UNITED
      STATESSECURITIES
      AND EXCHANGE COMMISSIONWashington,
      D.C.  20549FORM
      10-Q(Mark
      One)[X]
      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934For
      the quarterly period ended March 31,
      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
April 30, 2008, 76,928,841 shares of common stock, no par value per share, of
PNMR were outstanding.





The total
number of shares of common stock of PNM outstanding as of April 30, 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 April 30, 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.











ii





PNM
RESOURCES, INC. AND SUBSIDIARIES


PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY


TEXAS-NEW
MEXICO POWER COMPANY AND SUBSIDIARIES





INDEX







Page
      No.GLOSSARY
              4PART
      I.  FINANCIAL INFORMATION:ITEM
      1.  FINANCIAL STATEMENTS (Unaudited)PNM
      RESOURCES, INC. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
              6CONDENSED
      CONSOLIDATED BALANCE SHEETS
              7CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS
              9CONDENSED
      CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS’
      EQUITY
              11CONDENSED
      CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
              12PUBLIC
      SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
              13CONDENSED
      CONSOLIDATED BALANCE SHEETS
              14CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS
              16CONDENSED
      CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDER’S
      EQUITY
              18CONDENSED
      CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
              19TEXAS-NEW
      MEXICO POWER COMPANY AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF EARNINGS
              20CONDENSED
      CONSOLIDATED BALANCE SHEETS
              21CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS
              23CONDENSED
      CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDER’S
      EQUITY
              25CONDENSED
      CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
              26NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              27ITEM
      2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
      AND RESULTS OF OPERATIONS
              66ITEM
      3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
      RISK
              86ITEM
      4.  CONTROLS AND PROCEDURES
              95PART
      II.  OTHER INFORMATIONITEM
      1.  LEGAL PROCEEDINGS
              96ITEM
      1A.  RISK FACTORS
              96ITEM
      6.  EXHIBITS
              97SIGNATURE
              98





iii





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 UnitCal
      PX
              California
      Power ExchangeCal
      ISO
              California
      Independent System OperatorCascade
              Cascade
      Investment, L.L.C.Constellation
              Constellation
      Energy Commodities Group, Inc.Continental
              Continental
      Energy Systems, L.L.C.CRHC
              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 AgencyERCOT
              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 PlanFirst
      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 RateLordsburg
              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, 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 AgreementPSA
              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
              San
      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 SubsidiariesTNP
              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 Risk
   Accounting
      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
      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”
  5




PART
I. FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS


PNM
RESOURCES, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(LOSS)


(Unaudited)





Three
      Months Ended March 31,2008
            
            
            2007(In thousands, except per shareamounts)Operating
      Revenues:Electric
            
            $
            364,403
            
            
            $
            436,834Other
            
            
            100
            
            
            
            210Total
      operating revenues
            
            
            364,503
            
            
            
            437,044Operating
      Expenses:Cost
      of energy sold
            
            
            234,380
            
            
            
            216,812Administrative
      and general
            
            
            47,362
            
            
            
            58,327Energy
      production costs
            
            
            51,204
            
            
            
            47,382Regulatory
      disallowances
            
            
            30,248
            
            
            
            -Depreciation
      and amortization
            
            
            34,037
            
            
            
            34,841Transmission
      and distribution costs
            
            
            13,376
            
            
            
            14,655Taxes
      other than income taxes
            
            
            12,867
            
            
            
            16,572Total
      operating expenses
            
            
            423,474
            
            
            
            388,589Operating
      income (loss)
            
            
            (58,971
            )
            
            
            48,455Other
      Income and Deductions:Interest
      income
            
            
            5,530
            
            
            
            9,792Gains
      (losses) on investments held by NDT
            
            
            (3,705
            )
            
            
            44Other
      income
            
            
            890
            
            
            
            1,904Equity
      in net earnings (loss) of EnergyCo
            
            
            (25,083
            )
            
            
            (662
            )Other
      deductions
            
            
            (3,882
            )
            
            
            (975
            )Net
      other income and deductions
            
            
            (26,250
            )
            
            
            10,103Interest
      Charges:Interest
      on long-term debt
            
            
            18,908
            
            
            
            21,063Other
      interest charges
            
            
            8,927
            
            
            
            13,838Total
      interest charges
            
            
            27,835
            
            
            
            34,901Earnings
      (Loss) before Income Taxes
            
            
            (113,056
            )
            
            
            23,657Income
      Taxes (Benefit)
            
            
            (42,053
            )
            
            
            8,381Preferred
      Stock Dividend Requirements of Subsidiary
            
            
            132
            
            
            
            132Earnings
      (Loss) from Continuing Operations
            
            
            (71,135
            )
            
            
            15,144Earnings
      from Discontinued Operations, net of IncomeTaxes
      of $13,655 and $9,517
            
            
            22,499
            
            
            
            14,522Net
      Earnings (Loss)
            
            $
            (48,636
            )
            
            $
            29,666Earnings
      (Loss) from Continuing Operations per Common Share:Basic
            
            $
            (0.93
            )
            
            $
            0.20Diluted
            
            $
            (0.93
            )
            
            $
            0.19Net
      Earnings (Loss) per Common Share:Basic
            
            $
            (0.63
            )
            
            $
            0.39Diluted
            
            $
            (0.63
            )
            
            $
            0.38Dividends
      Declared per Common Share
            
            $
            0.23
            
            
            $
            0.23





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





6





PNM
RESOURCES, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS


(Unaudited)





March
      31,
            
            
            December
      31,2008
            
            
            2007(In
      thousands)ASSETSCurrent
      Assets:Cash
      and cash equivalents
            
            $
            27,724
            
            
            $
            17,763Special
      deposits
            
            
            2,727
            
            
            
            1,717Accounts
      receivable, net of allowance for uncollectible accounts of $5,923 and
      $6,021
            
            
            125,680
            
            
            
            134,325Unbilled
      revenues
            
            
            67,356
            
            
            
            74,896Other
      receivables
            
            
            71,567
            
            
            
            90,002Materials,
      supplies, and fuel stock
            
            
            42,429
            
            
            
            41,312Regulatory
      assets
            
            
            117
            
            
            
            157Derivative
      instruments
            
            
            237,398
            
            
            
            49,257Income
      taxes receivable
            
            
            40,958
            
            
            
            39,189Current
      assets of discontinued operations
            
            
            114,954
            
            
            
            120,061Other
      current assets
            
            
            50,549
            
            
            
            37,198Total
      current assets
            
            
            781,459
            
            
            
            605,877Other
      Property and Investments:Investment
      in PVNGS lessor notes
            
            
            180,547
            
            
            
            192,226Equity
      investment in EnergyCo
            
            
            201,361
            
            
            
            248,094Investments
      held by NDT
            
            
            130,227
            
            
            
            139,642Other
      investments
            
            
            43,696
            
            
            
            47,749Non-utility
      property, net of accumulated depreciation of $1,712 and
    $1,570
            
            
            9,533
            
            
            
            6,968Total
      other property and investments
            
            
            565,364
            
            
            
            634,679Utility
      Plant:Electric
      plant in service
            
            
            4,083,907
            
            
            
            3,920,071Common
      plant in service and plant held for future use
            
            
            140,217
            
            
            
            128,1194,224,124
            
            
            
            4,048,190Less
      accumulated depreciation and amortization
            
            
            1,480,788
            
            
            
            1,464,6252,743,336
            
            
            
            2,583,565Construction
      work in progress
            
            
            170,217
            
            
            
            299,574Nuclear
      fuel, net of accumulated amortization of $18,420 and
    $15,395
            
            
            59,117
            
            
            
            52,246Net
      utility plant
            
            
            2,972,670
            
            
            
            2,935,385Deferred
      Charges and Other Assets:Regulatory
      assets
            
            
            448,364
            
            
            
            481,872Pension
      asset
            
            
            20,149
            
            
            
            17,778Goodwill
            
            
            495,664
            
            
            
            495,664Other
      intangible assets, net of accumulated amortization of $3,690 and
      $3,362
            
            
            75,564
            
            
            
            75,892Derivative
      instruments
            
            
            16,075
            
            
            
            45,694Non-current
      assets of discontinued operations
            
            
            535,196
            
            
            
            526,539Other
      deferred charges
            
            
            53,096
            
            
            
            52,756Total
      deferred charges and other assets
            
            
            1,644,108
            
            
            
            1,696,195$
            5,963,601
            
            
            $
            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)





March
      31,
            
            
            December
      31,2008
            
            
            2007(In
      thousands, except share information)LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Short-term
      debt
            
            $
            737,000
            
            
            $
            665,900Current
      installments of long-term debt
            
            
            619,212
            
            
            
            449,219Accounts
      payable
            
            
            159,319
            
            
            
            148,955Accrued
      interest and taxes
            
            
            47,395
            
            
            
            57,766Derivative
      instruments
            
            
            251,678
            
            
            
            53,832Current
      liabilities of discontinued operations
            
            
            63,979
            
            
            
            96,003Other
      current liabilities
            
            
            100,585
            
            
            
            112,394Total
      current liabilities
            
            
            1,979,168
            
            
            
            1,584,069Long-term
      Debt
            
            
            1,064,253
            
            
            
            1,231,859Deferred
      Credits and Other Liabilities:Accumulated
      deferred income taxes
            
            
            571,474
            
            
            
            600,187Accumulated
      deferred investment tax credits
            
            
            26,078
            
            
            
            26,825Regulatory
      liabilities
            
            
            334,015
            
            
            
            332,372Asset
      retirement obligations
            
            
            68,352
            
            
            
            66,466Accrued
      pension liability and postretirement benefit cost
            
            
            59,489
            
            
            
            60,022Derivative
      instruments
            
            
            13,079
            
            
            
            55,206Non-current
      liabilities of discontinued operations
            
            
            90,035
            
            
            
            89,848Other
      deferred credits
            
            
            124,947
            
            
            
            121,342Total
      deferred credits and other liabilities
            
            
            1,287,469
            
            
            
            1,352,268Total
      liabilities
            
            
            4,330,890
            
            
            
            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 76,914,254 and 76,814,491 shares)
            
            
            1,044,861
            
            
            
            1,042,974Accumulated
      other comprehensive income (loss), net of income tax
            
            
            (6,018
            )
            
