            
            5,320Reclassification
      adjustment for (gains) included innet
      earnings (loss), net of income tax expenseof  $824,
      $787, $1,726 and $1,058
            
            
            (1,257
            )
            
            
            (1,201
            )
            
            
            (2,634
            )
            
            
            (1,614
            )Fair
      Value Adjustment for Designated Cash Flow Hedges:Change
      in fair market value, net of income tax (expense)benefit
      of  $8,434, $(723), $9,134 and $(1,511)
            
            
            (12,870
            )
            
            
            1,103
            
            
            
            (13,937
            )
            
            
            2,305Reclassification
      adjustment for (gains) losses included innet
      earnings (loss), net of income tax expense (benefit)of  $(225),
      $236, $374 and $(599)
            
            
            343
            
            
            
            (361
            )
            
            
            (571
            )
            
            
            913Total
      Other Comprehensive Income (Loss)
            
            
            (12,122
            )
            
            
            2,944
            
            
            
            (17,771
            )
            
            
            6,924Comprehensive
      Income (Loss)
            
            $
            (56,500
            )
            
            $
            2,001
            
            
            $
            (66,759
            )
            
            $
            34,729





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 June 30,
            
            
            Six
      Months Ended June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007(In
      thousands)Electric
      Operating Revenues
            
            $
            47,118
            
            
            $
            43,536
            
            
            $
            89,346
            
            
            $
            84,464Operating
      Expenses:Cost
      of energy
            
            
            7,935
            
            
            
            7,221
            
            
            
            15,747
            
            
            
            14,392Administrative
      and general
            
            
            7,074
            
            
            
            7,361
            
            
            
            13,645
            
            
            
            16,263Impairment
      of goodwill
            
            
            34,456
            
            
            
            -
            
            
            
            34,456
            
            
            
            -Depreciation
      and amortization
            
            
            8,777
            
            
            
            7,041
            
            
            
            17,136
            
            
            
            14,041Transmission
      and distribution costs
            
            
            5,508
            
            
            
            4,945
            
            
            
            9,972
            
            
            
            9,868Taxes,
      other than income taxes
            
            
            4,931
            
            
            
            5,413
            
            
            
            9,370
            
            
            
            10,238Total
      operating expenses
            
            
            68,681
            
            
            
            31,981
            
            
            
            100,326
            
            
            
            64,802Operating
      income (loss)
            
            
            (21,563
            )
            
            
            11,555
            
            
            
            (10,980
            )
            
            
            19,662Other
      Income and Deductions:Interest
      income
            
            
            4
            
            
            
            776
            
            
            
            5
            
            
            
            864Other
      income
            
            
            606
            
            
            
            770
            
            
            
            1,020
            
            
            
            1,046Other
      deductions
            
            
            (10
            )
            
            
            (46
            )
            
            
            (28
            )
            
            
            (73
            )Net
      other income and deductions
            
            
            600
            
            
            
            1,500
            
            
            
            997
            
            
            
            1,837Interest
      Charges:Interest
      on long-term debt
            
            
            2,801
            
            
            
            6,153
            
            
            
            7,209
            
            
            
            12,585Other
      interest charges
            
            
            1,564
            
            
            
            718
            
            
            
            2,145
            
            
            
            1,364Net
      interest charges
            
            
            4,365
            
            
            
            6,871
            
            
            
            9,354
            
            
            
            13,949Earnings
      (Loss) Before Income Taxes
            
            
            (25,328
            )
            
            
            6,184
            
            
            
            (19,337
            )
            
            
            7,550Income
      Taxes
            
            
            3,425
            
            
            
            1,950
            
            
            
            5,686
            
            
            
            2,378Net
      Earnings (Loss)
            
            $
            (28,753
            )
            
            $
            4,234
            
            
            $
            (25,023
            )
            
            $
            5,172





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)





June
      30,
            
            
            December
      31,2008
            
            
            2007(In
      thousands)ASSETSCurrent
      Assets:Cash
      and cash equivalents
            
            $
            73
            
            
            $
            187Special
      deposits
            
            
            50
            
            
            
            50Accounts
      receivable, net of allowance for uncollectible accounts of $94 and
      $0
            
            
            12,076
            
            
            
            8,789Unbilled
      revenues
            
            
            5,321
            
            
            
            4,392Other
      receivables
            
            
            8,386
            
            
            
            1,063Affiliate
      accounts receivable
            
            
            1,017
            
            
            
            8,005Materials
      and supplies
            
            
            1,419
            
            
            
            1,425Income
      taxes receivable
            
            
            -
            
            
            
            881Other
      current assets
            
            
            1,820
            
            
            
            501Total
      current assets
            
            
            30,162
            
            
            
            25,293Other
      Property and Investments:Other
      investments
            
            
            554
            
            
            
            554Non-utility
      property
            
            
            2,111
            
            
            
            2,111Total
      other property and investments
            
            
            2,665
            
            
            
            2,665Utility
      Plant:Electric
      plant in service
            
            
            799,030
            
            
            
            781,355Common
      plant in service and plant held for future use
            
            
            488
            
            
            
            488799,518
            
            
            
            781,843Less
      accumulated depreciation and amortization
            
            
            283,243
            
            
            
            274,128516,275
            
            
            
            507,715Construction
      work in progress
            
            
            23,985
            
            
            
            22,493Net
      utility plant
            
            
            540,260
            
            
            
            530,208Deferred
      Charges and Other Assets:Regulatory
      assets
            
            
            128,318
            
            
            
            133,154Goodwill
            
            
            226,665
            
            
            
            261,121Pension
      asset
            
            
            16,188
            
            
            
            14,919Other
      deferred charges
            
            
            5,621
            
            
            
            5,432Total
      deferred charges and other assets
            
            
            376,792
            
            
            
            414,626$
            949,879
            
            
            $
            972,792





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)





June
      30,
            
            
            December
      31,2008
            
            
            2007(In
      thousands, except share information)LIABILITIES
      AND STOCKHOLDER’S EQUITYCurrent
      Liabilities:Short-term
      debt
            
            $
            150,000
            
            
            $
            -Short-term
      debt – affiliate
            
            
            2,100
            
            
            
            3,404Current
      installments of long-term debt
            
            
            167,650
            
            
            
            148,882Accounts
      payable
            
            
            6,179
            
            
            
            5,666Affiliate
      accounts payable
            
            
            3,525
            
            
            
            3,456Accrued
      interest and taxes
            
            
            35,871
            
            
            
            35,204Other
      current liabilities
            
            
            3,553
            
            
            
            1,785Total
      current liabilities
            
            
            368,878
            
            
            
            198,397Long-term
      Debt
            
            
            -
            
            
            
            167,609Deferred
      Credits and Other Liabilities:Accumulated
      deferred income taxes
            
            
            117,658
            
            
            
            120,274Accumulated
      deferred investment tax credits
            
            
            96
            
            
            
            191Regulatory
      liabilities
            
            
            47,614
            
            
            
            46,590Asset
      retirement obligations
            
            
            690
            
            
            
            662Accrued
      pension liability and postretirement benefit cost
            
            
            3,752
            
            
            
            3,922Other
      deferred credits
            
            
            2,766
            
            
            
            1,699Total
      deferred credits and other liabilities
            
            
            172,576
            
            
            
            173,338Total
      liabilities
            
            
            541,454
            
            
            
            539,344Commitments
      and Contingencies (See Note 9)Common
      Stockholder’s Equity:Common
      stock outstanding ($10 par value, 12,000,000 shares
      authorized:issued
      and outstanding 6,358 shares)
            
            
            64
            
            
            
            64Paid-in-capital
            
            
            427,320
            
            
            
            427,320Accumulated
      other comprehensive income, net of income tax
            
            
            823
            
            
            
            823Retained
      earnings (deficit)
            
            
            (19,782
            )
            
            
            5,241Total
      common stockholder’s equity
            
            
            408,425
            
            
            
            433,448$
            949,879
            
            
            $
            972,792





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)





Six
      Months Ended June 30,2008
            
            
            2007(In
      thousands)Cash
      Flows From Operating Activities:Net
      earnings (loss)
            
            $
            (25,023
            )
            
            $
            5,172Adjustments
      to reconcile net earnings (loss) tonet
      cash flows from operating activities:Depreciation
      and amortization
            
            
            19,072
            
            
            
            15,724Impairment
      of goodwill
            
            
            34,456
            
            
            
            -Deferred
      income tax expense (benefit)
            
            
            (2,712
            )
            
            
            (2,205
            )Other,
      net
            
            
            (1,254
            )
            
            
            (693
            )Changes
      in certain assets and liabilities:Accounts
      receivable and unbilled revenues
            
            
            (4,310
            )
            
            
            (8,686
            )Materials
      and supplies
            
            
            5
            
            
            
            (292
            )Other
      current assets
            
            
            59
            
            
            
            (549
            )Other
      assets
            
            
            (668
            )
            
            
            (315
            )Accounts
      payable
            
            
            514
            
            
            
            (5,508
            )Accrued
      interest and taxes
            
            
            1,614
            
            
            
            (2,422
            )Other
      current liabilities
            
            
            1,456
            
            
            
            (12,895
            )Other
      liabilities
            
            
            305
            
            
            
            (539
            )Net
      cash flows from operating activities
            
            
            23,514
            
            
            
            (13,208
            )Cash
      Flows From Investing Activities -Utility
      plant additions
            
            
            (22,464
            )
            
            
            (17,249
            )





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)





Six
      Months Ended June 30,2008
            
            
            2007(In
      thousands)Cash
      Flow From Financing Activities:Short-term
      borrowings
            
            
            150,000
            
            
            
            -Short-term
      borrowings – affiliate
            
            
            (1,304
            )
            
            
            27,200Redemption
      of long-term debt
            
            
            (148,935
            )
            
            
            (100,500
            )Equity
      contribution by parent
            
            
            -
            
            
            
            101,249Other,
      net
            
            
            (925
            )
            
            
            -Net
      cash flows from financing activities
            
            
            (1,164
            )
            
            
            27,949Change
      in Cash and Cash Equivalents
            
            
            (114
            )
            
            
            (2,508
            )Cash
      and Cash Equivalents at Beginning of Period
            
            
            187
            
            
            
            2,542Cash
      and Cash Equivalents at End of Period
            
            $
            73
            
            
            $
            34Supplemental
      Cash Flow Disclosures:Interest
      paid, net of capitalized interest
            
            $
            10,112
            
            
            $
            14,127Income
      taxes paid (refunded), net
            
            $
            (858
            )
            
            $
            -




Supplemental
      schedule of noncash investing and financing activities:As
      of January 1, 2007, TNMP transferred its New Mexico operational assets and
      liabilities to PNMR through a redemption of TNMP’s common stock. PNMR
      contemporaneously contributed the TNMP New Mexico operational assets and
      liabilities to PNM.Current
      assets
            
            $
            15,444Other
      property and investments
            
            
            10Utility
      plant, net
            
            
            96,468Goodwill
            
            
            102,775Deferred
      charges
            
            
            1,377Total
      assets transferred to PNM
            
            
            216,074Current
      liabilities
            
            
            17,313Long-term
      debt
            
            
            1,065Deferred
      credits and other liabilities
            
            
            30,673Total
      liabilities transferred to PNM
            
            
            49,051Net
      assets transferred – common stock redeemed
            
            $
            167,023





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
            
            
            
            
            
            
            CommonNumber
      of
            
            
            Aggregate
            
            
            Paid-in
            
            
            Comprehensive
            
            
            Retained
            
            
            Stockholder’sShares
            
            
            Value
            
            
            Capital
            
            
            Income
            
            
            Earnings
      (Deficit)
            
            
            Equity(Dollars
      in thousands)Balance
      at December 31, 2007
            
            
            6,358
            
            
            $
            64
            
            
            $
            427,320
            
            
            $
            823
            
            
            $
            5,241
            
            
            $
            433,448Net
      earnings (loss)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (25,023
            )
            
            
            (25,023
            )Balance
      at June 30, 2008
            
            
            6,358
            
            
            $
            64
            
            
            $
            427,320
            
            
            $
            823
            
            
            $
            (19,782
            )
            
            $
            408,425





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 June 30,
            
            
            Six
      Months Ended June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007(In
      thousands)Net
      Earnings (Loss) and Comprehensive Income
            
            $
            (28,753
            )
            
            $
            4,234
            
            
            $
            (25,023
            )
            
            $
            5,172





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








26


PNM
RESOURCES, INC. AND SUBSIDIARIES


PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES


TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES





NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS


(Unaudited)





(1)
            Significant
      Accounting Policies and Responsibility for Financial
      Statements





Financial
Statement Preparation





In the
opinion of management, the accompanying unaudited interim Condensed Consolidated
Financial Statements reflect all normal and recurring accruals and adjustments
that are necessary to present fairly the consolidated financial position at June
30, 2008 and December 31, 2007, the consolidated results of operations and
comprehensive income for the three months and six months ended June 30, 2008 and
2007 and the consolidated cash flows for the six months ended June 30, 2008 and
2007.  The preparation of financial statements in conformity with GAAP
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
2007 Annual Reports on Form 10-K.





Principles
of Consolidation





The
Condensed Consolidated Financial Statements of each of PNMR, PNM, and TNMP
include their accounts and those of subsidiaries in which that entity owns a
majority voting interest.  PNMR’s primary subsidiaries are PNM, TNMP,
First Choice and, through May 31, 2007, Altura.  PNM consolidates the
PVNGS Capital Trust and Valencia.  See Note 16.  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 transmission and distribution services, lease payments,
dividends paid on common stock, and interest paid by PVNGS Capital Trust to
PNM.  All intercompany transactions and balances have been
eliminated.  See Note 12.





Presentation





The Notes
to the 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 2007 Condensed Consolidated Financial
Statements and Notes thereto have been reclassified to conform to the 2008
financial statement presentation.





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 $0.23 per share in July 2007.  On August 11,
2008, the Board declared a dividend of $0.125 per share.  The amounts
declared in July 2007 and August 2008 are reflected as being in the second
quarter and included in “Dividends Declared per Common Share” on the PNMR
Condensed Consolidated Statements of Earnings (Loss).  On August 12,
2008, PNM declared a dividend payable to PNMR amounting to $40
million.





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


(2)
            Acquisitions
      and Dispositions





PNM
Gas Sale; Termination of Cap Rock Acquisition





On
January 12, 2008, PNM reached a definitive agreement to sell its natural gas
operations, which comprise the PNM Gas segment, to NMGC, a subsidiary of
Continental, for $620 million in cash. 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.  The
termination agreement provides that Continental will pay PNMR $15.0 million, but
only upon the closing of the PNM Gas transaction.  PNMR expects to use
the proceeds from the sale of PNM Gas to retire debt, fund future electric
capital expenditures and for other corporate purposes. The agreement for the
sale of PNM Gas contains a number of customary representations and warranties
and indemnification provisions as well as closing conditions, including
regulatory and third party approvals.  The parties may terminate the
agreement under certain circumstances and may be obligated to pay a termination
fee in connection therewith.  The sale of the natural gas operations
is subject to, among other conditions, receiving approval from the
NMPRC.  On June 13, 2008, PNMR received notice of early termination of
the waiting period required under the Hart-Scott-Rodino antitrust
rules.  Notification of early termination is considered antitrust
clearance of the transaction.  The Company filed testimony with the
NMPRC in March 2008 for approvals required for the sale of its gas utility
operations and for transition services to be provided to
NMGC.  Hearings have been rescheduled to begin September 12,
2008.  Pending all approvals, the transaction is expected to close by
the end of 2008. There are no material relationships between the PNMR and
Continental parties other than in respect of the transactions described herein.
See Note 14 for financial information concerning PNM Gas, which is classified as
discontinued operations in the accompanying financial statements.





Twin
Oaks Acquisition and Disposition





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





As part
of the acquisition of Twin Oaks, PNMR determined the fair value of two
contractual obligations to sell power.  The first contract obligated
Altura to sell power through September 2007 at which time the second contract
began and extends for three years.  In comparing the pricing terms of
the contractual obligations against the forward price of electricity in the
relevant market at the acquisition date, PNMR concluded that the contracts were
below market.  In accordance with SFAS 141, the contracts were
recorded at fair value to be amortized as an increase in operating revenue over
the contract periods.  The amortization matches the difference between
the forward price curve and the contractual obligations for each month in
accordance with the contract as of the acquisition date.  For the
first contract, a liability of $147.3 million was recorded and $29.6 million was
recorded for the second contract.  During the three months and six
months ended June 30, 2007, PNMR amortized $20.0 million and $35.0 million for
the first contract and nothing for the second contract.





(3)
            Segment
      Information





The
following segment presentation is based on the methodology that management uses
for making operating decisions and assessing performance of its various business
activities.  A reconciliation of the segment presentation to the GAAP
financial statements is provided.





Effective
as of December 31, 2007, management changed the methodology it uses to operate
and assess the business activities of the Company as described in the 2007
Annual Reports on Form 10-K.  The segment information presented below
includes recasting prior period information to be consistent with the new
methodology.


28


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


PNM
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 includes
the generation and sale of electricity into the wholesale
market.  This includes optimization of PNM’s jurisdictional assets as
well as the capacity of its generating plants excluded from retail
rates.   Although the FERC has jurisdiction over the wholesale
rates, they are not subject to traditional rate of return
regulation.  PNM Electric also includes the purchase power contract
with Valencia, which is a variable interest entity and is consolidated by
PNM.  See Note 16.





TNMP
Electric





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





PNM
Gas





PNM Gas
distributes natural gas to most of the major communities in New Mexico and is
subject to traditional rate regulation by the NMPRC.  The customer
base of PNM Gas includes both sales-service customers and transportation-service
customers.  PNM Gas purchases natural gas in the open market and
resells it at cost to its sales-service customers.  As a result,
increases or decreases in gas revenues resulting from gas price fluctuations do
not impact gross margin or earnings.  As described in Note 2, PNM
entered into an agreement to sell its gas operations on January 12,
2008.  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.





Altura





The
Altura segment includes the results of Twin Oaks from the date of its
acquisition by PNMR on April 18, 2006 until its contribution to EnergyCo as of
June 1, 2007. See Note 2 and Note 11.





First
Choice





First
Choice is a certified retail electric provider operating in Texas, which allows
it to provide electricity to residential, small and large commercial, industrial
and institutional customers.  Although First Choice is regulated in
certain respects by the PUCT, it is not subject to traditional rate of return
regulation.  First Choice has also entered into speculative trading
transactions in order to attempt to take advantage of market
opportunities.  As explained in Note 4, First Choice has closed out
its speculative positions and has ended any further speculative trading due to
market volatility and the deterioration of the forward basis
market.  On August 11, 2008, PNMR announced that it has decided to
pursue strategic alternatives for First Choice.





EnergyCo





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


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)





Corporate
and Other





PNMR
Services Company is included in the Corporate and Other
segment.  Corporate and Other also reflects activities of the PNMR
holding company, including earnings (loss) of EnergyCo and interest expense on
PNMR short-term and long-term debt.





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 reporting segment.  TNMP also operates in only one
reportable segment.  Therefore, tabular segment information is not
presented for PNM and TNMP.


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)


PNMR
SEGMENT INFORMATION





PNM
            
            
            TNMP
            
            
            First
            
            
            Corporate2008
            
            Electric
            
            
            Electric
            
            
            Choice
            
            
            and
      Other
            
            
            Consolidated(In
      thousands)Three
      Months Ended June 30, 2008:Operating
      revenues
            
            $
            386,034
            
            
            $
            32,209
            
            
            $
            162,224
            
            
            $
            (157
            )
            
            $
            580,310Intersegment
      revenues
            
            
            24
            
            
            
            14,909
            
            
            
            -
            
            
            
            (14,933
            )
            
            
            -Total
      revenues
            
            
            386,058
            
            
            
            47,118
            
            
            
            162,224
            
            
            
            (15,090
            )
            
            
            580,310Cost
      of energy
            
            
            247,589
            
            
            
            7,935
            
            
            
            158,082
            
            
            
            (14,908
            )
            
            
            398,698Gross
      margin
            
            
            138,469
            
            
            
            39,183
            
            
            
            4,142
            
            
            
            (182
            )
            
            
            181,612Operating
      expenses
            
            
            147,210
            
            
            
            51,969
            
            
            
            72,803
            
            
            
            (2,260
            )
            
            
            269,722Depreciation
      and amortization
            
            
            20,896
            
            
            
            8,777
            
            
            
            579
            
            
            
            4,398
            
            
            
            34,650Operating
      income (loss)
            
            
            (29,637
            )
            
            
            (21,563
            )
            
            
            (69,240
            )
            
            
            (2,320
            )
            
            
            (122,760
            )Interest
      income
            
            
            4,878
            
            
            
            4
            
            
            
            393
            
            
            
            (863
            )
            
            
            4,412Equity
      in net earnings (loss) of EnergyCo
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,523
            )
            
            
            (2,523
            )Other
      income (deductions)
            
            
            (2,185
            )
            
            
            596
            
            
            
            (7
            )
            
            
            (2,054
            )
            
            
            (3,650
            )Net
      interest charges
            
            
            (17,623
            )
            
            
            (4,365
            )
            
            
            (320
            )
            
            
            (9,712
            )
            
            
            (32,020
            )Segment
      earnings (loss) before income taxes
            
            
            (44,567
            )
            
            
            (25,328
            )
            
            
            (69,174
            )
            
            
            (17,472
            )
            
            
            (156,541
            )Income
      taxes (benefit)
            
            
            2,441
            
            
            
            3,425
            
            
            
            (8,755
            )
            
            
            (7,536
            )
            
            
            (10,425
            )Preferred
      stock dividend requirements
            
            
            132
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            132Segment
      net earnings (loss) from continuing operations
            
            $
            (47,140
            )
            
            $
            (28,753
            )
            
            $
            (60,419
            )
            
            $
            (9,936
            )
            
            $
            (146,248
            )Six
      Months Ended June 30, 2008:Operating
      revenues
            
            $
            638,673
            
            
            $
            60,027
            
            
            $
            246,393
            
            
            $
            (281
            )
            
            $
            944,812Intersegment
      revenues
            
            
            50
            
            
            
            29,319
            
            
            
            -
            
            
            
            (29,369
            )
            
            
            -Total
      revenues
            
            
            638,723
            
            
            
            89,346
            
            
            
            246,393
            
            
            
            (29,650
            )
            
            
            944,812Cost
      of energy
            
            
            383,284
            
            
            
            15,747
            
            
            
            263,351
            
            
            
            (29,303
            )
            
            
            633,079Gross
      margin
            
            
            255,439
            
            
            
            73,599
            
            
            
            (16,958
            )
            
            
            (347
            )
            
            
            311,733Operating
      expenses
            
            
            273,793
            
            
            
            67,443
            
            
            
            88,258
            
            
            
            (4,716
            )
            
            
            424,778Depreciation
      and amortization
            
            
            41,866
            
            
            
            17,136
            
            
            
            1,049
            
            
            
            8,635
            
            
            
            68,686Operating
      income (loss)
            
            
            (60,220
            )
            
            
            (10,980
            )
            
            
            (106,265
            )
            
            
            (4,266
            )
            
            
            (181,731
            )Interest
      income
            
            
            10,969
            
            
            
            5
            
            
            
            870
            
            
            
            (1,902
            )
            
            
            9,942Equity
      in net earnings (loss) of EnergyCo
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (27,606
            )
            
            
            (27,606
            )Other
      income (deductions)
            
            
            (7,656
            )
            
            
            992
            
            
            
            (72
            )
            
            
            (3,611
            )
            
            
            (10,347
            )Net
      interest charges
            
            
            (31,726
            )
            
            
            (9,354
            )
            
            
            (614
            )
            
            
            (18,161
            )
            
            
            (59,855
            )Segment
      earnings (loss) before income taxes
            
            
            (88,633
            )
            
            
            (19,337
            )
            
            
            (106,081
            )
            
            
            (55,546
            )
            
            
            (269,597
            )Income
      taxes (benefit)
            
            
            (14,648
            )
            
            
            5,686
            
            
            
            (21,597
            )
            
            
            (21,918
            )
            
            
            (52,477
            )Preferred
      stock dividend requirements
            
            
            264
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            264Segment
      net earnings (loss) from continuing operations
            
            $
            (74,249
            )
            
            $
            (25,023
            )
            
            $
            (84,484
            )
            
            $
            (33,628
            )
            
            $
            (217,384
            )At
      June 30, 2008:Total
      assets*
            
            $
            3,549,985
            
            
            $
            949,879
            
            
            $
            544,531
            
            
            $
            463,284
            
            
            $
            5,507,679Goodwill
            
            $
            51,632
            
            
            $
            226,665
            
            
            $
            88,559
            
            
            $
            -
            
            
            $
            366,856





*  Excludes
total assets of PNM Gas discontinued operations of $619,114.




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)
 PNMR SEGMENT INFORMATION





2007
            
            PNM
            
            
            TNMP
            
            
            
            
            
            First
            
            
            CorporateElectric
            
            
            Electric
            
            
            Altura
            
            
            Choice
            
            
            and
      Other
            
            
            ConsolidatedThree Months Ended
      June 30, 2007
            
            
            
            
            
            
            
            (In
      thousands)Operating
      revenues
            
            $
            300,331
            
            
            $
            26,480
            
            
            $
            28,592
            
            
            $
            150,002
            
            
            $
            164
            
            
            $
            505,569Intersegment
      revenues
            
            
            -
            
            
            
            17,056
            
            
            
            -
            
            
            
            31
            
            
            
            (17,087
            )
            
            
            -Total
      revenues
            
            
            300,331
            
            
            
            43,536
            
            
            
            28,592
            
            
            
            150,033
            
            
            
            (16,923
            )
            
            
            505,569Cost
      of energy
            
            
            185,346
            
            
            
            7,221
            
            
            
            9,897
            
            
            
            125,863
            
            
            
            (16,862
            )
            
            
            311,465Gross
      margin
            
            
            114,985
            
            
            
            36,315
            
            
            
            18,695
            
            
            
            24,170
            
            
            
            (61
            )
            
            
            194,104Operating
      expenses
            
            
            89,653
            
            
            
            17,719
            
            
            
            5,066
            
            
            
            12,961
            
            
            
            8,587
            
            
            
            133,986Depreciation
      and amortization
            
            
            20,729
            
            
            
            7,041
            
            
            
            3,074
            
            
            
            470
            
            
            
            2,908
            
            
            
            34,222Operating
      income (loss)
            
            
            4,603
            
            
            
            11,555
            
            
            
            10,555
            
            
            
            10,739
            
            
            
            (11,556
            )
            
            
            25,896Interest
      income
            
            
            7,192
            
            
            
            776
            
            
            
            28
            
            
            
            534
            
            
            
            (947
            )
            
            
            7,583Equity
      in net earnings of EnergyCo
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,272
            
            
            
            2,272Other
      income (deductions)
            
            
            2,073
            
            
            
            724
            
            
            
            1
            
            
            
            8
            
            
            
            (3,538
            )
            
            
            (732
            )Net
      interest charges
            
            
            (12,741
            )
            
            
            (6,871
            )
            
            
            (3,066
            )
            
            
            (1,061
            )
            
            
            (3,255
            )
            
            
            (26,994
            )Segment
      earnings (loss) before income taxes
            
            
            1,127
            
            
            
            6,184
            
            
            
            7,518
            
            
            
            10,220
            
            
            
            (17,024
            )
            
            
            8,025Income
      taxes (benefit)
            
            
            350
            
            
            
            1,950
            
            
            
            2,976
            
            
            
            3,854
            
            
            
            (23,065
            )
            
            
            (13,935
            )Preferred
      stock dividend requirements
            
            
            132
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            132Segment
      earnings from continuing operations
            
            $
            645
            
            
            $
            4,234
            
            
            $
            4,542
            
            
            $
            6,366
            
            
            $
            6,041
            
            
            $
            21,828Six Months Ended June
      30, 2007Operating
      revenues
            
            $
            540,683
            
            
            $
            50,641
            
            
            $
            65,395
            
            
            $
            285,520
            
            
            $
            374
            
            
            $
            942,613Intersegment
      revenues
            
            
            -
            
            
            
            33,823
            
            
            
            -
            
            
            
            78
            
            
            
            (33,901
            )
            
            
            -Total
      revenues
            
            
            540,683
            
            
            
            84,464
            
            
            
            65,395
            
            
            
            285,598
            
            
            
            (33,527
            )
            
            
            942,613Cost
      of energy
            
            
            288,519
            
            
            
            14,392
            
            
            
            22,063
            
            
            
            236,679
            
            
            
            (33,376
            )
            
            
            528,277Gross
      margin
            
            
            252,164
            
            
            
            70,072
            
            
            
            43,332
            
            
            
            48,919
            
            
            
            (151
            )
            
            
            414,336Operating
      expenses
            
            
            177,910
            
            
            
            36,369
            
            
            
            17,326
            
            
            
            28,118
            
            
            
            11,199
            
            
            
            270,922Depreciation
      and amortization
            
            
            41,484
            
            
            
            14,041
            
            
            
            7,684
            
            
            
            941
            
            
            
            4,913
            
            
            
            69,063Operating
      income (loss)
            
            
            32,770
            
            
            
            19,662
            
            
            
            18,322
            
            
            
            19,860
            
            
            
            (16,263
            )
            
            
            74,351Interest
      income
            
            
            14,898
            
            
            
            864
            
            
            
            146
            
            
            
            1,017
            
            
            
            450
            
            
            
            17,375Equity
      in net earnings of EnergyCo
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,610
            
            
            
            1,610Other
      income (deductions)
            
            
            2,541
            
            
            
            973
            
            
            
            -
            
            
            
            (34
            )
            
            
            (3,239
            )
            
            
            241Net
      interest charges
            
            
            (25,887
            )
            
            
            (13,949
            )
            
            
            (8,564
            )
            
            
            (1,176
            )
            
            
            (12,319
            )
            
            
            (61,895
            )Segment
      earnings (loss) before income taxes
            
            
            24,322
            
            
            
            7,550
            
            
            
            9,904
            
            
            
            19,667
            
            
            
            (29,761
            )
            
            
            31,682Income
      taxes (benefit)
            
            
            9,187
            
            
            
            2,378
            
            
            
            3,921
            
            
            
            7,419
            
            
            
            (28,459
            )
            
            
            (5,554
            )Preferred
      stock dividend requirements
            
            
            264
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            264Segment
      earnings (loss) from continuing operations
            
            $
            14,871
            
            
            $
            5,172
            
            
            $
            5,983
            
            
            $
            12,248
            
            
            $
            (1,302
            )
            
            $
            36,972At
      June 30, 2007:Total
      Assets*
            
            $
            3,427,895
            
            
            $
            1,002,001
            
            
            $
            -
            
            
            $
            409,602
            
            
            $
            363,288
            
            
            $
            5,202,786Goodwill
            
            $
            102,601
            
            
            $
            260,144
            
            
            $
            -
            
            
            $
            131,768
            
            
            $
            -
            
            
            $
            494,513





*  Excludes
total assets of PNM Gas discontinued operations of $590,167.




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)




(4)
            Energy
      Related Derivative Contracts and Fair Value
  Disclosures





Energy
Related Derivative Contracts





Overview





Under
derivative accounting and related rules for energy contracts, the Company
accounts for its various derivative instruments for the purchase and sale of
energy based on the Company’s intent.   Energy contracts that do
not qualify for the normal sales and purchases exception are recorded at fair
value.   Note 8 of Notes to Consolidated Financial Statements in
the 2007 Annual Reports on Form 10-K contains information regarding energy
related derivative contracts.  See Note 7 for additional information
regarding interest rate swaps, which are fair value hedges.





For
derivative transactions meeting the definition of a cash flow or fair value
hedge, the Company documents the relationships between the hedging instruments
and the items being hedged.  This documentation includes the strategy
that supports executing the specific transaction and the methods utilized to
assess the effectiveness of the hedges.  Changes in the fair value of
contracts qualifying for cash flow hedge accounting are included in accumulated
other comprehensive income to the extent effective.  Ineffectiveness
gains and losses were immaterial for the three months and six months ended June
30, 2008 and 2007.  The amounts shown as current assets and current
liabilities relate to contracts that will be settled in the next twelve
months.  Gains or losses related to cash flow hedge instruments are
reclassified from accumulated other comprehensive income when the hedged
transaction settles and impacts earnings.  Based on market prices at
June 30, 2008, after-tax gains of less than $0.1 million for PNMR and
losses of $8.3 million for PNM would be reclassified from other comprehensive
income 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 June 30, 2008, the maximum length of time over which
the Company is hedging its exposure to the variability in future cash flows is
through December 31, 2010.





The
contracts recorded at fair value that do not qualify or are not designated for
hedge accounting are classified as either trading transactions or economic
hedges.  Trading transactions are defined as derivative instruments
that are either speculative and expose the Company to market risk or
transactions that lock in margin with no forward market risk and are not
economic hedges.  Changes in the fair value of trading transactions
are reflected on a net basis in operating revenues.  Economic hedges
are defined as derivative instruments, including long-term power agreements,
used to hedge generation assets, purchased power 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.





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.  Generally, market
data to value these instruments is available for up to five years for gas
swaps and electricity contracts and up to 18 months for options. 
The remaining periods are referred to as the illiquid period and are
valued using internally developed pricing data.  The Company regularly
assesses the validity and availability of pricing data for the illiquid period
of its derivative transactions.  Although management uses its best
judgment in estimating the fair value of these instruments, there are inherent
limitations in any estimation technique.





Effective
January 1, 2008, the Company adopted SFAS 157, SFAS 159, and FSP FIN 39-1.
SFAS 157 defines fair value, establishes a framework for measuring fair value
under GAAP, and enhances disclosures about fair value measurements. Fair value
is defined under SFAS 157 as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date.  FSP 157-2 delayed the
effective date of SFAS 157 for certain nonfinancial assets and nonfinancial
liabilities measured on a nonrecurring basis, primarily




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)
 goodwill
and other intangible assets, and the Company has not elected to early adopt SFAS
157 for these items.  SFAS 159 allows an entity the irrevocable option
to elect fair value for the initial and subsequent measurement for certain
financial assets and liabilities on a contract-by-contract basis. FSP FIN 39-1
permits a reporting entity to offset fair value amounts recognized for
derivative instruments executed with the same counterparty under a master
netting arrangement and to offset fair value amounts recognized for the right to
reclaim cash collateral (a receivable) or the obligation to return cash
collateral (a payable) against fair value amounts recognized for derivative
instruments in accordance with FSP FIN 39-1.





Prior to
January 1, 2008, the Company deferred gains and losses at inception of certain
derivative contracts whose fair value was not evidenced by observable market
data in accordance with EITF 02-3. For those gains and losses not evidenced by
observable market data, the transaction price was used as the fair value of the
derivative contract. Any difference between the transaction price and the model
fair value was considered an unrecognized gain or loss at inception of the
contract. These unrecognized gains and losses were recorded in income as the
contracts settled. The adoption of SFAS 157 on January 1, 2008, eliminated
the deferral of these gains and losses resulting in the recognition of
previously deferred gains and losses as a net after-tax increase of $10.4
million in the beginning balance of retained earnings for both PNMR and PNM and
had no impact on TNMP.





As stated
in SFAS 157, valuations of derivative assets and liabilities must take into
account nonperformance risk including the effect of the Company’s own credit
standing.  Nonperformance risk refers to the risk that the obligation
will not be fulfilled and affects the value at which the liability is
transferred.  Effective January 1, 2008, the Company updated its
methodology to include the impact of the nonperformance risk and its own credit
standing. The Company did not elect to irrevocably fair value any additional
financial assets and liabilities under SFAS 159 and did not elect to offset fair
values of its derivative instruments under FSP FIN 39-1.





At June
30, 2008, amounts recognized for the right to reclaim cash collateral are $43.9
million for PNMR and $8.5 million for PNM.  In addition, obligations
to return cash collateral were $2.2 million for PNMR and none for
PNM.





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








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)


PNMR





PNMR’s
commodity derivative instruments are summarized as follows:





June
      30,
            
            
            December
      31,
            
            
            June
      30,
            
            
            December
      31,2008
            
            
            2007
            
            
            2008
            
            
            2007Type
      of Derivative
            
            Mark-to-Market
      Instruments
            
            
            Hedge
      Instruments(In
      thousands)Current
      AssetsEnergy
      contracts
            
            $
            92,621
            
            
            $
            14,486
            
            
            $
            -
            
            
            $
            864Swaps
      and futures
            
            
            85,341
            
            
            
            25,653
            
            
            
            8,111
            
            
            
            524Options
            
            
            46,564
            
            
            
            7,372
            
            
            
            12,976
            
            
            
            358Total
      current assets
            
            
            224,526
            
            
            
            47,511
            
            
            
            21,087
            
            
            
            1,746Deferred
      ChargesEnergy
      contracts
            
            
            18,964
            
            
            
            14,133
            
            
            
            -
            
            
            
            -Swaps
      and futures
            
            
            19,668
            
            
            
            26,898
            
            
            
            731
            
            
            
            -Options
            
            
            -
            
            
            
            4,663
            
            
            
            -
            
            
            
            -Total
      deferred charges
            
            
            38,632
            
            
            
            45,694
            
            
            
            731
            
            
            
            -Total
      Assets
            
            
            263,158
            
            
            
            93,205
            
            
            
            21,818
            
            
            
            1,746Current
      LiabilitiesEnergy
      contracts
            
            
            (145,464
            )
            
            
            (19,842
            )
            
            
            (16,911
            )
            
            
            -Swaps
      and futures
            
            
            (65,827
            )
            
            
            (25,308
            )
            
            
            (899
            )
            
            
            (1,058
            )Options
            
            
            (34,137
            )
            
            
            (7,594
            )
            
            
            -
            
            
            
            (30
            )Total
      current liabilities
            
            
            (245,428
            )
            
            
            (52,744
            )
            
            
            (17,810
            )
            
            
            (1,088
            )Long-term
      Liabilities
            
            
            
            
            
            
            -
            
            
            
            
            
            
            
            -Energy
      contracts
            
            
            (14,017
            )
            
            
            (42,009
            )
            
            
            (9,895
            )
            
            
            -Swaps
      and futures
            
            
            (16,815
            )
            
            
            (4,465
            )
            
            
            (42
            )
            
            
            (32
            )Options
            
            
            -
            
            
            
            (8,700
            )
            
            
            -
            
            
            
            -Total
      long-term liabilities
            
            
            (30,832
            )
            
            
            (55,174
            )
            
            
            (9,937
            )
            
            
            (32
            )Total
      Liabilities
            
            
            (276,260
            )
            
            
            (107,918
            )
            
            
            (27,747
            )
            
            
            (1,120
            )Net
      Total Assets and Liabilities
            
            $
            (13,102
            )
            
            $
            (14,713
            )
            
            $
            (5,929
            )
            
            $
            626





First
      Choice Trading Activities





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.  In the second
quarter of 2008, First Choice incurred an additional $1.9 million loss to close
out remaining speculative positions, including transaction costs.  Of
the speculative trading losses, $23.4 million has not cash settled and
represents unrealized losses on its remaining forward positions at June 30,
2008.  The majority of these positions will cash settle before
December 31, 2008.  No significant additional costs are expected
related to speculative trading.





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)


PNM





PNM’s
commodity derivative instruments are summarized as follows:





June
      30,
            
            
            December
      31,
            
            
            June
      30,
            
            
            December
      31,2008
            
            
            2007
            
            
            2008
            
            
            2007Type
      of Derivative
            
            Mark-to-Market
      Instruments
            
            
            Hedge
      Instruments(In
      thousands)Current
      AssetsEnergy
      contracts
            
            $
            620
            
            
            $
            2,587
            
            
            $
            -
            
            
            $
            864Swaps
      and futures
            
            
            13,276
            
            
            
            6,650
            
            
            
            4,031
            
            
            
            422Options
            
            
            12,726
            
            
            
            4,336
            
            
            
            -
            
            
            
            -Total
      current assets
            
            
            26,622
            
            
            
            13,573
            
            
            
            4,031
            
            
            
            1,286Deferred
      ChargesEnergy
      contracts
            
            
            954
            
            
            
            9,443
            
            
            
            -
            
            
            
            -Swaps
      and futures
            
            
            6,007
            
            
            
            23,253
            
            
            
            -
            
            
            
            -Options
            
            
            -
            
            
            
            4,663
            
            
            
            -
            
            
            
            -Total
      deferred charges
            
            
            6,961
            
            
            
            37,359
            
            
            
            -
            
            
            
            -Total
      Assets
            
            
            33,583
            
            
            
            50,932
            
            
            
            4,031
            
            
            
            1,286Current
      LiabilitiesEnergy
      contracts
            
            
            (6,251
            )
            
            
            (6,872
            )
            
            
            (16,911
            )
            
            
            -Swaps
      and futures
            
            
            (14,723
            )
            
            
            (6,037
            )
            
            
            (842
            )
            
            
            (868
            )Options
            
            
            -
            
            
            
            (4,119
            )
            
            
            -
            
            
            
            -Total
      current liabilities
            
            
            (20,974
            )
            
            
            (17,028
            )
            
            
            (17,753
            )
            
            
            (868
            )Long-term
      LiabilitiesEnergy
      contracts
            
            
            (185
            )
            
            
            (38,172
            )
            
            
            (9,895
            )
            
            
            -Swaps
      and futures
            
            
            -
            
            
            
            (693
            )
            
            
            (42
            )
            
            
            (32
            )Options
            
            
            -
            
            
            
            (8,700
            )
            
            
            -
            
            
            
            -Total
      long-term liabilities
            
            
            (185
            )
            
            
            (47,565
            )
            
            
            (9,937
            )
            
            
            (32
            )Total
      Liabilities
            
            
            (21,159
            )
            
            
            (64,593
            )
            
            
            (27,690
            )
            
            
            (900
            )Net
      Total Assets and Total Liabilities
            
            $
            12,424
            
            
            $
            (13,661
            )
            
            $
            (23,659
            )
            
            $
            386





Sale
of Wholesale Contracts





On
January 18, 2008, PNM entered into an agreement to sell certain wholesale power,
natural gas and transmission contracts. These contracts represent a significant
portion of the wholesale activity portfolio of PNM Electric, and include several
long-term sales and purchase power agreements.  Included in the sales
agreement were the Tri-State Pyramid Unit 4 operating lease and certain
transmission agreements, which were not considered derivative instruments under
SFAS 133.  The derivative contracts included in the sale were fair
valued and reflected in the above table at December 31, 2007 as current assets
of $6.3 million, deferred charges of $35.8 million, current liabilities of $10.7
million, and long-term liabilities of $47.6 million.  In connection
with the adoption of SFAS 157, pre-tax gains on these contracts amounting to
$17.2 million were recorded as an adjustment to January 1, 2008 retained
earnings. On June 19, 2008 PNM completed the sale for $6.1
million.  PNM recognized gains on these contracts of $2.9 million and
$5.1 million in the three months and six months ended June 30,
2008.  PNM provided the buyer with a $10 million letter of credit for
18 months in connection with PNM’s representations regarding the
contracts.





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)


Sale
of Power from PVNGS Unit 3





In April
2008, PNM entered into three separate contracts for the sale of capacity and
energy related to its entire ownership interest in PVNGS Unit 3, which is 135
MW.  Under two of the contracts, PNM will sell 90 MW of firm capacity and
energy.  Under the remaining contract, PNM will sell 45 MW of unit
contingent capacity and energy. The term of the contracts is May 1, 2008 through
December 31, 2010.  Under the two firm contracts, the two buyers made
prepayments of $40.6 million and $30.0 million.  These amounts are recorded
to a deferred revenue account and amortized over the life of the
contracts.  The amount to be amortized in the next 12 months is
included in other current liabilities in the Condensed Consolidated Balance
Sheet and the remainder is included in other deferred credits.  The
prepayments received under the firm contracts, as well as required subsequent
monthly payments on them, are shown as a financing activity in the Condensed
Consolidated Statement of Cash Flows as required by GAAP.  The firm
contracts are considered energy derivatives and a loss of $4.8 million was
recognized at inception.  Future changes in the fair value of the firm
contracts will be accounted for as cash flow hedges and included in accumulated
other comprehensive income.  The contingent contract is accounted for
as a normal sale.





Fair
      Value Disclosures





Effective
January 1, 2008, the Company determines the fair market values of its
instruments based on the fair value hierarchy established in SFAS 157, which
requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. The standard describes three
levels of inputs that may be used to measure fair value.  Level 1
inputs are quoted prices (unadjusted) in active markets for identical assets or
liabilities that the reporting entity has the ability to access at the
measurement date.  Level 2 inputs are inputs other than quoted prices
included within Level 1 that are observable for the asset or liability, either
directly or indirectly.  Level 3 inputs are unobservable inputs for
the asset or liability.  The fair values determinations at June 30,
2008 are as follows:





Assets
and Liabilities Measured at Fair Value on a Recurring Basis


Fair
Value Measurements





Total
            
            
            Quoted
      Prices in Active Market for Identical Assets
              (Level
      1)
            
            
            Significant
      Other Observable Inputs
              (Level
      2)
            
            
            Significant
      Unobservable Inputs
              (Level
      3)(In
      thousands)PNMRAssetsCommodity
      derivatives
            
            $
            284,976
            
            
            $
            116,113
            
            
            $
            148,503
            
            
            $
            20,360NDT
            
            
            130,806
            
            
            
            88,216
            
            
            
            42,590
            
            
            
            -Rabbi
      Trust
            
            
            1,841
            
            
            
            1,831
            
            
            
            10
            
            
            
            -Interest
      rate swaps
            
            
            803
            
            
            
            -
            
            
            
            803
            
            
            
            -Total
      Assets
            
            
            418,426
            
            
            
            206,160
            
            
            
            191,906
            
            
            
            20,360LiabilitiesCommodity
      derivatives
            
            
            (304,007
            )
            
            
            (72,704
            )
            
            
            (230,806
            )
            
            
            (497
            )Interest
      rate swaps
            
            
            (803
            )
            
            
            -
            
            
            
            (803
            )
            
            
            -Total
      Liabilities
            
            
            (304,810
            )
            
            
            (72,704
            )
            
            
            (231,609
            )
            
            
            (497
            )Net
      Total Assets and Total Liabilities
            
            $
            113,616
            
            
            $
            133,456
            
            
            $
            (39,703
            )
            
            $
            19,863


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





PNMAssetsCommodity
      derivatives
            
            $
            37,614
            
            
            $
            6,401
            
            
            $
            11,547
            
            
            $
            19,666NDT
            
            
            130,806
            
            
            
            88,216
            
            
            
            42,590
            
            
            
            -Rabbi
      Trust
            
            
            1,841
            
            
            
            1,831
            
            
            
            10
            
            
            
            -Interest
      rate swaps
            
            
            803
            
            
            
            -
            
            
            
            803
            
            
            
            -Total
      Assets
            
            
            171,064
            
            
            
            96,448
            
            
            
            54,950
            
            
            
            19,666LiabilitiesCommodity
      derivatives
            
            
            (48,849
            )
            
            
            -
            
            
            
            (48,849
            )
            
            
            -Interest
      rate swaps
            
            
            (803
            )
            
            
            -
            
            
            
            (803
            )
            
            
            -Total
      Liabilities
            
            
            (49,652
            )
            
            
            -
            
            
            
            (49,652
            )
            
            
            -Net
      Total Assets and Total Liabilities
            
            $
            121,412
            
            
            $
            96,448
            
            
            $
            5,298
            
            
            $
            19,666





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





Recurring
Fair Value Measurements Using Significant Unobservable Inputs


(Level
3)





Three
      Months Ended
            
            
            Six
      Months EndedJune
      30, 2008
            
            
            June
      30, 2008PNMR
            
            
            PNM
            
            
            PNMR
            
            
            PNM(In
      thousands)Level
      3 Fair Value Assets and LiabilitiesBalance
      at December 31, 2007
            
            
            
            
            
            
            
            $
            2,061
            
            
            $
            2,679Adoption
      of SFAS 157
            
            
            
            
            
            
            
            
            16,407
            
            
            
            16,407Balance
      at beginning of period
            
            $
            32,946
            
            
            $
            33,348
            
            
            
            18,468
            
            
            
            19,086Total
      gains included in earnings
            
            
            6,912
            
            
            
            7,605
            
            
            
            16,164
            
            
            
            16,917Total
      gains included in other comprehensive income
            
            
            88
            
            
            
            -
            
            
            
            88
            
            
            
            -Purchases,
      issuances, and settlements1
            
            
            (20,083
            )
            
            
            (21,287
            )
            
            
            (14,857
            )
            
            
            (16,337
            )Balance
      at June 30, 20082
            
            $
            19,863
            
            
            $
            19,666
            
            
            $
            19,863
            
            
            $
            19,666Total
      gains included in earnings attributable to the change in unrealized gains
      or losses relating to assets still held at the end of the
      period
            
            $
            10,242
            
            
            $
            10,484
            
            
            $
            16,195
            
            
            $
            16,632





(1)
            Represents
      unearned and prepaid option premiums received and paid during the period
      for contracts still held at end of period and sale of PNM Electric
      wholesale contracts.


(2)
            There
      were no transfers in or out of Level 3 during the
  period.





Gains and
losses (realized and unrealized) for Level 3 fair value measurements included in
earnings for the three and six months ended June 30, 2008 are reported in
operating revenues and cost of energy 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)




Three
      Months Ended
            
            
            Six
      Months EndedJune
      30, 2008
            
            
            June
      30, 2008PNMR
            
            Operating
              Revenues
            
            
            Cost
      of
              Energy
            
            
            Total
            
            
            Operating
              Revenues
            
            
            Cost
      of
              Energy
            
            
            Total(In
      thousands)Total
      gains (losses) included in earnings
            
            $
            (824
            )
            
            $
            7,736
            
            
            $
            6,912
            
            
            $
            (1,087
            )
            
            $
            17,251
            
            
            $
            16,164Change
      in unrealized gains or losses relating to assets still held at reporting
      date
            
            $
            (351
            )
            
            $
            10,593
            
            
            $
            10,242
            
            
            $
            (546
            )
            
            $
            16,741
            
            
            $
            16,195PNMTotal
      gains (losses) included in earnings
            
            $
            (213
            )
            
            $
            7,818
            
            
            $
            7,605
            
            
            $
            (224
            )
            
            $
            17,141
            
            
            $
            16,917Change
      in unrealized gains or losses relating to assets still held at reporting
      date
            
            $
            -
            
            
            $
            10,484
            
            
            $
            10,484
            
            
            $
            -
            
            
            $
            16,632
            
            
            $
            16,632





(5)
            Earnings
      Per Share





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


Three
      Months Ended
            
            Six
      Months EndedJune
      30,
            
            June
      30,2008
            
            2007
            
            2008
            
            2007(In
      thousands)Earnings
      (Loss):Earnings
      (loss) from continuing operations
            $
      (146,248)
            
            $
      21,828
            
            $
      (217,384)
            
            $  36,972Earnings
      (loss) from discontinued operations
            2,762
            
            (1,588)
            
            25,261
            
            12,934Net
      Earnings (Loss)
            $
      (143,486)
            
            $
      20,240
            
            $
      (192,123)
            
            $  49,906Average
      Number of Common Shares Outstanding
            81,698
            
            76,695
            
            79,274
            
            76,677Dilutive
      Effect of Common Stock Equivalents (a):Stock
      options and restricted stock
            -
            
            659
            
            -
            
            680Equity-linked
      units
            -
            
            1,439
            
            -
            
            1,089Average
      Common and Common EquivalentShares
      Outstanding
            81,698
            
            78,793
            
            79,274
            
            78,446Per
      Share of Common Stock – Basic:Earnings
      (loss) from continuing operations
            $  (1.79)
            
            $    0.28
            
            $    (2.74)
            
            $     0.48Earnings
      (loss) from discontinued operations
            0.03
            
            (0.02)
            
            0.32
            
            0.17Net
      Earnings (Loss)
            $  (1.76)
            
            $    0.26
            
            $    (2.42)
            
            $     0.65Per
      Share of Common Stock – Diluted:Earnings
      (loss) from continuing operations
            $  (1.79)
            
            $    0.28
            
            $    (2.74)
            
            $     0.47Earnings
      (loss) from discontinued operations
            0.03
            
            (0.02)
            
            0.32
            
            0.17Net
      Earnings (Loss)
            $  (1.76)
            
            $    0.26
            
            $    (2.42)
            
            $     0.64







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)
            At
      June 30, 2008, PNMR had 2,890,155 out-of-the-money stock options and
      873,200 in-the-money stock options that are anti-dilutive.  In
      addition, PNMR’s privately held equity-linked units are
      anti-dilutive.  Based on the current price of PNMR’s common
      stock, it is anticipated that 4,778,000 common stock equivalents will be
      issued in connection with the settlement of the purchase contracts that
      are contained in the units.





(6)
            Stock-Based
      Compensation





Information
concerning stock-based compensation plans is contained in Note 13 of Notes to
Consolidated Financial Statements in the 2007 Annual Reports on Form
10-K.





Stock
Options





The
following table represents stock option activity for the six months ended June
30, 2008:





Weighted-Weighted-
            
            
            Aggregate
            
            
            AverageAverage
            
            
            Intrinsic
            
            
            RemainingExercise
            
            
            Value
            
            
            Contract
      LifeOptions
      for PNMR Common Stock
            
            Shares
            
            
            Price
            
            
            (In
      thousands)
            
            
            (Years)Outstanding
      at beginning of period
            
            
            3,264,898
            
            
            $
            23.26Granted
            
            
            554,261
            
            
            
            11.91Exercised
            
            
            (5,001
            )
            
            
            16.13Forfeited
            
            
            (50,803
            )
            
            
            25.57Outstanding
      at end of period
            
            
            3,763,355
            
            
            $
            21.54
            
            
            $
            (36,010
            )
            
            
            7.34Options
      exercisable at end of period
            
            
            2,634,551
            
            
            $
            22.00
            
            
            $
            (26,432
            )
            
            
            5.84Options
      available for future grant
            
            
            1,942,024





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





Options
      for PNMR Common Stock
            
            2008
            
            
            2007(In
      thousands,
              except
      per share amounts)Weighted-average
      grant date fair value per share of options granted
            
            $
            1.39
            
            
            $
            4.70Total
      intrinsic value of options exercised during the period
            
            $
            15
            
            
            $
            4,847





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)


Restricted
Stock





The
following table summarizes nonvested restricted stock activity for the six
months ended June 30, 2008:





Weighted-AverageNonvested
      Restricted
            
            
            
            
            Grant-DatePNMR
      Common Stock
            
            Shares
            
            
            Fair
      ValueNonvested
      at beginning of period
            
            
            169,750
            
            
            $
            26.09Granted
            
            
            125,250
            
            
            $
            11.56Vested
            
            
            (79,656
            )
            
            $
            25.70Forfeited
            
            
            (5,005
            )
            
            $
            26.44Nonvested
      at end of period
            
            
            210,339
            
            
            $
            17.54





The total
fair value of shares of restricted stock that vested during the six months ended
June 30, 2008 was $2.0 million.





(7)
            Financing





Information
concerning financing activities is contained in Note 6 of Notes to Consolidated
Financial Statements in the 2007 Annual Reports on Form 10-K.





Financing
Activities





On May 5,
2008, PNM entered into a $300 million unsecured delayed draw term loan facility
(as amended, the “Term Loan Agreement”) with Merrill Lynch Bank USA, Morgan
Stanley Senior Funding, Inc. and Wachovia Bank, National Association, as initial
lenders. The Term Loan Agreement allowed PNM, at its option, to borrow, on no
more than two occasions, up to $300 million at any time prior to 45 days before
April 30, 2009.  In the event of a downgrade in senior unsecured debt
credit ratings of PNM, PNM may be required to borrow money under the Term Loan
Agreement.  Borrowings must be repaid on April 30, 2009, or 45 days
before that date if PNM makes no optional borrowings under the credit
facility.  PNM must pay interest and fees from time to time based upon
its then-current senior unsecured debt credit ratings.  The Term Loan
Agreement is to be used for general corporate purposes.  Borrowings
under the Term Loan Agreement are conditioned on the ability of PNM to make
certain representations.  The Term Loan Agreement includes customary
covenants, including requirements to maintain a maximum consolidated
debt-to-consolidated capitalization ratio and a minimum consolidated earnings
before interest, income taxes, depreciation and amortization to consolidated
interest expense ratio.  The Term Loan Agreement provides that if PNM
receives net cash proceeds from the sale of certain debt securities or the sale
of assets, the amount of the commitments under the Term Loan Agreement may be
reduced.  As described below, on May 13, 2008, PNM completed the
offering of $350 million aggregate principal amount of senior unsecured
notes.  On May 28, 2008, PNM was notified that the lenders under the
Term Loan Agreement had reduced their commitments to $150
million.  The Term Loan Agreement provides that upon the closing of
the sale of PNM Gas described in Note 2, any amounts outstanding must be repaid
and remaining commitments for borrowings would be terminated.  No
borrowings have been made under the Term Loan Agreement.







On May 8,
2008, PNM entered into a $100 million unsecured letter of credit facility
pursuant to a reimbursement agreement (as amended, the “Reimbursement
Agreement”) with Deutsche Bank AG and Royal Bank of Canada, as
lenders.  The Reimbursement Agreement allows PNM to obtain, from time
to time, standby letters of credit up to the aggregate amount of $100 million at
any time prior to April 30, 2009.  The letter of credit and commitment
fees will vary depending upon the then-current senior unsecured debt credit
rating for PNM.  The Reimbursement Agreement will be used for general
corporate purposes, including supporting margin requirements




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)


under
hedging agreements.  Letter of credit issuances under the
Reimbursement Agreement are conditioned on the ability of PNM to make certain
customary representations.  The Reimbursement Agreement includes
customary covenants, including requirements to maintain a maximum consolidated
debt-to-consolidated capitalization ratio and a minimum consolidated earnings
before interest, income taxes, depreciation and amortization to consolidated
interest expense ratio.  No letters of credit have been issued under
this arrangement.




On May 16,
2008, PNM issued $350 million aggregate principal amount of senior unsecured
notes. The notes pay interest semi-annually at a rate of 7.95% per year, payable
on May 15 and November 15 of each year, beginning November 15, 2008, and mature
on May 15, 2018.




PNMR
previously issued 4,945,000 6.75% publicly held equity-linked
units.  Each of these equity-linked units consisted of a purchase
contract and a 5.0% undivided beneficial ownership interest in one of PNMR’s
senior notes with a stated amount of $1,000, which corresponds to a $50.00
stated amount of PNMR’s senior notes. The senior notes were scheduled to mature
in May 2010 (subject to the remarketing described below) and bore interest at a
rate of 4.8% per year.  The purchase contracts entitled their holders
to contract adjustment payments of 1.95% per year on the stated amount of
$50.00.  Each purchase contract contained a mandatory obligation for
the holder to purchase, and PNMR to sell, at a purchase price of $50.00 in cash,
shares of PNMR’s common stock on or before May 16,
2008.  Generally, the number of shares each holder of the
equity-linked units was obligated to purchase depended on the average closing
price per share of PNMR’s common stock over a 20-day trading period ending on
the third trading day immediately preceding May 16, 2008, with an adjusted
maximum price of $32.08 per share and minimum price of $26.29 per
share.  In accordance with the terms of the equity-linked units, the
senior note components were remarketed prior to May 16,
2008.  The proceeds from the remarketed senior notes amounted to
$247.3 million and were utilized by the holders of the equity-linked units to
satisfy their obligations to purchase 9,403,412 shares of PNMR’s common stock
for the same aggregate amount on May 16, 2008.  In connection with the
remarketed senior notes, PNMR sold an additional $102.7 million of senior notes
with the same terms for a total offering of $350 million.  The senior
notes pay interest semi-annually at a rate of 9.25% per year, payable on May 15
and November 15 of each year, beginning November 15, 2008, and mature on May 15,
2015.





PNMR also
has outstanding 4,000,000 privately held 6.625% equity-linked
units.  Each of these equity-linked units consists of a purchase
contract and a 2.5% undivided beneficial ownership interest in one of PNMR’s
senior notes with a stated amount of $1,000, which corresponds to a $25.00
stated amount of PNMR’s senior notes.  The ownership interest in the
senior notes is pledged to secure the holder’s obligation to purchase PNMR
common or preferred stock under the related purchase contract.  The
senior notes are scheduled to mature in August 2010 (subject to the remarketing
described below) and bear interest at the annual rate of 5.1%.  The
purchase contracts entitle the holder to quarterly contract adjustment payments
of 1.525% per year on the stated amount of $25.00.  Each purchase
contract contains a mandatory obligation for the holder to purchase, and PNMR to
sell, at a purchase price of $25.00 in cash, shares of PNMR’s common stock (or
preferred stock in a ratio of 1/10 of a preferred share for each share of common
stock) aggregating $100 million on or before November 16,
2008.  Generally, the number of shares the holder is obligated to
purchase depends on the average closing price per share of PNMR’s common stock
over a 20-day trading period ending on the third trading day immediately
preceding November 16, 2008, with a maximum price of $25.12 per share and
minimum price of $20.93 per share.  Beginning on November 7, 2008,
PNMR will attempt to remarket the senior notes.  If the remarketing is
successful, the interest rate on the senior notes may change to a rate selected
by the remarketing agent, and the maturity of the senior notes may be extended
to a date selected by PNMR subject to certain conditions.  If the
remarketing of the senior notes is not successful, the maturity and interest
rate of the senior notes will not change and holder of the equity-linked units
will have the option of putting its senior notes to PNMR to satisfy its
obligations under the purchase contracts.  Although there can be no
assurance, PNMR expects that the remarketing of the senior notes will be
successful.





Short-term
Debt





PNMR and
PNM have revolving credit facilities for borrowings up to $600 million under the
PNMR Facility and $400 million under the PNM Facility that primarily expire in
2012 and local lines of credit amounting to $10.0 million and $8.5
million.  PNMR and PNM also have commercial paper programs under which
they may issue up to




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)


$400
million and $300 million of commercial paper although these commercial paper
programs are currently suspended and no commercial paper has been issued since
March 11, 2008.  The revolving credit facilities serve as support for
the commercial paper programs.  Operationally, this means the
aggregate borrowings under the commercial paper program and the revolving credit
facility for each of PNMR and PNM cannot exceed the maximum amount of the
revolving credit facility for that entity.





On March
7, 2008, TNMP entered into a $150 million short-term bank loan agreement with
two banks.  TNMP borrowed $150 million under this agreement on April
9, 2008 and used the proceeds to redeem the remaining $148.9 million of its
6.125% senior unsecured notes prior to the maturity date of June 1,
2008.