            
            11,208Retained
      earnings
            
            
            582,339
            
            
            
            638,229Total
      common stockholders’ equity
            
            
            1,621,182
            
            
            
            1,692,411$
            5,963,601
            
            
            $
            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)





Three
      Months Ended March 31,2008
            
            
            2007(In
      thousands)Cash
      Flows From Operating Activities:Net
      earnings (loss)
            
            $
            (48,636
            )
            
            $
            29,666Adjustments
      to reconcile net earnings (loss) to net cash flows from operating
      activities:Depreciation
      and amortization
            
            
            39,855
            
            
            
            47,772Deferred
      income tax expense (benefit)
            
            
            (24,849
            )
            
            
            14,282Equity
      in net (earnings) loss of EnergyCo
            
            
            25,083
            
            
            
            662Net
      unrealized (gains) losses on derivatives
            
            
            18,015
            
            
            
            (3,795
            )Realized
      (gains) losses on investments held by NDT
            
            
            3,705
            
            
            
            (44
            )Amortization
      of fair value of acquired Twin Oaks sales contract
            
            
            -
            
            
            
            (20,035
            )Stock
      based compensation expense
            
            
            1,983
            
            
            
            4,381Regulatory
      disallowances
            
            
            30,248
            
            
            
            -Other,
      net
            
            
            (2,961
            )
            
            
            (928
            )Changes
      in certain assets and liabilities:Customer
      accounts receivable and unbilled revenues
            
            
            10,161
            
            
            
            2,909Materials,
      supplies, fuel stock, and natural gas stored
            
            
            525
            
            
            
            (6,155
            )Other
      current assets
            
            
            9,156
            
            
            
            23,560Other
      assets
            
            
            (360
            )
            
            
            4,721Accounts
      payable
            
            
            (17,754
            )
            
            
            (25,897
            )Accrued
      interest and taxes
            
            
            (12,873
            )
            
            
            (6,029
            )Other
      current liabilities
            
            
            (9,168
            )
            
            
            (13,213
            )Other
      liabilities
            
            
            2,562
            
            
            
            (8,235
            )Net
      cash flows from operating activities
            
            
            24,692
            
            
            
            43,622Cash
      Flows From Investing Activities:Utility
      plant additions
            
            
            (77,793
            )
            
            
            (89,484
            )Proceeds
      from sales of investments held by NDT
            
            
            36,635
            
            
            
            31,803Purchases
      of investments held by NDT
            
            
            (36,760
            )
            
            
            (36,365
            )Proceeds
      from sales of utility plant
            
            
            -
            
            
            
            4,572Return
      of principal on PVNGS lessor notes
            
            
            10,645
            
            
            
            11,612Reduction
      in restricted special deposits
            
            
            2,554
            
            
            
            -Investments
      in EnergyCo
            
            
            -
            
            
            
            (2,500
            )Other,
      net
            
            
            (3,183
            )
            
            
            4,290Net
      cash flows from investing activities
            
            
            (67,902
            )
            
            
            (76,072
            )





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








9





PNM
RESOURCES, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





Three
      Months Ended March 31,2008
            
            
            2007(In
      thousands)Cash
      Flows From Financing Activities:Short-term
      borrowings (repayments), net
            
            
            71,100
            
            
            
            (25,000
            )Issuance
      of common stock
            
            
            1,309
            
            
            
            1,070Proceeds
      from stock option exercise
            
            
            86
            
            
            
            6,509Purchase
      of common stock to satisfy stock awards
            
            
            (1,140
            )
            
            
            (11,587
            )Excess
      tax benefits (tax shortfall) from stock-based payment
      arrangements
            
            
            (380
            )
            
            
            6Dividends
      paid
            
            
            (17,802
            )
            
            
            (16,863
            )Other,
      net
            
            
            (3
            )
            
            
            (118
            )Net
      cash flows from financing activities
            
            
            53,170
            
            
            
            (45,983
            )Change
      in Cash and Cash Equivalents
            
            
            9,960
            
            
            
            (78,433
            )Cash
      and Cash Equivalents at Beginning of Period
            
            
            17,791
            
            
            
            123,419Cash
      and Cash Equivalents at End of Period
            
            $
            27,751
            
            
            $
            44,986Supplemental
      Cash Flow Disclosures:Interest
      paid, net of capitalized interest
            
            $
            41,321
            
            
            $
            37,218Income
      taxes paid (refunded), net
            
            $
            (4,176
            )
            
            $
            -





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





10





PNM
RESOURCES, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS’ EQUITY


(Unaudited)





AccumulatedCommon
      Stock
            
            
            Other
            
            
            
            
            
            Total
      CommonNumber
      of
            
            
            Aggregate
            
            
            Comprehensive
            
            
            Retained
            
            
            Stockholders’Shares
            
            
            Value
            
            
            Income
            
            
            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
            
            
            -
            
            
            
            (1,025
            )
            
            
            -
            
            
            
            -
            
            
            
            (1,025
            )Tax
      shortfall from stock-based compensation arrangements
            
            
            -
            
            
            
            (380
            )
            
            
            -
            
            
            
            -
            
            
            
            (380
            )Stock
      based compensation expense
            
            
            -
            
            
            
            1,983
            
            
            
            -
            
            
            
            -
            
            
            
            1,983Sale
      of common stock
            
            
            75,519
            
            
            
            1,022
            
            
            
            -
            
            
            
            -
            
            
            
            1,022Common
      stock issued to ESPP
            
            
            24,244
            
            
            
            287
            
            
            
            -
            
            
            
            -
            
            
            
            287Net
      earnings (loss)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (48,636
            )
            
            
            (48,636
            )Total
      other comprehensive income (loss)
            
            
            -
            
            
            
            -
            
            
            
            (17,226
            )
            
            
            -
            
            
            
            (17,226
            )Dividends
      declared on common stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (17,676
            )
            
            
            (17,676
            )Balance
      at March 31, 2008
            
            
            76,914,254
            
            
            $
            1,044,861
            
            
            $
            (6,018
            )
            
            $
            582,339
            
            
            $
            1,621,182





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








11





PNM
RESOURCES, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)


(Unaudited)





Three
      Months Ended March 31,2008
            
            
            2007(In
      thousands)Net
      Earnings (Loss)
            
            $
            (48,636
            )
            
            $
            29,666Other
      Comprehensive Income (Loss):Unrealized Gain (Loss) on
      Investment Securities:Unrealized
      holding gains (losses) arising duringthe
      period, net of income tax (expense) benefitof
      $1,501 and $(1,420)
            
            
            (2,291
            )
            
            
            2,167Reclassification
      adjustment for (gains) included innet
      earnings (loss), net of income tax expenseof
      $902 and $435
            
            
            (1,377
            )
            
            
            (663
            )Fair
      Value Adjustment for Designated Cash Flow Hedges:Change
      in fair market value, net of income tax (expense)of
      $6,789 and $11,886
            
            
            (10,206
            )
            
            
            (18,112
            )Reclassification
      adjustment for (gains) losses included innet
      earnings (loss), net of income tax expense (benefit)of
      $2,251 and $(954)
            
            
            (3,352
            )
            
            
            1,554Total
      Other Comprehensive Income (Loss)
            
            
            (17,226
            )
            
            
            (15,054
            )Comprehensive
      Income (Loss)
            
            $
            (65,862
            )
            
            $
            14,612





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








12





PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(LOSS)


(Unaudited)





Three
      Months Ended March 31,2008
            
            
            2007(In
      thousands)Electric
      Operating Revenues
            
            $
            252,664
            
            
            $
            240,352Operating
      Expenses:Cost
      of energy sold
            
            
            135,693
            
            
            
            103,173Administrative
      and general
            
            
            26,826
            
            
            
            31,503Energy
      production costs
            
            
            53,583
            
            
            
            40,387Regulatory
      disallowances
            
            
            30,248
            
            
            
            -Depreciation
      and amortization
            
            
            20,970
            
            
            
            20,755Transmission
      and distribution costs
            
            
            8,907
            
            
            
            9,729Taxes
      other than income taxes
            
            
            7,019
            
            
            
            6,638Total
      operating expenses
            
            
            283,246
            
            
            
            212,185Operating
      income (loss)
            
            
            (30,582
            )
            
            
            28,167Other
      Income and Deductions:Interest
      income
            
            
            6,091
            
            
            
            7,706Gains
      (losses) on investments held by NDT
            
            
            (3,705
            )
            
            
            44Other
      income
            
            
            547
            
            
            
            1,021Other
      deductions
            
            
            (2,314
            )
            
            
            (597
            )Net
      other income and deductions
            
            
            619
            
            
            
            8,174Interest
      Charges:Interest
      on long-term debt
            
            
            10,530
            
            
            
            9,491Other
      interest charges
            
            
            3,573
            
            
            
            3,655Total
      interest charges
            
            
            14,103
            
            
            
            13,146Earnings
      (Loss) before Income Taxes
            
            
            (44,066
            )
            
            
            23,195Income
      Taxes (Benefit)
            
            
            (17,089
            )
            
            
            8,837Earnings
      (Loss) from Continuing Operations
            
            
            (26,977
            )
            
            
            14,358Earnings
      from Discontinued Operations, net of IncomeTaxes
      of $13,655 and $9,517
            
            
            22,499
            
            
            
            14,522Net
      Earnings (Loss)
            
            
            (4,478
            )
            
            
            28,880Preferred
      Stock Dividends Requirements
            
            
            132
            
            
            
            132Net
      Earnings (Loss) Available for Common Stock
            
            $
            (4,610
            )
            
            $
            28,748





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





13





PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONDENSED CONSOLIDATED BALANCE SHEETS


(Unaudited)





March
      31,
            
            
            December
      31,2008
            
            
            2007(In
      thousands)ASSETSCurrent
      Assets:Cash
      and cash equivalents
            
            $
            21,708
            
            
            $
            4,303Special
      deposits
            
            
            2,407
            
            
            
            1,397Accounts
      receivable, net of allowance for uncollectible accounts of $778 and
      $729
            
            
            80,697
            
            
            
            78,094Unbilled
      revenues
            
            
            28,115
            
            
            
            32,039Other
      receivables
            
            
            59,194
            
            
            