On May
15, 2008, TNMP entered into a credit agreement with eight lenders for the TNMP
Facility.  The TNMP Facility provides TNMP with a revolving credit
facility for up to $200 million.  In connection with entering into the
TNMP Facility, TNMP withdrew as a borrower under the PNMR Facility and is no
longer a party under the PNMR Facility.  There have been no borrowings
under the TNMP Facility.





At June
30, 2008, the weighted average interest rate was 3.83% for the PNMR Facility,
3.67% for the PNM Facility, and 3.40% for the TNMP short-term bank loan.
Short-term debt outstanding consists of:






June
      30,
              
              December
      31,Short-term
      Debt
              2008
              
              2007(In
      thousands)PNMCommercial
      paper
              $              -
              
              $ -Revolving
      credit facility
              -
              
              321,000Delayed
      draw term loan facility
              -
              
              -Local
      lines of credit
              -
              
              -Total
      PNM
              -
              
              321,000TNMPShort-term
      bank loan
              150,000
              
              -Revolving
      credit facility
              -
              
              -Total
      TNMP
              150,000
              
              -PNMRCommercial
      paper
              -
              
              -Revolving
      credit facility
              190,000
              
              343,500Local
      lines of credit
              -
              
              1,400Total
      PNMR
              190,000
              
              344,900Total PNM, TNMP and
      PNMR
              340,000
              
              665,900Valencia
              86,651
              
              -$  426,651
              
              $
      665,900
    The June
30, 2008 Condensed Consolidated Balance Sheets of PNMR and PNM include $86.7
million of short-term debt of Valencia, which is a variable interest entity that
is consolidated by PNM beginning May 30, 2008.  See Note
16.  As of June 30, 2008, TNMP had outstanding borrowings of $2.1
million from PNMR under its intercompany loan agreement.





At August
4, 2008, PNMR, PNM, and TNMP had $252.8 million, $380.7 million, and $198.5
million of availability under their respective revolving credit facilities and
local lines of credit, including reductions of availability due to outstanding
letters of credit.  In addition, PNM had availability of $150 million
under the Term Loan Agreement and $100 million under the Reimbursement
Agreement.  Total availability at August 4, 2008 was $630.7 million
for PNM and, on a consolidated basis, $1,082.0 million for PNMR.  At
August 4, 2008, PNMR,




43


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





PNMR has
entered into three fixed-to-floating interest rate swaps with an aggregate
notional principal amount of $150.0 million.  Under these swaps, PNMR
receives a 4.40% fixed interest payment on the notional principal amount on a
semi-annual basis and pays a floating rate equal to the six month LIBOR plus
58.15 basis points (0.5815%) on the notional amount through September 15,
2008.  The floating rate was 6.09% at December 31, 2007 and was reset
to 3.28% on March 17, 2008.  The swaps are accounted for as fair-value
hedges with an asset position of $0.8 million at June 30, 2008, with a
corresponding addition to current maturities of long-term debt.





Stockholders’
Equity





See
Financing Activities above for information on PNMR common stock issued in
connection with its publicly held equity-linked units.  PNMR offers
new shares of PNMR common stock through the PNMR Direct Plan and an equity
distribution agreement.  The equity distribution agreement is
currently suspended.  For the six months ended June 30, 2008, PNMR
sold 128,177 shares of its common stock through the PNMR Direct Plan for net
proceeds of $1.8 million.  PNMR also issued 44,621 shares of its
common stock for $0.5 million through its ESPP during the six months ended June
30, 2008.





(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
2007 Annual Reports on Form 10-K for additional information on these
plans.





PNM
Plans





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





Three
      Months Ended June 30,Pension
      Plan
            
            
            Other
      Postretirement Benefits
            
            
            Executive
      Retirement Program2008
            
            
            2007
            
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007(In
      thousands)Components
      of Net PeriodicBenefit
      Cost (Income)Service
      cost
            
            $
            -
            
            
            $
            36
            
            
            $
            178
            
            
            $
            632
            
            
            $
            14
            
            
            $
            14Interest
      cost
            
            
            8,317
            
            
            
            7,953
            
            
            
            2,086
            
            
            
            1,928
            
            
            
            284
            
            
            
            272Expected
      long-term return on assets
            
            
            (10,336
            )
            
            
            (10,195
            )
            
            
            (1,532
            )
            
            
            (1,464
            )
            
            
            -
            
            
            
            -Amortization
      of net loss
            
            
            481
            
            
            
            972
            
            
            
            1,204
            
            
            
            1,461
            
            
            
            13
            
            
            
            24Amortization
      of prior service cost
            
            
            79
            
            
            
            79
            
            
            
            (1,422
            )
            
            
            (1,422
            )
            
            
            3
            
            
            
            3Net
      periodic benefit cost (income)
            
            $
            (1,459
            )
            
            $
            (1,155
            )
            
            $
            514
            
            
            $
            1,135
            
            
            $
            314
            
            
            $
            313





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)








Six
      Months Ended June 30,Pension
      Plan
            
            
            Other
      Postretirement Benefits
            
            
            Executive
      Retirement Program2008
            
            
            2007
            
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007(In
      thousands)Components
      of Net PeriodicBenefit
      Cost (Income)Service
      cost
            
            $
            -
            
            
            $
            72
            
            
            $
            356
            
            
            $
            1,264
            
            
            $
            28
            
            
            $
            28Interest
      cost
            
            
            16,634
            
            
            
            15,906
            
            
            
            4,172
            
            
            
            3,856
            
            
            
            568
            
            
            
            544Expected
      long-term return on assets
            
            
            (20,672
            )
            
            
            (20,389
            )
            
            
            (3,064
            )
            
            
            (2,927
            )
            
            
            -
            
            
            
            -Amortization
      of net loss
            
            
            962
            
            
            
            1,944
            
            
            
            2,408
            
            
            
            2,922
            
            
            
            26
            
            
            
            46Amortization
      of prior service cost
            
            
            158
            
            
            
            158
            
            
            
            (2,844
            )
            
            
            (2,844
            )
            
            
            6
            
            
            
            6Net
      periodic benefit cost (income)
            
            $
            (2,918
            )
            
            $
            (2,309
            )
            
            $
            1,028
            
            
            $
            2,271
            
            
            $
            628
            
            
            $
            624





PNM does
not anticipate making any contributions to the pension plan trust during
2008.  For the three months ended June 30, 2008 and 2007, PNM
contributed $1.8 million and $1.5 million to trusts for other postretirement
benefits and $2.8 million and $3.1 million for the six months ended June 30,
2008 and 2007.  PNM expects to make contributions totaling $4.9
million during the year ended December 31, 2008 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 and $0.4 million in the three months ended June 30,
2008 and 2007 and $0.8 million and $0.8 million in the six months ended June 30,
2008 and 2007, and are expected to total $1.5 million during 2008.





TNMP
Plans





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





Three
      Months Ended June 30,Pension
      Plan
            
            
            Other
      Postretirement Benefits
            
            
            Executive
      Retirement Program2008
            
            
            2007
            
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007(In
      thousands)Components
      of Net PeriodicBenefit
      Cost (Income)Service
      cost
            
            $
            -
            
            
            $
            -
            
            
            $
            71
            
            
            $
            98
            
            
            $
            -
            
            
            $
            -Interest
      cost
            
            
            1,061
            
            
            
            1,057
            
            
            
            179
            
            
            
            165
            
            
            
            19
            
            
            
            19Expected
      long-term return on assets
            
            
            (1,659
            )
            
            
            (1,710
            )
            
            
            (122
            )
            
            
            (114
            )
            
            
            -
            
            
            
            -Amortization
      of net gain
            
            
            (36
            )
            
            
            (2
            )
            
            
            (68
            )
            
            
            (39
            )
            
            
            -
            
            
            
            -Amortization
      of prior service cost
            
            
            -
            
            
            
            -
            
            
            
            15
            
            
            
            15
            
            
            
            -
            
            
            
            -Net
      Periodic Benefit Cost (Income)
            
            $
            (634
            )
            
            $
            (655
            )
            
            $
            75
            
            
            $
            125
            
            
            $
            19
            
            
            $
            19





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)





Six
      Months Ended June 30,Pension
      Plan
            
            
            Other
      Postretirement Benefits
            
            
            Executive
      Retirement Program2008
            
            
            2007
            
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007(In
      thousands)Components
      of Net PeriodicBenefit
      Cost (Income)Service
      cost
            
            $
            -
            
            
            $
            -
            
            
            $
            142
            
            
            $
            196
            
            
            $
            -
            
            
            $
            -Interest
      cost
            
            
            2,122
            
            
            
            2,114
            
            
            
            358
            
            
            
            330
            
            
            
            38
            
            
            
            38Expected
      long-term return on assets
            
            
            (3,318
            )
            
            
            (3,420
            )
            
            
            (244
            )
            
            
            (228
            )
            
            
            -
            
            
            
            -Amortization
      of net gain
            
            
            (72
            )
            
            
            (4
            )
            
            
            (136
            )
            
            
            (78
            )
            
            
            -
            
            
            
            -Amortization
      of prior service cost
            
            
            -
            
            
            
            -
            
            
            
            30
            
            
            
            30
            
            
            
            -
            
            
            
            -Net
      Periodic Benefit Cost (Income)
            
            $
            (1,268
            )
            
            $
            (1,310
            )
            
            $
            150
            
            
            $
            250
            
            
            $
            38
            
            
            $
            38





TNMP does
not anticipate making any contributions to the pension trust during
2008.  For the three months ended June 30, 2008 and 2007, TNMP made no
and $0.3 million contributions to the trust for other postretirement benefit and
made $0.2 million and $0.3 million for the six months ended June 30, 2008 and
2007.  TNMP expects to make contributions totaling $0.4 million during
the year ended December 31, 2008 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 and six months ended June 30, 2008
and 2007, and are expected to total $0.2 million during 2008.





(9)
            Commitments
      and Contingencies





Overview





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





Commitments
and Contingencies Related to the Environment





Renewable
Portfolio Standard





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


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)





On July
1, 2008, PNM filed its annual renewable energy plan for 2009.  Costs
incurred under a NMPRC-approved plan are authorized to be included for recovery
in a future rate proceeding.  PNM requested: (1) approval to continue
its program for purchasing RECs from customers with photovoltaic (“PV”)
distributed generation systems sized no larger than 10 kW at a price of $0.13
per REC per kWh generated, which was initially approved in December 2005, beyond
the currently authorized budget and cost recovery in order to avoid a suspension
of the program that would otherwise be necessary by early 2010; (2) approval to
implement a program to acquire RECs from customers with PV systems sized greater
than 10 kW and up to 1 MW at a price of $0.13 per REC per kWh generated and for
cost recovery; and (3) approval to supplement the plan with any new projects
that result for the two requests for proposals (“RFPs”) that PNM has recently
issued for renewable resources.  One of the RFPs was jointly issued
with three other electric providers for a concentrated solar power project using
solar parabolic trough technology that would be located in New
Mexico.  The second RFP was for diverse non-wind renewable
energy.  PNM’s filing also reported on PNM's termination of the
biomass project described below and indicated that PNM may need additional
resources to meet the renewable energy portfolio standard requirement for 2010
and the diversity requirements for 2011.





The
Clean Air Act





Regional
Haze





On April
22, 1999, the EPA announced final regional haze rules.  These
regulations required states to submit state implementation plans (“SIPs”) by
December 2007 to demonstrate “reasonable progress” towards achieving natural
visibility conditions in certain “Class I Areas,” including several on the
Colorado Plateau.  SIPs are required to consider and potentially apply
BART for certain older major stationary sources.




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 these areas.  In
October 2006, the EPA issued the final BART alternatives rule which made
revisions to the 2005 regional haze rules.  In particular, the
alternatives rule defines how an SO2 emissions
trading program developed by the Western Regional Air Partnership, a voluntary
organization of western states, tribes and federal agencies, can be used by
western states.  New Mexico will be participating in the SO2 program,
which is a trading program that will be implemented if SO2 reduction
milestones, which are still being developed, are not met.





The NMED
had requested a BART analysis for nitrogen oxides and particulates be done for
each of the four units at SJGS.  PNM submitted the analysis to the
NMED in early June 2007.  Based on the results of the BART analysis,
PNM did not recommend that any additional pollution control equipment be
installed on any of the SJGS units beyond that which is being installed. PNM
believes the controls being installed constitute BART.  The NMED is
presently reviewing the analysis.  Potentially, additional nitrogen
oxide emission reductions could be required.  The nature and cost of
compliance with these potential requirements cannot be determined at this
time.





In
addition, EPA Region 9 requested APS to perform a BART analysis for Four
Corners.  APS completed the analysis and submitted it to the EPA on
January 30, 2008.  The EPA will now review the submission and
determine what constitutes BART for Four Corners.  APS’
recommendations include the installation of certain pollution control equipment
that it believes constitutes BART.  Once APS receives the EPA’s final
determination, Four Corners will have five years to complete the installation of
the equipment and to achieve the emission limits established by EPA Region
9.  Until the EPA makes a final determination on this matter, the
Company cannot accurately estimate the expenditures that may be
required.  As a result, PNM’s current environmental expenditure
estimates do not include amounts for Four Corners BART
expenditures.




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)


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 or, if the agencies disagree with those recommendations for SJGS
or Four Corners, the nature of the BART controls the agencies may ultimately
mandate and the resulting financial or operational impact.





New
Source Review Rules





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





Citizen
Suit Under the Clean Air Act





PNM
reached an impasse with the Grand Canyon Trust and Sierra Club (“Plaintiffs”)
and with the NMED with respect to certain matters under a consent decree of May
10, 2005.  As a result, PNM filed petitions with the U.S. District Court
for the District of New Mexico on October 6 and 12, 2006, seeking a
determination that PNM had complied with the consent decree with respect to the
matters at issue.  The controversies related to PNM’s reports on NOX
controls and demisters at SJGS.  PNM reached an agreement with the
Plaintiffs and the NMED concerning these issues which was set forth in a
stipulated order entered by the court approving the settlement on December 27,
2006.





The
consent decree includes a provision whereby stipulated penalties are assessed
for non-compliance with specified emissions limits.  Stipulated
penalty amounts are placed in escrow on a quarterly basis pending review of
SJGS’s emissions performance for each quarter.  As of June 30, 2008,
PNM’s share of the total amount of stipulated penalties is $3.2 million of which
$3.0 million had been deposited into the escrow account and the remaining amount
was deposited subsequently.  By letter dated March 20, 2007, the NMED
and Plaintiffs requested information concerning PNM’s calculation of potential
stipulated penalty amounts and the amounts held in escrow.  PNM
submitted its response to NMED on May 23, 2007.  To date, the NMED has
taken no further action with respect to the requested information.





Navajo
Nation Environmental Issues





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





The
Navajo Acts, enacted in 1995, purport to give the Navajo Nation EPA authority to
promulgate regulations covering air quality, drinking water, and pesticide
activities, including those activities that occur at Four Corners.  In
October 1995, the Four Corners participants filed a lawsuit in the District
Court of the Navajo Nation,




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)


Window
Rock District, challenging the applicability of the Navajo Acts as to Four
Corners.  The District Court stayed these proceedings pursuant to a
request by the parties and the parties are seeking to negotiate a
settlement.





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





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





The
Company cannot currently predict the outcome of these matters.





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.  On July 2, 2007, APS,
the plant operator, 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 has
intervened in this action.  On July 6, 2007, the Sierra Club and other
parties filed a petition for review with the same court challenging the FIP’s
compliance with the Clean Air Act and APS has intervened in their
action.  In APS’ lawsuit, APS challenges two key provisions of the
FIP:  a 20% opacity limit on certain fugitive dust emissions, which
the EPA filed a motion to remand and vacate in early December 2007, and a 20%
stack opacity limit on Units 4 and 5.  Briefing in this case is now
complete and oral argument occurred in May 2008.  APS anticipates that
the court will issue its opinion before the end of 2008.  Although the
Company cannot predict the outcome or the timing of these matters, the Company
does not believe that they will have a material adverse impact on the Company’s
financial position, results of operations or cash flows.





Santa
Fe Generating Station





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





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




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)





PNM has
been verbally informed that the Superfund Oversight Section of the NMED is
conducting an investigation into the chlorinated solvent contamination in the
vicinity of the site of the former Santa Fe Generating Station.  The
investigation will study possible sources for the chlorinated solvents in the
groundwater.  In December 2007, PNM provided certain groundwater data
at the request of the NMED.  The NMED investigation is
ongoing.





Coal
Combustion Waste Disposal





SJCC
currently disposes of coal combustion products consisting of fly ash, bottom
ash, and gypsum from SJGS in the surface mine pits adjacent to the
plant.  The Office of Surface Mining is in the process of developing
revisions to the Surface Mining Control and Reclamation Act (“SMCRA”) Title IV
and V that would specifically address the placement of coal combustion products
(“CCP’s”) in surface mines.  PNM understands that these revisions do
not represent a major overhaul of the SMCRA regulations and will continue to
support the mine placement of CCP’s.  PNM expects the proposed
regulations to be published by the end of summer 2008.





EPA is
currently working on a Notice of Data Availability (“NODA”) on the placement of
CCP’s in surface impoundments and landfill.  The NODA allows
additional data and information to be collected and could cause EPA to revisit
its current regulations on the disposal of CCP’s in surface impoundments or
landfill.  PNM cannot predict the outcome of this matter but does not
believe currently that it will have a material adverse impact on its results of
operations or financial position, because the majority of the CCP’s from SJGS
are placed in the mine and not surface impoundments or landfills.





In June,
the U.S. House of Representatives Subcommittee on Energy and Mineral Resources
conducted an oversight hearing on how the federal government should address the
health and environmental risks of coal combustion wastes.  This is the
first of a number of hearings the subcommittee will hold.  PNM cannot
predict the outcome of these hearings but does not believe additional
regulations will result.





Gila
River Indian Reservation Superfund Site





By letter
dated April 25, 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





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 $100.6
million, subject to an annual limit of $15.0 million per incident, to be
periodically adjusted for inflation.  Based on PNM’s 10.2% interest in
the three PVNGS units, PNM’s maximum




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 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
$7.4 million.  The insurance coverage discussed in this and the
previous paragraph is subject to policy conditions and exclusions.





NRC
Matters





In
October 2006, the NRC conducted an inspection of the PVNGS emergency diesel
generators after a PVNGS Unit 3 generator started but did not provide electrical
output during routine inspections on July 25 and September 22,
2006.  On February 22, 2007, the NRC issued a “white” finding (low to
moderate safety significance) for this matter.  Under the NRC’s Action
Matrix, this finding, coupled with a previous NRC “yellow” finding relating to a
2004 matter involving PVNGS’ safety injection systems, resulted in PVNGS Unit 3
being placed in the “multiple/repetitive degraded cornerstone” column of the
NRC’s Action Matrix (“Column 4”), which has resulted in an enhanced NRC
inspection regime.  Although only PVNGS Unit 3 is in NRC’s Column 4,
in order to adequately assess the need for improvements, APS management has been
conducting site-wide assessments of equipment and operations.





Preliminary
work in support of the NRC’s enhanced inspection regime took place throughout
the summer of 2007.  On June 21, 2007, the NRC issued an initial
confirmatory action letter confirming APS’ commitments regarding specific
actions APS will take to improve PVNGS’ performance.  From October 1,
2007, through November 2, 2007, a team of NRC inspectors performed on-site
in-depth inspections of PVNGS equipment and operations.  The NRC’s
inspection results were presented at a public meeting on December 19, 2007, and
documented in an NRC letter to APS dated February 1, 2008.  The
inspection report indicated that the facility is being operated safely but also
identified certain performance deficiencies.  On December 31, 2007,
APS submitted its improvement plan to the NRC, which addresses issues identified
by APS management during its site-wide assessments of equipment and operations
that occurred during 2007.  The NRC reviewed the adequacy of this
improvement plan and issued a revised confirmatory action letter on February 15,
2008 that outlines the actions APS must take in order for the NRC to return the
PVNGS site to the NRC’s routine inspection and assessment
process.   This revised confirmatory action letter was
anticipated as part of the NRC’s inspection procedure.  On March 31,
2008, APS submitted to the NRC a revision to its improvement plan to address
issues raised by the NRC in its inspection report.  The NRC will
continue to provide increased oversight at PVNGS until the facility demonstrates
sustained performance improvement.  APS continues to cooperate fully
with the NRC throughout this process.





San
Juan River Adjudication





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




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)
 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.





Republic
Savings Bank Litigation





In 1992,
Meadows Resources, Inc., 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
the Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”)
prohibited certain accounting practices 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 Meadows’
claims for lack of standing.





Discovery
was completed in 1999 and 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 judge in this matter entered his opinion granting the
Federal government’s motion to dismiss Meadows for lack of standing, 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 remaining Plaintiffs damages in the amount of $14.9
million.  The Court determined that Plaintiffs should receive
restitution damages in the amount of $17 million for the initial cash
contribution into RSB, reduced by the Federal government’s contribution of $3
million and enhanced by the $0.9 million profit received by the FDIC upon
selling the business of RSB.  Meadows received payment from the FDIC
in October 2004 in the amount of $0.3 million, representing the final
distribution of the receivership.  This payment reduces the amount of
damages owed to $14.6 million.





The
Company is unable to predict the ultimate outcome of this litigation as both
parties have rights to seek rehearing and appeal.





Western
United States Wholesale Power Market





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





California
Refund Proceeding





SDG&E
filed a complaint with the FERC in 2000 against sellers into the California
wholesale electric market. In 2002, the FERC ALJ issued the Proposed Findings on
California Refund Liability, in which it determined that the Cal ISO and Cal PX
had, for the most part, correctly calculated the amounts of the potential
refunds owed by most sellers and identified approximations for the amount of
refunds due. In 2003, the FERC issued an order substantially adopting the
findings from the ALJ’s 2002 decision, but requiring a change to the formula
used to calculate refunds, which had the effect of increasing the refund amounts
owed by most sellers. In August 2005, the FERC issued an order setting out the
process by which sellers into the Cal ISO and Cal PX markets could make cost




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)





As
previously reported, there have been a number of additional appeals pending
before the U.S. Court of Appeals for the Ninth Circuit with regard to FERC’s
orders issued in the various California market refund dockets and PNM has
participated in various appeals as one of the members of the Competitive Sellers
Group.  The Ninth Circuit has held a number of mediation conferences
in which PNM has participated, regarding these and the multiple other appeals
pending before it, to assess the opportunities for settlement.  The
Ninth Circuit issued an order initially declaring a 45-day time-out period to
allow parties the opportunity to assess the recent court decisions and the
potential for settlement of cases.  The Ninth Circuit has continued to
extend the time out period in several of the cases.  In September
2006, a mediation conference was convened at the California Public Utilities
Commission to assess the potential settlement of the refund
proceedings.  The conference was attended by, among others, PNM, the
other buyers and sellers, FERC personnel, a settlement judge and mediator from
the Ninth Circuit.  Representatives of PNM continue to attend and
participate in the mediation and case management sessions being hosted by the
Ninth Circuit.  In August 2007, the Ninth Circuit further extended the
time-out period for settlement discussions to continue until November
2007.  In October 2007, PNM attended an additional case management
conference hosted by the Ninth Circuit.  The time-out period
established by the Ninth Circuit expired in mid-November
2007.  Subsequently, the Ninth Circuit issued its mandate in the Lockyer v. FERC case and
allowed the appellate process to continue in other pending
appeals.  As a result, various petitions for rehearing of the court’s
prior decisions have been filed in the Ninth Circuit.  PNM
participated with a group of sellers in a petition for rehearing in the CPUC v.
FERC appeal.  The petitions for rehearing are currently pending before
the Ninth Circuit.





In
December 2007, the Ninth Circuit issued the mandate in the Lockyer v. FERC case and
formally remanded this proceeding back to FERC.  See California
Attorney General Complaint below.





The
Company cannot predict the ultimate outcome of FERC proceedings that may
result from the decisions in these appeals, or whether PNM will be ultimately
directed to make any additional future refunds as the result of these court
decisions, or whether settlement will be reached in the case.





Pacific
Northwest Refund Proceeding





Puget
Sound Energy, Inc. filed a complaint at FERC alleging that spot market prices in
the Pacific Northwest wholesale electric market were unjust and
unreasonable.  In 2003, FERC issued an order recommending that no
refunds should be ordered.  Several parties in the proceeding filed
requests for rehearing and FERC denied rehearing and reaffirmed its prior ruling
that refunds were not appropriate for spot market sales in the Pacific Northwest
during the first half of 2001.  The Port of Seattle then filed an
appeal of the FERC’s order denying rehearing in the




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)





FERC
Gaming Partnerships Order





In 2003,
in the Gaming Partnerships Order, FERC asserted that certain entities, including
PNM, acted in concert with Enron Corporation and other market participants to
engage in activities that constitute gaming and/or anomalous market behavior in
violation of the Cal ISO and Cal PX tariffs during 2000 and 2001.  In
2003, PNM filed its responses to the Gaming Partnerships Order indicating that
it did not engage in the alleged partnerships, alliances or other
arrangements.





In 2004,
FERC issued an order granting the FERC staff’s motion to dismiss seven of the
thirteen PNM customers on grounds that there was no evidence to conclude that
these companies used their commercial relationship with PNM to game the Cal ISO
and Cal PX markets.  FERC approved the settlements entered into by two
of the thirteen PNM customers and dismissed another of PNM’s customers from the
proceeding.  Of the three remaining PNM customers in the docket, the
FERC staff entered into settlement agreements with two of them.  In
2004, the FERC staff filed a motion to dismiss PNM from the docket and to enter
into a settlement of certain parking and lending transactions.  The
staff’s motion stated that after investigation and review there was no evidence
that PNM engaged in a gaming practice that violated either the Cal ISO or Cal PX
tariffs.  However, PNM entered into a settlement of certain matters
outside the scope of the docket related to historic parking and lending
transactions, under which PNM agreed not to provide parking and lending services
prospectively without first meeting certain requirements agreed to with the FERC
staff.  Additionally, PNM agreed to pay $1.0 million in settlement to
FERC to obtain satisfaction of all issues related to any potential liability
stemming from the provision of parking and lending services
historically.  In July 2005, FERC issued its order granting the
staff’s motion to dismiss PNM from the Gaming Partnerships docket.  In
its order, FERC found that PNM did not engage in prohibited gaming practices as
defined in the FERC’s Gaming Partnership Order and also approved the settlement
on the parking and lending services.  FERC also denied the California
parties’ request to keep the docket open as to PNM and terminated the PNM
docket.  Subsequently, the California parties filed their petition for
rehearing at FERC objecting to FERC’s dismissal of PNM from the Gaming
Partnership investigation and objecting to the settlement reached with the FERC
staff.  The petition for rehearing is pending before FERC and PNM
cannot predict the ultimate outcome of the rehearing petition.  In
August 2005, Enron, the final of the original 13 PNM customers, entered into a
settlement agreement with the FERC staff, the California parties and others that
was contested by several parties.  In November 2005, FERC issued an
order approving the joint offer of settlement.  Various parties either
objected to the settlement or otherwise sought efforts to stay or overturn
FERC’s order.  In January 2007, the Enron matter went to hearing on
certain contested matters.  In June 2007, the FERC administrative law
judge issued its initial decision, which has no impact on PNM.  In
October 2007, Enron entered a settlement with the final parties litigating
against them and filed the settlement at FERC, which is still pending before
FERC.





In
November 2007, FERC staff initiated a settlement proceeding designed to
determine how the proceeds from the penalty amounts should be allocated among
participants in the Cal PX and Cal ISO markets (Phase II Distribution
proceedings).  PNM has participated in several settlement conferences
regarding proposed allocations of these funds.  The settlement process
is still ongoing.  PNM cannot predict the ultimate outcome of this
proceeding.




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)


California
Power Exchange and Pacific Gas and Electric Bankruptcies





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





California
Attorney General Complaint





In 2002,
the California Attorney General filed a complaint with FERC against numerous
sellers, including PNM, regarding prices for wholesale electric sales into the
Cal ISO and Cal PX markets and to the California Department of Water Resources.
In 2002, FERC entered an order denying the California Attorney General’s request
to initiate a refund proceeding, but directed sellers, including PNM, to comply
with additional reporting requirements with regard to certain wholesale power
transactions. The California Attorney General filed a petition for review in the
Ninth Circuit. The Ninth Circuit issued a decision in September 2004 upholding
the FERC’s authority to establish the market-based rate framework under the
Federal Power Act, but held that FERC violated its administrative discretion by
declining to investigate whether it should order refunds from sellers who failed
to provide transaction-specific reports to FERC as required by its rules. The
Ninth Circuit determined that FERC has the authority to order refunds for these
transactions if it elects to do so and remanded the case back to FERC for
further proceedings, including a determination as to whether additional refunds
are appropriate. In October 2004, PNM joined the group of competitive Sellers
and filed a petition for rehearing at the Ninth Circuit.  In July
2006, the Ninth Circuit denied rehearing.  In December 2006, PNM
joined a group of sellers in filing a petition for writ of certiorari in the
U.S. Supreme Court challenging the decision by the Ninth Circuit.  On
June 18, 2007, the U.S. Supreme Court denied the Petition for Certiorari filed
by various competitive sellers, including PNM.  In November 2007, the
Ninth Circuit’s time-out period expired and in December 2007, the Ninth Circuit
issued its mandate remanding the case back to FERC.





Upon
remand to FERC, numerous parties filed motions at FERC regarding the appropriate
procedures to occur on remand for the disposition of the case.  In
March 2008, FERC issued its order on remand indicating that it will establish
trial type hearings to determine if specific Sellers’ violation of FERC’s
quarterly reporting requirements led to an unjust and unreasonable rate for
these Sellers in Cal ISO and Cal Px markets during the 2000-2001 time
period.  The order required sellers to submit revised quarterly
reports to FERC for review.  PNM filed its quarterly sales transaction
reports per FERC’s order.  The order also established settlement
procedures for the matters.  An initial settlement conference was held
in April 2008.  PNM has participated in these settlement proceedings.
Several parties filed petitions for rehearing of FERC’s order. PNM participated
with the other members of the Competitive Sellers Group to respond to the
petition for rehearing.  The petitions for rehearing are currently
pending before FERC.  The Company cannot predict the ultimate outcome
of the FERC proceeding on remand, or whether PNM will be ultimately directed to
make any additional refunds as the result of the decision.





California
Antitrust Litigation





In May
2005, the California Attorney General filed a lawsuit in California state court
against PNM, PowerEx, and the Colorado River Commission alleging that PNM and
PowerEx conspired to engage in unfair trade practices involving overcharges for
electricity in violation of California state antitrust laws.  In June
2005, the lawsuit was removed to Federal Court.  In April 2006, the
Federal District Court issued its decision denying the California Attorney
General’s motion to remand the case back to the state court, and granted PNM’s
and PowerEx’s motions to dismiss the case.  The California Attorney
General has appealed the case to the Ninth Circuit.  Briefs were filed
in




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)





Regional
Transmission Issues





In
September 2005, FERC issued a NOI on Preventing Undue Discrimination and
Preference in Transmission Services seeking information from the industry
regarding the provisions of the OATT for possible revision in a future
rulemaking.  On May 18, 2006, FERC issued a NOPR to reform its pro
forma OATT.  FERC emphasized that its purpose for the NOPR was not to
create new market structures, redesign approved RTO or ISO markets, require
transmission owners to divest control over transmission, impinge on state
jurisdiction, or weaken the protection of native load customers.  Core
OATT elements were retained, including comparability requirements, protection of
native load, state’s jurisdiction over bundled retail load, functional
unbundling to address undue discrimination, and reciprocity.  PNM and
TNMP filed Comments and Supplemental Comments in this proceeding.  In
February 2007, FERC issued Order 890 setting out the new OATT rule, which became
effective in May 2007.  Order 890 addressed several elements of
transmission service, including:  (1) requiring greater consistency
and transparency in calculating available transfer capacity for transmission;
(2) requiring transparent transmission planning and customer access to
transmission plans; (3) reform of rollover rights; and (4) clarification of
various ambiguities in transmission rights under the new
OATT.   Order 890 also required numerous compliance filings to be
made by transmission providers.  Order 890 also attempted to clarify
certain elements of transmission service utilized for network generation
resources, but still left uncertain the transmission used for such resources
that pre-dated transmission open access.  PNM filed a petition for
rehearing seeking clarification of this issue in regards to one such generation
resource that PNM has under contract.  Numerous other entities also
filed petitions for rehearing and/or clarification.  Additionally, a
number of entities, including EEI, requested extensions of time for making
several of the compliance filings due under the order issued in the
NOPR.  In December 2007, FERC issued its order on rehearing and
clarified and revised some aspects of its initial order and rule designated as
Order 890-A.  FERC did not specifically rule on the request PNM filed
for clarification on transmission used for network generation
resources.  The order reiterated its general rule on this topic, which
had no impact on PNM operations.  In January 2008, multiple parties
filed requests for rehearing of Order 890-A.  PNM did not join any of
these rehearing requests.  The Company cannot predict the outcome of
the final rule.





The
Company’s transmission group completed the numerous FERC compliance filings
required by Order 890.  On May 30, 2007, the Company posted its
initial compliance filing and its transmission planning proposal on its
website.  PNM will continue making the required compliance filings and
will participate in FERC’s technical conferences regarding Order 890 reliability
standards.





Biomass
Project





PNM
entered into a 20-year contract for the purchase of 32 MW of capacity from a
renewable biomass power generation facility in central New Mexico to commence in
2009.  The purchase power agreement is contingent upon the satisfaction of
certain conditions precedent as outlined in the purchase power
agreement.  The contract contains several conditions including
obtaining permits, completion of financial closing by April 2, 2007 and the
start of construction by July 2, 2007.  The biomass project owner was
unable to complete the financial closing on April 2, 2007 or to start
construction by July 2, 2007.  As a result, PNM delivered a remediable
event of default letter to the biomass project owner.  The operator
declared a force majeure over failure to obtain an air permit.  The
air permit was subsequently approved on October 2, 2007.





The
biomass project owner filed an application in August 2007 for a renewable energy
production tax credit in connection with the project.   The
project owner’s application was initially denied, on grounds that the owner had
not demonstrated the project was a qualifying facility for the credit because it
had not shown there was a sufficient amount of wood fuel under
contract.  The project owner filed an appeal and ultimately obtained
the


56




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




Valencia




On April 18,
2007, PNM entered into a power purchase agreement to purchase all of the
electric capacity and energy from Valencia, a natural gas-fired power plant near
Albuquerque, New Mexico.  A third-party built, owns and operates the
facility while PNM will be the sole purchaser of the electricity generated. The
Valencia facility began commercial operation on May 30, 2008.  For
financial accounting purposes PNM consolidates the plant under FIN 46R since it
absorbs the majority of the variability in the cash flows of the
plant.  See Note 16.


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





(10)
            Regulatory
      and Rate Matters





PNMR





Price-to-Beat
Base Rate Reset





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





First
Choice Request for ERCOT Alternative Dispute Resolution





On June
30, 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
requests that ERCOT resolve the dispute by restating certain elements of its
first quarter 2008




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)


The Company is
unable to predict the outcome of this matter.





PNM





Gas
Rate Case





On May
30, 2006, PNM filed a general gas rate case that asked the NMPRC to approve an
increase in the service fees charged to its 481,000 natural gas customers,
including the set monthly fee, the charge tied to monthly usage, and
miscellaneous on-demand service fees.  Those fees are separate from
the cost of gas charged to customers, which would not be affected by the fee
increase.  The petition requested an increase in base gas service
rates of $22.6 million and an increase in miscellaneous on-demand service rates
of $0.2 million.  The request was designed to provide PNM’s gas
utility an opportunity to earn an 11% return on equity, which is consistent with
the average return allowed ten comparable natural gas utilities.  The
petition also requested approval of a line item that provides a true-up
mechanism for operational costs when system-wide gas consumption is lower or
higher than what is designed in the rates.  On June 29, 2007 the NMPRC
unanimously approved an increase in annual revenues of approximately $9 million
for PNM.  The NMPRC based the new rates on a revenue requirement
needed to earn a 9.53% return on equity.  The NMPRC did not approve
PNM’s request for the true-up mechanism for operational costs based on
system-wide gas consumption.  PNM and the AG filed appeals with the
New Mexico Supreme Court.  The AG’s appeal seeks reversal of the NMPRC
decision on one issue – weather normalization.  PNM’s appeal seeks
reversal of the NMPRC determination of the required return on equity and on four
cost-of-service accounting issues.  If PNM’s appeal is successful in
all respects and the AG’s appeal is unsuccessful, PNM’s authorized annual
revenue would increase by about $10 million.  If PNM’s appeal is
unsuccessful in all respects and the AG’s appeal is upheld, PNM’s annual
revenues would decrease by $6.8 million.  The Supreme Court has
scheduled oral argument for September 16, 2008.  PNM is unable to
predict the outcome of these appeals.





Electric
Rate Case





On
February 21, 2007, PNM filed a general electric rate case requesting the NMPRC
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% 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.  Hearings were held in December 2007.  At the
hearing PNM adjusted its revenue increase request to $76.9
million.  On April 24, 2008, the NMPRC issued a final order in the
case that resulted in a revenue increase of $34.4 million.  The rate
increase provides for a 10.1% 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, but
did allow PNM the opportunity to seek recovery in the next rate case if it can
demonstrate that it incurred an actual incremental cost for its compliance with
the RPS.  The NMPRC also ruled that recovery of coal mine
decommissioning costs should be capped at $100 million.  The order
results 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 is evaluating whether it will be successful
in meeting the criteria set forth by the NMPRC.  PNM has appealed the
treatment of coal mine decommissioning and the RECs to the New Mexico Supreme
Court.  The AG has moved to intervene.  To the extent PNM is
successful in demonstrating these costs are recoverable through future rate
proceedings, the costs will be restored to PNM’s balance sheet. The Company is
unable to predict the outcome of this matter.





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)





On March
20, 2008, PNM and the International Brotherhood of Electrical Workers Local No.
611, filed a joint motion in the general electric rate case requesting NMPRC
authorization to implement an Emergency FPPAC on an interim
basis.  The motion requested immediate authority to implement an
Emergency FPPAC for a period of 24 months or until the effective date of new
rates in PNM’s next rate case, whichever is earlier.





On May
22, 2008, following an evidentiary hearing, the NMPRC issued a final order that
approved the Emergency FPPAC with certain modifications relating to power plant
performance and the treatment of revenue from SO2
allowances.  The Emergency FPPAC permits PNM to recover its actual
fuel and purchased power costs up to $0.024972 per kWh, which is an increase of
$0.008979 per kWh above the fuel costs included in base rates.  PNM is
unable to predict if actual fuel and purchased power costs will exceed the cap
during the period the Emergency FPPAC is in effect.PNM implemented the
Emergency FPPAC as modified on June 2, 2008 and expects to recover $58 million
to $62 million annually.  Motions for rehearing were filed by NMPRC
staff and intervenors on June 12, 2008 and June 23, 2008.  PNM filed
timely responses to these motions.  The NMPRC denied the motions for
rehearing on July 8, 2008.  Appeals from the final order may be filed
within 30 days from the last date on which a rehearing motion is
denied.  The Albuquerque Bernalillo County Water Utility Authority
filed an appeal on August 1, 2008.  PNM is unable to predict if other
appeals will be filed or the final outcome.





Complaint
Against Southwestern Public Service Company





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





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





In July
2007, the FERC open meeting agenda indicated the Golden Spread complaint case
initial decision was on the docket for consideration by the FERC.  SPS
and Golden Spread filed a motion to delay the FERC action on the initial
decision to provide additional opportunity for the parties to reach
settlement.  PNM filed its opposition to the motion requesting the
FERC to proceed to issue an order on the initial decision.  However,
FERC removed the Golden Spread item from its agenda.  In September
2007, FERC open meeting agenda again indicated the Golden Spread complaint case
initial decision was on the docket for consideration by the FERC.  SPS
and Golden Spread




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)




.





In April
2008, FERC issued its order in the Golden Spread complaint case and affirmed in
part and reversed in part the ALJ’s initial decision.  FERC affirmed
the decision of the ALJ that SPS violated its tariffs, and did not overturn the
ALJ’s decision requiring SPS to make refunds.  However, FERC did
truncate the refund period to the period beginning January 1,
2005.  Additionally, there was no identification of the amount of
refunds owed to PNM in the order.  In a separate order issued on the
same day, FERC approved the SPS-Golden Spread settlement entered in the
case.The
Company filed a petition for rehearing of FERC’s order, as did other entities,
including SPS, which are still pending before FERC.  PNM cannot
predict the final outcome of the case at FERC.





Gas
      Utility Assets Sale and Service
Abandonment





On March
11, 2008, PNM filed its application at the NMPRC seeking regulatory approval for
the sale of the gas utility assets and approval for the abandonment of its
natural gas utility service in New Mexico.  In a separate application
filed simultaneously at the NMPRC, NMGC requested approval to purchase PNM Gas’s
utility assets, requested the issuance of a Certificate of Convenience and
Necessity to operate the gas utility and provide natural gas utility service in
New Mexico, and for various other regulatory approvals.  On March 17,
2008, PNM and NMGC filed a joint motion to consolidate the applications before
the NMPRC.  By order dated March 27, 2008, the NMPRC consolidated the
two applications into one docket and appointed a hearing examiner in the case to
hear the case.  Discovery has commenced in the case.  The
Company filed testimony with the NMPRC in March 2008 for approvals required for
the sale of its gas utility service and for transition services to be provided
to NMGC.  PNM and NMGC continue to respond to discovery
requests.  Hearings have been rescheduled to begin September 12,
2008.  On August 12, 2008, the NMPRC staff, the AG, PNM and NMGC filed
a motion to vacate the current procedural schedule and to move the hearing date
to start on September 16, 2008.  This motion indicates the filing
parties have agreed to a stipulation resolving the issues in the proceeding and
anticipate that stipulation will be filed on August 20, 2008.  The
motion was conditionally approved on August 13, 2008.  PNM is unable to
predict the outcome of the case.





NMPRC
      Inquiry on Fuel and Purchased Power Adjustment
  Clauses





On
October 16, 2007, the NMPRC opened a NOI that may 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 responses will be discussed at a future
workshop.  The NMPRC staff was directed to make a filing
dealing with the need for consistency of the fuel clauses, streamlining, and
whether a single methodology would be beneficial and should be applied to all of
the utilities.  PNM filed its comments on December 3,
2007.





NMPRC
Rulemaking On Disincentives to Energy Efficiency Programs





On
January 29, 2008, the NMPRC issued a NOI to identify disincentives in utility
expenditures on energy efficiency and measures to mitigate those disincentives,
including specific ratemaking alternatives.  In a procedural order
issued April 1, 2008, the NMPRC determined that the proceeding should be
conducted as a rulemaking and appointed a Hearing Examiner to conduct workshops
as part of the process.  Workshops have begun and will continue at
least through August 2008.  A revised rule is expected to be approved
by the end of 2008.





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)
 Investigation Into Executive
Compensation





On
December 11, 2007, the NMPRC issued an order docketing an investigation into
whether the level of compensation paid to executives by investor-owned New
Mexico utilities is reasonable and prudent.  The order required all
such utilities to submit certain information and documents by January 11,
2008.  PNM made the required filing.  No further proceedings
are scheduled at this time.





PVNGS
Unit 2 Lease Interest Transfer





On June
29, 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.In January
2008, PNM filed an application at the NMPRC seeking approval to acquire the
beneficial ownership interest in the trust from the PNMR
subsidiary.  PNM requested recovery of the costs of acquiring the Unit
2 interest through inclusion in its electric rates.  The filing also
requested certain variances from NMPRC filing and reporting requirements
normally required for general diversification filings.  Discovery has
commenced in the proceeding and the Company has been responding to discovery
requests made by NMPRC staff and intervenors in the case.  The
procedural schedule has changed several times, and the hearing in the case is
currently set for October 2008.  The Company cannot predict the
outcome of this proceeding at this time.





In April
2008, PNM also filed an application at FERC seeking FERC approval of the
proposed acquisition of the PVNGS Unit 2 interest.  FERC established a
comment date in early May 2008, and no comments or interventions were filed in
the docket.  On June 30, 2008, FERC issued its order approving the
transfer of the PVNGS Unit 2 interest to PNM.





TNMP





TNMP
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 and the Supreme Court has requested response to those
filings.





In July
2005, the PUCT issued a final order confirming the calculation of carrying costs
and the amount of stranded costs allowed for recovery. TNMP and other parties
appealed the July PUCT order. On July 24, 2006, the district court in Austin,
Texas affirmed the PUCT order. TNMP appealed that decision to the Texas Third
Court of Appeals in Austin, Texas.  On January 31, 2008, the Court of
Appeals affirmed the District Court and PUCT decisions.  TNMP and
other parties have filed a request with the Texas Supreme Court to review the
Court of Appeals decision.





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





The PUCT
approved an amendment to the true-up rule at its June 29, 2006 open meeting. The
amendment will result in a lower interest rate that TNMP is allowed to collect
on the unsecuritized true-up balance through a 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 new rate will affect
TNMP by lowering the previously approved carrying cost rate of 10.93%. This
change in carrying charges will affect the rates set in TNMP’s stranded cost
filing. The rule went into effect on July 20, 2006, and TNMP made its compliance
filing.  Because the PUCT staff disagreed with TNMP’s calculation of
the carrying cost rate, the matter was referred to SOAH for a hearing on the
merits. The parties filed and submitted testimony.  Initial briefs
were filed on April 6, 2007 with reply briefs filed on April 16,
2007.  On June 18, 2007, the ALJ issued a proposed order approving a




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)







60-Day
Rate Review





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





(11)
            EnergyCo





In
January 2007, PNMR and ECJV, a wholly owned subsidiary of Cascade, created
EnergyCo to serve expanding U.S. markets throughout the Southwest, Texas and the
West.  PNMR and ECJV each have a 50 percent ownership interest in
EnergyCo, a limited liability company.  See Note 22 of the Notes to
Consolidated Financial Statements in the 2007 Annual Reports on Form
10-K.  PNMR has no commitments or guarantees with respect to
EnergyCo.  Summarized financial information for EnergyCo is as
follows:





Results
of Operations





Three
      Months Ended
            
            
            Six
      Months EndedJune
      30,
            
            
            June
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007(In
      thousands)Operating
      revenues
            
            $
            304,462
            
            
            $
            14,366
            
            
            $
            478,540
            
            
            $
            14,366Cost
      of sales
            
            
            259,927
            
            
            
            4,561
            
            
            
            457,097
            
            
            
            4,561Gross
      margin
            
            
            44,535
            
            
            
            9,805
            
            
            
            21,443
            
            
            
            9,805Non-fuel
      operations and maintenance expenses
            
            
            4,947
            
            
            
            799
            
            
            
            9,603
            
            
            
            799Administrative
      and general expenses
            
            
            7,697
            
            
            
            2,314
            
            
            
            13,799
            
            
            
            3,647Impairment
      of intangible assets
            
            
            21,795
            
            
            
            -
            
            
            
            21,795
            
            
            
            -Depreciation
      and amortization expense
            
            
            7,658
            
            
            
            1,528
            
            
            
            15,227
            
            
            
            1,528Interest
      expense
            
            
            4,789
            
            
            
            818
            
            
            
            11,357
            
            
            
            818Taxes
      other than income tax
            
            
            3,609
            
            
            
            1,004
            
            
            
            7,269
            
            
            
            1,004Other
      (income) and deductions
            
            
            (449
            )
            
            
            (34
            )
            
            
            (706
            )
            
            
            (43
            )Earnings
      (loss) before income taxes
            
            
            (5,511
            )
            
            
            3,376
            
            
            
            (56,901
            )
            
            
            2,052Income
      taxes (benefit)(1)
            
            
            91
            
            
            
            -
            
            
            
            (293
            )
            
            
            -Net
      earnings (loss)
            
            $
            (5,602
            )
            
            $
            3,376
            
            
            $
            (56,608
            )
            
            $
            2,05250
      percent of net earnings (loss)
            
            $
            (2,801
            )
            
            $
            1,688
            
            
            $
            (28,304
            )
            
            $
            1,026Amortization
      of basis difference in EnergyCo
            
            
            278
            
            
            
            584
            
            
            
            698
            
            
            
            584PNMR
      equity in net earnings (loss) of EnergyCo
            
            $
            (2,523
            )
            
            $
            2,272
            
            
            $
            (27,606
            )
            
            $
            1,610


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








62


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


Financial
Position





June
      30, 2008
            
            
            December
      31, 2007(In
      thousands)Current
      assets
            
            $
            247,095
            
            
            $
            119,255Net
      property, plant and equipment
            
            
            898,642
            
            
            
            853,492Deferred
      assets
            
            
            254,130
            
            
            
            297,197Total
      assets
            
            
            1,399,867
            
            
            
            1,269,944Current
      liabilities
            
            
            288,556
            
            
            
            88,812Long-term
      debt
            
            
            700,778
            
            
            
            650,778Other
      long-term liabilities
            
            
            60,869
            
            
            
            34,344Total
      liabilities
            
            
            1,050,203
            
            
            
            773,934Owners’
      equity
            
            $
            349,664
            
            
            $
            496,01050
      percent of owners’ equity
            
            $
            174,832
            
            
            $
            248,005Unamortized
      PNMR basis difference in EnergyCo
            
            
            225
            
            
            
            89PNMR
      equity investment in EnergyCo
            
            $
            175,057
            
            
            $
            248,094





SFAS 141
requires that EnergyCo individually value each asset and liability received in
the Altura and Altura Cogen Power Plant transactions and initially record them
on its balance sheet at the determined fair value.  For both
transactions, this accounting results in a significant amount of amortization
since the acquired contracts’ pricing terms differ significantly from fair value
at the date of acquisition and emission allowances, while acquired from
government programs without future cost to EnergyCo, have historically had
significant market value.  During the three months and six months
ended June 30, 2008, EnergyCo recorded amortization of contracts acquired of
$(0.3) million and $1.0 million, which is recorded in operating revenues, and
amortization on emission allowances of $1.2 million and $5.3 million, which is
recorded in cost of sales.





In July
2008, a federal appeals court ruling by the U.S. Court of Appeals for the
District of Columbia Circuit Court invalidated CAIR.  This ruling
appears to remove the need for emissions allowance credits under the CAIR
program.  EnergyCo currently carries $153.5 million in inventory for
emissions allowances, $34.6 million of which fall under the CAIR program, from
the purchase of the Altura Cogen plant and contribution of the Twin Oaks
plant.  EnergyCo is currently evaluating what impacts this ruling
might have on the value of this inventory.





The
contribution of Altura created a basis difference between PNMR’s recorded
investment in EnergyCo and 50 percent of EnergyCo’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 six months ended June 30, 2008, the
basis difference adjustment detailed above of $0.2 million and $0.6 million
relates mainly to contract amortization with insignificant offsets related to
the other minor basis difference components.





EnergyCo
intends to have an active hedging program that covers a multi-year
period.  The level of hedging at any given time varies depending on
current market conditions and other factors.  Economic hedges that do
not qualify for or are not designated as cash flow hedges or normal
purchases/sales under SFAS 133 are derivative instruments that are required to
be marked to market.  Changes in the fair value of economic hedges
resulted in an increase in net earnings of $8.1 million in the three months
ended June 30, 2008 and a reduction of net earnings of $39.0 million in the six
months ended June 30, 2008 as a result of higher power prices.  Due to
the extreme market volatility experienced in the first quarter in the ERCOT
market, EnergyCo made the decision to exit the speculative trading business and
close out the speculative trading positions.  In May 2008, EnergyCo
closed out all remaining




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)







The
assets of Altura transferred to EnergyCo included the development rights for a
possible 600-megawatt expansion of the Twin Oaks plant, which was classified as
an intangible asset.  EnergyCo has made a strategic decision not to
pursue the Twin Oaks expansion at this time and, in the three months ended June
30, 2008, has written off the development rights as an impairment of intangible
assets amounting to $21.8 million.





(12)
            Related
      Party Transactions





PNMR,
PNM, TNMP, and EnergyCo are considered related parties as defined in
SFAS 57.  PNMR Services Company provides corporate services to
PNMR, its subsidiaries, and EnergyCo.  Additional information
concerning the Company’s related party transactions is contained in Note 20 of
the Notes to Consolidated Financial Statements in the 2007 Annual Reports on
Form 10-K.





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





Three
      Months Ended
            
            
            Six
      Months EndedJune
      30,
            
            
            June
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007(In
      thousands)Transmission,
      distribution and related services billings:PNM
      to TNMP
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            126TNMP
      to PNMR
            
            
            14,909
            
            
            
            16,873
            
            
            
            29,319
            
            
            
            33,386Shared
      services billings from PNMR to:PNM*
            
            $
            23,544
            
            
            $
            23,697
            
            
            $
            46,411
            
            
            $
            49,595TNMP
            
            
            5,038
            
            
            
            4,587
            
            
            
            9,815
            
            
            
            10,117Services
      billings from PNMR to EnergyCo
            
            $
            4,749
            
            
            $
            2,344
            
            
            $
            7,224
            
            
            $
            3,414Income
      tax sharing payments from:PNMR
      to PNM
            
            $
            -
            
            
            $
            -
            
            
            $
            1,855
            
            
            $
            -PNMR
      to TNMP
            
            
            -
            
            
            
            -
            
            
            
            858
            
            
            
            -Capital
      expenditure billings from PNMR to:PNM
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            99TNMP
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            18Interest
      payments:TNMP
      to PNMR
            
            $
            28
            
            
            $
            324
            
            
            $
            117
            
            
            $
            592





* PNM
shared services include billings to PNM Gas of $6.0 million and $8.1 million for
the three months ended and $12.1 million and $16.6 million for the six months
ended June 30, 2008 and 2007.


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)





(13)
            New
      Accounting Pronouncements





Note 21
of Notes to Consolidated Financial Statements in the 2007 Annual Reports on Form
10-K contains information regarding recently issued accounting pronouncements
that could have a material impact on the Company.  See Note 4
regarding the implementation of SFAS 157, SFAS 159, and FSP FIN
39-1.





SFAS
161 – Disclosures about Derivative Instruments and Hedging Activities—an
amendment of FASB Statement No. 133





In March
2008, the FASB released SFAS 161, which is effective for years beginning after
November 15, 2008 and changes the disclosure requirements for derivative
instruments and hedging instruments.  Entities are required to provide
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under SFAS 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, results of operation, and cash flows.  The Company is
currently reviewing the requirements of SFAS 161 and will implement the required
disclosures no later than January 1, 2009.





SFAS
162 – The Hierarchy of Generally Accepted Accounting Principles





The
current GAAP hierarchy, as set forth in the American Institute of Certified
Public Accountants Statement on Auditing Standards No. 69, has been criticized
because (1) it is directed to the auditor rather than the entity, (2) it is
complex, and (3) it ranks FASB Statements of Financial Accounting Concepts,
which are subject to the same level of due process as FASB Statements of
Financial Accounting Standards, below industry practices that are widely
recognized as generally accepted but that are not subject to due
process.  The Board concluded that the GAAP hierarchy should reside in
the accounting literature established by the FASB and issued this Statement to
achieve that result.  This statement is effective 60 days following
the SEC’s approval.  The Company has reviewed the impact of SFAS 162
and does not believe it will result in a change in current
practice.





(14)
            Discontinued
      Operations





As
discussed in Note 2, PNM entered into an agreement to sell its gas operations,
which comprise the PNM Gas segment.  Under GAAP, the assets and
liabilities of PNM Gas are considered to be held-for-sale beginning December 31,
2007 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.  Prior periods have been recast to be consistent with
this presentation.  In accordance with SFAS 144, no depreciation is
recorded on assets held for sale in 2008.  Summarized financial
information for PNM Gas is as follows:





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)


Results
of Operations





Three
      Months Ended
            
            
            Six
      Months EndedJune
      30,
            
            
            June
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007(In
      thousands)Operating
      revenues
            
            $
            95,568
            
            
            $
            75,112
            
            
            $
            316,024
            
            
            $
            291,569Cost
      of energy
            
            
            64,917
            
            
            
            45,068
            
            
            
            225,747
            
            
            
            206,776Gross
      margin
            
            
            30,651
            
            
            
            30,044
            
            
            
            90,277
            
            
            
            84,793Operating
      expenses
            
            
            22,991
            
            
            
            23,808
            
            
            
            44,433
            
            
            
            47,089Depreciation
      and amortization
            
            
            -
            
            
            
            5,473
            
            
            
            -
            
            
            
            11,074Operating
      income
            
            
            7,660
            
            
            
            763
            
            
            
            45,844
            
            
            
            26,630Other
      income (deductions)
            
            
            502
            
            
            
            (493
            )
            
            
            1,443
            
            
            
            625Net
      interest charges
            
            
            (3,576
            )
            
            
            (2,898
            )
            
            
            (6,547
            )
            
            
            (5,844
            )Segment
      earnings before income taxes
            
            
            4,586
            
            
            
            (2,628
            )
            
            
            40,740
            
            
            
            21,411Income
      taxes
            
            
            1,824
            
            
            
            (1,040
            )
            
            
            15,479
            
            
            
            8,477Segment
      earnings (loss)
            
            $
            2,762
            
            
            $
            (1,588
            )
            
            $
            25,261
            
            
            $
            12,934








Financial
Position





June
      30,
            
            
            December
      31,2008
            
            
            2007(In
      thousands)ASSETSCash
      and cash equivalents
            
            $
            25
            
            
            $
            28Accounts
      receivable and unbilled revenues, net
            
            
            50,181
            
            
            
            89,699Regulatory
      and other current assets
            
            
            27,480
            
            
            
            30,334Total
      current assets
            
            
            77,686
            
            
            
            120,061Gas
      plant in service
            
            
            758,351
            
            
            
            743,664Accumulated
      depreciation and amortization
            
            
            (241,876
            )
            
            
            (245,741
            )Construction
      work in progress
            
            
            19,803
            
            
            
            22,411Net
      utility plant
            
            
            536,278
            
            
            
            520,334Regulatory
      and other assets
            
            
            5,150
            
            
            
            6,205$
            619,114
            
            
            $
            646,600LIABILITIES
      AND EQUITYAccounts
      payable and accrued expenses
            
            $
            18,313
            
            
            $
            68,458Regulatory
      and other current liabilities
            
            
            24,409
            
            
            
            27,545Total
      current liabilities
            
            
            42,722
            
            
            
            96,003Regulatory
      liabilities
            
            
            73,790
            
            
            
            72,727Deferred
      credits and other liabilities
            
            
            15,524
            
            
            
            17,121Total
      deferred credits and other liabilities
            
            
            89,314
            
            
            
            89,848Equity
            
            
            487,078
            
            
            
            460,749$
            619,114
            
            
            $
            646,600





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)
 PNM’s
cost-of-gas revenues collected from sales-service customers are recovered in
accordance with NMPRC regulations through the PGAC and represent a pass-through
of the cost of natural gas to the customer.  The NMPRC has approved an
agreement regarding the hedging strategy of PNM and the implementation of a
price management fund program which includes a continuous monthly balancing
account with a carrying charge.  This carrying charge has the effect
of keeping PNM whole on purchases of gas since it is compensated for the time
value of money that exists due to any delay in collections from
customers.
  PNM uses call
options and financial swaps to facilitate the hedge strategy. PNM Gas also
enters into physical gas contracts to meet the needs of its retail sales-service
customers.  Costs and gains and losses for these instruments are
deferred and recovered through the PGAC with no income statement
effect.  At June 30, 2008, PNM Gas had $1.7 million of current assets
and current liabilities related to these instruments.  At December 31,
2007, PNM Gas had $7.1 million of current assets and current liabilities related
to these instruments.  At June 30, 2008, PNM Gas derivatives were
valued using Level 2 and Level 3 inputs as defined in SFAS 157.





(15)
            Business
      Improvement Plan




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




The
Company has existing plans providing severance benefits to employees who are
involuntarily terminated due to elimination of their positions.  Under
SFAS 112, the severance benefits payable under the Company’s existing plans
should be recorded when it is probable that a liability has been incurred and
the amount can be reasonably estimated.  At June 30, 2008, the Company
assessed the status of the business improvement plan process and the positions
that were probable of being eliminated as determined at that
time.  During the three months and six months ended June 30, 2008, the
Company recorded pre-tax severance benefits payable of $0.3 million and $0.5
million and other costs, primarily consulting fees, related to the business
improvement plan of $1.2 million and $3.2 million.  Substantially all
of these costs were recorded by PNMR.  As additional phases of the
business improvement plan are developed, the associated costs will be
analyzed and recorded.





(16)
            Variable
      Interest Entities





Information
regarding the Company’s assessment of potential variable interest entities is
contained in Note 9 of Notes to the Consolidated Financial Statements in the
2007 Annual Reports on Form 10-K.





On April
18, 2007, PNM entered into a power purchase agreement to purchase all of the
electric capacity and energy from Valencia, a natural gas-fired power plant near
Albuquerque, 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 power purchase agreement is
for 20 years beginning June 1, 2008, with the full output of the plant estimated
to be 145 MW.  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 has
evaluated the accounting treatment of this arrangement and concluded that the
third party entity that owns Valencia is a variable interest entity and that PNM
is the primary beneficiary of the entity under FIN 46R since it 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


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)







Summarized
financial information for Valencia is as follows:





Results of Operations






May 30, 2008
      toJune 30,
      2008(In
      thousands)Operating
      revenues
            $                            
      1,416Operating
      expenses
            190Interest
      expense
            225Income attributable to minority interest
            $                            
      1,001






Financial Position








June 30,
      2008(In
      thousands)Current
      assets
            $                         
        1,472Net property,
      plant and equipment
            90,041Total assets
            91,513Short-term
      debt
            86,651Other current
      liabilities
            5,016Total liabilities
            91,667Owner' equity
      - minority interest
            $               
                  
      (154)





As of
June 30, 2008, the utility plant serves as collateral for the obligations of
this variable interest entity.  As of June 30, 2008, the short-term
debt of variable interest entity is to its parent and is non-recourse to both
PNMR and PNM.  Subsequent to June 30, 2008, the variable interest
entity restructured its financial arrangements with its parent through a new
short-term debt obligation of $75.2 million.





(17)
            Impairment
      of Goodwill and Other Intangible
Assets





Under the
provisions of SFAS 142, 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, $102.8 million of goodwill was transferred to
PNM.