            79,842Affiliate
      accounts receivable
            
            
            188
            
            
            
            271Materials,
      supplies, and fuel stock
            
            
            40,999
            
            
            
            39,771Regulatory
      assets
            
            
            117
            
            
            
            157Derivative
      instruments
            
            
            112,838
            
            
            
            14,859Current
      assets of discontinued operations
            
            
            114,954
            
            
            
            120,061Other
      current assets
            
            
            33,433
            
            
            
            28,926Total
      current assets
            
            
            494,650
            
            
            
            399,720Other
      Property and Investments:Investment
      in PVNGS lessor notes
            
            
            218,244
            
            
            
            231,582Investments
      held by NDT
            
            
            130,227
            
            
            
            139,642Other
      investments
            
            
            17,546
            
            
            
            20,733Non-utility
      property
            
            
            976
            
            
            
            976Total
      other property and investments
            
            
            366,993
            
            
            
            392,933Utility
      Plant:Electric
      plant in service
            
            
            3,204,859
            
            
            
            3,055,953Common
      plant in service and plant held for future use
            
            
            18,237
            
            
            
            18,2373,223,096
            
            
            
            3,074,190Less
      accumulated depreciation and amortization
            
            
            1,165,047
            
            
            
            1,157,7752,058,049
            
            
            
            1,916,415Construction
      work in progress
            
            
            149,646
            
            
            
            259,386Nuclear
      fuel, net of accumulated amortization of $18,420 and
    $15,395
            
            
            59,117
            
            
            
            52,246Net
      utility plant
            
            
            2,266,812
            
            
            
            2,228,047Deferred
      Charges and Other Assets:Regulatory
      assets
            
            
            317,537
            
            
            
            348,719Pension
      asset
            
            
            4,509
            
            
            
            2,859Derivative
      instruments
            
            
            2,468
            
            
            
            37,359Goodwill
            
            
            102,775
            
            
            
            102,775Non-current
      assets of discontinued operations
            
            
            535,196
            
            
            
            526,539Other
      deferred charges
            
            
            64,760
            
            
            
            64,449Total
      deferred charges and other assets
            
            
            1,027,245
            
            
            
            1,082,700$
            4,155,700
            
            
            $
            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)





March
      31,
            
            
            December
      31,2008
            
            
            2007(In
      thousands, except share information)LIABILITIES
      AND STOCKHOLDER’S EQUITYCurrent
      Liabilities:Short-term
      debt
            
            $
            345,000
            
            
            $
            321,000Current
      installments of long-term debt
            
            
            299,980
            
            
            
            299,969Accounts
      payable
            
            
            91,065
            
            
            
            72,864Affiliate
      accounts payable
            
            
            34,502
            
            
            
            19,948Accrued
      interest and taxes
            
            
            28,924
            
            
            
            26,385Derivative
      instruments
            
            
            104,215
            
            
            
            17,896Current
      liability of discontinued operations
            
            
            63,979
            
            
            
            96,003Other
      current liabilities
            
            
            43,956
            
            
            
            59,468Total
      current liabilities
            
            
            1,011,621
            
            
            
            913,533Long-term
      Debt
            
            
            705,705
            
            
            
            705,701Deferred
      Credits and Other Liabilities:Accumulated
      deferred income taxes
            
            
            407,684
            
            
            
            409,430Accumulated
      deferred investment tax credits
            
            
            25,934
            
            
            
            26,634Regulatory
      liabilities
            
            
            287,065
            
            
            
            285,782Asset
      retirement obligations
            
            
            67,596
            
            
            
            65,725Accrued
      pension liability and postretirement benefit cost
            
            
            55,693
            
            
            
            56,101Derivative
      instruments
            
            
            77
            
            
            
            47,597Non-current
      liabilities of discontinued operations
            
            
            90,035
            
            
            
            89,848Other
      deferred credits
            
            
            99,373
            
            
            
            98,295Total
      deferred credits and liabilities
            
            
            1,033,457
            
            
            
            1,079,412Total
      liabilities
            
            
            2,750,783
            
            
            
            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, net of income tax
            
            
            1,931
            
            
            
            7,580Retained
      earnings
            
            
            458,934
            
            
            
            453,122Total
      common stockholder’s equity
            
            
            1,393,388
            
            
            
            1,393,225$
            4,155,700
            
            
            $
            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)





Three
      Months Ended March 31,2008
            
            
            2007(In
      thousands)Cash
      Flows From Operating Activities:Net
      earnings (loss)
            
            $
            (4,478
            )
            
            $
            28,880Adjustments
      to reconcile net earnings (loss) to net cash flows from operating
      activities:Depreciation
      and amortization
            
            
            25,077
            
            
            
            32,854Deferred
      income tax expense
            
            
            (5,574
            )
            
            
            7,137Net
      unrealized (gains) losses on derivatives
            
            
            (10,332
            )
            
            
            (3,892
            )Realized
      (gains) losses on investments held by NDT
            
            
            3,705
            
            
            
            (44
            )Regulatory
      disallowances
            
            
            30,248
            
            
            
            -Other,
      net
            
            
            (1,543
            )
            
            
            (3,089
            )Changes
      in certain assets and liabilities, net of amounts
acquired:Accounts
      receivable and unbilled revenues
            
            
            (4,850
            )
            
            
            5,570Materials,
      supplies, fuel stock, and natural gas stored
            
            
            414
            
            
            
            (6,171
            )Other
      current assets
            
            
            25,757
            
            
            
            18,042Other
      assets
            
            
            (565
            )
            
            
            3,927Accounts
      payable
            
            
            (9,917
            )
            
            
            (12,482
            )Accrued
      interest and taxes
            
            
            2,076
            
            
            
            9,418Other
      current liabilities
            
            
            (3,567
            )
            
            
            (6,191
            )Other
      liabilities
            
            
            799
            
            
            
            (6,446
            )Net
      cash flows from operating activities
            
            
            47,250
            
            
            
            67,513Cash
      Flows From Investing Activities:Utility
      plant additions
            
            
            (68,566
            )
            
            
            (80,335
            )Proceeds
      from sales of NDT investments
            
            
            36,635
            
            
            
            31,803Purchases
      of NDT investments
            
            
            (36,760
            )
            
            
            (36,365
            )Proceeds
      from sales of utility plant
            
            
            -
            
            
            
            4,572Return
      of principal on PVNGS lessor notes
            
            
            12,304
            
            
            
            11,612Reduction
      in restricted special deposits
            
            
            2,554
            
            
            
            -Other,
      net
            
            
            423
            
            
            
            871Net
      cash flows from investing activities
            
            
            (53,410
            )
            
            
            (67,842
            )





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








16





PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





Three
      Months Ended March 31,2008
            
            
            2007(In
      thousands)Cash
      Flows From Financing Activities:Short-term
      borrowings (repayments), net
            
            
            24,004
            
            
            
            (4,574
            )Dividends
      paid
            
            
            (132
            )
            
            
            (132
            )Other,
      net
            
            
            (308
            )
            
            
            (418
            )Net
      cash flows from financing activities
            
            
            23,564
            
            
            
            (5,124
            )Change
      in Cash and Cash Equivalents
            
            
            17,404
            
            
            
            (5,453
            )Cash
      and Cash Equivalents at Beginning of Period
            
            
            4,331
            
            
            
            11,886Cash
      and Cash Equivalents at End of Period
            
            $
            21,735
            
            
            $
            6,433Supplemental
      Cash Flow Disclosures:Interest
      paid, net of capitalized interest
            
            $
            23,110
            
            
            $
            21,883Income
      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
            
            $
            167,023





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
            
            
            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)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (4,478
            )
            
            
            (4,478
            )Total
      other comprehensive income (loss)
            
            
            -
            
            
            
            -
            
            
            
            (5,649
            )
            
            
            -
            
            
            
            (5,649
            )Dividends
      on preferred stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (132
            )
            
            
            (132
            )Balance
      at March 31, 2008
            
            
            39,117,799
            
            
            $
            932,523
            
            
            $
            1,931
            
            
            $
            458,934
            
            
            $
            1,393,388





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








18





PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)


(Unaudited)





Three
      Months Ended March 31,2008
            
            
            2007(In
      thousands)Net
      Earnings (Loss) Available for Common Stock
            
            $
            (4,610
            )
            
            $
            28,748Other
      Comprehensive Income (Loss):Unrealized Gain (Loss) on
      Investment Securities:Unrealized
      holding gains (losses) arising duringthe
      period, net of income tax (expense) benefitof
      $1,501 and $(1,420)
            
            
            (2,291
            )
            
            
            2,167Reclassification
      adjustment for (gains) included innet
      earnings, net of income tax expenseof
      $902 and $435
            
            
            (1,377
            )
            
            
            (663
            )Fair
      Value Adjustment for Designated Cash Flow Hedges:Change
      in fair market value, net of income tax (expense)benefit
      of $700 and $(1,013)
            
            
            (1,067
            )
            
            
            1,545Reclassification
      adjustment for (gains) losses included innet
      earnings, net of income tax expense (benefit)of
      $599 and $(610)
            
            
            (914
            )
            
            
            931Total
      Other Comprehensive Income (Loss)
            
            
            (5,649
            )
            
            
            3,980Comprehensive
      Income (Loss)
            
            $
            (10,259
            )
            
            $
            32,728





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





19





TEXAS-NEW
MEXICO POWER COMPANY AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS


(Unaudited)





Three
      Months Ended March 31,2008
            
            
            2007(In
      thousands)Electric
      Operating Revenues
            
            $
            42,228
            
            
            $
            40,928Operating
      Expenses:Cost
      of energy sold
            
            
            7,812
            
            
            
            7,171Administrative
      and general
            
            
            6,570
            
            
            
            8,902Depreciation
      and amortization
            
            
            8,359
            
            
            
            7,000Transmission
      and distribution costs
            
            
            4,464
            
            
            
            4,923Taxes,
      other than income taxes
            
            
            4,440
            
            
            
            4,825Total
      operating expenses
            
            
            31,645
            
            
            
            32,821Operating
      income
            
            
            10,583
            
            
            
            8,107Other
      Income and Deductions:Interest
      income
            
            
            2
            
            
            
            88Other
      income
            
            
            414
            
            
            
            276Other
      deductions
            
            
            (19
            )
            