The
Company performed its annual testing of these assets as of April 1,
2008.  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


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)


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.





The market
capitalization of PNMR’s common stock has been significantly below book value
during 2008, which is an indicator that intangible assets may be
impaired.  In addition, changes in the ERCOT market in which First
Choice operates have significantly impacted its results of
operations.  The first step of the impairment test for goodwill
requires that the Company compare the fair value of each reporting unit with its
carrying value, including goodwill.  For non-amortizing intangibles,
the Company compares the fair value of the intangible asset to its recorded
value.  As a result of this analysis, the Company concluded there was
an indication of impairment in the reporting units having goodwill and that the
First Choice trade name was impaired.  This conclusion requires the
Company to perform the second step of the SFAS 142 impairment analysis,
determining the amount of goodwill impairment to be recorded.  The
amount is calculated by comparing the implied fair value of the goodwill to its
carrying amount.  This exercise requires the Company to allocate the
fair value determined in step one to the individual assets and liabilities of
the reporting unit.  Any remaining fair value would be the implied
fair value of goodwill on the testing date.  To the extent the
recorded amount of goodwill of a reporting unit exceeds the implied fair value
determined in step two, an impairment loss is reflected in results of
operations.  Although the impairments of goodwill have no income tax
effects, the impairment of the First Choice trade name does have an income tax
effect.





Because
of the timing and complexity of the calculations required in the second step of
the impairment analysis related to the goodwill of First Choice, the Company
anticipates finalizing this analysis in the third quarter of
2008.  However, a preliminary estimate of the goodwill impairment has
been recorded based on the calculations performed to date and may be
revised.  Neither the impairments recorded as of June 30, 2008 nor
changes to the estimated amounts impact the Company’s cash flows.  A
summary of goodwill and non-amortizing intangible assets and pre-tax impairments
recorded in the three months ended June 30, 2008 is as follows:





Balance
            
            
            Balancebefore
            
            
            afterImpairment
            
            
            Impairment
            
            
            ImpairmentGoodwill:First
      Choice
            
            $
            131,768
            
            
            $
            88,559
            
            
            $
            43,209PNM
            
            
            102,775
            
            
            
            51,632
            
            
            
            51,143TNMP
            
            
            261,121
            
            
            
            226,665
            
            
            
            34,456Total
      PNMR
            
            $
            495,664
            
            
            $
            366,856
            
            
            
            128,808Other
      intangible assets - First Choice trade name
            
            $
            68,774
            
            
            $
            61,403
            
            
            
            7,371Total
      impairment
            
            
            
            
            
            
            
            
            
            $
            136,179




69




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





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





MD&A
FOR PNMR





BUSINESS
AND STRATEGY





Overview





The
overall strategy of PNMR is to concentrate business efforts on its core
regulated and unregulated electric businesses.  PNMR intends to focus
on its regulated electric business by selling its gas operations, which is
expected to close near the end of 2008.  PNMR expects to use the net
after-tax proceeds to retire debt, fund future electric capital expenditures and
for other corporate purposes.  The growth of the unregulated electric
business is expected from the further development of EnergyCo.  The
strategic growth of EnergyCo was initiated with PNMR’s contribution of Altura on
June 1, 2007 and continued with EnergyCo’s acquisition of the Altura Cogen Power
Plant in August 2007 and with EnergyCo’s ongoing joint development project for
the Cedar Bayou IV Generating Station with NRG Energy, Inc.  On August
11, 2008, PNMR announced that it has decided to pursue strategic alternatives
for First Choice.





The focus
on the electric businesses also includes environmental sustainability
efforts.  These efforts are comprised of various components including
environmental upgrades, energy efficiency leadership, solar generating site and
technology feasibility, purchasing power from renewable resources, and climate
change leadership.  The investment in environmental sustainability is
expected to result in future emission reductions as well as other long-term
benefits for the Company.





Another
initiative of PNMR is the separation of its merchant operations from PNM, which
is being accomplished in several steps.  In June, 2008, PNMR completed
the sale of certain wholesale power, natural gas and transmission contracts as
an initial step in separating its merchant plant activities from
PNM.  In addition, Luna and Lordsburg are required to be separated by
January 1, 2010 under an existing NMPRC regulatory order.  These units
will either be sold, included in retail rates, or placed in another PNMR
subsidiary.  PVNGS Unit 3, which is not subject to the separation
order, can remain in PNM.  In April 2008, PNM entered into three
separate contracts for the sale of capacity and energy related to its entire
ownership interest in PVNGS Unit 3, which is 135 MW.  Under two of the
contracts, PNM sells 90 MW of firm capacity and energy.  Under the
remaining contract, PNM sells 45 MW of unit contingent capacity and
energy.  The term of the contracts is May 1, 2008 through December 31,
2010.  Under the two firm contracts, the two buyers made prepayments of
$40.6 million and $30.0 million.  The prepayments have been recorded as
deferred revenue and are being amortized over the life of the
contracts.





Critical
to PNMR’s success for the foreseeable future is the financial health of PNM,
PNMR’s largest subsidiary.  In 2007, PNM filed for new electric rates
designed to increase operating revenues $76.9 million on an annual
basis.  In addition, PNM asked for reinstatement of its FPPAC, which
it voluntarily relinquished in 1994 under dramatically different
circumstances.  As discussed in Note 10, on April 24, 2008, the NMPRC
issued a final order in the case resulting in a revenue increase of $34.4
million and new rates reflecting the 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 PNM’s RECs that are being deferred as
regulatory assets and to cap the recovery of coal mine decommissioning costs at
$100 million. PNM recorded pre-tax write-offs in the first quarter of 2008 of
$19.6 million related to the coal mine decommissioning and $10.6 million for REC
costs deferred through March 31, 2008.  PNM has appealed the treatment
of coal mine decommissioning and the RECs to the New Mexico Supreme
Court.  The AG has moved to intervene.  The Company is
unable to predict the outcome of this matter.  As a result of PNM’s
filing of the Emergency FPPAC described below, the NMPRC determined that it was
unnecessary to address the merits of the FPPAC proposed in PNM’s original
case.





70


On March
20, 2008, PNM, together with the International Brotherhood of Electrical Workers
Local 611, filed a joint motion to implement an Emergency FPPAC. The motion
requested immediate authority to implement an Emergency FPPAC for a period of 24
months or until the effective date of new rates in PNM’s next rate case,
whichever is earlier.  On May 22, 2008, following an evidentiary
hearing, the NMPRC issued a final order that approved the Emergency FPPAC with
certain modifications relating to power plant performance and the treatment of
revenue from SO2
allowances.  The Emergency FPPAC permits PNM to recover its actual
fuel and purchased power costs up to $0.024972 per kWh, which is an increase of
$0.008979 per kWh above the fuel costs included in base rates. PNM is unable to
predict if actual fuel and purchased power costs will exceed the cap during the
period the Emergency FPPAC is in effect.  PNM implemented the
Emergency FFPAC as modified on June 2, 2008 and expects to recover $58 million
to $62 million annually.  Appeals from the final order may be filed
within 30 days from the last date on which a rehearing motion is
denied.  The Albuquerque Bernalillo County Water Utility Authority
filed an appeal on August 1, 2008.  PNM is unable to predict if other
appeals will be filed or the final outcome.





PNM
expects to file a general base rate case during the third quarter of 2008
for all of its electric customers in New Mexico, except those previously served
by TNMP.  PNM expects new rates to be effective in the third
quarter of 2009.  The general rate increase will seek recovery
of increased capital spending and O&M costs and to replace the existing
Emergency FPPAC with a permanent FPPAC.  The rate increase will
also seek to include Luna and Lordsburg in rates charged to New Mexico
customers.





TNMP
expects to file a general base rate case in Texas on August 29, 2008. TNMP will
requests rates become effective October 3, 2008. Rates would become effective on
this date, unless the PUCT or those cities retaining original jurisdiction
suspend the proposed rates. Suspension of proposed rates is the normal
course of action and results in the matter being referred to a contested
hearing.  TNMP's last general rate case was filed in March 2000, with
rates effective January 1, 2002.





EnergyCo





EnergyCo
was formed with ECJV as an unregulated energy company that will serve expanding
U.S. markets throughout the Southwest, Texas and the West.  ECJV is a
wholly owned subsidiary of Cascade, which is a large PNMR
shareholder.  PNMR and ECJV each have a 50 percent ownership interest
in EnergyCo, a limited liability company.





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





·
            Competitive
      retail energy sales


·
            Development,
      ownership, and active management of diverse generation
    fleet


·
            Wholesale
      marketing to capture the extrinsic value of the generating
      fleet


·
            Multi-year
      hedging program to minimize price volatility and maximize cash flow
      predictability





On June
1, 2007, PNMR contributed its ownership of Altura to EnergyCo at fair market
value of $549.6 million, as adjusted to reflect changes in working
capital.  ECJV made a cash contribution to EnergyCo equal to 50% of
the contribution amount and EnergyCo distributed that cash to
PNMR.  EnergyCo has entered into a bank credit facility for working
capital and other corporate purposes.  In August 2007, EnergyCo
completed the acquisition of Altura Cogen and announced plans to co-develop the
Cedar Bayou IV Generating Station, substantial portions of which are financed
through EnergyCo’s credit facility.  In addition to purchasing
energy-related assets, EnergyCo could continue to grow by PNMR contributing
existing unregulated assets and ECJV, in turn, matching those contributions with
cash contributions, but any such contributions would be at the option of PNMR
and ECJV.





Dividends
on Common Stock





On August
11, 2008, the Board declared the regular quarterly dividend on common stock of
$0.125 per share, which represents a reduction of 46 percent from the previous
quarter. PNMR’s indicated annual rate is $0.50 per share. The Board took this
action to improve the Company’s liquidity and set a new foundation for long-term
value creation.  The reduction also better aligns PNMR’s dividend
yield with industry averages.





71


Business
Improvement Plan




The
Company has undertaken a business improvement process that includes a
comprehensive cost structure analysis of its operations and a benchmarking
analysis to similar-sized utilities.  The Company is now in the
process of implementing a series of initiatives designed to manage future
operational costs, maintain financial strength and strengthen its regulated
utilities.  The multi-phase process includes a business improvement
plan to streamline internal processes and reduce operating costs.  The
utility-related process enhancements are designed to improve business
functions.  For the three months and six months ended June 30, 2008,
PNMR recorded pre-tax expense of $1.5 million and $3.8 million for costs of the
business improvement plan, primarily consulting and severance-related
costs.  As additional phases of the business improvement plan are
developed, the associated costs will be analyzed and recorded as specified
by GAAP.





RESULTS
OF OPERATIONS





Executive
Summary





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





Three
      Months Ended June 30,
            
            
            Six
      Months Ended June 30,2008
            
            
            2007
            
            
            Change
            
            
            2008
            
            
            2007
            
            
            Change(In
      millions, except earnings per share)Earnings
      (loss) from continuing operations
            
            $
            (146.2
            )
            
            $
            21.8
            
            
            $
            (168.1
            )
            
            $
            (217.4
            )
            
            $
            37.0
            
            
            $
            (254.4
            )Earnings
      from discontinued operations, net of income taxes
            
            
            2.8
            
            
            
            (1.6
            )
            
            
            4.4
            
            
            
            25.3
            
            
            
            12.9
            
            
            
            12.4Net
      earnings (loss)
            
            $
            (143.5
            )
            
            $
            20.2
            
            
            $
            (163.7
            )
            
            $
            (192.1
            )
            
            $
            49.9
            
            
            $
            (242.0
            )Average
      common and common equivalent shares outstanding
            
            
            81.7
            
            
            
            78.8
            
            
            
            2.9
            
            
            
            79.3
            
            
            
            78.4
            
            
            
            0.9Earnings
      (loss) from continuing operations per diluted share
            
            $
            (1.79
            )
            
            $
            0.28
            
            
            $
            (2.07
            )
            
            $
            (2.74
            )
            
            $
            0.47
            
            
            $
            (3.21
            )Net
      earnings (loss) per diluted share
            
            $
            (1.76
            )
            
            $
            0.26
            
            
            $
            (0.29
            )
            
            $
            (2.42
            )
            
            $
            0.64
            
            
            $
            (3.06
            )





The
components of the changes in earnings (loss) from continuing operations by
segment are:





Three
      Months Ended
            
            
            Six
      Months EndedJune
      30, 2008
            
            
            June
      30, 2008(In
      millions)PNM
      Electric
            
            $
            (47.8
            )
            
            $
            (89.1
            )TNMP
      Electric
            
            
            (33.0
            )
            
            
            (30.2
            )Altura
            
            
            (4.5
            )
            
            
            (6.0
            )First
      Choice
            
            
            (66.8
            )
            
            
            (96.7
            )Corporate
      and Other
            
            
            (12.7
            )
            
            
            (14.3
            )EnergyCo
            
            
            (3.3
            )
            
            
            (18.1
            )Net
      change
            
            $
            (168.1
            )
            
            $
            (254.4
            )





Detailed
information regarding the changes in earnings (loss) from continuing and
discontinued operations is included in the segment information below. The
changes in the number of common and common equivalent shares are primarily due
to shares of common stock issued in May 2008 under the publicly held
equity-linked units (See Note 7) offset by a reduced number of dilutive shares
due to changes in share price.





As
discussed in Note 17, the Company performs its annual assessment of its goodwill
and non-amortizing assets as of April 1 of each year.  The 2008
assessment indicates that goodwill and the First Choice trade name have been
impaired.  EnergyCo has made a strategic decision not to pursue the
Twin Oaks expansion at this time and has written off its development rights as
an impairment.  After-tax impairment losses totaling $140.7 million
were recorded in the three months ended June 30, 2008.





72


The
impairments of goodwill amounting to $128.8 million have no income tax
impacts.  However, the impairment of the First Choice trade name
amounting to $7.4 million and PNMR’s equity in the EnergyCo impairment amounting
to $10.9 million do have income tax impacts.  The absence of income
tax benefits on the goodwill impairments has a significant impact on the
effective tax rates of the Company in 2008.  In 2007, PNMR had
favorable tax decisions regarding previously unrecognized tax benefits,
including a settlement with the IRS, that had a $16.0 million positive impact on
income taxes, which reduced the effective tax rate.





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.





PNM
Electric





The table
below summarizes operating results for PNM Electric:





Three
      Months Ended June 30,
            
            
            Six
      Months Ended June 30,2008
            
            
            2007
            
            
            Change
            
            
            %
            
            
            2008
            
            
            2007
            
            
            Change
            
            
            %(Dollars
      in millions)Total
      operating revenues
            
            $
            386.1
            
            
            $
            300.3
            
            
            $
            85.8
            
            
            
            28.6
            
            
            $
            638.7
            
            
            $
            540.7
            
            
            $
            98.0
            
            
            
            18.1Cost
      of energy
            
            
            247.6
            
            
            
            185.3
            
            
            
            62.3
            
            
            
            33.6
            
            
            
            383.3
            
            
            
            288.5
            
            
            
            94.8
            
            
            
            32.9Gross
      margin
            
            
            138.5
            
            
            
            115.0
            
            
            
            23.5
            
            
            
            20.4
            
            
            
            255.4
            
            
            
            252.2
            
            
            
            3.2
            
            
            
            1.3Operating
      expenses
            
            
            147.2
            
            
            
            89.7
            
            
            
            57.5
            
            
            
            64.1
            
            
            
            273.8
            
            
            
            177.9
            
            
            
            95.9
            
            
            
            53.9Depreciation
      and amortization
            
            
            20.9
            
            
            
            20.7
            
            
            
            0.2
            
            
            
            1.0
            
            
            
            41.9
            
            
            
            41.5
            
            
            
            0.4
            
            
            
            1.0Operating
      income (loss)
            
            
            (29.6
            )
            
            
            4.6
            
            
            
            (34.2
            )
            
            
            (743.5
            )
            
            
            (60.2
            )
            
            
            32.8
            
            
            
            (93.0
            )
            
            
            (283.5
            )Interest
      income
            
            
            4.9
            
            
            
            7.2
            
            
            
            (2.3
            )
            
            
            (31.9
            )
            
            
            11.0
            
            
            
            14.9
            
            
            
            (3.9
            )
            
            
            (26.2
            )Other
      income (deductions)
            
            
            (2.2
            )
            
            
            2.1
            
            
            
            (4.3
            )
            
            
            (204.8
            )
            
            
            (7.7
            )
            
            
            2.5
            
            
            
            (10.2
            )
            
            
            (408.0
            )Net
      interest charges
            
            
            (17.6
            )
            
            
            (12.7
            )
            
            
            (4.9
            )
            
            
            38.6
            
            
            
            (31.7
            )
            
            
            (25.9
            )
            
            
            (5.8
            )
            
            
            22.4Earnings
      (loss) before income taxes
            
            
            (44.6
            )
            
            
            1.1
            
            
            
            (45.7
            )
            
            
            (4,154.5
            )
            
            
            (88.6
            )
            
            
            24.3
            
            
            
            (112.9
            )
            
            
            (464.6
            )Income
      taxes (benefit)
            
            
            2.4
            
            
            
            0.4
            
            
            
            2.0
            
            
            
            500.0
            
            
            
            (14.6
            )
            
            
            9.2
            
            
            
            (23.8
            )
            
            
            (258.7
            )Preferred
      stock dividend requirements
            
            
            0.1
            
            
            
            0.1
            
            
            
            -
            
            
            
            -
            
            
            
            0.3
            
            
            
            0.3
            
            
            
            -
            
            
            
            -Segment
      earnings (loss)
            
            $
            (47.1
            )
            
            $
            0.6
            
            
            $
            (47.7
            )
            
            
            (7,950.0
            )
            
            $
            (74.2
            )
            
            $
            14.9
            
            
            $
            (89.1
            )
            
            
            (598.0
            )





73


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





Three
      Months Ended June 30, 2008
            
            
            Six
      Months Ended June 30, 2008Earnings
      (Loss)
            
            
            
            
            
            
            
            
            
            
            
            Earnings
      (Loss)Before
            
            
            Segment
            
            
            
            
            
            
            
            
            Before
            
            
            SegmentTotal
            
            
            Gross
            
            
            Income
            
            
            Earnings
            
            
            Total
            
            
            Gross
            
            
            Income
            
            
            EarningsRevenues
            
            
            Margin
            
            
            Taxes
            
            
            (Loss)
            
            
            Revenues
            
            
            Margin
            
            
            Taxes
            
            
            (Loss)(In
      millions)Increased
      rate recovery including emergency FPPAC
            
            $
            11.5
            
            
            $
            11.5
            
            
            $
            11.5
            
            
            $
            6.9
            
            
            $
            11.5
            
            
            $
            11.5
            
            
            $
            11.5
            
            
            $
            6.9Regulated
      sales growth
            
            
            1.8
            
            
            
            1.0
            
            
            
            1.0
            
            
            
            0.6
            
            
            
            7.6
            
            
            
            2.3
            
            
            
            2.3
            
            
            
            1.4Generation
      and purchased power cost increases
            
            
            -
            
            
            
            (0.7
            )
            
            
            (0.7
            )
            
            
            (0.4
            )
            
            
            -
            
            
            
            (9.3
            )
            
            
            (9.3
            )
            
            
            (5.6
            )Regulated
      plant availability
            
            
            24.7
            
            
            
            8.3
            
            
            
            5.7
            
            
            
            3.4
            
            
            
            9.3
            
            
            
            (13.3
            )
            
            
            (28.2
            )
            
            
            (17.0
            )Sales
      of SO2
      allowances
            
            
            (13.1
            )
            
            
            (13.1
            )
            
            
            (13.1
            )
            
            
            (7.9
            )
            
            
            (13.2
            )
            
            
            (13.2
            )
            
            
            (13.2
            )
            
            
            (8.0
            )Unregulated
      margins
            
            
            (1.3
            )
            
            
            0.6
            
            
            
            0.6
            
            
            
            0.4
            
            
            
            29.5
            
            
            
            2.8
            
            
            
            2.8
            
            
            
            1.7Gain
      on sale of merchant portfolio
            
            
            2.9
            
            
            
            2.9
            
            
            
            2.9
            
            
            
            1.8
            
            
            
            5.1
            
            
            
            5.1
            
            
            
            5.1
            
            
            
            3.1Net
      unrealized economic hedges
            
            
            54.9
            
            
            
            12.2
            
            
            
            12.2
            
            
            
            7.4
            
            
            
            41.2
            
            
            
            17.4
            
            
            
            17.4
            
            
            
            10.5Operational
      costs
            
            
            -
            
            
            
            -
            
            
            
            (4.8
            )
            
            
            (2.9
            )
            
            
            -
            
            
            
            -
            
            
            
            (2.2
            )
            
            
            (1.3
            )NDT
            
            
            -
            
            
            
            -
            
            
            
            (2.6
            )
            
            
            (1.6
            )
            
            
            -
            
            
            
            -
            
            
            
            (7.2
            )
            
            
            (4.3
            )Regulatory
      disallowances
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (30.2
            )
            
            
            (18.2
            )Impairment
      of goodwill
            
            
            -
            
            
            
            -
            
            
            
            (51.1
            )
            
            
            (51.1
            )
            
            
            -
            
            
            
            -
            
            
            
            (51.1
            )
            
            
            (51.1
            )Other
            
            
            4.4
            
            
            
            0.8
            
            
            
            (7.3
            )
            
            
            (4.3
            )
            
            
            7.0
            
            
            
            (0.1
            )
            
            
            (10.6
            )
            
            
            (7.2
            )Total
      increase (decrease)
            
            $
            85.8
            
            
            $
            23.5
            
            
            $
            (45.7
            )
            
            $
            (47.7
            )
            
            $
            98.0
            
            
            $
            3.2
            
            
            $
            (112.9
            )
            
            $
            (89.1
            )








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





Three
      Months Ended June 30,
            
            
            Six
      Months Ended June 30,2008
            
            
            2007
            
            
            Change
            
            
            %
            
            
            2008
            
            
            2007
            
            
            Change
            
            
            %(Dollars
      in millions)Residential
            
            $
            66.6
            
            
            $
            58.4
            
            
            $
            8.2
            
            
            
            14.0
            
            
            $
            137.8
            
            
            $
            126.2
            
            
            $
            11.6
            
            
            
            9.2Commercial
            
            
            81.7
            
            
            
            73.1
            
            
            
            8.6
            
            
            
            11.8
            
            
            
            149.2
            
            
            
            137.8
            
            
            
            11.4
            
            
            
            8.3Industrial
            
            
            25.4
            
            
            
            25.8
            
            
            
            (0.4
            )
            
            
            (1.6
            )
            
            
            51.1
            
            
            
            49.2
            
            
            
            1.9
            
            
            
            3.9Transmission
            
            
            6.2
            
            
            
            6.5
            
            
            
            (0.3
            )
            
            
            (4.6
            )
            
            
            11.5
            
            
            
            13.1
            
            
            
            (1.6
            )
            
            
            (12.2
            )Other
      retail
            
            
            6.6
            
            
            
            5.8
            
            
            
            0.8
            
            
            
            13.8
            
            
            
            11.9
            
            
            
            11.0
            
            
            
            0.9
            
            
            
            8.2Wholesale
      long-term sales
            
            
            47.4
            
            
            
            34.3
            
            
            
            13.1
            
            
            
            38.2
            
            
            
            82.6
            
            
            
            61.9
            
            
            
            20.7
            
            
            
            33.4Wholesale
      short-term sales
            
            
            152.2
            
            
            
            96.4
            
            
            
            55.8
            
            
            
            57.9
            
            
            
            194.6
            
            
            
            141.5
            
            
            
            53.1
            
            
            
            37.5$
            386.1
            
            
            $
            300.3
            
            
            $
            85.8
            
            
            
            28.6
            
            
            $
            638.7
            
            
            $
            540.7
            
            
            $
            98.0
            
            
            
            18.1Average
      customers (thousands)
            
            
            494.7
            
            
            
            488.1
            
            
            
            6.6
            
            
            
            1.4
            
            
            
            494.3
            
            
            
            487.6
            
            
            
            6.7
            
            
            
            1.4





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





Three
      Months Ended June 30,
            
            
            Six
      Months Ended June 30,2008
            
            
            2007
            
            
            Change
            
            
            %
            
            
            2008
            
            
            2007
            
            
            Change
            
            
            %(Gigawatt
      hours)Residential
            
            
            718.2
            
            
            
            704.9
            
            
            
            13.3
            
            
            
            1.9
            
            
            
            1,575.9
            
            
            
            1,525.6
            
            
            
            50.3
            
            
            
            3.3Commercial
            
            
            1,016.2
            
            
            
            992.6
            
            
            
            23.6
            
            
            
            2.4
            
            
            
            1,926.6
            
            
            
            1,869.5
            
            
            
            57.1
            
            
            
            3.1Industrial
            
            
            410.4
            
            
            
            494.2
            
            
            
            (83.8
            )
            
            
            (17.0
            )
            
            
            852.2
            
            
            
            964.5
            
            
            
            (112.3
            )
            
            
            (11.6
            )Other
      retail
            
            
            71.2
            
            
            
            63.4
            
            
            
            7.8
            
            
            
            12.3
            
            
            
            130.8
            
            
            
            119.8
            
            
            
            11.0
            
            
            
            9.2Wholesale
      long-term sales
            
            
            773.1
            
            
            
            631.2
            
            
            
            141.9
            
            
            
            22.5
            
            
            
            1,427.2
            
            
            
            1,174.7
            
            
            
            252.5
            
            
            
            21.5Wholesale
      short-term sales
            
            
            1,089.8
            
            
            
            1,286.8
            
            
            
            (197.0
            )
            
            
            (15.3
            )
            
            
            2,169.1
            
            
            
            2,453.7
            
            
            
            (284.6
            )
            
            
            (11.6
            )4,078.9
            
            
            
            4,173.1
            
            
            
            (94.2
            )
            
            
            (2.3
            )
            
            
            8,081.8
            
            
            
            8,107.8
            
            
            
            (26.0
            )
            
            
            (0.3
            )





On May 1,
2008, PNM Electric implemented a $34.4 million base rate increase approved by
the NMPRC.  The rate increase provides for a 10.1% return on
equity.  Additionally, the NMPRC approved the implementation of an
Emergency FPPAC effective June 2, 2008, which is projected to allow PNM Electric
to recover an additional $58




74


t o $62
million of actual fuel and purchased power costs annually above amounts
collected through base rates.  See Note 10.  Implementation
of the base rate increase resulted in a $9.2 million increase to revenues and
gross margin in the second quarter of 2008.  The Emergency FPPAC
resulted in a $2.3 million increase to revenues and gross margin in the second
quarter of 2008 when compared to the second quarter of 2007, reflecting the net
amount of fuel and purchased power costs used to serve retail loads that were
recovered in addition to amounts recovered through base rates.





An
increase in the average retail customer count, combined with higher per-customer
usage among residential and commercial customers, was partially offset by a
reduction in sales volumes due to the reduced operations of a major industrial
customer and higher costs to serve this growth.





For the
three months ended June 30, the increase in segment earnings associated with
sales growth was more than offset by increases in generation prices and
purchased power costs.  For the six months ended June 30, increases in
generation prices and purchased power costs more than offset the increase in
regulated sales growth.





For the
three months ended June 30, increased generation from regulated power plants
increased system sales revenues, gross margin and segment
earnings.  During the first quarter of 2008, planned outages at SJGS
Unit 3 and Four Corners Unit 5, along with the extension of a planned outage for
environmental upgrades at SJGS Unit 4 and a planned refueling outage at PVNGS
Unit 3, decreased off-system sales revenues, gross margins and segment
earnings.  During both the first and second quarters of 2008, O&M
costs related to regulated plant performance increased as a result of an
increase in the maintenance work performed during the outages, the addition of
Afton and an increase in costs for labor, materials and supplies.





A
decrease in the sales of SO2 allowances
reduced revenues, gross margin and segment earnings.





Unregulated
margins decreased over prior year levels due to increased costs to serve
long-term sales contracts and decreased availability at
PVNGS.  Unregulated margins also benefited from an increase in trading
margins primarily driven by losses recognized in the second quarter of
2007.





A gain on
the sale of the merchant portfolio in June 2008 increased revenues, gross margin
and segment earnings.  PNM’s merchant portfolio included certain
wholesale power, natural gas and transmission contracts that represent a
significant portion of the wholesale activity portfolio of PNM Electric and
include several long-term sales and purchase power agreements.  See
Note 4.





Changes
in net unrealized mark-to-market gains and losses on economic hedges were driven
by increased gas and electric price movements during the first and second
quarters of 2008 compared to the first and second quarters of 2007.





Operational
costs include costs for materials and supplies, self-insurance, depreciation,
advertising, and interest as well as shared services, employee labor, pension
and benefits.  Increased costs in the second quarter, largely driven
by interest on higher debt balances and transaction fees associated with the
refinancing of debt, were partially offset by decreases in incentive-based
compensation, as well as cost savings resulting from the business improvement
plan.





Income
related to NDT assets includes realized gains and losses, interest and dividend
income and any associated fees and taxes, along with other than temporary
impairment losses recognized in accordance with SFAS 115.  This income
totaled a loss of $0.2 million in the second quarter of 2008 and a loss of $4.3
million for the six months ending June 30, 2008, compared to a gain of $2.4
million in the second quarter of 2007 and $2.9 million for the six months ending
June 30, 2007.





An
impairment of goodwill amounting to $51.1 million was recorded in the three
months ended June 30, 2008 as a result of the annual impairment assessment (See
Note 17).  Regulatory disallowances resulting from the NMPRC’s rate
order dated April 24, 2008 include write-offs of $10.6 million for deferred
costs of RECs and $19.6 million for coal mine decommissioning
costs.


75





TNMP
Electric





The table
below summarizes the operating results for TNMP Electric:





Three
      Months Ended June 30,
            
            
            Six
      Months Ended June 30,2008
            
            
            2007
            
            
            Change
            
            
            %
            
            
            2008
            
            
            2007
            
            
            Change
            
            
            %(Dollars
      in millions)Total
      operating revenues
            
            $
            47.1
            
            
            $
            43.5
            
            
            $
            3.6
            
            
            
            8.3
            
            
            $
            89.3
            
            
            $
            84.5
            
            
            $
            4.8
            
            
            
            5.7Cost
      of energy
            
            
            7.9
            
            
            
            7.2
            
            
            
            0.7
            
            
            
            9.7
            
            
            
            15.7
            
            
            
            14.4
            
            
            
            1.3
            
            
            
            9.0Gross
      margin
            
            
            39.2
            
            
            
            36.3
            
            
            
            2.9
            
            
            
            8.0
            
            
            
            73.6
            
            
            
            70.1
            
            
            
            3.5
            
            
            
            5.0Operating
      expenses
            
            
            52.0
            
            
            
            17.7
            
            
            
            34.3
            
            
            
            193.8
            
            
            
            67.4
            
            
            
            36.4
            
            
            
            31.0
            
            
            
            85.2Depreciation
      and amortization
            
            
            8.8
            
            
            
            7.0
            
            
            
            1.8
            
            
            
            25.7
            
            
            
            17.1
            
            
            
            14.0
            
            
            
            3.1
            
            
            
            22.1Operating
      income (loss)
            
            
            (21.6
            )
            
            
            11.6
            
            
            
            (33.2
            )
            
            
            (286.2
            )
            
            
            (11.0
            )
            
            
            19.7
            
            
            
            (30.7
            )
            
            
            (155.8
            )Interest
      income
            
            
            -
            
            
            
            0.8
            
            
            
            (0.8
            )
            
            
            (100.0
            )
            
            
            -
            
            
            
            0.9
            
            
            
            (0.9
            )
            
            
            (100.0
            )Other
      income (deductions)
            
            
            0.6
            
            
            
            0.7
            
            
            
            (0.1
            )
            
            
            (14.3
            )
            
            
            1.0
            
            
            
            1.0
            
            
            
            -
            
            
            
            -Net
      interest charges
            
            
            (4.4
            )
            
            
            (6.9
            )
            
            
            2.5
            
            
            
            (36.2
            )
            
            
            (9.4
            )
            
            
            (13.9
            )
            
            
            4.5
            
            
            
            (32.4
            )Earnings
      (loss) before income taxes
            
            
            (25.3
            )
            
            
            6.2
            
            
            
            (31.5
            )
            
            
            (508.1
            )
            
            
            (19.3
            )
            
            
            7.6
            
            
            
            (26.9
            )
            
            
            (353.9
            )Income
      taxes
            
            
            3.4
            
            
            
            2.0
            
            
            
            1.4
            
            
            
            70.0
            
            
            
            5.7
            
            
            
            2.4
            
            
            
            3.3
            
            
            
            137.5Segment
      earnings (loss)
            
            $
            (28.8
            )
            
            $
            4.2
            
            
            $
            (33.0
            )
            
            
            (785.7
            )
            
            $
            (25.0
            )
            
            $
            5.2
            
            
            $
            (30.2
            )
            
            
            (580.8
            )





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





Three
      Months Ended June 30, 2008
            
            
            Six
      Months Ended June 30, 2008Earnings
      (Loss)
            
            
            
            
            
            
            
            
            
            
            
            Earnings
      (Loss)Before
            
            
            Segment
            
            
            
            
            
            
            
            
            Before
            
            
            SegmentTotal
            
            
            Gross
            
            
            Income
            
            
            Earnings
            
            
            Total
            
            
            Gross
            
            
            Income
            
            
            EarningsRevenues
            
            
            Margin
            
            
            Taxes
            
            
            (Loss)
            
            
            Revenues
            
            
            Margin
            
            
            Taxes
            
            
            (Loss)(In
      millions)Retail
      growth/weather
            
            $
            2.3
            
            
            $
            2.3
            
            
            $
            2.3
            
            
            $
            1.5
            
            
            $
            2.9
            
            
            $
            2.9
            
            
            $
            2.9
            
            
            $
            1.9Synergy
      savings credits
            
            
            -
            
            
            
            -
            
            
            
            0.8
            
            
            
            0.5
            
            
            
            -
            
            
            
            -
            
            
            
            1.6
            
            
            
            1.0Debt
      reduction
            
            
            -
            
            
            
            -
            
            
            
            2.3
            
            
            
            1.5
            
            
            
            -
            
            
            
            -
            
            
            
            3.8
            
            
            
            2.5Operational
      costs
            
            
            -
            
            
            
            -
            
            
            
            (0.8
            )
            
            
            (0.5
            )
            
            
            -
            
            
            
            -
            
            
            
            1.3
            
            
            
            0.9Impairment
      of goodwill
            
            
            -
            
            
            
            -
            
            
            
            (34.5
            )
            
            
            (34.5
            )
            
            
            -
            
            
            
            -
            
            
            
            (34.5
            )
            
            
            (34.5
            )Other
            
            
            1.3
            
            
            
            0.6
            
            
            
            (1.6
            )
            
            
            (1.5
            )
            
            
            1.9
            
            
            
            0.6
            
            
            
            (2.0
            )
            
            
            (2.0
            )Total
      increase
            
            $
            3.6
            
            
            $
            2.9
            
            
            $
            (31.5
            )
            
            $
            (33.0
            )
            
            $
            4.8
            
            
            $
            3.5
            
            
            $
            (26.9
            )
            
            $
            (30.2
            )





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





Three
      Months Ended June 30,
            
            
            Six
      Months Ended June 30,2008
            
            
            2007
            
            
            Change
            
            
            %
            
            
            2008
            
            
            2007
            
            
            Change
            
            
            %(Dollars
      in millions)Residential
            
            $
            17.8
            
            
            $
            15.6
            
            
            $
            2.2
            
            
            
            14.1
            
            
            $
            33.1
            
            
            $
            30.4
            
            
            $
            2.7
            
            
            
            8.9Commercial
            
            
            18.8
            
            
            
            17.7
            
            
            
            1.1
            
            
            
            6.2
            
            
            
            35.5
            
            
            
            33.7
            
            
            
            1.8
            
            
            
            5.3Industrial
            
            
            3.3
            
            
            
            1.8
            
            
            
            1.5
            
            
            
            83.3
            
            
            
            6.5
            
            
            
            3.5
            
            
            
            3.0
            
            
            
            85.7Other
            
            
            7.2
            
            
            
            8.4
            
            
            
            (1.2
            )
            
            
            (14.3
            )
            
            
            14.2
            
            
            
            16.9
            
            
            
            (2.7
            )
            
            
            (16.0
            )$
            47.1
            
            
            $
            43.5
            
            
            $
            3.6
            
            
            
            8.3
            
            
            $
            89.3
            
            
            $
            84.5
            
            
            $
            4.8
            
            
            
            5.7Average
      customers (thousands(1))
            
            
            229.3
            
            
            
            225.3
            
            
            
            4.0
            
            
            
            1.8
            
            
            
            228.3
            
            
            
            225.3
            
            
            
            3.0
            
            
            
            1.3





(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 (in thousands) 119.5 and 138.9 and
      customers of TNMP Electric for the three months ended June 30, 2008 and
      2007 and 121.9 and 141.4 customers for the six months ended June 30, 2008
      and 2007 who have chosen First Choice as their REP.  These
      customers are also included in the First Choice
  segment.








76


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





Three
      Months Ended June 30,
            
            
            Six
      Months Ended June 30,2008
            
            
            2007
            
            
            Change
            
            
            %
            
            
            2008
            
            
            2007
            
            
            Change
            
            
            %(Gigawatt
      hours(1))Residential
            
            
            637.4
            
            
            
            579.9
            
            
            
            57.5
            
            
            
            9.9
            
            
            
            1,175.9
            
            
            
            1,118.3
            
            
            
            57.6
            
            
            
            5.2Commercial
            
            
            587.2
            
            
            
            563.7
            
            
            
            23.5
            
            
            
            4.2
            
            
            
            1,060.9
            
            
            
            1,022.9
            
            
            
            38.0
            
            
            
            3.7Industrial
            
            
            516.6
            
            
            
            473.9
            
            
            
            42.7
            
            
            
            9.0
            
            
            
            1,059.7
            
            
            
            881.2
            
            
            
            178.5
            
            
            
            20.3Other
            
            
            26.3
            
            
            
            23.9
            
            
            
            2.4
            
            
            
            10.0
            
            
            
            52.8
            
            
            
            48.1
            
            
            
            4.7
            
            
            
            9.81,767.5
            
            
            
            1,641.4
            
            
            
            126.1
            
            
            
            7.7
            
            
            
            3,349.3
            
            
            
            3,070.5
            
            
            
            278.8
            
            
            
            9.1





(1)
            The
      GWh sales reported above include 433.0 and 487.3 GWhs for the three months
      ended June 30, 2008 and 2007 and 828.0 and 960.3 GWhs for the six months
      ended June 30, 2008 and 2007 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.





Increases
in the average customer count and warmer temperatures in the second quarter more
than offset milder temperatures in the first quarter, resulting in increases in
sales volumes.  The increase in sales volumes and higher service fees
approved by the PUCT increased operating revenues and gross margin.





Credits
from synergy savings related to the acquisition of TNMP operations by PNMR were
returned to customers from July 2005 through June 2007, as ordered by the
PUCT.  The completion of the return of these savings in 2007 resulted
in increased 2008 earnings.





Second
quarter 2008 segment earnings also benefited from lower interest charges
resulting from a $100 million long-term debt reduction in the second quarter of
2007 and the refinancing of $148.9 million of debt in the second quarter of
2008.





An
impairment of goodwill amounting to $34.5 million was recorded in the three
months ended June 30, 2008 as a result of the annual impairment assessment (See
Note 17).





Operational
costs include costs for materials and supplies, self-insurance, depreciation and
advertising, as well as shared services, employee labor, pension and
benefits.  Increased building maintenance and shared service costs in
the second quarter were more than offset by decreases in incentive-based
compensation in the first quarter and savings resulting from the business
improvement plan.





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 June 30,
            
            
            Six
      Months Ended June 30,2008
            
            
            2007
            
            
            Change
            
            
            %
            
            
            2008
            
            
            2007
            
            
            Change
            
            
            %(Dollars
      in millions)Total
      operating revenues
            
            $
            95.6
            
            
            $
            75.1
            
            
            $
            20.5
            
            
            
            27.3
            
            
            $
            316.0
            
            
            $
            291.6
            
            
            $
            24.4
            
            
            
            8.4Cost
      of energy
            
            
            64.9
            
            
            
            45.1
            
            
            
            19.8
            
            
            
            43.9
            
            
            
            225.7
            
            
            
            206.8
            
            
            
            18.9
            
            
            
            9.1Gross
      margin
            
            
            30.7
            
            
            
            30.0
            
            
            
            0.7
            
            
            
            2.3
            
            
            
            90.3
            
            
            
            84.8
            
            
            
            5.5
            
            
            
            6.5Operating
      expenses
            
            
            23.0
            
            
            
            23.8
            
            
            
            (0.8
            )
            
            
            (3.4
            )
            
            
            44.4
            
            
            
            47.1
            
            
            
            (2.7
            )
            
            
            (5.7
            )Depreciation
      and amortization
            
            
            -
            
            
            
            5.5
            
            
            
            (5.5
            )
            
            
            (100.0
            )
            
            
            -
            
            
            
            11.1
            
            
            
            (11.1
            )
            
            
            (100.0
            )Operating
      income
            
            
            7.7
            
            
            
            0.8
            
            
            
            6.9
            
            
            
            862.5
            
            
            
            45.8
            
            
            
            26.6
            
            
            
            19.2
            
            
            
            72.2Interest
      income
            
            
            0.4
            
            
            
            (0.5
            )
            
            
            0.9
            
            
            
            (180.0
            )
            
            
            1.3
            
            
            
            0.5
            
            
            
            0.8
            
            
            
            160.0Other
      income (deductions)
            
            
            0.1
            
            
            
            -
            
            
            
            0.1
            
            
            
            -
            
            
            
            0.1
            
            
            
            0.2
            
            
            
            (0.1
            )
            
            
            (50.0
            )Net
      interest charges
            
            
            (3.6
            )
            
            
            (2.9
            )
            
            
            (0.7
            )
            
            
            24.1
            
            
            
            (6.5
            )
            
            
            (5.8
            )
            
            
            (0.7
            )
            
            
            12.1Earnings
      (loss) before income taxes
            
            
            4.6
            
            
            
            (2.6
            )
            
            
            7.2
            
            
            
            (276.9
            )
            
            
            40.7
            
            
            
            21.4
            
            
            
            19.3
            
            
            
            90.2Income
      taxes
            
            
            1.8
            
            
            
            (1.0
            )
            
            
            2.8
            
            
            
            (280.0
            )
            
            
            15.5
            
            
            
            8.5
            
            
            
            7.0
            
            
            
            82.4Segment
      earnings (loss)
            
            $
            2.8
            
            
            $
            (1.6
            )
            
            $
            4.4
            
            
            
            (275.0
            )
            
            $
            25.3
            
            
            $
            12.9
            
            
            $
            12.4
            
            
            
            96.1





77


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





Three
      Months Ended June 30, 2008
            
            
            Six
      Months Ended June 30, 2008Earnings
      (Loss)
            
            
            
            
            
            
            
            
            
            
            
            Earnings
      (Loss)Before
            
            
            Segment
            
            
            
            
            
            
            
            
            Before
            
            
            SegmentTotal
            
            
            Gross
            
            
            Income
            
            
            Earnings
            
            
            Total
            
            
            Gross
            
            
            Income
            
            
            EarningsRevenues
            
            
            Margin
            
            
            Taxes
            
            
            (Loss)
            
            
            Revenues
            
            
            Margin
            
            
            Taxes
            
            
            (Loss)(In
      millions)Retail
      gas prices
            
            $
            11.1
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            0.8
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Rate
      increase
            
            
            1.6
            
            
            
            1.6
            
            
            
            1.6
            
            
            
            1.0
            
            
            
            5.1
            
            
            
            5.1
            
            
            
            5.1
            
            
            
            3.1Retail
      growth/weather
            
            
            4.5
            
            
            
            0.5
            
            
            
            0.5
            
            
            
            0.3
            
            
            
            15.0
            
            
            
            2.0
            
            
            
            2.0
            
            
            
            1.2Off-system
      activities
            
            
            4.4
            
            
            
            0.3
            
            
            
            0.3
            
            
            
            0.2
            
            
            
            5.3
            
            
            
            0.2
            
            
            
            0.2
            
            
            
            0.1Operational
      costs
            
            
            -
            
            
            
            -
            
            
            
            0.5
            
            
            
            0.3
            
            
            
            -
            
            
            
            -
            
            
            
            2.4
            
            
            
            1.4Discontinuation
      of depreciation on assets
            
            
            -
            
            
            
            -
            
            
            
            5.4
            
            
            
            3.3
            
            
            
            -
            
            
            
            -
            
            
            
            10.6
            
            
            
            6.4Other
            
            
            (1.1
            )
            
            
            (1.7
            )
            
            
            (1.1
            )
            
            
            (0.7
            )
            
            
            (1.8
            )
            
            
            (1.8
            )
            
            
            (0.9
            )
            
            
            0.2Total
      increase (decrease)
            
            $
            20.5
            
            
            $
            0.7
            
            
            $
            7.2
            
            
            $
            4.4
            
            
            $
            24.4
            
            
            $
            5.5
            
            
            $
            19.3
            
            
            $
            12.4





The
following table shows PNM Gas operating revenues by customer class included in
earnings from discontinued operations within the presentation of Condensed
Consolidated Statements of Earnings (Loss) and average number of
customers:





Three
      Months Ended June 30,
            
            
            Six
      Months Ended June 30,2008
            
            
            2007
            
            
            Change
            
            
            %
            
            
            2008
            
            
            2007
            
            
            Change
            
            
            %(Dollars
      in millions)Residential
            
            $
            59.2
            
            
            $
            48.4
            
            
            $
            10.8
            
            
            
            22.3
            
            
            $
            215.7
            
            
            $
            200.7
            
            
            $
            15.0
            
            
            
            7.5Commercial
            
            
            19.1
            
            
            
            15.5
            
            
            
            3.6
            
            
            
            23.2
            
            
            
            63.9
            
            
            
            60.6
            
            
            
            3.3
            
            
            
            5.4Industrial
            
            
            1.3
            
            
            
            0.4
            
            
            
            0.9
            
            
            
            225.0
            
            
            
            2.1
            
            
            
            1.0
            
            
            
            1.1
            
            
            
            110.0Transportation(1)
            
            
            3.7
            
            
            
            3.4
            
            
            
            0.3
            
            
            
            8.8
            
            
            
            9.8
            
            
            
            8.4
            
            
            
            1.4
            
            
            
            16.7Other
            
            
            12.3
            
            
            
            7.4
            
            
            
            4.9
            
            
            
            66.2
            
            
            
            24.5
            
            
            
            20.9
            
            
            
            3.6
            
            
            
            17.2$
            95.6
            
            
            $
            75.1
            
            
            $
            20.5
            
            
            
            27.3
            
            
            $
            316.0
            
            
            $
            291.6
            
            
            $
            24.4
            
            
            
            8.4Average
      customers (thousands)
            
            
            496.3
            
            
            
            490.5
            
            
            
            5.8
            
            
            
            1.2
            
            
            
            497.2
            
            
            
            491.2
            
            
            
            6.0
            
            
            
            1.2





(1)
            Customer-owned
      gas.





The
following table shows PNM Gas throughput by customer class:





Three
      Months Ended June 30,
            
            
            Six
      Months Ended June 30,2008
            
            
            2007
            
            
            Change
            
            
            %
            
            
            2008
            
            
            2007
            
            
            Change
            
            
            %(Thousands
      of Decatherms)Residential
            
            
            3,747.6
            
            
            
            3,826.8
            
            
            
            (79.2
            )
            
            
            (2.1
            )
            
            
            18,035.1
            
            
            
            17,770.9
            
            
            
            264.2
            
            
            
            1.5Commercial
            
            
            1,477.1
            
            
            
            1,515.0
            
            
            
            (37.9
            )
            
            
            (2.5
            )
            
            
            6,071.2
            
            
            
            6,149.5
            
            
            
            (78.3
            )
            
            
            (1.3
            )Industrial
            
            
            136.0
            
            
            
            50.1
            
            
            
            85.9
            
            
            
            171.5
            
            
            
            227.9
            
            
            
            113.2
            
            
            
            114.7
            
            
            
            101.3Transportation(1)
            
            
            9,192.8
            
            
            
            10,149.2
            
            
            
            (956.4
            )
            
            
            (9.4
            )
            
            
            20,569.3
            
            
            
            20,948.9
            
            
            
            (379.6
            )
            
            
            (1.8
            )Other
            
            
            957.4
            
            
            
            499.5
            
            
            
            457.9
            
            
            
            91.7
            
            
            
            1,990.1
            
            
            
            1,825.0
            
            
            
            165.1
            
            
            
            9.015,510.9
            
            
            
            16,040.6
            
            
            
            (529.7
            )
            
            
            (3.3
            )
            
            
            46,893.6
            
            
            
            46,807.5
            
            
            
            86.1
            
            
            
            0.2





(1)
            Customer-owned
      gas.





Due to
the pending sale of the PNM Gas business, the Company is reporting this segment
as discontinued operations as required under GAAP.  See Note
14.  Certain corporate items that historically were allocated to the
PNM Gas segment cannot be included as discontinued operations and were
reassigned to PNM Electric for previously reported periods.  These
items include officer compensation, depreciation on common utility and
shared-service assets, and postage costs.  The after-tax amount of
costs reassigned in the three and six months ended June 30, 2007 totaled $1.6
million and $3.3 million.  Beginning in 2008, these costs were
reallocated among all PNMR business segments.





78


PNM Gas
purchases natural gas in the open market and resells it at no profit to its
sales-service customers.  As a result, increases or decreases in gas
revenues driven by gas costs do not impact the gross margin or operating income
of PNM Gas.  Increases or decreases to gross margin caused by changes
in sales-service volumes represent margin earned on the delivery of gas to
customers based on regulated rates.





On June
29, 2007, the NMPRC unanimously approved an increase in annual revenues of
approximately $9 million for PNM Gas, which included a 9.53% return on
equity.  See Note 10.  Implementation of this rate increase
resulted in an increase to revenues and gross margin in 2008.





Customer
growth resulted in increased operating revenues and gross
margin.  This was partially offset by weather impacts, as temperatures
across the service area were colder than normal levels early in the year,
particularly in January, but were milder than temperatures experienced during
the first quarter of 2007.





Revenues
from off-system activity increased during the first and second quarters due to
increased gas prices, which were largely offset by increases in costs for the
transactions.  In the second quarter of 2008, increased activity
resulted in a slight increase to margin, which more than offset the slight
decrease experienced in the first quarter due to reduced activity.





Operational
costs include costs for materials and supplies, self-insurance and advertising,
as well as shared services, employee labor, pension and
benefits.  Decreases in these costs in 2008 represent decreases in
incentive-based compensation, as well as cost savings resulting from the
business improvement plan.





Due to
the pending sale of the gas business, the assets held for sale have not been
depreciated in accordance with SFAS 144. If PNM Gas was not treated as
discontinued operations, depreciation of $5.4 million and $10.6 million would
have been recorded in the three and six months ended June 30, 2008.





Altura





Effective
June 1, 2007, PNMR contributed Altura, including the Twin Oaks business, to
EnergyCo.  See Note 2.  Accordingly, Altura’s results of
operations are included in PNMR for the three months and six months ended June
30, 2007, but not in 2008.





First
Choice





The table
below summarizes the operating results for First Choice:





Three
      Months Ended June 30,
            
            
            Six
      Months Ended June 30,2008
            
            
            2007
            
            
            Change
            
            
            %
            
            
            2008
            
            
            2007
            
            
            Change
            
            
            %(Dollars
      in millions)Total
      operating revenues
            
            $
            162.2
            
            
            $
            150.0
            
            
            $
            12.2
            
            
            
            8.1
            
            
            $
            246.4
            
            
            $
            285.6
            
            
            $
            (39.2
            )
            
            
            (13.7
            )Cost
      of energy
            
            
            158.1
            
            
            
            125.9
            
            
            
            32.2
            
            
            
            25.6
            
            
            
            263.4
            
            
            
            236.7
            
            
            
            26.7
            
            
            
            11.3Gross
      margin
            
            
            4.1
            
            
            
            24.2
            
            
            
            (20.1
            )
            
            
            (83.1
            )
            
            
            (17.0
            )
            
            
            48.9
            
            
            
            (65.9
            )
            
            
            (134.8
            )Operating
      expenses
            
            
            72.8
            
            
            
            13.0
            
            
            
            59.8
            
            
            
            460.0
            
            
            
            88.3
            
            
            
            28.1
            
            
            
            60.2
            
            
            
            214.2Depreciation
      and amortization
            
            
            0.6
            
            
            
            0.5
            
            
            
            0.1
            
            
            
            20.0
            
            
            
            1.0
            
            
            
            0.9
            
            
            
            0.1
            
            
            
            11.1Operating
      income (loss)
            
            
            (69.2
            )
            
            
            10.7
            
            
            
            (79.9
            )
            
            
            (746.7
            )
            
            
            (106.3
            )
            
            
            19.9
            
            
            
            (126.2
            )
            
            
            (634.2
            )Interest
      income
            
            
            0.4
            
            
            
            0.5
            
            
            
            (0.1
            )
            
            
            (20.0
            )
            
            
            0.9
            
            
            
            1.0
            
            
            
            (0.1
            )
            
            
            (10.0
            )Other
      income (deductions)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (0.1
            )
            
            
            -
            
            
            
            (0.1
            )
            
            
            -Net
      interest charges
            
            
            (0.3
            )
            
            
            (1.1
            )
            
            
            0.8
            
            
            
            (72.7
            )
            
            
            (0.6
            )
            
            
            (1.2
            )
            
            
            0.6
            
            
            
            (50.0
            )Earnings
      (loss) before income taxes
            
            
            (69.2
            )
            
            
            10.2
            
            
            
            (79.4
            )
            
            
            (778.4
            )
            
            
            (106.1
            )
            
            
            19.7
            
            
            
            (125.8
            )
            
            
            (638.6
            )Income
      taxes (benefit)
            
            
            (8.8
            )
            
            
            3.9
            
            
            
            (12.7
            )
            
            
            (325.6
            )
            
            
            (21.6
            )
            
            
            7.4
            
            
            
            (29.0
            )
            
            
            (391.9
            )Segment
      earnings (loss)
            
            $
            (60.4
            )
            
            $
            6.4
            
            
            $
            (66.8
            )
            
            
            (1,043.8
            )
            
            $
            (84.5
            )
            
            $
            12.2
            
            
            $
            (96.7
            )
            
            
            (792.6
            )





79


The
following table summarizes the significant changes to operating revenues, gross
margin, earnings (loss) before income taxes, and segment earnings
(loss):





Three
      Months Ended June 30, 2008
            
            
            Six
      Months Ended June 30, 2008Earnings
      (Loss)
            
            
            
            
            
            
            
            
            
            
            
            Earnings
      (Loss)Before
            
            
            Segment
            
            
            
            
            
            
            
            
            Before
            
            
            SegmentTotal
            
            
            Gross
            
            
            Income
            
            
            Earnings
            
            
            Total
            
            
            Gross
            
            
            Income
            
            
            EarningsRevenues
            
            
            Margin
            
            
            Taxes
            
            
            (Loss)
            
            
            Revenues
            
            
            Margin
            
            
            Taxes
            
            
            (Loss)(In
      millions)Usage/weather
            
            $
            0.2
            
            
            $
            (3.6
            )
            
            $
            (3.6
            )
            
            $
            (2.3
            )
            
            $
            (6.2
            )
            
            $
            (5.7
            )
            
            $
            (5.7
            )
            
            $
            (3.7
            )Retail
      margins
            
            
            15.6
            
            
            
            (15.6
            )
            
            
            (15.6
            )
            
            
            (10.1
            )
            
            
            15.7
            
            
            
            (20.5
            )
            
            
            (20.5
            )
            
            
            (13.3
            )Trading
      margin
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (47.3
            )
            
            
            (47.3
            )
            
            
            (47.3
            )
            
            
            (30.4
            )Unrealized
      economic hedges
            
            
            (3.6
            )
            
            
            (0.9
            )
            
            
            (0.9
            )
            
            
            (0.6
            )
            
            
            (1.4
            )
            
            
            7.6
            
            
            
            7.6
            
            
            
            4.9Bad
      debt expense
            
            
            -
            
            
            
            -
            
            
            
            (4.9
            )
            
            
            (3.2
            )
            
            
            -
            
            
            
            -
            
            
            
            (4.6
            )
            
            
            (3.0
            )Other
      operational costs
            
            
            -
            
            
            
            -
            
            
            
            (4.4
            )
            
            
            (2.8
            )
            
            
            -
            
            
            
            -
            
            
            
            (5.0
            )
            
            
            (3.2
            )Impairment
      of goodwill and other intangible assets
            
            
            -
            
            
            
            -
            
            
            
            (50.6
            )
            
            
            (48.0
            )
            
            
            -
            
            
            
            -
            
            
            
            (50.6
            )
            
            
            (48.0
            )Other
            
            
            -
            
            
            
            -
            
            
            
            0.6
            
            
            
            0.2
            
            
            
            -
            
            
            
            -
            
            
            
            0.3
            
            
            
            -Total
      increase (decrease)
            
            $
            12.2
            
            
            $
            (20.1
            )
            
            $
            (79.4
            )
            
            $
            (66.8
            )
            
            $
            (39.2
            )
            
            $
            (65.9
            )
            
            $
            (125.8
            )
            
            $
            (96.7
            )





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





Three
      Months Ended June 30,
            
            
            Six
      Months Ended June 30,2008
            
            
            2007
            
            
            Change
            
            
            %
            
            
            2008
            
            
            2007
            
            
            Change
            
            
            %(Dollars
      in millions)Residential
            
            $
            109.7
            
            
            $
            88.4
            
            
            $
            21.3
            
            
            
            24.1
            
            
            
            186.4
            
            
            $
            174.0
            
            
            $
            12.4
            
            
            
            7.1Mass-market
            
            
            13.7
            
            
            
            18.0
            
            
            
            (4.3
            )
            
            
            (23.9
            )
            
            
            29.6
            
            
            
            34.3
            
            
            
            (4.7
            )
            
            
            (13.7
            )Mid-market
            
            
            37.8
            
            
            
            38.1
            
            
            
            (0.3
            )
            
            
            (0.8
            )
            
            
            73.4
            
            
            
            69.0
            
            
            
            4.4
            
            
            
            6.4Trading
      gains (losses)
            
            
            (1.9
            )
            
            
            (1.9
            )
            
            
            -
            
            
            
            -
            
            
            
            (49.0
            )
            
            
            (1.7
            )
            
            
            (47.3
            )
            
            
            2,782.4Other
            
            
            2.9
            
            
            
            7.4
            
            
            
            (4.5
            )
            
            
            (60.8
            )
            
            
            6.0
            
            
            
            10.0
            
            
            
            (4.0
            )
            
            
            (40.0
            )$
            162.2
            
            
            $
            150.0
            
            
            $
            12.2
            
            
            
            8.1
            
            
            $
            246.4
            
            
            $
            285.6
            
            
            $
            (39.2
            )
            
            
            (13.7
            )Actual
      customers (thousands)(1,2)
            
            
            253.8
            
            
            
            249.5
            
            
            
            4.3
            
            
            
            1.7
            
            
            
            253.8
            
            
            
            249.5
            
            
            
            4.3
            
            
            
            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 June 30 is presented in the table above as a more representative
      business indicator than average
customers.





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





Three
      Months Ended June 30,
            
            
            Six
      Months Ended June 30,2008
            
            
            2007
            
            
            Change
            
            
            %
            
            
            2008
            
            
            2007
            
            
            Change
            
            
            %(Gigawatt
      hours) (1)Residential
            
            
            709.1
            
            
            
            638.0
            
            
            
            71.1
            
            
            
            11.1
            
            
            
            1,272.8
            
            
            
            1,252.9
            
            
            
            19.9
            
            
            
            1.6Mass-market
            
            
            68.2
            
            
            
            111.1
            
            
            
            (42.9
            )
            
            
            (38.6
            )
            
            
            163.0
            
            
            
            211.4
            
            
            
            (48.4
            )
            
            
            (22.9
            )Mid-market
            
            
            304.5
            
            
            
            332.0
            
            
            
            (27.5
            )
            
            
            (8.3
            )
            
            
            583.3
            
            
            
            595.6
            
            
            
            (12.3
            )
            
            
            (2.1
            )Other
            
            
            5.4
            
            
            
            5.3
            
            
            
            0.1
            
            
            
            1.9
            
            
            
            9.8
            
            
            
            10.4
            
            
            
            (0.6
            )
            
            
            (5.8
            )1,087.2
            
            
            
            1,086.4
            
            
            
            0.8
            
            
            
            0.1
            
            
            
            2,028.9
            
            
            
            2,070.3
            
            
            
            (41.4
            )
            
            
            (2.0
            )








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





A shift
in the customer mix to include lower margin customers resulted in a decrease to
gross margin and segment earnings for both the second quarter and year-to-date
2008.  An increase in the average retail sales price over 2007 levels,
largely related to higher purchased power costs, resulted in increased sales
revenues. However, these higher power costs resulted in a decrease in the
average retail margin.  Average market clearing prices




80


within ERCOT have
increased 115 percent since December of 2007.  A delay in
implementing price increases on fixed price term customer renewals,
coupled with contractual limitations on monthly price increases for floating
rate customers prevented First Choice from recouping the dramatic increase in
purchase power costs. Losses on unrealized economic hedges in the second quarter
2008 and a gain year-to-date represent unrealized fair value estimates related
to forward energy contracts and are not necessarily indicative of the amounts
that will be realized upon settlement.





For the
six months ended June 30, a decrease in trading margins from a $1.7 million loss
in 2007 to a $49.0 million loss in 2008 resulted in an after-tax $30.4 million
decrease in segment earnings.  The losses were primarily the result of
a series of speculative forward trades that arbitraged basis differentials among
certain ERCOT delivery zones.  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.  In the
second quarter of 2008, First Choice incurred a $1.9 million loss to close out
remaining speculative positions.  Of the speculative trading
losses, $23.4 million has not cash settled and represents unrealized losses on
its remaining forward positions at June 30, 2008.  The majority of
these positions will cash settle before December 31, 2008.No
significant additional costs are expected related to speculative
trading.





Impairments
of goodwill of $43.2 million and the First Choice trade name of $7.4 million
pre-tax ($4.8 million after-tax) were recorded in the three months ended June
30, 2008 as a result of the annual impairment assessment (See Note
17).  Because of the timing and complexity of the calculations
required in the impairment analysis related to the goodwill of First Choice, the
Company anticipates finalizing this analysis in the third quarter of
2008.  However, a preliminary estimate of the goodwill impairment has
been recorded based on the calculations performed to date and may be revised, as
allowed by GAAP.