            
            (27
            )Net
      other income and deductions
            
            
            397
            
            
            
            337Interest
      Charges:Interest
      on long-term debt
            
            
            4,408
            
            
            
            6,432Other
      interest charges
            
            
            581
            
            
            
            646Net
      interest charges
            
            
            4,989
            
            
            
            7,078Earnings
      Before Income Taxes
            
            
            5,991
            
            
            
            1,366Income
      Taxes
            
            
            2,261
            
            
            
            428Net
      Earnings
            
            $
            3,730
            
            
            $
            938





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








20





TEXAS-NEW
MEXICO POWER COMPANY AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONDENSED CONSOLIDATED BALANCE SHEETS


(Unaudited)





March
      31,
            
            
            December
      31,2008
            
            
            2007(In
      thousands)ASSETSCurrent
      Assets:Cash
      and cash equivalents
            
            $
            87
            
            
            $
            187Special
      deposits
            
            
            50
            
            
            
            50Accounts
      receivable
            
            
            9,949
            
            
            
            8,789Unbilled
      revenues
            
            
            3,829
            
            
            
            4,392Other
      receivables
            
            
            1,650
            
            
            
            1,063Affiliate
      accounts receivable
            
            
            7,252
            
            
            
            8,005Materials
      and supplies
            
            
            1,430
            
            
            
            1,425Income
      taxes receivable
            
            
            -
            
            
            
            881Other
      current assets
            
            
            238
            
            
            
            501Total
      current assets
            
            
            24,485
            
            
            
            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
            
            
            796,285
            
            
            
            781,355Common
      plant in service and plant held for future use
            
            
            488
            
            
            
            488796,773
            
            
            
            781,843Less
      accumulated depreciation and amortization
            
            
            278,783
            
            
            
            274,128517,990
            
            
            
            507,715Construction
      work in progress
            
            
            14,639
            
            
            
            22,493Net
      utility plant
            
            
            532,629
            
            
            
            530,208Deferred
      Charges and Other Assets:Regulatory
      assets
            
            
            130,826
            
            
            
            133,154Goodwill
            
            
            261,121
            
            
            
            261,121Pension
      asset
            
            
            15,640
            
            
            
            14,919Other
      deferred charges
            
            
            5,148
            
            
            
            5,432Total
      deferred charges and other assets
            
            
            412,735
            
            
            
            414,626$
            972,514
            
            
            $
            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)





March
      31,
            
            
            December
      31,2008
            
            
            2007(In
      thousands, except share information)LIABILITIES
      AND STOCKHOLDER’S EQUITYCurrent
      Liabilities:Short-term
      debt – affiliate
            
            $
            500
            
            
            $
            3,404Current
      installments of long-term debt
            
            
            316,543
            
            
            
            148,882Accounts
      payable
            
            
            4,105
            
            
            
            5,666Affiliate
      accounts payable
            
            
            6,853
            
            
            
            3,456Accrued
      interest and taxes
            
            
            31,279
            
            
            
            35,204Other
      current liabilities
            
            
            2,626
            
            
            
            1,785Total
      current liabilities
            
            
            361,906
            
            
            
            198,397Long-term
      Debt
            
            
            -
            
            
            
            167,609Deferred
      Credits and Other Liabilities:Accumulated
      deferred income taxes
            
            
            118,838
            
            
            
            120,274Accumulated
      deferred investment tax credits
            
            
            143
            
            
            
            191Regulatory
      liabilities
            
            
            46,950
            
            
            
            46,590Asset
      retirement obligations
            
            
            676
            
            
            
            662Accrued
      pension liability and postretirement benefit cost
            
            
            3,796
            
            
            
            3,922Other
      deferred credits
            
            
            3,027
            
            
            
            1,699Total
      deferred credits and other liabilities
            
            
            173,430
            
            
            
            173,338Total
      liabilities
            
            
            535,336
            
            
            
            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
            
            
            8,971
            
            
            
            5,241Total
      common stockholder’s equity
            
            
            437,178
            
            
            
            433,448$
            972,514
            
            
            $
            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)





Three
      Months Ended March 31,2008
            
            
            2007(In
      thousands)Cash
      Flows From Operating Activities:Net
      earnings
            
            $
            3,730
            
            
            $
            938Adjustments
      to reconcile net earnings tonet
      cash flows from operating activities:Depreciation
      and amortization
            
            
            9,321
            
            
            
            7,843Deferred
      income tax expense (benefit)
            
            
            (1,484
            )
            
            
            (1,247
            )Other,
      net
            
            
            (681
            )
            
            
            (424
            )Changes
      in certain assets and liabilities:Accounts
      receivable and unbilled revenues
            
            
            (596
            )
            
            
            (6,233
            )Materials
      and supplies
            
            
            (5
            )
            
            
            (169
            )Other
      current assets
            
            
            545
            
            
            
            1,002Other
      assets
            
            
            37
            
            
            
            (285
            )Accounts
      payable
            
            
            (1,560
            )
            
            
            (4,870
            )Accrued
      interest and taxes
            
            
            (2,995
            )
            
            
            (4,481
            )Other
      current liabilities
            
            
            4,991
            
            
            
            (15,805
            )Other
      liabilities
            
            
            220
            
            
            
            (113
            )Net
      cash flows from operating activities
            
            
            11,523
            
            
            
            (23,844
            )Cash
      Flows From Investing Activities:Utility
      plant additions
            
            
            (8,669
            )
            
            
            (7,804
            )Other,
      net
            
            
            -
            
            
            
            (3
            )Net
      cash flows from investing activities
            
            
            (8,669
            )
            
            
            (7,807
            )





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








23





TEXAS-NEW
MEXICO POWER COMPANY AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





Three
      Months Ended March 31,2008
            
            
            2007(In
      thousands)Cash
      Flow From Financing Activities:Short-term
      borrowings – affiliate
            
            
            (2,904
            )
            
            
            29,200Other,
      net
            
            
            (50
            )
            
            
            1Net
      cash flows from financing activities
            
            
            (2,954
            )
            
            
            29,201Change
      in Cash and Cash Equivalents
            
            
            (100
            )
            
            
            (2,450
            )Cash
      and Cash Equivalents at Beginning of Period
            
            
            187
            
            
            
            2,542Cash
      and Cash Equivalents at End of Period
            
            $
            87
            
            
            $
            92Supplemental
      Cash Flow Disclosures:Interest
      paid, net of capitalized interest
            
            $
            5,269
            
            
            $
            5,912Income
      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
            
            
            Equity(Dollars
      in thousands)Balance
      at December 31, 2007
            
            
            6,358
            
            
            $
            64
            
            
            $
            427,320
            
            
            $
            823
            
            
            $
            5,241
            
            
            $
            433,448Net
      earnings
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3,730
            
            
            
            3,730Balance
      at March 31, 2008
            
            
            6,358
            
            
            $
            64
            
            
            $
            427,320
            
            
            $
            823
            
            
            $
            8,971
            
            
            $
            437,178





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








25





TEXAS-NEW
MEXICO POWER COMPANY AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME


(Unaudited)





Three
      Months Ended March 31,2008
            
            
            2007(In
      thousands)Net
      Earnings and Comprehensive Income
            
            $
            3,730
            
            
            $
            938





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







26





PNM
RESOURCES, INC. AND SUBSIDIARIES


PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES


TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES





NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS


(Unaudited)





(1)
            Significant
      Accounting Policies and Responsibility for Financial
      Statements





Financial
Statement Preparation





In the
opinion of management, the accompanying unaudited interim Condensed Consolidated
Financial Statements reflect all normal and recurring accruals and adjustments
that are necessary to present fairly the consolidated financial position at
March 31, 2008 and December 31, 2007, the consolidated results of operations,
comprehensive income, and cash flows for the three months ended March 31, 2008
and 2007.  The preparation of financial statements in conformity with
generally accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period.  Actual results could ultimately
differ from those estimated.  The results of operations presented in
the accompanying Condensed Consolidated Financial Statements are not necessarily
representative of operations for an entire year.





These
Condensed Consolidated Financial Statements are unaudited, and certain
information and note disclosures normally included in the annual Consolidated
Financial Statements have been condensed or omitted, as permitted under the
applicable rules and regulations.  Readers of these financial
statements should refer to PNMR’s, PNM’s and TNMP’s audited Consolidated
Financial Statements and Notes thereto that are included in their respective
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.  PNMR shared services’ administrative and general
expenses, which represent costs that are primarily driven by corporate level
activities, are allocated to the business segments.  Other significant
intercompany transactions between PNMR, PNM, and TNMP include energy purchases
and sales, transmission and distribution services, lease payments, dividends
paid on common stock, and interest paid by PVNGS Capital Trust to
PNM.  All intercompany transactions and balances have been
eliminated.  See Note 12.





Presentation





The Notes
to Condensed Consolidated Financial Statements include disclosures for PNMR,
PNM, and TNMP.  For discussion purposes, this report will use the term
“Company” when discussing matters of common applicability to PNMR, PNM and
TNMP.  Discussions regarding only PNMR, PNM or TNMP will be indicated
as such.  Certain amounts in the 2007 Condensed Consolidated Financial
Statements and Notes thereto have been reclassified to conform to the 2008
financial statement presentation.











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





(2)
            Acquisitions
      and Dispositions





PNM
Gas Sale and 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 that is
conditioned upon the sale of the natural gas operations, PNMR will acquire CRHC,
Continental’s regulated Texas electric transmission and distribution business,
for $202.5 million in cash, subject to adjustment for the changes in certain
components of working capital, and subject to the condition that the outstanding
indebtedness of that business is eliminated at or prior to closing. PNMR will
acquire CRHC and its subsidiary Cap Rock Energy, an electric distribution and
transmission company serving approximately 36,000 customers in 28 counties in
north, west and central Texas. PNMR expects to use the net proceeds of these
transactions to retire debt, fund future electric capital expenditures and for
other corporate purposes. The agreements each contain 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 each of the agreements 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 and review under the anti-trust rules. PNMR’s
acquisition of CRHC’s electric operations also requires anti-trust review and
approvals by FERC and the PUCT. Pending all approvals, the transactions are
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. 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.  Hearings have been
scheduled to begin August 19, 2008.