Other
operational costs include costs for customer acquisition and service, as well as
shared services, employee labor, pension, and benefits.  Increased
operational costs including higher bad debt expense resulted in a decrease to
segment earnings for both the second quarter and year-to-date
2008.  Unfavorable operating costs were driven largely by an increase
in bad debt expense as a result of residual billing system conversion
issues.





On August
11, 2008, PNMR announced that it has decided to pursue strategic alternatives
for First Choice.





Corporate
and Other





The
following table summarizes the significant changes to operating revenues, gross
margin, earnings (loss) before income taxes, and segment earnings
(loss):





Three
      Months Ended June 30, 2008
            
            
            Six
      Months Ended June 30, 2008Earnings
      (Loss)
            
            
            
            
            
            
            
            
            
            
            
            Earnings
      (Loss)Before
            
            
            Segment
            
            
            
            
            
            
            
            
            Before
            
            
            SegmentTotal
            
            
            Gross
            
            
            Income
            
            
            Earnings
            
            
            Total
            
            
            Gross
            
            
            Income
            
            
            EarningsRevenues
            
            
            Margin
            
            
            Taxes
            
            
            (Loss)
            
            
            Revenues
            
            
            Margin
            
            
            Taxes
            
            
            (Loss)(In
      millions)Intercompany
      eliminations
            
            $
            2.0
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            4.1
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -EnergyCo
      formation costs
            
            
            -
            
            
            
            -
            
            
            
            3.0
            
            
            
            1.8
            
            
            
            -
            
            
            
            -
            
            
            
            4.2
            
            
            
            2.5Loss
      on contribution of Altura
            
            
            -
            
            
            
            -
            
            
            
            7.0
            
            
            
            4.3
            
            
            
            -
            
            
            
            -
            
            
            
            7.0
            
            
            
            4.3Equity
      in earnings (loss) of EnergyCo
            
            
            -
            
            
            
            -
            
            
            
            (4.8
            )
            
            
            (3.3
            )
            
            
            -
            
            
            
            -
            
            
            
            (29.2
            )
            
            
            (18.1
            )Business
      improvement plan
            
            
            -
            
            
            
            -
            
            
            
            (1.5
            )
            
            
            (1.0
            )
            
            
            -
            
            
            
            -
            
            
            
            (4.1
            )
            
            
            (2.5
            )Financing
            
            
            -
            
            
            
            -
            
            
            
            (1.5
            )
            
            
            (0.9
            )
            
            
            -
            
            
            
            -
            
            
            
            (2.0
            )
            
            
            (1.2
            )Effects
      of settlement with IRS
            
            
            -
            
            
            
            -
            
            
            
            (4.6
            )
            
            
            (18.8
            )
            
            
            -
            
            
            
            -
            
            
            
            (4.7
            )
            
            
            (18.8
            )Other
            
            
            (0.2
            )
            
            
            -
            
            
            
            2.0
            
            
            
            1.9
            
            
            
            (0.3
            )
            
            
            -
            
            
            
            3.0
            
            
            
            1.5Total
      increase (decrease)
            
            $
            1.8
            
            
            $
            -
            
            
            $
            (0.4
            )
            
            $
            (16.0
            )
            
            $
            3.8
            
            
            $
            -
            
            
            $
            (25.8
            )
            
            $
            (32.3
            )





The
Corporate and Other segment includes consolidation eliminations of revenue and
expense between TNMP and First Choice.  In 2007, PNMR incurred costs
associated with formation of EnergyCo as well as a loss on the contribution of
Altura to EnergyCo, which are included in the Corporate and Other
segment.  Corporate and Other results also include earnings associated
with EnergyCo.  Further explanation of equity in earnings of EnergyCo
is shown below.  As part of the business improvement plan to reduce
costs and improve processes in




81


future
years, costs to achieve these savings such as severances and consulting charges
were incurred in 2008.  Increased financing charges in 2008 resulted
from remarketing of the debt component of equity-linked units at a higher
interest rate and additional long-term debt, as well as higher short-term
borrowings partially offset by lower short-term interest rates.  In
2007, the Corporate and Other segment includes favorable tax decisions regarding
previously unrecognized tax benefits, including a settlement with the IRS that
had a $16.0 million non-recurring impact on income taxes.





EnergyCo





The table
below summarizes the operating results for EnergyCo:





Three
      Months Ended June 30,
            
            
            Six
      Months Ended June 30,2008
            
            
            2007
            
            
            Change
            
            
            2008
            
            
            2007
            
            
            Change(In
      millions)Total
      operating revenues
            
            $
            304.5
            
            
            $
            14.4
            
            
            $
            290.1
            
            
            $
            478.5
            
            
            $
            14.4
            
            
            $
            464.2Cost
      of energy
            
            
            259.9
            
            
            
            4.6
            
            
            
            255.4
            
            
            
            457.1
            
            
            
            4.6
            
            
            
            452.5Gross
      margin
            
            
            44.5
            
            
            
            9.8
            
            
            
            34.7
            
            
            
            21.4
            
            
            
            9.8
            
            
            
            11.6Operating
      expenses
            
            
            38.0
            
            
            
            4.1
            
            
            
            33.9
            
            
            
            52.5
            
            
            
            5.5
            
            
            
            47.0Depreciation
      and amortization
            
            
            7.7
            
            
            
            1.5
            
            
            
            6.1
            
            
            
            15.2
            
            
            
            1.5
            
            
            
            13.7Operating
      income (loss)
            
            
            (1.3
            )
            
            
            4.2
            
            
            
            (5.5
            )
            
            
            (46.2
            )
            
            
            2.8
            
            
            
            (49.0
            )Other
      income (deductions)
            
            
            0.4
            
            
            
            -
            
            
            
            0.4
            
            
            
            0.7
            
            
            
            -
            
            
            
            0.7Net
      interest charges
            
            
            (4.8
            )
            
            
            (0.8
            )
            
            
            (4.0
            )
            
            
            (11.4
            )
            
            
            (0.8
            )
            
            
            (10.5
            )Earnings
      (loss) before income taxes
            
            
            (5.5
            )
            
            
            3.4
            
            
            
            (8.9
            )
            
            
            (56.9
            )
            
            
            2.1
            
            
            
            (59.0
            )Income
      tax (benefit) on margin
            
            
            0.1
            
            
            
            -
            
            
            
            0.1
            
            
            
            0.3
            
            
            
            -
            
            
            
            0.3Net
      earnings (loss)
            
            $
            (5.6
            )
            
            $
            3.4
            
            
            $
            (9.0
            )
            
            $
            (56.6
            )
            
            $
            2.1
            
            
            $
            (58.7
            )50
      percent of net earnings (loss)
            
            $
            (2.8
            )
            
            $
            1.7
            
            
            $
            (4.5
            )
            
            $
            (28.3
            )
            
            $
            1.0
            
            
            $
            (29.3
            )P    
      Plus amortization of basis difference in EnergyCo
            
            
            0.3
            
            
            
            0.6
            
            
            
            (0.3
            )
            
            
            0.7
            
            
            
            0.6
            
            
            
            0.1PNMR
      Equity in net earnings (loss) of EnergyCo
            
            $
            (2.5
            )
            
            $
            2.3
            
            
            $
            (4.8
            )
            
            $
            (27.6
            )
            
            $
            1.6
            
            
            $
            (29.2
            )





PNMR
evaluates the results of operation of EnergyCo on an earnings before interest,
income taxes, depreciation, and amortization (“EBITDA”) basis.  In
this evaluation of EnergyCo, PNMR also excludes purchase accounting amortization
recorded in accordance with SFAS 141, speculative trading and mark to market on
forward economic hedges.





SFAS 141
requires that EnergyCo individually value each asset and liability received in
the Altura and Altura Cogen transactions and initially record them on its
balance sheet at the determined fair value.  For both transactions,
this results in a significant amount of amortization since the acquired
contracts’ pricing terms differ significantly from fair value at the date of
acquisition and the emission allowances, while acquired from government programs
without future cost to the plants, have historically had significant market
value.  Amortization related to out of market contracts changed the
above total operating revenues by $(0.3) million and $1.0 million for the three
months and six months ended June 30, 2008.  Amortization for out of
market contracts will continue through the expiration of each contract, the
latest of which is 2010 for Altura and 2021 for Altura Cogen.  In
addition, cost of energy includes $1.2 million and $5.3 million of amortization
related to emission allowances acquired in the transactions for the three months
and six months ended June 30, 2008.  The amortizations for emission
allowances are recorded as the allowances are used in plant operations, sold or
expire.





In July
2008, a federal appeals court ruling by the U.S. Court of Appeals for the
District of Columbia Circuit Court invalidated CAIR.  This ruling
appears to remove the need for emissions allowance credits under the CAIR
program.  EnergyCo currently carries $153.5 million in inventory for
emissions allowances, $34.6 million of which fall under the CAIR program, from
the purchase of the Altura Cogen plant and contribution of the Twin Oaks
plant.  EnergyCo is currently evaluating what impacts this ruling
might have on the value of this inventory.  Following this ruling, the
trading markets for emissions allowances have deteriorated, which could impact
the future carrying amount of EnergyCo’s inventory of emission
allowances.





EnergyCo
intends to have an active hedging program that covers a multi-year
period.  The level of hedging at




82


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 under SFAS 133 are derivative instruments that
are required to be marked to market.  Changes in the fair value
of these instruments resulted in an increase in net earnings of $8.1 million in
the three months ended June 30, 2008 and a reduction of net earnings of $39.0
million in the six months ended June 30, 2008 as a result of higher power
prices.Due to the extreme market volatility experienced in
the first quarter in the ERCOT market, EnergyCo has made the decision to exit
the speculative trading business. As of May 2008, EnergyCo closed out all
remaining speculative positions.  EnergyCo recognized speculative
trading losses of $2.4 million in the first quarter of 2008 and less than $0.1
million in the second quarter of 2008.  No additional costs are
expected related to speculative trading.





Results
of operations for EnergyCo for the three months ended June 30, 2008 primarily
include the operations of the Altura and Altura Cogen generation
stations.  Altura was contributed to EnergyCo on June 1, 2007 and
EnergyCo acquired Altura Cogen on August 1, 2007.  Both the generation
stations had strong performance during the first six months of 2008, with
Altura’s availability significantly higher than the same period in 2007 due to
additional outages in the prior year. Since primary operations of EnergyCo did
not commence until the contribution of Altura, the earnings for the six months
ended June 30, 2007 only reflect start-up costs and one month of Altura
operating activity.





The
contribution of Altura created a basis difference between PNMR’s recorded
investment in EnergyCo and 50 percent of EnergyCo’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 six months ended June 30, 2008, the
basis difference adjustment detailed above of $0.2 million and $0.6 million
relate mainly to contract amortization with insignificant offsets related to the
other minor basis difference components.





The
assets of Altura transferred to EnergyCo included the development rights for a
possible 600-megawatt expansion of the Twin Oaks plant, which was classified as
an intangible asset.  EnergyCo has made a strategic decision not to
pursue the Twin Oaks expansion at this time and, in the three months ended June
30, 2008, has written off the development rights as an impairment of intangible
assets amounting to $21.8 million.





LIQUIDITY
AND CAPITAL RESOURCES





Statements
of Cash Flows





The
changes in PNMR’s cash flows for the six months ended June 30, 2008 compared to
2007 are summarized as follows:





Six
      Months Ended June 30,2008
            
            
            2007
            
            
            Change(In
      millions)Net
      cash flows from operating activities
            
            $
            12.3
            
            
            $
            87.2
            
            
            $
            (74.9
            )Net
      cash flows from investing activities
            
            
            (150.1
            )
            
            
            172.4
            
            
            
            (322.5
            )Net
      cash flows from financing activities
            
            
            257.9
            
            
            
            (325.0
            )
            
            
            582.9Net
      change in cash and cash equivalents
            
            $
            120.1
            
            
            $
            (65.4
            )
            
            $
            185.5





The
change in PNMR’s cash flows from operating activities reflects lower earnings
after adjustments to reconcile to cash flows from operations due primarily to
results of operations at First Choice and PNM Electric as discussed in Results
of Operations. The
decrease in operating cash flows is partially offset by settlements in 2007 of
2006 TNMP liabilities to REPs related to retail competition in Texas as ordered
under TECA and payments in 2007 of 2006 incentive based compensation
accruals.





The
change in cash flows from investing activities reflects net distributions from
EnergyCo in 2007 related to the contribution of Altura, partially offset by less
cash used at PNM for utility plant additions in 2008 compared to 2007 when the
expansion of the Afton plant and corporate software upgrades impacted cash
flows.





The change in cash flows
from financing activitiesreflects higher long-term
borrowingspartially offset by the repayment of short-term borrowings at
PNM and PNMR.  In addition, the redemption of long-term debt at




83


TNMP was
partially offset by new short-term borrowings at TNMP. The issuance of common
stock by PNMR in 2008 also increased cash flows from financing activities. Cash
flows from financing activities continued to fund construction
expendituresas well as strengthen the Company’s liquidity
position.





Capital
Requirements





Total
capital requirements consist of construction expenditures and cash dividend
requirements for both common and preferred stock.  The main focus of
PNMR’s current construction program is upgrading generation resources, including
pollution control equipment, upgrading and expanding the electric and gas
transmission and distribution systems, and purchasing nuclear
fuel.  On August 11, 2008, the Board declared the regular quarterly
dividend on common stock of $0.125 per share, which represents a reduction of 46
percent from the previous quarter. PNMR’s indicated annual rate is $0.50 per
share. The Board took this action to improve the Company’s liquidity and set a
new foundation for long-term value creation.  The reduction also
better aligns PNMR’s dividend yield with industry averages. Projections,
including amounts expended through June 30, 2008, for total capital requirements
for 2008 are $414.4 million, including construction expenditures of $356.6
million.  Total capital requirements for the years 2008-2012 are
projected to be $1,983.6 million, including construction expenditures of
$1,741.4 million.  This projection includes $81.0 million for the SJGS
environmental project to install low NOX combustion control and mercury
reduction technologies, as well as equipment to increase SO2
controls.  These estimates are under continuing review and subject to
on-going adjustment, as well as to board review and approval.  .  On August 11,
2008, PNMR announced that it has decided to pursue strategic alternatives for
First Choice.  No significant capital expenditures for First Choice
are included in the above amounts.





On March
7, 2008, TNMP entered into a $150 million short-term loan agreement with two
banks.  On April 9, 2008, TNMP borrowed $150.0 million under this
agreement and used the proceeds to redeem the remaining $148.9 million of its
6.125% senior unsecured notes prior to the maturity date of June 1,
2008.  TNMP is currently evaluating options for refinancing the
short-term bank loan which is due on October 9, 2008, including the potential
for extending this borrowing for six months, repaying the loan by borrowing
under the TNMP Facility, or accessing the public or private securities markets
to issue long-term debt in the form of additional senior unsecured notes, or a
combination of the foregoing.





As
described in Note 7, in May 2008, PNM issued $350 million of senior unsecured
notes and PNMR remarketed the senior unsecured notes component of its publicly
held equity-linked units.  In connection with the remarketing, PNMR
issued an additional $102.7 million of new senior unsecured notes for an
aggregate offering of $350 million.





During
the first six months of 2008, the Company utilized cash from the debt
arrangements described above, cash generated from operations and cash on hand,
as well as its liquidity arrangements, to meet its capital requirements and
construction expenditures.  During the six months ended June 30, 2008,
PNM also received $3.7 million from draws under its $20 million of pollution
control revenue bonds issued by the City of Farmington, New Mexico.





PNM has
$300.0 million of senior unsecured notes that mature in September 2008, TNMP has
$167.7 million in senior unsecured notes that mature in January 2009, and PNMR
has $100.0 million in the debt component of its privately held equity-linked
units that currently are scheduled to mature in 2010, but as discussed below,
the debt component of the equity-linked units will be remarketed in 2008 and the
maturity may be extended if the remarketing is successful.  PNMR and
its subsidiaries have no other long-term debt that comes due prior to 2016,
except for $13.2 million that is due in installments through 2013.





As
discussed in Note 22 of Notes to Consolidated Financial Statements in the 2007
Annual Reports on Form 10-K, EnergyCo purchased an electric generating plant in
August 2007 for $477.9 million, after working capital adjustments, for which
PNMR and ECJV each made a cash contribution to EnergyCo of $42.5
million.  In addition, EnergyCo has announced an agreement for the
co-development of an additional generating unit for which its share of the
construction costs is anticipated to be approximately $215 million, including
financing costs.  To the extent EnergyCo’s credit facility should be
insufficient to finance the current project or additional projects, PNMR and
ECJV may, at their option, provide additional funds to
EnergyCo.  Likewise, if EnergyCo undertakes additional projects, which
require funds that would exceed the capacity of its current credit facility and
EnergyCo is unable to obtain additional financing capabilities, PNMR and ECJV
may be asked to provide additional funding, but such funding would be at the
option of PNMR and ECJV.  PNMR is unable to predict if additional
funding will be




84


required
or, if required, the amount or timing of additional funds that would be provided
to EnergyCo.





PNMR’s
privately held equity-linked units contain mandatory obligations under which the
holders are required to purchase for cash, $100.0 million of PNMR common or
preferred stock in November 2008.  The equity-linked units also
provide that, prior to settlement of those purchase obligations, the debt
components of the equity-linked units, which are scheduled to mature in 2010,
will be remarketed beginning November 7, 2008.  The maturity date of
the senior notes may be extended in the remarketing and the interest rate will
be reset to a level designed to achieve a successful remarketing of the
notes.  If the remarketing is successful, PNMR would receive $100.0
million in cash for its equity securities and the debt would continue to mature
in 2010, or such later date established in the remarketing.  If the
remarketing is not successful, the holders of the equity-linked units may
satisfy their obligations to purchase PNMR equity securities by tendering the
debt to PNMR instead of paying cash for the equity securities, the equity
securities would be issued, and the debt would be cancelled without requiring
payment in cash by PNMR.  As discussed below, the credit ratings of
PNMR’s debt were recently downgraded.  There has also been an overall
deterioration of the credit markets in general.  Although there can be
no assurance, PNMR believes the remarketing will be successful.





As
discussed in Note 2, on January 12, 2008, PNM reached a definitive agreement to
sell its natural gas operations, which comprise the PNM Gas segment, for $620
million in cash, subject to regulatory approval by the NMPRC and other
conditions.  The parties may terminate the agreement under certain
circumstances.  PNMR expects to use the net after-tax proceeds of this
transaction to retire debt, fund future electric capital expenditures and for
other corporate purposes.





In
addition to cash that may be received from the issuance of equity securities
during the settlement of PNMR’s privately held equity-linked units, the sale of
PNM Gas, 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 and the repayment of senior unsecured notes during the 2008-2012
period.  To the extent the cash anticipated to be received from the
settlement of the equity-linked units is not received, the need for new
financing will be increased.





At August
4, 2008, the Company had short-term debt outstanding of $385.0
million.  In addition, the Company has scheduled maturities of
long-term debt aggregating $470.3 million prior to June 30, 2009.  The
Company is exploring financial alternatives to meet these
obligations.  The Company currently believes that its internal cash
generation, 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 senior unsecured notes at
maturity.  To cover the difference in the amounts and timing of cash
generation and cash requirements, the Company intends to use short-term
borrowings under its current and future liquidity arrangements.





Liquidity





The
Company’s principal liquidity arrangements include the PNMR Facility and the PNM
Facility, both of which primarily expire in 2012, and the TNMP Facility, which
expires in May 2009.  These facilities provide short-term borrowing
capacity and also allow letters of credit to be issued, which reduce the
available capacity under the facilities.  Both PNMR and PNM also have
lines of credit with local financial institutions.





PNMR has
a commercial paper program under which it may issue commercial paper for up to
270 days and PNM has a commercial paper program under which it may issue
commercial paper for up to 365 days although these commercial paper programs are
currently suspended and no commercial paper has been issued since March 11,
2008.  The commercial paper is unsecured and the proceeds are used for
short-term cash management needs.  The PNMR Facility and the PNM
Facility serve as support for the outstanding commercial
paper.  Operationally, this means the aggregate borrowings under the
commercial paper program and the revolving credit facility for each of PNMR and
PNM cannot exceed the maximum amount of that entity’s revolving credit
facility.





On May 5,
2008, PNM entered into a delayed draw term loan facility that matures April 30,
2009 in an aggregate principal amount of up to $300.0 million, which capacity
was reduced to $150 million on May 28, 2008.  On May 8, 2008, PNM
entered into a $100 million unsecured letter of credit facility, which allows
PNM to obtain standby letters of credit up to the aggregate amount of $100
million at any time prior to April 30, 2009.  No borrowings have been
made and no letters of credit have been issued under these
arrangements.





85


A summary
of these arrangements as of August 4, 2008 is as follows:





PNMR
            
            PNM
            
            TNMP
            
            PNMRSeparate
            
            Separate
            
            Separate
            
            Consolidated(In
      millions)Financing
      Capacity:Revolving
      credit facility
            $         600.0
            
            $         400.0
            
            $        200.0
            
            $      1,200.0Local
      lines of credit
            10.0
            
            8.5
            
            -
            
            18.5Delayed
      draw term loan facility
            -
            
            150.0
            
            -
            
            150.0Letter
      of credit facility
            -
            
            100.0
            
            -
            
            100.0Term
      loan credit facility
            -
            
            -
            
            150.0
            
            150.0Total
      financing capacity
            $         610.0
            
            $         658.5
            
            $        350.0
            
            $      1,618.5Commercial
      paper program maximum
            $         400.0
            
            $         300.0
            
            $               -
            
            $        700.0Amounts
      outstanding as of August 4, 2008:Commercial
      paper program
            $                -
            
            $                 -
            
            $               -
            
            $               -Revolving
      credit facility
            235.0
            
            -
            
            -
            
            235.0Local
      lines of credit
            -
            
            -
            
            -
            
            -Delayed
      draw term loan facility
            -
            
            -
            
            -
            
            -Term
      loan credit facility
            -
            
            -
            
            150.0
            
            150.0Total
      short-term debt outstanding
            235.0
            
            -
            
            150.0
            
            385.0Letters
      of credit
            122.2
            
            27.8
            
            1.5
            
            151.5Total
      short term-debt and letters of credit
            $         357.2
            
            $           27.8
            
            $       151.5
            
            $        536.5Remaining
      availability as of August 4, 2008
            $         252.8
            
            $         630.7
            
            $       198.5
            
            $     1,082.0Cash
      balances as of August 4, 2008
            $         54.8
            
            $           54.4
            
            $              -
            
            $        109.2





The above
tables do not include short-term debt of Valencia.  See Note
16.  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.





PNMR has
an effective universal shelf registration statement for the issuance of debt
securities, common stock, preferred stock, purchase contracts, purchase contract
units and warrants.  As of August 4, 2008, PNMR had approximately
$150.0 million of remaining unissued securities under this universal shelf
registration statement.  In addition, in August 2006, PNMR filed a new
automatically effective shelf registration statement with the SEC for common
stock and in April 2008, PNMR filed a new automatically effective shelf
registration statement for debt securities.  These new registration
statements can be amended at any time to include additional securities of
PNMR.  As a result, these new shelf registration statements have
unlimited availability, subject to certain restrictions and
limitations.





PNMR
offers new shares of PNMR common stock through the PNMR Direct Plan and an
equity distribution agreement.  The equity distribution agreement is
currently suspended.  From January 1, 2008 through August 4, 2008,
PNMR had sold a total of 137,738 shares of its common stock through the PNMR
Direct Plan for net proceeds of $1.9 million.





In April
2008, PNM filed a new shelf registration statement for the issuance of $750
million of senior
unsecured notesthat was declared effective on April 29,
2008.  As of August 4, 2008, PNM had $600.0 million of remaining
unissued securities registered under this and a prior shelf registration
statement.





86


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.





On April
18, 2008, S&P lowered the credit ratings for PNMR, PNM, and TNMP and placed
them on credit watch for possible additional downgrades.  On May 6,
2008, S&P again lowered the credit ratings for PNMR, PNM, and TNMP and the
outlook was changed to stable for all entities.  On April 25, 2008,
Moody’s lowered the credit ratings for PNMR and PNM and continued a review for
possible downgrade, while reaffirming TNMP’s ratings with a negative
outlook.  On May 23, 2008, Moody’s changed the outlook for PNMR and
PNM from rating under review for possible downgrade to negative.  The
ratings actions have increased borrowing costs for PNMR and PNM; could increase
future borrowing costs for PNMR, PNM, and TNMP; required the posting of
approximately $14.7 million of letters of credit to support certain contractual
arrangements; and could require the posting of additional letters of credit or
other collateral that would have a negative impact on liquidity. In addition,
certain contractual arrangements require that the Company obtain commercial
insurance for risks that were previously self-insured.  As of August
4, 2008, ratings on the Company’s securities were as follows:





PNMR
            
            PNM
            
            TNMPS&PSenior
      unsecured notes
            BB-
            
            BB+
            
            BB+Commercial
      paper
            B-2
            
            B-2
            
            *Preferred
      stock
            *
            
            B
            
            *Moody’sSenior
      unsecured notes
            Ba2
            
            Baa3
            
            Baa3Commercial
      paper
            NP
            
            P-3
            
            *Preferred
      stock
            *
            
            Ba2
            
            *





*  Not
applicable





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





Off-Balance
Sheet Arrangements





PNMR’s
off-balance sheet arrangements include PNM’s operating lease obligations for
PVNGS Units 1 and 2, the EIP transmission line, and the entire output of Delta,
a gas-fired generating plant.  These arrangements help ensure PNM the
availability of lower-cost generation needed to serve customers.  In
addition, PNMR issued both public and private equity-linked units in 2005, each
of which consisted of a debt component and a purchase contract for PNMR’s equity
securities.  The purchase contracts are forward transactions in the
equity securities of PNMR that are not considered derivatives.  The
debt component of the publicly held equity-linked units was remarketed in May
2008 and common stock was issued in exchange for cash received from the purchase
contract component thereby ending that off-balance sheet
arrangement.  See Note 7.  See MD&A – Off-Balance Sheet
Arrangements and Notes 6 and 7 of Notes to Consolidated Financial Statements in
the 2007 Annual Reports on Form 10-K.





Commitments
and Contractual Obligations





PNMR, PNM
and TNMP have contractual obligations for long-term debt, operating leases,
purchase obligations and certain other long-term liabilities that were
summarized in a table of contractual obligations in the Current Report on Form
8-K filed March 14, 2008.





PNMR
entered into a five-year contract on July 1, 2008 for the outsourcing of certain
data processing services.  This contract has a five-year base period
of performance and three one-year options.  The base contract requires
payments aggregating $20.9 million over the five-year term.





87


Contingent
Provisions of Certain Obligations





As
discussed in the 2007 Annual Reports on Form 10-K, PNMR, PNM and TNMP have a
number of debt obligations and other contractual commitments that contain
contingent provisions.  Some of these, if triggered, could affect the
liquidity of the Company.  The contingent provisions include
contractual increases in the interest rate charged on certain of the Company’s
short-term debt obligations in the event of a downgrade in credit ratings and
the requirement to provide security under certain contractual agreements. As
discussed above, the Company’s credit ratings were recently downgraded, which
has resulted in increases in the interest rates on certain short-term debt
obligations and the requirement to provide letters of credit to support certain
agreements aggregating approximately $14.7 million.  Based on
additional credit facilities entered into by PNM and TNMP in May 2008, 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.








June
      30,
            
            
            December
      31,2008
            
            
            2007PNMRCommon
      equity
            
            
            46.0
            %
            
            
            50.0
            %Preferred
      stock of subsidiary
            
            
            0.3
            %
            
            
            0.3
            %Long-term
      debt
            
            
            53.7
            %
            
            
            49.7
            %Total
      capitalization
            
            
            100.0
            %
            
            
            100.0
            %





PNMCommon
      equity
            
            
            49.5
            %
            
            
            57.8
            %Preferred
      stock
            
            
            0.4
            %
            
            
            0.5
            %Long-term
      debt
            
            
            50.1
            %
            
            
            41.7
            %Total
      capitalization
            
            
            100.0
            %
            
            
            100.0
            %





TNMPCommon
      equity
            
            
            70.9
            %
            
            
            57.8
            %Long-term
      debt
            
            
            29.1
            %
            
            
            42.2
            %Total
      capitalization
            
            
            100.0
            %
            
            
            100.0
            %





OTHER
ISSUES FACING THE COMPANY





Climate
Change Issues





The
prospect of future climate change regulations is becoming an issue of increasing
importance for the energy industry.  A growing body of scientific
evidence is demonstrating with a high degree of probability that human activity,
especially the burning of fossil fuels, has contributed to increased
concentrations of greenhouse gases (“GHG”) in the atmosphere and a rise in
average global temperatures.  Although there continues to be debate
over the precise impacts, growing public concern over the potential effects of
climate change and increased state and federal legislative and regulatory
activity calling for the regulation of GHG indicate that climate change
legislation is likely to be passed in the future.





In
January 2007 the Company became a founding member of the United States Climate
Action Partnership (“USCAP”), a coalition of 35 businesses and national
environmental organizations calling on the federal government to enact national
legislation to reduce GHG emissions at the earliest practicable date. USCAP has
issued a landmark set of principles and recommendations outlining a policy
framework for a national climate change program.   As a member of
USCAP, the Company believes that a mandatory, economy-wide federal cap and trade
program, combined with other complementary state and federal policies, is the
most cost effective and




88


environmentally
efficient means of slowing, stopping and reversing GHG
emissions.    The Company intends to continue working with
USCAP and the administration and Congress to advocate for federal action to
address this challenging environmental issue.





Pursuant
to New Mexico law, each utility must submit an integrated resource plan 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 the Company’s customers.  The NMPRC
issued an order on June 19, 2007, requiring that New Mexico utilities factor a
standardized cost of carbon emissions into their integrated resource plans using
prices ranging between $8 and $40 per metric ton of CO2
emitted.  Under the NMPRC order each utility must analyze these
standardized prices as projected operating costs with respect to years 2010 and
thereafter.  The Company’s next integrated resource plan is due to be
filed with the NMPRC in September 2008.  Reflecting the developing
nature of this issue, the NMPRC order states that these prices may be changed in
the future to account for additional information or changed
circumstances.   The Company is required, however, to use these
prices for planning purposes, and the prices may not reflect the costs that it
ultimately will incur.





In February
2007 five western states (Arizona, California, New Mexico, Oregon and
Washington) entered into an accord, called the Western Regional Climate Action
Initiative (the “WCI”), to reduce GHG emissions from automobiles and certain
industries, including utilities.  Since then, Utah, British Columbia
and Manitoba, Montana, Ontario, and Quebec have joined as partners in the
WCI.  The WCI requires the states and provinces signing the accord to
work together to set a regional emissions goal within nine months and develop a
specific plan to meet the goal within eighteen months.  In August 2007
the WCI signors announced a regional GHG reduction goal of 15% below 2005 levels
by 2020 for the participating states and provinces.  In July 2008, the
WCI signors released a draft recommendation of the design elements for a
regional cap and trade program for the seven participating states and these
Canadian provinces with GHG reporting requirements to commence in 2010 and a cap
and trading system to commence 2012.  Final recommendations on the
design elements are expected to be issued by the end of September 2008.The
Company continues to monitor the WCI and to assess the implications of
these proposed requirements.