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 ended March
31, 2007, PNMR amortized $20.0 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.




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)




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.





PNM
Electric





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





TNMP
Electric





TNMP
Electric is a regulated utility operating in Texas.  TNMP’s operations
are subject to traditional rate 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 is in the
process of closing out its speculative positions and has ended any further
speculative trading due to market volatility and the deterioration of the
forward basis market.





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.





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





PNMR
SEGMENT INFORMATION





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





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





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








PNM
            
            
            TNMP
            
            
            
            
            
            First
            
            
            CorporateThree Months Ended March 31,
      2007
            
            Electric
            
            
            Electric
            
            
            Altura
            
            
            Choice
            
            
            and
      Other
            
            
            Consolidated(In
      thousands)Operating
      revenues
            
            $
            240,352
            
            
            $
            24,161
            
            
            $
            36,803
            
            
            $
            135,518
            
            
            $
            210
            
            
            $
            437,044Intersegment
      revenues
            
            
            -
            
            
            
            16,767
            
            
            
            -
            
            
            
            47
            
            
            
            (16,814
            )
            
            
            -Total
      revenues
            
            
            240,352
            
            
            
            40,928
            
            
            
            36,803
            
            
            
            135,565
            
            
            
            (16,604
            )
            
            
            437,044Cost
      of energy
            
            
            103,173
            
            
            
            7,171
            
            
            
            12,166
            
            
            
            110,816
            
            
            
            (16,514
            )
            
            
            216,812Gross
      margin
            
            
            137,179
            
            
            
            33,757
            
            
            
            24,637
            
            
            
            24,749
            
            
            
            (90
            )
            
            
            220,232Operating
      expenses
            
            
            88,257
            
            
            
            18,650
            
            
            
            12,260
            
            
            
            15,157
            
            
            
            2,612
            
            
            
            136,936Depreciation
      and amortization
            
            
            20,755
            
            
            
            7,000
            
            
            
            4,609
            
            
            
            471
            
            
            
            2,006
            
            
            
            34,841Operating
      income (loss)
            
            
            28,167
            
            
            
            8,107
            
            
            
            7,768
            
            
            
            9,121
            
            
            
            (4,708
            )
            
            
            48,455Interest
      income
            
            
            7,706
            
            
            
            88
            
            
            
            117
            
            
            
            483
            
            
            
            1,398
            
            
            
            9,792Equity
      in net earnings (loss) of EnergyCo
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (662
            )
            
            
            (662
            )Other
      income (deductions)
            
            
            468
            
            
            
            249
            
            
            
            -
            
            
            
            (42
            )
            
            
            298
            
            
            
            973Net
      interest charges
            
            
            (13,146
            )
            
            
            (7,078
            )
            
            
            (5,499
            )
            
            
            (115
            )
            
            
            (9,063
            )
            
            
            (34,901
            )Segment
      earnings (loss) before income taxes
            
            
            23,195
            
            
            
            1,366
            
            
            
            2,386
            
            
            
            9,447
            
            
            
            (12,737
            )
            
            
            23,657Income
      taxes (benefit)
            
            
            8,837
            
            
            
            428
            
            
            
            944
            
            
            
            3,564
            
            
            
            (5,392
            )
            
            
            8,381Preferred
      stock dividend requirements
            
            
            132
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            132Segment
      earnings (loss) from continuing operations
            
            $
            14,226
            
            
            $
            938
            
            
            $
            1,442
            
            
            $
            5,883
            
            
            $
            (7,345
            )
            
            $
            15,144At
      March 31, 2007:Total
      Assets*
            
            $
            3,426,868
            
            
            $
            1,007,234
            
            
            $
            654,141
            
            
            $
            344,685
            
            
            $
            104,862
            
            
            $
            5,537,790Goodwill
            
            $
            102,562
            
            
            $
            260,183
            
            
            $
            -
            
            
            $
            131,768
            
            
            $
            -
            
            
            $
            494,513





*  Excludes
total assets of PNM Gas discontinued operations of $594,612.








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








(4)
            Energy
      Related Derivative Contracts and Fair Value
  Disclosures





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 differently based on the Company’s intent.   Energy
contracts that do not qualify for the normal sales and purchases exception are
recorded at fair value on the Condensed Consolidated Balance
Sheets.   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.





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.  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 March 31, 2008, gains of
$1.0 million for PNMR and losses of $2.8 million for PNM would be
reclassified from other comprehensive income into earnings during the next
twelve months. However, the actual amount reclassified into earnings could vary
due to future changes in market prices.  As of March 31, 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, 2009 for PNMR and
September 30, 2008 for PNM.





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 that lock
in margin and do not have forward market risk.  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.





Ineffectiveness
gains and losses were immaterial.




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)


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. 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 both the nonperformance risk and its own
credit standing.





Subsequent
changes in fair value of these financial assets and liabilities are recognized
in earnings when they occur.  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.











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)





PNMR





The
following table does not include activity related to PNM Gas.  See
Note 14.  PNMR’s commodity derivative instruments are summarized as
follows:





March
      31,
            
            
            December
      31,
            
            
            March
      31,
            
            
            December
      31,2008
            
            
            2007
            
            
            2008
            
            
            2007Type
      of Derivative
            
            Mark-to-Market
      Instruments
            
            
            Hedge
      Instruments(In
      thousands)Current
      AssetsEnergy
      contracts
            
            $
            90,915
            
            
            $
            14,486
            
            
            $
            -
            
            
            $
            864Fixed-for-float
      swaps and futures
            
            
            78,579
            
            
            
            25,653
            
            
            
            3,480
            
            
            
            524Options
            
            
            60,981
            
            
            
            7,372
            
            
            
            3,443
            
            
            
            358Total
      current assets
            
            
            230,475
            
            
            
            47,511
            
            
            
            6,923
            
            
            
            1,746Deferred
      ChargesEnergy
      contracts
            
            
            8,254
            
            
            
            14,133
            
            
            
            -
            
            
            
            -Fixed-for-float
      swaps
            
            
            7,821
            
            
            
            26,898
            
            
            
            -
            
            
            
            -Options
            
            
            -
            
            
            
            4,663
            
            
            
            -
            
            
            
            -Total
      deferred charges
            
            
            16,075
            
            
            
            45,694
            
            
            
            -
            
            
            
            -Total
      Assets
            
            
            246,550
            
            
            
            93,205
            
            
            
            6,923
            
            
            
            1,746Current
      LiabilitiesEnergy
      contracts
            
            
            (174,891
            )
            
            
            (19,842
            )
            
            
            (5,131
            )
            
            
            -Fixed-for-float
      swaps
            
            
            (46,899
            )
            
            
            (25,308
            )
            
            
            (769
            )
            
            
            (1,058
            )Options
            
            
            (18,639
            )
            
            
            (7,594
            )
            
            
            -
            
            
            
            (30
            )Other
            
            
            (5,349
            )
            
            
            -
            
            
            
            -
            
            
            
            -Total
      current liabilities
            
            
            (245,778
            )
            
            
            (52,744
            )
            
            
            (5,900
            )
            
            
            (1,088
            )Long-term
      LiabilitiesEnergy
      contracts
            
            
            (6,742
            )
            
            
            (42,009
            )
            
            
            -
            
            
            
            -Fixed-for-float
      swaps
            
            
            (6,233
            )
            
            
            (4,465
            )
            
            
            (104
            )
            
            
            (32
            )Options
            
            
            -
            
            
            
            (8,700
            )
            
            
            -
            
            
            
            -Total
      long-term liabilities
            
            
            (12,975
            )
            
            
            (55,174
            )
            
            
            (104
            )
            
            
            (32
            )Total
      Liabilities
            
            
            (258,753
            )
            
            
            (107,918
            )
            
            
            (6,004
            )
            
            
            (1,120
            )Net
      Total Assets and Liabilities
            
            $
            (12,203
            )
            
            $
            (14,713
            )
            
            $
            919
            
            
            $
            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, 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. Of this amount, $13.0 million was for cash settled transactions and
$34.1 million was for unrealized losses on its remaining forward
positions.  Because of continued market volatility and the concern
that the forward basis market would continue to deteriorate, First Choice is in
the process of closing out its speculative positions and has ended any further
speculative trading.








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





PNM





The
following table does not include activity related to PNM Gas.  See
Note 14.  PNM’s commodity derivative instruments are summarized as
follows:





March
      31,
            
            
            December
      31,
            
            
            March
      31,
            
            
            December
      31,2008
            
            
            2007
            
            
            2008
            
            
            2007Type
      of Derivative
            
            Mark-to-Market
      Instruments
            
            
            Hedge
      Instruments(In
      thousands)Current
      AssetsEnergy
      contracts
            
            $
            23,830
            
            
            $
            2,587
            
            
            $
            -
            
            
            $
            864Fixed-for-float
      swaps
            
            
            42,386
            
            
            
            6,650
            
            
            
            3,068
            
            
            
            422Options
            
            
            43,554
            
            
            
            4,336
            
            
            
            -
            
            
            
            -Total
      current assets
            
            
            109,770
            
            
            
            13,573
            
            
            
            3,068
            
            
            
            1,286Deferred
      ChargesEnergy
      contracts
            
            
            -
            
            
            
            9,443
            
            
            
            -
            
            
            
            -Fixed-for-float
      swaps
            
            
            2,468
            
            
            
            23,253
            
            
            
            -
            
            
            
            -Options
            
            
            -
            
            
            
            4,663
            
            
            
            -
            
            
            
            -Total
      deferred charges
            
            
            2,468
            
            
            
            37,359
            
            
            
            -
            
            
            
            -Total
      Assets
            
            
            112,238
            
            
            
            50,932
            
            
            
            3,068
            
            
            
            1,286Current
      LiabilitiesEnergy
      contracts
            
            
            (69,915
            )
            
            
            (6,872
            )
            
            
            (5,131
            )
            
            
            -Fixed-for-float
      swaps
            
            
            (13,278
            )
            
            
            (6,037
            )
            
            
            (769
            )
            
            
            (868
            )Options
            
            
            (9,773
            )
            
            
            (4,119
            )
            
            
            -
            
            
            
            -Other
            
            
            (5,349
            )Total
      current liabilities
            
            
            (98,315
            )
            
            
            (17,028
            )
            
            
            (5,900
            )
            
            
            (868
            )Long-term
      LiabilitiesEnergy
      contracts
            
            
            -
            
            
            
            (38,172
            )
            
            
            -
            
            
            
            -Fixed-for-float
      swaps
            
            
            -
            
            
            
            (693
            )
            
            
            (77
            )
            
            
            (32
            )Options
            
            
            -
            
            
            
            (8,700
            )
            
            
            -
            
            
            
            -Total
      long-term liabilities
            
            
            -
            
            
            
            (47,565
            )
            
            
            (77
            )
            
            
            (32
            )Total
      Liabilities
            
            
            (98,315
            )
            
            
            (64,593
            )
            
            
            (5,977
            )
            
            
            (900
            )Net
      Total Assets and Total Liabilities
            
            $
            13,923
            
            
            $
            (13,661
            )
            
            $
            (2,909
            )
            
            $
            386





Sale
of Wholesale Contracts





On
January 18, 2008, PNM entered into an agreement to sell certain wholesale power,
natural gas and transmission contracts for $5.8 million, based on an assumed
closing on March 31, 2008.  The purchase price is subject to
adjustment depending on the actual date of closing, which is now expected to be
as of June 30, 2008, at which time the agreed upon sales price will be $6.1
million.  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
is the Tri-State Pyramid Unit 4 operating lease and certain transmission
agreements, which are not considered derivative instruments under SFAS
133.  The derivative contracts included in the sales agreement are
fair valued at March 31, 2008 and are reflected in the above table as current
assets of $92.7 million and current liabilities of $89.6 million.  The
derivative contracts included in the sales agreement are 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 at January 1,
2008 were recorded as an adjustment to January 1, 2008 retained
earnings.




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)


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 March
31, 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
            
            
            Significant
      Other Observable Inputs
            
            
            Significant
      Unobservable Inputs(Level
      1)
            
            
            (Level
      2)
            
            
            (Level
      3)(In
      thousands)PNMRAssetsCommodity
      derivatives
            
            $
            253,473
            
            
            $
            20,574
            
            
            $
            176,184
            
            
            $
            56,715NDT
            
            
            130,227
            
            
            
            87,910
            
            
            
            42,317
            
            
            
            -Rabbi
      Trust
            
            
            2,223
            
            
            
            2,213
            
            
            
            10
            
            
            
            -Interest
      rate swaps
            
            
            798
            
            
            
            -
            
            
            
            798
            
            
            
            -Total
      Assets
            
            
            386,721
            
            
            
            110,697
            
            
            
            219,309
            
            
            
            56,715LiabilitiesCommodity
      derivatives
            
            
            (264,757
            )
            
            
            (8,167
            )
            
            
            (232,821
            )
            
            
            (23,769
            )Interest
      rate swaps
            
            
            (798
            )
            
            
            -
            
            
            
            (798
            )
            
            
            -Total
      Liabilities
            
            
            (265,555
            )
            
            
            (8,167
            )
            
            
            (233,619
            )
            
            
            (23,769
            )Net
      Total Assets and Total Liabilities
            
            $
            121,166
            
            
            $
            102,530
            
            
            $
            (14,310
            )
            
            $
            32,946PNMAssetsCommodity
      derivatives
            
            $
            115,306
            
            
            $
            -
            
            
            $
            58,889
            
            
            $
            56,417NDT
            
            
            130,227
            
            
            
            87,910
            
            
            
            42,317
            
            
            
            -Rabbi
      Trust
            
            
            2,223
            
            
            
            2,213
            
            
            
            10
            
            
            
            -Interest
      rate swaps
            
            
            798
            
            
            
            -
            
            
            
            798
            
            
            
            -Total
      Assets
            
            
            248,554
            
            
            
            90,123
            
            
            
            102,014
            
            
            
            56,417LiabilitiesCommodity
      derivatives
            
            
            (104,292
            )
            
            
            -
            
            
            
            (81,223
            )
            
            
            (23,069
            )Interest
      rate swaps
            
            
            (798
            )
            
            
            -
            
            
            
            (798
            )
            
            
            -Total
      Liabilities
            
            
            (105,090
            )
            
            
            -
            
            
            
            (82,021
            )
            
            
            (23,069
            )Net
      Total Assets and Total Liabilities
            
            $
            143,464
            
            
            $
            90,123
            
            
            $
            19,993
            
            
            $
            33,348




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)


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
              March
      31, 2008PNMR
            
            
            PNM(In
      thousands)Level
      3 Fair Value Assets and LiabilitiesBalance
      at December 31, 2007
            
            $
            417
            
            
            $
            1,035Adoption
      of SFAS 157
            
            
            16,407
            
            
            
            16,407Balance
      at January 1, 2008
            
            
            16,824
            
            
            
            17,442Total
      gains (losses)  included in earnings1
            
            
            15,584
            
            
            
            15,906Purchases,
      issuances, and settlements2
            
            
            538
            
            
            
            -Balance
      at March 31, 20083
            
            $
            32,946
            
            
            $
            33,348Total
      gains included in earnings attributable to the change in unrealized gains
      or losses relating to assets still held at the end of the
      period
            
            $
            16,295
            
            
            $
            16,037





(1)
            No
      gains or losses were included in other comprehensive
    income.


(2)
            Represents
      unearned and prepaid option premiums received and paid during the
      period.


(3)
            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 quarter ending March 31, 2008 are reported in operating revenues
and cost of energy as follows:





PNMR
            
            Operating
      Revenues
            
            
            Cost
      of EnergyTotal
      gains (losses) included in earnings
            
            $
            (7,163
            )
            
            $
            22,747Change
      in unrealized gains or losses relating to asset still held at reporting
      date
            
            $
            (6,582
            )
            
            $
            22,877PNMTotal
      gains (losses) included in earnings
            
            $
            (6,925
            )
            
            $
            22,831Change
      in unrealized gains or losses relating to asset still held at reporting
      date
            
            $
            (6,925
            )
            
            $
            22,962








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)








(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
              March
      31,2008
            
            
            2007(In
      thousands, except
              per
      share amounts)Earnings
      (Loss):Earnings
      (loss) from continuing operations
            
            $
            (71,135
            )
            
            $
            15,144Earnings
      from discontinued operations
            
            
            22,499
            
            
            
            14,522Net
      Earnings (Loss)
            
            $
            (48,636
            )
            
            $
            29,666Average
      Number of Common Shares Outstanding
            
            
            76,850
            
            
            
            76,659Dilutive
      Effect of Common Stock Equivalents (a):Stock
      options and restricted stock
            
            
            -
            
            
            
            701Equity-linked
      units
            
            
            -
            
            
            
            739Average
      Common and Common Equivalent SharesOutstanding
            
            
            76,850
            
            
            
            78,099Per
      Share of Common Stock – Basic:Earnings
      (loss) from continuing operations
            
            $
            (0.93
            )
            
            $
            0.20Earnings
      from discontinued operations
            
            
            0.30
            
            
            
            0.19Net
      Earnings (Loss)
            
            $
            (0.63
            )
            
            $
            0.39Per
      Share of Common Stock – Diluted:Earnings
      (loss) from continuing operations
            
            $
            (0.93
            )
            
            $
            0.19Earnings
      from discontinued operations
            
            
            0.30
            
            
            
            0.19Net
      Earnings (Loss)
            
            $
            (0.63
            )
            
            $
            0.38





(a)
            Excludes
      the effect of average anti-dilutive common stock equivalents related to
      out-of-the-money stock options of 2,912,451 and 722,306 for the three
      months ended March 31, 2008 and 2007.  Also excludes the effect of
      97,886 anti-dilutive shares of in-the-money stock options and restricted
      stock for the three months ended March 31,
2008.





(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.





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)








Stock
Options





The
following table represents stock option activity for the three months ended
March 31, 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
            
            
            538,361
            
            
            
            11.82Exercised
            
            
            (5,001
            )
            
            
            16.13Forfeited
            
            
            (9,607
            )
            
            
            27.18Outstanding
      at end of period
            
            
            3,788,651
            
            
            $
            21.60
            
            
            $
            (34,586
            )
            
            
            6.79Options
      exercisable at end of period
            
            
            2,484,479
            
            
            $
            21.66
            
            
            $
            (22,843
            )
            
            
            5.42Options
      available for future grant
            
            
            1,930,728





The
following table provides additional information concerning stock option activity
for the three months ended March 31:





Options
      for PNMR Common Stock
            
            2008
            
            
            2007(In
      thousands,
              except
      per share amounts)Weighted-average
      grant date fair value per share of options granted
            
            $
            1.38
            
            
            $
            4.70Total
      intrinsic value of options exercised during the period
            
            $
            15
            
            
            $
            3,103





Restricted
Stock





The
following table summarizes nonvested restricted stock activity for the three
months ended March 31, 2008:





Weighted-AverageNonvested
      Restricted
            
            
            
            
            Grant-DatePNMR
      Common Stock
            
            Shares
            
            
            Fair
      ValueNonvested
      at beginning of period
            
            
            169,750
            
            
            $
            26.09Granted
            
            
            111,250
            
            
            $
            13.17Vested
            
            
            (72,656
            )
            
            $
            25.65Forfeited
            
            
            (5,005
            )
            
            $
            26.44Nonvested
      at end of period
            
            
            203,339
            
            
            $
            19.17





The total
fair value of shares of restricted stock that vested during the three months
ended March 31, 2008 was $1.9 million.




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)





(7)
            Capitalization





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





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 $15 million and $13.5
million.  PNMR and PNM also have commercial paper programs under which
they may issue up to $400 million and $300 million of commercial
paper.  The revolving credit facilities serve as support for the
commercial paper programs.  Operationally, this means the aggregate
borrowings under the commercial paper program and the revolving credit facility
for each of PNMR and PNM cannot exceed the maximum amount of the revolving
credit facility for that entity.  At March 31, 2008, the weighted
average interest rate for the PNMR Facility was 3.64% and for the PNM Facility
was 3.57%.  Short-term debt outstanding consists of:





March
      31,
            
            
            December
      31,Short-term
      Debt
            
            2008
            
            
            2007(In
      thousands)PNMCommercial
      paper
            
            $
            -
            
            
            $
            -Revolving
      credit facility
            
            
            345,000
            
            
            
            321,000345,000
            
            
            
            321,000PNMRCommercial
      paper
            
            
            -
            
            
            
            -Revolving
      credit facility
            
            
            392,000
            
            
            
            343,500Local
      lines of credit
            
            
            -
            
            
            
            1,400$
            737,000
            
            
            $
            665,900





At April
30, 2008, PNMR and PNM had $66.6 million and $58.7 million of availability under
their respective revolving credit facilities and local lines of credit,
including reductions of availability due to outstanding letters of
credit.  At April 30, 2008, PNMR and PNM had cash balances of $29.8
million and $49.0 million.