Several
legislative initiatives are under consideration in Congress that would regulate
GHG emissions as well.  These initiatives propose a number of
requirements, ranging from reporting obligations to increased efficiency to a
cap and trading system.  While it appears unlikely that legislation
will be adopted in 2008, the Company expects legislation to be adopted in the
near-term.  It is unclear what the final legislation will
require.





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





Other
Matters





See Notes
9 and 10 herein and Notes 16, 17 and 18 in the 2007 Annual Reports on Form 10-K
for a discussion of commitments and contingencies, rate and regulatory matters
and environmental issues facing the Company.





CRITICAL
ACCOUNTING POLICIES AND ESTIMATES





The
preparation of financial statements in accordance with GAAP requires Company
management to select and apply accounting policies that best provide the
framework to report the results of operations and financial position for PNMR,
PNM, and TNMP.  The selection and application of those policies
requires management to make difficult, subjective and/or complex judgments
concerning reported amounts of revenue and expenses during 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
June 30, 2008, there have been no significant changes with regard to the
critical accounting policies disclosed in PNMR’s, PNM’s, and TNMP’s Annual
Reports on Forms 10-K for the year ended December 31, 2007.  The
policies disclosed included the accounting for unbilled revenues, regulatory
accounting, impairments, decommissioning costs, derivatives, pension and other
postretirement benefits, accounting for contingencies, income taxes, and market
risk.


89


MD&A
FOR PNM





RESULTS
OF OPERATIONS





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





MD&A
FOR TNMP





RESULTS
OF OPERATIONS





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





DISCLOSURE
REGARDING FORWARD LOOKING STATEMENTS





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





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





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


·
            State
      and federal regulatory and legislative decisions and
    actions,


·
            The
      risk that the closings of the pending sales of the PNM natural gas utility
      may not occur due to regulatory or other
  reasons,


·
            The
      outcome of the decision to pursue strategic alternatives for First Choice
      and of not successfully implementing such
  alternatives,


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


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


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


·
            The
      outcome of any appeals of the PUCT order in the stranded cost true-up
      proceeding,


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


·
            Changes
      in ERCOT protocols,


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


·
            Finalization
      of the goodwill impairment analysis for First
  Choice,


·
            Collections
      experience,


·
            Insurance
      coverage available for claims made in
  litigation,


·
            Fluctuations
      in interest rates,


·
            Weather,


·
            Water
      supply,


·
            Changes
      in fuel costs,


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




90


·
            Availability
      of fuel supplies,


·
            The
      effectiveness of risk management and commodity risk
      transactions,


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


·
            Variability
      of wholesale power prices and natural gas
  prices,


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


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


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


·
            The
      ability to secure long-term power
sales,


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


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


·
            The
      outcome of legal proceedings, including pending appeals of PNM’s electric
      and gas rate cases and the Emergency
FPPAC,


·
            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 2007 Annual Report on Form 10-K are disclosed in Item 1A, Risk Factors,
in Part II of this Form 10-Q.





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





SECURITIES
ACT DISCLAIMER





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





ITEM
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





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





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





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





It is the
responsibility of each business segment to create its own control procedures and
policies within the parameters established by the Finance
Committee.  The RMC reviews and approves these policies, which are
created with the assistance of the Corporate Controller, Director of Internal
Audit and the Executive Director of




91


Financial
Risk Management.  Each business segment’s policies address the
following controls:  authorized risk exposure limits; authorized
instruments and markets; authorized personnel; policies on segregation of
duties; policies on mark-to-market accounting; responsibilities for deal
capture; confirmation procedures; responsibilities for reporting results;
statement on the role of derivative transactions; and limits on individual
transaction size (nominal value).





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





Accounting
for Derivatives





Under
derivative accounting and related rules for energy contracts, the Company
accounts for its various derivative instruments for the purchase and sale of
energy based on the Company’s intent.  Energy contracts that meet the
definition of a derivative under SFAS 133 and do not qualify for the normal
sales and purchases exception are recorded on the balance sheet at fair value at
each period end.  The changes in fair value are recognized in earnings
unless specific hedge accounting criteria are met.  Should an energy
transaction qualify as a cash flow hedge under SFAS 133, fair value changes are
recognized on the balance sheet with a corresponding entry in other
comprehensive income to the extent the transaction is an effective
hedge.  The amounts in accumulated other comprehensive income are
recognized in results of operations when the hedged transaction settles and
impacts earnings.  Derivatives that meet the normal sales and
purchases exception within SFAS 133 are not marked to market but rather recorded
in results of operations when the underlying transaction settles.  The
contracts recorded at fair value that do not qualify for hedge accounting are
classified as trading transactions or economic hedges.  Trading
transactions are defined as derivative instruments that are either speculative
and expose the Company to market risk or transactions that lock in margin with
no forward market risk and are not economic hedges.  Economic hedges
are defined as derivative instruments, including long-term power agreements,
used to hedge generation assets, purchase power costs, and customer load
requirements.





Commodity
Risk





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





PNM’s
unregulated operations, including long-term contracts and short-term sales, 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.  Additionally, PNM’s regulated
generation capacity is inadequate to meet retail load requirements during
certain peak times and PNM must rely on market purchases to meet these
requirements.  As such, except to the extent costs are recoverable
through the Emergency FPPAC, PNM is exposed to risks related to fluctuations in
the market price of energy that could impact the sales price or purchase price
of energy.  In 2008, PNM ended speculative trading.





First
Choice is responsible for energy supply related to the sale of electricity to
retail customers in Texas.  TECA contains no provisions for the
specific recovery of fuel and purchased power costs.  The rates
charged to First Choice customers are negotiated with each
customer.  As a result, changes in purchased power costs will affect
First Choice’s operating results.  First Choice is exposed to market
risk to the extent that its retail rates or cost of supply fluctuates with
market prices.  Additionally, fluctuations in First Choice retail load
requirements greater than anticipated may subject First Choice to market
risk.  First Choice’s basic strategy is to minimize its exposure to
fluctuations in market energy prices by matching fixed price sales contracts
with fixed price supply retail operations.  As discussed in the
results of operations for First Choice, in 2008 First Choice is exiting
speculative trading.


92


GAAP
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at
the measurement date.  Fair value is based on current market quotes as
available and are supplemented by modeling techniques and assumptions made by
the Company to the extent quoted market prices or volatilities are not
available.  Generally, market data to value these instruments is
available for up to five years for gas swaps and electricity contracts and
up to 18 months for options.  The remaining periods are referred to as
the illiquid period and are valued using internally developed pricing
data.  The Company regularly assesses the validity and availability of
pricing data for the illiquid period of its derivative
transactions.  Although management uses its best judgment in
estimating the fair value of these financial instruments, there are inherent
limitations in any estimation technique.





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





June
      30, 2008Trading
            
            
            Economic
              Hedges
            
            
            Total(In
      thousands)Mark-to-market
      energy contracts:Current
      asset
            
            $
            180,866
            
            
            $
            43,660
            
            
            $
            224,526Long-term
      asset
            
            
            31,252
            
            
            
            7,380
            
            
            
            38,632Total
      mark-to-market assets
            
            
            212,118
            
            
            
            51,040
            
            
            
            263,158Current
      liability
            
            
            (216,886
            )
            
            
            (28,542
            )
            
            
            (245,428
            )Long-term
      liability
            
            
            (30,647
            )
            
            
            (185
            )
            
            
            (30,832
            )Total
      mark-to-market liabilities
            
            
            (247,533
            )
            
            
            (28,727
            )
            
            
            (276,260
            )Net
      fair value of mark-to-market energy contracts
            
            $
            (35,415
            )
            
            $
            22,313
            
            
            $
            (13,102
            )





December
      31, 2007Trading
            
            
            Economic
              Hedges
            
            
            Total(In
      thousands)Mark-to-market
      energy contracts:Current
      asset
            
            $
            32,451
            
            
            $
            15,060
            
            
            $
            47,511Long-term
      asset
            
            
            8,335
            
            
            
            37,359
            
            
            
            45,694Total
      mark-to-market assets
            
            
            40,786
            
            
            
            52,419
            
            
            
            93,205Current
      liability
            
            
            (34,753
            )
            
            
            (17,991
            )
            
            
            (52,744
            )Long-term
      liability
            
            
            (7,610
            )
            
            
            (47,564
            )
            
            
            (55,174
            )Total
      mark-to-market liabilities
            
            
            (42,363
            )
            
            
            (65,555
            )
            
            
            (107,918
            )Net
      fair value of mark-to-market energy contracts
            
            $
            (1,577
            )
            
            $
            (13,136
            )
            
            $
            (14,713
            )





PNMR has
elected not to offset the fair value amounts of derivative instruments under
master netting arrangements or with the cash collateral associated with its
derivative positions as elected under FSP FIN 39-1.


93


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





June
      30, 2008Trading
            
            
            Economic
              Hedges
            
            
            Total(In
      thousands)Sources
      of fair value gain (loss):Fair
      value at beginning of year
            
            $
            (1,577
            )
            
            $
            (13,136
            )
            
            $
            (14,713
            )Adoption
      of SFAS 157
            
            
            -
            
            
            
            17,253
            
            
            
            17,253Adjusted
      beginning fair value
            
            
            (1,577
            )
            
            
            4,117
            
            
            
            2,540Amount
      realized on contracts delivered during period
            
            
            (21,756
            )
            
            
            7,519
            
            
            
            (14,237
            )Changes
      in fair value
            
            
            (2,046
            )
            
            
            10,726
            
            
            
            8,680Net
      change recorded as mark-to-market
            
            
            (23,802
            )
            
            
            18,245
            
            
            
            (5,557
            )Unearned/prepaid
      option premiums
            
            
            (10,036
            )
            
            
            (49
            )
            
            
            (10,085
            )Net
      fair value at end of period
            
            $
            (35,415
            )
            
            $
            22,313
            
            
            $
            (13,102
            )








June
      30, 2007
              Mark-to-market
      instrumentsTrading
            
            
            Economic
              Hedges
            
            
            Total(In
      thousands)Sources
      of fair value gain (loss):Fair
      value at beginning of year
            
            $
            925
            
            
            $
            2,541
            
            
            $
            3,466Amount
      realized on contracts delivered during period
            
            
            3,458
            
            
            
            (635
            )
            
            
            2,823Changes
      in fair value
            
            
            (6,503
            )
            
            
            (4,260
            )
            
            
            (10,763
            )Net
      change recorded as mark-to-market
            
            
            (3,045
            )
            
            
            (4,895
            )
            
            
            (7,940
            )Net
      fair value at end of period
            
            $
            (2,120
            )
            
            $
            (2,354
            )
            
            $
            (4,474
            )





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





Fair
Value of mark-to-market instruments at June 30, 2008





Less
      than1
      year
            
            
            1-3
      Years
            
            
            4+
      Years
            
            
            Total(In
      thousands)Trading
            
            $
            (36,020
            )
            
            $
            605
            
            
            $
            -
            
            
            $
            (35,415
            )Economic
      hedges
            
            
            15,118
            
            
            
            2,620
            
            
            
            4,575
            
            
            
            22,313Total
            
            $
            (20,902
            )
            
            $
            3,225
            
            
            $
            4,575
            
            
            $
            (13,102
            )





94


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





Six
      Months EndedJune
      30,2008
            
            
            2007Type
      of Derivative
            
            Hedge
      Instruments(In
      thousands)Change
      in fair value of energy contracts
            
            $
            (27,670
            )
            
            $
            (34,223
            )Change
      in fair value of swaps and futures
            
            
            8,467
            
            
            
            6,228Change
      in the fair value of options
            
            
            12,648
            
            
            
            30Net
      change in fair value
            
            $
            (6,555
            )
            
            $
            (27,965
            )





As of
June 30, 2008, PNMR had $19.9 million of net derivative assets and liabilities
measured using Level 3 inputs (as defined in SFAS 157).  The fair
value of these net Level 3 transactions is 17% of PNMR’s total fair value net
asset and liability positions.  At January 1, 2008, PNM held $15.7
million of Level 3 net derivative assets relating to PNM Electric wholesale
contracts, which were sold in June 2008 for a $1.6 million loss.  For
the six months ended June 30, 2008, changes in PNMR’s Level 3 transactions were
primarily related to the $15.7 million sale of PNM’s wholesale contracts and
$16.2 million unrealized gains included in earnings.  Substantially
all Level 3 unrealized gains will settle out in 2008.





Risk
Management Activities





PNM
measures the market risk of its long-term contracts and wholesale activities
using a VaR calculation to maintain total exposure within management-prescribed
limits.  The VaR calculation reports the possible market loss for the
respective transactions.  This calculation is based on the
transaction’s fair market value on the reporting date.  Accordingly,
the VaR calculation is not a measure of the potential accounting mark-to-market
loss.  PNM utilizes the Monte Carlo simulation model of
VaR.  The Monte Carlo model utilizes a random generated simulation
based on historical volatility to generate portfolio values.  The
quantitative risk information, however, is limited by the parameters established
in creating the model.  The instruments being evaluated may trigger a
potential loss in excess of calculated amounts if changes in commodity prices
exceed the confidence level of the model used.  The VaR methodology
employs the following critical parameters:  volatility estimates,
market values of open positions, appropriate market-oriented holding periods and
seasonally adjusted correlation estimates.  The VaR calculation
considers PNM’s forward position for the next eighteen months.  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
99%.  For example, if VaR is calculated at $10.0 million, it is
estimated that in 990 out of 1000 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 six months ended June 30, 2008, the average
VaR amount for these transactions was $0.7 million with high and low VaR amounts
for the period of $1.4 million and $0.4 million.  The VaR amount for
these transactions at June 30, 2008 was $1.3 million.  For the six
months ended June 30, 2007, the average VaR amount for these transactions was
$4.1 million with high and low VaR amounts for the period of $6.4 million and
$1.8 million.  The total VaR amount for these transactions at June 30,
2007 was $1.8 million.





First
Choice measures the market risk of its activities using an EaR calculation to
maintain PNMR’s total exposure within management-prescribed
limits.  Because of its obligation to serve customers, First Choice
must take certain contracts to settlement.  Accordingly, a measure
that evaluates the settlement of First Choice’s positions against earnings
provides management with a useful tool to manage its portfolio.  First
Choice uses a held-to-maturity VaR calculation to approximate EaR. The
calculation utilizes the same Monte Carlo simulation approach described above at
a 95% confidence level and includes the retail load and supply portfolios as
well as all speculative trades. Management believes the VaR results are a
reasonable approximation of the potential variability of earnings against
forecasted earnings.  The quantitative risk information, however, is
limited by the parameters established in creating the model.  The
instruments being evaluated may trigger a potential loss in excess of




95


calculated
amounts if changes in commodity prices exceed the confidence level of the model
used.  The EaR calculation considers the Company’s forward position
for the next twelve months and holds each position to settlement.  The
volatility and the correlation estimates measure the impact of adverse price
movements both at an individual position level as well as at the total portfolio
level.  For example, if EaR is calculated at $10.0 million, it is
estimated that in 950 out of 1000 market scenarios calculated by the model the
losses against the Company’s forecasted earnings over the next twelve months
would not exceed $10.0 million.





For the
six months ended June 30, 2008, the average EaR amount was $22.2 million, with
high and low EaR amounts for the period of $44.3 million and $12.6
million.  The total EaR amount at June 30, 2008 was $15.3
million.  For the six months ended June 30, 2007, the average EaR
amount for these transactions was $14.0 million, with high and low EaR amounts
for the period of $20.5 million and $5.7 million.  The total EaR
amount for these transactions at June 30, 2007 was $7.3 million.





In
addition, First Choice utilizes two VaR measures to manage its market
risk.  The first VaR limit is based on the same total portfolio
approach as the EaR measure; however, the VaR measure is intended to capture the
effects of changes in market prices over a 10-day holding
period.  This holding period is considered appropriate given the
nature of First Choice’s supply portfolio and the constraints faced by First
Choice in the ERCOT market.  The calculation utilizes the same Monte
Carlo simulation approach described above at a 95% confidence
level.  The VaR amount for these transactions was $4.6 million at June
30, 2008.  For the six months ended June 30, 2008, the high, low and
average mark-to-market VaR amounts were $12.1 million, $1.6 million and $5.9
million.  The VaR amount for these transactions was $4.5 million at
June 30, 2007.  For the six months ended June 30, 2007, the high, low
and average mark-to-market VaR amounts were $6.2 million, $2.1 million and $4.1
million.





The
second VaR limit was established for First Choice transactions that are subject
to mark-to-market accounting as defined by SFAS 133.  This calculation
captures the effect of changes in market prices over a 3-day holding period and
utilizes the same Monte Carlo simulation approach described above at a 95%
confidence level.  The VaR amount for these transactions was less than
$0.1 million at June 30, 2008.  For the six months ended June 30,
2008, the high, low and average mark-to-market VaR amounts were $3.5 million,
less than $0.1 million and $1.0 million.  The VaR amount for these
transactions was $1.8 million at June 30, 2007.  For the six months
ended June 30, 2007, the high, low and average mark-to-market VaR amounts were
$4.4 million, $0.7 million and $2.0 million.





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.  As discussed in Results of
Operations, First Choice experienced speculative pre-tax trading losses of $47.1
million in the first quarter of 2008. These transactions triggered exceedences
of the EaR limit and the 10-day VaR limit. These occurrences resulted in
numerous meetings between the RMC and First Choice management and ultimately the
decision to exit the basis transactions and further  speculative
trading.





The VaR
and EaR limits represent an estimate of the potential gains or losses that could
be recognized on the Company’s portfolios, subject to market risk, given current
volatility in the market, and are not necessarily indicative of actual results
that may occur, since actual future gains and losses will differ from those
estimated.  Actual gains and losses may differ due to actual
fluctuations in market prices, operating exposures, and the timing thereof, as
well as changes to the underlying portfolios during the year.





Credit
Risk





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





The
following table provides information related to PNMR’s credit exposure as of
June 30, 2008.  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 PNMR may
have.


96





PNMR


Schedule
of Credit Risk Exposure


June
30, 2008





Net(b)
            
            
            Number
            
            
            ExposureNet
            
            
            of
            
            
            ofCredit
            
            
            Counter
            
            
            Counter-Risk
            
            
            -parties
            
            
            partiesRating
      (a)
            
            Exposure
            
            
            >10%
            
            
            >10%(Dollars
      in thousands)External
      ratings:Investment
      grade
            
            $
            195,757
            
            
            
            2
            
            
            $
            134,351Non-investment
      grade
            
            
            350
            
            
            
            -
            
            
            
            -Split
      Rating
            
            
            2,090
            
            
            
            -
            
            
            
            -Internal
      ratings:Investment
      grade
            
            
            1,298
            
            
            
            -
            
            
            
            -Non-investment
      grade
            
            
            2,484
            
            
            
            -
            
            
            
            -Total
            
            $
            201,979
            
            
            
            
            
            
            $
            134,351





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





(b)
            The
      Net Credit Risk Exposure is the net credit exposure from
      operations.  This includes long-term contracts, forward sales
      and short-term sales. The exposure captures the net 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 and reduced by credit collateral.  Credit
      collateral includes cash deposits, letters of credit and performance bonds
      received from counterparties.  Amounts are presented before
      those reserves that are determined on a portfolio
  basis.





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





PNMR


Maturity
      of Credit Risk Exposure


June
30, 2008





Greater
            
            
            TotalLess
      than
            
            
            
            
            
            than
            
            
            NetRating
            
            2
      Years
            
            
            2-5
      Years
            
            
            5
      Years
            
            
            Exposure(In
      thousands)External
      ratings:Investment
      grade
            
            $
            180,776
            
            
            $
            11,309
            
            
            $
            3,672
            
            
            $
            195,757Non-investment
      grade
            
            
            350
            
            
            
            -
            
            
            
            -
            
            
            
            350Split
            
            
            2,090
            
            
            
            -
            
            
            
            -
            
            
            
            2,090Internal
      ratings:Investment
      grade
            
            
            1,298
            
            
            
            -
            
            
            
            -
            
            
            
            1,298Non-investment
      grade
            
            
            2,484
            
            
            
            -
            
            
            
            -
            
            
            
            2,484Total
            
            $
            186,998
            
            
            $
            11,309
            
            
            $
            3,672
            
            
            $
            201,979





The
Company provides for losses due to market and credit risk.  Credit
risk for PNMR's largest counterparty as of June 30, 2008 and December 31, 2007
was $97.4 million and $77.2 million.


97


Interest
Rate Risk





The
remarketing of PNMR’s debt issued as part of the equity-linked units sold in
October 2005 will begin on November 7, 2008.  The maturity date may be
extended in the remarketing and the interest rate will be reset to a level
designed to achieve a successful remarketing of the notes.If the remarketing of the
debt is not successful, the maturity and interest rate of the debt will not
change and holders of the equity-linked units will have the option of putting
their debt to PNMR to satisfy their obligations under the purchase contracts.
The credit ratings of PNMR’s debt were recently downgraded and there has been an
overall deterioration of the credit markets in general. Although there can be no
assurance, PNMR believes the remarketing will be successful.





PNMR has
long-term debt which subjects it to the risk of loss associated with movements
in market interest rates.  The majority of PNMR’s long-term debt is
fixed-rate debt, and therefore, does not expose PNMR’s earnings to a major risk
of loss due to adverse changes in market interest rates.  However, the
fair value of all long-term debt instruments would increase by approximately
2.0%, if interest rates were to decline by 50 basis points from their levels at
June 30, 2008.  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.





The
securities held by PNM in the NDT and in trusts for pension and other
post-employment benefits had an estimated fair value of $657.5 million at June
30, 2008, of which 26.6% were fixed-rate debt securities that subject PNM to
risk of loss of fair value with movements in market interest
rates.  If rates were to increase by 50 basis points from their levels
at June 30, 2008, the decrease in the fair value of the fixed-rate securities
would be 3.3%, or $5.7 million.  PNM does not currently recover or
return through rates any losses or gains on these securities.  PNM,
therefore, is at risk for shortfalls in its funding of its obligations due to
investment losses.  PNM does not believe that long-term market returns
over the period of funding will be less than required for PNM to meet its
obligations.  However, this belief is based on assumptions about
future returns that are inherently uncertain.





The
securities held by TNMP in trusts
forpension and other
post-employment benefits had an estimated fair value of $81.2 million at
June 30, 2008, of which 21.0% were fixed-rate debt securities that subject TNMP
to risk of loss of fair value with movements in market interest
rates.  If rates were to increase by 50 basis points from their levels
at June 30, 2008, the decrease in the fair value of the fixed-rate securities
would be 4.0%, or $0.7 million.  TNMP, therefore, is at risk for
shortfalls in its funding of its obligations due to investment
losses.  TNMP does not believe that long-term market returns over the
period of funding will be less than required for TNMP to meet its
obligations.  However, this belief is based on assumptions about
future returns that are inherently uncertain.





Equity
Market Risk





The NDT
and trusts established for PNM’s pension and post-employment benefits hold
certain equity securities at June 30, 2008.  These equity securities
also expose PNM to losses in fair value.  Equity securities comprised
56.3% of the securities held by the various trusts as of June 30,
2008.  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 also expose TNMP to losses
in fair value.  Equity securities comprised 50.7% of the securities
held by the trusts as of June 30, 2008.  TNMP does not recover or earn
a return through rates on any losses or gains on these equity
securities.





Alternatives
Investment Risk





The
Company has a target of investing 20% of its pension assets in the alternatives
asset class. This includes real estate, private equity, and hedge funds. The
private equity and hedge fund investments are limited partner structures that
are multi-manager multi-strategy funds. This investment approach gives broad
diversification and minimizes risk compared to a direct investment in any one
component of the funds. The general partner oversees the selection and
monitoring of the underlying managers. The Company’s Corporate Investment
Committee, assisted by its investment consultant, monitors the performance of
the funds and general partner’s investment process. There is risk associated
with these funds due to the nature of the strategies and techniques and the use
of investments that do not have readily determinable fair value.





98


ITEM
4.  CONTROLS AND PROCEDURES





PNMR





Disclosure
of controls and procedures





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





Changes
in internal controls





There
have been no changes in PNMR’s internal controls over financial reporting for
the quarter ended June 30, 2008, that have materially affected, or are
reasonably likely to materially affect, PNMR’s internal control over financial
reporting.





PNM





Disclosure
of controls and procedures





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





Changes
in internal controls





There
have been no changes in PNM’s internal controls over financial reporting for the
quarter ended June 30, 2008, that have materially affected, or are reasonably
likely to materially affect, PNM’s internal control over financial
reporting.





TNMP





Disclosure
of controls and procedures





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








Changes
in internal controls





There
have been no changes in TNMP’s internal controls over financial reporting for
the quarter ended June 30, 2008, that have materially affected, or are
reasonably likely to materially affect, TNMP’s internal control over financial
reporting.





99


PART
II – OTHER INFORMATION





ITEM
1.  LEGAL PROCEEDINGS





On June
24, 2008, NMED issued an Administrative Compliance Order against PNM for alleged
violations of the New Mexico Radiation Protection Act.  The Compliance
Order assesses a penalty of $121,170 against PNM for four violations
relating to the disposal of instruments containing radioactive materials,
including failure to perform and document physical inventory every six months to
account for radioactive materials, failure to assure secure storage of
radioactive material upon removal from service, failure to review radiation
protection program content and implementation at least annually, and failure to
use NMED-authorized persons to dispose of licensed material.  The
Compliance Order requires PNM to correct all violations cited within 30 days of
receipt of the Order and to pay the penalty within 45 days of receipt of the
Order.  PNM implemented changes necessary to come into compliance with
the Order and submitted a certification of compliance to NMED on July 21,
2008.  Compliance included payment of the full penalty.





In
addition, see Notes 9 and 10 in the Notes to Condensed Consolidated Financial
Statements for information related to the following matters, for PNMR, PNM and
TNMP, incorporated in this item by reference.





·
            Citizen
      Suit Under the Clean Air Act


·
            Navajo
      Nation Environmental Issues


·
            Four
      Corners Federal Implementation Plan
Litigation


·
            Santa
      Fe Generating Station


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


·
            TNMP
      True-Up Proceeding


·
            San
      Juan River Adjudication


·
            Gila
      River Indian Reservation Superfund
Site





ITEM
1A.  RISK FACTORS





Any
failure to meet our debt obligations could harm our business, financial
condition and results of operations.




As of
August 4, 2008, the Company had consolidated short-term debt outstanding of
$385.0 million.  In addition, as of August 4, 2008, PNMR’s
subsidiaries had scheduled maturities of long-term debt aggregating $467.7
million due prior to August 4, 2009, consisting of PNM’s $300.0 million
aggregate principal amount of 4.4% senior unsecured notes due September 15,
2008 and TNMP’s $167.7 million aggregate principal amount of 6.25% senior
unsecured notes due January 15, 2009.




PNMR has
$100.0 million aggregate principal amount of 5.1% senior unsecured notes due
August 1, 2010.  PNMR is obligated to remarket these notes
beginning November 7, 2008, and if PNMR cannot remarket the notes, the holder of
the notes has the right to put the notes to us on November 16, 2008 to
satisfy its obligations under the related purchase contracts to purchase PNMR
equity securities from us and we will not receive the $100 million of cash we
would have otherwise received for the issuance PNMR equity
securities.




The
Company is exploring financial alternatives to meet these obligations and
currently believes that internal cash generation, credit arrangements, and
access to the public and private capital markets will provide sufficient
resources to meet capital requirements and retire or refinance the debt
described above 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 current liquidity arrangements.




The
credit ratings for the debt of PNMR, PNM, and TNMP were recently
downgraded.  In some instances our credit ratings are below investment
grade.  There has also been an overall deterioration of the credit
markets in general.  If our cash flow and capital resources are
insufficient to fund our debt obligations, we may be forced to sell assets, seek
additional equity or debt capital or restructure our debt.  In
addition, any failure to make scheduled payments of interest and principal on
our outstanding indebtedness would likely result in a further reduction of our
credit rating, which could harm our ability to incur additional indebtedness on
acceptable terms and would result in an increase in the interest rates
applicable under our credit facilities.  Our cash flow and capital
resources may be insufficient to pay interest and principal on our debt in the
future, including payments on the notes.  If that should




100


occur,
our capital raising or debt restructuring measures may be unsuccessful or
inadequate to meet our scheduled debt service obligations, which could cause us
to default on our obligations and further impair our liquidity.




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





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





Annual
Meeting





The
Annual Meeting of Shareholders of PNMR was held on May 28, 2008.  The
matters voted on at the meeting and the results were as follows:





The
election of the following nominees to serve as directors until the Annual
Meeting of Shareholders in 2009:





Director
            Votes
      For
            Votes
      WithheldAdelmo
      E. Archuleta
            62,921,454
            7,719,581Julie
      A. Dobson
            62,917,821
            7,723,214Woody
      L. Hunt
            62,913,088
            7,727,947R.R.
      Nordhaus
            62,885,999
            7,755,036M. T.
      Pacheco
            62,897,640
            7,743,395R. M.
      Price
            62,759,301
            7,881,734B. S.
      Reitz
            62,899,789
            7,741,246Jeffry
      E. Sterba
            62,747,156
            7,893,879Joan B.
      Woodard
            62,912,562
            7,728,473





The approval of an amendment to the PNM
Resources, Inc. Employee Stock Purchase Plan:





Votes
      For
            Votes
      Against
            Abstentions57,970,301
            705,790
            828,575





The
approval of the selection of Deloitte & Touche LLP as independent auditors
for the fiscal year ending December 31, 2008:





Votes
      For
            Votes
      Against
            Abstentions70,167,757
            231,682
            241,596


101


ITEM
6.  EXHIBITS





10.1**
            PNMR
            PNM
      Resources, Inc. 2008 Officer Incentive Plan10.2**
            PNMR
            PNM
      Resources, Inc. Performance Cash Program for the Utilities
      President12.1
            PNMR
            Ratio
      of Earnings to Fixed Charges12.2
            PNM
            Ratio
      of Earnings to Fixed Charges12.3
            PNM
            Ratio
      of Earnings to Combined Fixed Charges and Preferred Stock
      Dividends31.1
            PNMR
            Chief
      Executive Officer Certification Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
            PNMR
            Chief
      Financial Officer Certification Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.3
            PNM
            Chief
      Executive Officer Certification Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.4
            PNM
            Chief
      Financial Officer Certification Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.5
            TNMP
            Chief
      Executive Officer Certification Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.6
            TNMP
            Chief
      Financial Officer Certification Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
            PNMR
            Chief
      Executive Officer Certification Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.2
            PNMR
            Chief
      Financial Officer Certification Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.3
            PNM
            Chief
      Executive Officer Certification Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.4
            PNM
            Chief
      Financial Officer Certification Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.5
            TNMP
            Chief
      Executive Officer Certification Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.6
            TNMP
            Chief
      Financial Officer Certification Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002





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


102


SIGNATURE





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





PNM
      RESOURCES, INC.
              PUBLIC
      SERVICE COMPANY OF NEW MEXICO
              TEXAS-NEW
      MEXICO POWER COMPANY(Registrants)Date:   August
      14, 2008
            /s/
      Thomas G. SategnaThomas
      G. SategnaVice
      President and Corporate Controller(Officer
      duly authorized to sign this
report)








103