As of
March 31, 2008, TNMP had outstanding borrowings of $0.5 million from PNMR under
its intercompany loan agreement.





On May 1,
2008, PNMR announced that PNM entered into a binding commitment for a delayed
draw term loan facility that matures April 30, 2009 in an aggregate principal
amount of up to $300.0 million and that PNM entered into a binding commitment
for a 364 day letter of credit facility in an aggregate principal amount of up
to $100.0 million.  On that same day, PNMR announced that TNMP has entered
into a binding commitment for a revolving credit facility currently in an
aggregate principal amount of up to $80.0 million and is in the process of
syndicating additional amounts. On May 5, 2008, the loan agreement for PNM’s
delayed draw term loan facility was executed.  Each of the remaining
commitments is subject to conditions and final documentation.





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 March 31, 2008, with a
corresponding addition to current maturities of long-term debt.




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)


Financing
Activities





On
February 26, 2008, the Board of Directors of TNMP authorized TNMP to enter into
a proposed $150 million short-term bank loan agreement with two
banks.  The bank loan agreement was executed on March 7,
2008.   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.





PNMR’s
equity-linked units contain mandatory obligations under which the holders are
required to purchase $247.3 million of PNMR equity securities in May 2008 and
$100.0 million 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 May 9, 2008 for the publicly held units and August 16, 2008
for the privately held units.  The maturity dates may be extended in
the remarketings and the interest rate will be reset to a level designed to
achieve a successful remarketing of the notes.  If the remarketings
are successful, PNMR would receive $347.3 million in cash for its equity
securities and the debt would continue to mature in 2010 or such later
date established in the remarketings.  If the remarketings
are 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.  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 remarketings will be successful.





Stockholders’
Equity





PNMR
offers new shares of PNMR common stock through the PNMR Direct Plan and an
equity distribution agreement.  The equity distribution agreement is
currently suspended.  For the three months ended March 31, 2008, PNMR
sold 75,519 shares of its common stock through the PNMR Direct Plan for net
proceeds of $1.0 million.  PNMR also issued 24,244 shares of its
common stock for $0.3 million through its ESPP during the three months ended
March 31, 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.





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)





PNM
Plans





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





Three
      Months Ended March 31,Pension
      Plan
            
            
            Other
      Postretirement Benefits
            
            
            Executive
      Retirement 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





PNM does
not anticipate making any contributions to the pension plan trust during
2008.  For the three months ended March 31, 2008 and 2007, PNM
contributed $1.0 million and $1.5 million to trusts for other postretirement
benefits.  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 March 31, 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 March 31,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





TNMP made
no first quarter contributions to the pension trust in either 2008 or 2007 and
no contributions are anticipated for 2008.  For the three months ended
March 31, 2008, TNMP contributed $0.2 million and expects to make contributions
totaling $0.4 million during the year ended December 31, 2008 to the trust for
other postretirement benefits.  No contributions were made for the
three months ended March 31, 2007 for other postretirement
benefits.  Disbursements under the executive retirement program, which
are funded by the Company and considered to be contributions to the plan, were
less than $0.1 million in the three months ended March 31, 2008 and 2007, and
are expected to total $0.2 million during 2008.




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)





(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.





In August
2006, PNM filed its renewable energy portfolio report and 2007 renewable energy
procurement plan.  In its procurement plan, PNM stated that it would
continue to procure renewable energy and RECs from wind and solar photovoltaic
facilities and to capitalize the costs for recovery in rates in accordance with
a stipulation approved by the NMPRC in 2003.  However, see Note 10 and
Note 16 regarding recent NMPRC actions.  The procurement plan
requested the NMPRC to amend PNM’s solar photovoltaic program to eliminate the
annual ceiling on new customer subscriptions, to approve the procurement of
renewable energy and RECs from a biomass facility under a 20-year PPA beginning
in 2009 and to authorize recovery of the costs of procurement under the PPA,
including costs related to imputed debt.  The NMPRC issued a final
order on December 14, 2006, which approved the amendment to the photovoltaic
program, approved the procurement under the biomass PPA, and recognized a
“disputable presumption” of the reasonableness of the costs of energy and
capacity under the PPA.  The NMPRC denied PNM’s request to recover
imputed debt costs, but gave PNM leave to present the issue again in a rate
case.  On February 6, 2007, the NMPRC entered an order reopening the
case with the limited purpose of reconsidering its determination that the act
creates only a “disputable presumption” of the reasonableness of costs incurred
under an approved procurement plan and invited briefs on that
issue.  PNM, the NMPRC staff, and the New Mexico Attorney General
filed briefs.  The Commission issued its Order on Reconsideration on
January 15, 2008.  The Commission modified its prior order and
determined that the effect of approval of a procurement plan is a conclusive
presumption of reasonableness for costs that are consistent with the approved
plan.




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)





PNM’s
Energy Portfolio Procurement Plan for 2008, filed September 4, 2007 with the
NMPRC, sought approval to recover costs associated with certain
RECs.  No new renewable energy procurements were proposed in this
filing.  The Commission issued a final order approving the plan on
November 27, 2007.





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
“best available retrofit technology” (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 particulate 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 to meet
the requirements of a consent decree. PNM believes the controls being installed
for the consent decree 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.





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.




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)




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.  The Court entered a stipulated order approving the
settlement on December 27, 2006.  The settlement does not require any
additional material expenditures with respect to the implementation of the
consent decree.





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 March 31, 2008,
PNM’s share of the total amount of stipulated penalties is $3.0 million of which
$2.4 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, 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.




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)





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 United States 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 the court scheduled oral arguments, as requested by the EPA, to
occur 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 the
well and the remediation facilities called for under the latest amended
Settlement Agreement.  The well continues to operate and meets federal
drinking water standards.  PNM is not able to assess the duration of
this project.





PNM has
been verbally informed that the Superfund Oversight Section of the NMED is
conducting an investigation into the chlorinated solvent contamination in the
vicinity of the 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.





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)








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.





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.





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 potential assessment per incident for all
three units is $30.8 million, with an annual payment limitation of $4.6
million.





The PVNGS
participants maintain “all risk” (including nuclear hazards) insurance for
property damage to, and decontamination of, property at PVNGS in the aggregate
amount of $2.75 billion, a substantial portion of which must first be applied to
stabilization and decontamination.  The participants have also secured
insurance against portions of any increased cost of generation or purchased
power and business interruption resulting from a sudden and unforeseen
accidental outage of any of the three units.  The property damage,
decontamination, and replacement power coverages are provided by Nuclear
Electric Insurance Limited (“NEIL”).  PNM is subject to retrospective
assessments under all NEIL policies if NEIL’s losses in any policy year exceed
accumulated funds.  The maximum amount of retrospective assessments
PNM could incur under the current NEIL policies totals
$7.4 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.




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)





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”).  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.





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.




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)





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
recovery filings pursuant to the FERC’s prior orders that indicated sellers
would get the opportunity to submit evidence demonstrating that the refund
methodology creates a revenue shortfall for their transactions during the refund
period (October 2, 2000 through June 20, 2001).  Included in PNM’s
submittal were objections to the limited amount of time the FERC allowed for
sellers to complete their respective submittals, and the FERC’s arbitrary
decision to allow only marketers, and not load serving entities such as PNM, to
include a return component in their cost filings. PNM participated with certain
other sellers to request rehearing of these issues before the FERC. In September
2005, PNM made its cost recovery filing identifying its costs associated with
sales into the Cal ISO and Cal PX markets during the refund period. In January
2006, the FERC issued its order on the cost recovery filings, acting on 23
filings that were made by multiple sellers. The FERC accepted that portion of
PNM’s filing submitted as prescribed by the FERC’s August 2005 order, but
rejected the alternative filings that included a return component for PNM as a
load serving entity. The effect of the FERC’s order is that PNM’s allowed cost
offset against its refund liability is zero. In February 2006, PNM filed a
petition for rehearing requesting FERC to reconsider its order and allow PNM to
include a return on equity. In November 2007, FERC issued an order denying other
rehearing petitions regarding the cost recovery calculation methodology,
including the appropriateness of earning a return by load serving
entities.  This was not an order on PNM’s specific rehearing
request.  However, to preserve its rights to appeal the issues, PNM
filed an appeal in the Ninth Circuit Court of Appeals on these cost recovery
rehearing orders.  While PNM believes it has meritorious legal
arguments, the Company cannot predict the outcome of this cost recovery
proceeding at this time.




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)





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 these, and the multiple other appeals pending before it, to assess the
opportunities for settlement, in which PNM has participated.  The
Ninth Circuit issued an order 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 the FERC alleging that spot market
prices in the Pacific Northwest wholesale electric market were unjust and
unreasonable.  In 2003, the FERC issued an order recommending that no
refunds should be ordered.  Several parties in the proceeding filed
requests for rehearing and the FERC denied rehearing and reaffirmed its prior
ruling that refunds were not appropriate for spot market sales in the Pacific
Northwest during the first half of 2001.  The Port of Seattle then
filed an appeal of the FERC’s order denying rehearing in the Ninth
Circuit.  As a participant in the proceedings before the FERC, PNM
also participated in the appeal proceedings.  Oral argument in the
case was held in January 2007.  In August 2007, the Ninth Circuit
issued its decision on appeal and determined that FERC erred in excluding
certain purchases in the Pacific Northwest spot markets from consideration in
the Pacific Northwest refund proceeding, and that FERC should have taken into
account evidence of manipulation in the California spot markets that
was presented after the original evidentiary proceeding.  The court
remanded the case to FERC to reconsider its decision to deny refunds, in light
of the evidence of market manipulation and the various recent Ninth Circuit
decisions, but did not require FERC to order refunds.  In September
2007, the Ninth Circuit extended the time period for filing petitions for
rehearing on their decision until November 16, 2007.  At the
conclusion of the time-out period, several parties filed petitions for rehearing
of the Ninth Circuit’s decision.  PNM did not participate in any of
the petitions for rehearing.  The Company is unable to predict the
ultimate outcome of this appeal.





FERC
Gaming Partnerships Order





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




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)


In 2004,
the FERC issued an order granting the FERC staff’s motion to dismiss seven of
the thirteen PNM customers on grounds that there was no evidence to conclude
that these companies used their commercial relationship with PNM to game the Cal
ISO and Cal PX markets.  The FERC approved the settlements entered
into by two of the thirteen PNM customers and dismissed another of PNM’s
customers from the proceeding.  Of the three remaining PNM customers
in the docket, the FERC staff entered into settlement agreements with two of
them.  In 2004, the FERC staff filed a motion to dismiss PNM from the
docket and to enter into a settlement of certain parking and lending
transactions.  The staff’s motion stated that after investigation and
review there was no evidence that PNM engaged in a gaming practice that violated
either the Cal ISO or Cal PX tariffs.  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 the FERC to obtain satisfaction of all
issues related to any potential liability stemming from the provision of parking
and lending services historically.  In July 2005, the FERC issued its
order granting the staff’s motion to dismiss PNM from the Gaming Partnerships
docket.  In its order, the FERC found that PNM did not engage in
prohibited gaming practices as defined in the FERC’s Gaming Partnership Order
and also approved the settlement on the parking and lending
services.  The FERC also denied the California parties’ request to
keep the docket open as to PNM and terminated the PNM
docket.  Subsequently, the California parties filed their petition for
rehearing at the FERC objecting to the FERC’s dismissal of PNM from the Gaming
Partnership investigation and objecting to the settlement reached with the FERC
staff.  The petition for rehearing is pending before FERC and PNM
cannot predict the ultimate outcome of the rehearing petition.  In
August 2005, Enron, the final of the original 13 PNM customers, entered into a
settlement agreement with the FERC staff, the California parties and others that
was contested by several parties.  In November 2005, the FERC issued
an order approving the joint offer of settlement.  Various parties
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.  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.  PNM cannot predict the ultimate outcome of this
proceeding.





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 the FERC before
the claims are actually paid.  The PG&E bankruptcy case has an
escrow account and the Cal PX bankruptcy has established a settlement account,
both of which are awaiting final determination by the FERC setting the level of
claims and allocating the funds.





California
Attorney General Complaint





In 2002,
the California Attorney General filed a complaint with the FERC against numerous
sellers, including PNM, regarding prices for wholesale electric sales into the
Cal ISO and Cal PX markets and to the California Department of Water Resources.
In 2002, the FERC entered an order denying the California Attorney General’s
request to initiate a refund proceeding, but directed sellers, including PNM, to
comply with additional reporting requirements with regard to certain wholesale
power transactions. The California Attorney General filed a petition for review
in the Ninth Circuit. The Ninth Circuit issued a decision in September 2004
upholding the FERC’s authority to establish the market-based rate framework
under the Federal Power Act, but held that the FERC violated its administrative
discretion by declining to investigate whether it should order refunds from
sellers who failed to provide transaction-specific reports to the FERC as
required by its rules. The Ninth Circuit determined that the FERC has the
authority to order refunds for these transactions if it elects to do so and
remanded the case back to the FERC for further proceedings, including a
determination as to whether additional refunds are appropriate. In




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)




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 time-out period
expired and in December 2007, the Ninth Circuit issued its mandate remanding the
case back 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 hearing to determine if specific Sellers’ violation
of FERC’s quarterly reporting requirements led to an unjust and unreasonable
rate for particular Sellers in CAISO and CalPx markets during the 2000-2001 time
period.  The order required sellers to submit revised quarterly
reports for FERC for review.  The order also established settlement
procedures for the matters.  An initial settlement conference was held
in April 2008.  PNM has participated in these filings.  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 the case by the parties, and oral argument was held in March
2008.  The Company cannot predict the final outcome of this litigation
nor whether PNM will be required to make refunds or pay damages under these
claims.





Regional
Transmission Issues





In
September 2005, the FERC issued a Notice of Inquiry on Preventing Undue
Discrimination and Preference in Transmission Services seeking information from
the industry regarding the provisions of the OATT for possible revision in a
future rulemaking.  On May 18, 2006, FERC issued a NOPR to reform its
pro forma OATT.  FERC emphasized that its purpose for the NOPR was not
to create new market structures, redesign approved RTO or ISO markets, require
transmission owners to divest control over transmission, impinge on state
jurisdiction, or weaken the protection of native load customers.  Core
OATT elements were retained, including comparability requirements, protection of
native load, state’s jurisdiction over bundled retail load, functional
unbundling to address undue discrimination, and reciprocity.  PNM and
TNMP 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.




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


The
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 has
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
has declared a force majeure over failure to obtain an air permit.  On
June 18, 2007, PNM sent a letter to the operator conditionally accepting the
notice of force majeure.  The operator was required to remedy the
condition within 180 days of the notice dated May 25, 2007.  A hearing
was held on August 20, 2007 on the owner’s appeal of the denial of the air
permit.  The air permit was approved on October 2, 2007.





The
biomass project owner filed an application in August 2007 with the New Mexico
Energy, Mineral and Natural Resources Department (“EMNRD”) for a renewable
energy production tax credit in connection with the
project.   Production tax credit to all applicants is limited to
two million megawatt hours per year.  The project owner’s application
was denied on September 27, 2007, 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 of that decision on October 10, 2007.  A
hearing on the appeal was held on January 25, 2008.  On February 14,
2008, the EMNRD Secretary issued an order directing the Energy Conservation and
Management Division of EMNRD to accept the project owner’s application and
estimate of the plant’s annual power-generating potential.  The
project manager anticipates being issued the production tax credit on the basis
of the Secretary’s order and is in the process of obtaining financing for the
project. The biomass facility is expected to begin commercial operations in late
2009 or early 2010, provided adequate financing is obtained by June 1,
2008.





Valencia
Energy Facility





On April
18, 2007, PNM entered into a power purchase agreement to purchase all of the
electric capacity and energy from the Valencia Energy Facility, a proposed
natural gas-fired power plant to be constructed near Albuquerque, New
Mexico.  A third-party will build, own and operate the facility while
PNM will be the sole purchaser of the electricity generated. The total projected
construction cost for the facility is from $100 million to $105 million. The
term of the power purchase agreement is for 20 years beginning June 1, 2008,
with the full output of the plant estimated up to an average of 148
MW.  PNM will have the option to purchase and own up to 50% of the
plant after it reaches commercial operation.  PNM estimates that the
plant will typically operate during peak periods of energy demand in summer
(less than 18% of the time on an annual basis).  PNM has evaluated the
accounting treatment of this PPA and concluded that until the plant reaches
commercial operation there are no impacts on PNM since it has no financial
risks.  However, after commercial operation is achieved, PNM will
consolidate the plant under FIN 46R since it will absorb the majority of the
variability in the cash flows of the plant. The commercial operation of the
Valencia facility is anticipated in the summer of 2008.




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)


On May
31, 2007, the office of the AG and the staff of the NMPRC filed a petition for
formal review requesting the NMPRC to investigate the PPA and related
transactions relating to the Valencia Energy Facility to determine, among other
things, whether the transactions are prudent, appropriate and consistent with
NMPRC rules, and to establish the ratemaking treatment of the 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.  On November 30, 2007, the hearing examiner
issued a procedural order which set a deadline of March 31, 2008 for
intervention and for parties other than PNM to file pleadings in response to the
NMPRC’s November 6, 2007, order.  The procedural order further
provided that PNM may respond to those pleadings by April 15, 2008 and scheduled
a prehearing conference for April 22, 2008.  On March 27, 2008, the
hearing examiner granted the parties’ joint motion to vacate the deadlines for
additional pleadings to give the parties an opportunity to discuss
settlement.  On April 22, 2008, a new schedule for pleadings was
set.  NMPRC staff and intervenors have until July 18, 2008 to file
pleadings and PNM has until July 31, 2008 to respond.  Another
prehearing conference is scheduled for August 6, 2008.  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 FCP have intervened
and will defend the PUCT’s Final Order approving the NUS.





Price-to-Beat
Fuel Factor





Under the
PUCT’s final order approving the acquisition of TNP by PNMR, First Choice filed
its post-true-up price-to-beat adjustment filing to adjust its price-to-beat
fuel factor on September 21, 2006.  First Choice’s filing calculated a
24.95% decrease in its price-to-beat fuel factors.  The PUCT made the
fuel factor reset effective December 1, 2006, as First Choice had requested. As
price-to-beat rates expired on December 31, 2006, the adjustments approved by
the PUCT are no longer applicable.





Energy
Agreement





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




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)


In 2004,
FCPSP, a bankruptcy remote entity, was created pursuant to the agreement with
Constellation to hold all customer contracts previously held by First
Choice.  Constellation received a lien against the assets of FCPSP to
cover the settlement exposure and the mark-to-market exposure rather than
requiring FCPSP to post alternate collateral for the purchase of power
supply.  In addition, FCPSP was restricted by covenants that limited
the size of FCPSP’s unhedged market positions and required that sales by FCPSP
retain a positive retail margin.  The agreement did not, however,
permit Constellation to demand additional collateral irrespective of its credit
exposure under the agreement.  If, however, a change in electricity or
gas forward prices increased Constellation’s credit exposure to FCPSP beyond a
limit based on Constellation’s liens in cash and accounts receivable,
Constellation had no obligation to supply additional power to customers of FCPSP
unless FCPSP provided letters of credit or other collateral acceptable to
Constellation, and FCPSP was constrained in its ability to sign up additional
customers until that credit shortfall was corrected.  The existing
pricing mechanism under the Constellation power supply agreement expired on
December 31, 2006.  In addition, Constellation agreed to supply power
in certain transactions under the PSA beyond the date when that commitment
expired.  The obligations of Constellation to act as a qualified
scheduling entity continued until the expiration of the agreement on December
31, 2007.   The contract was extended until January 31, 2008 and
First Choice then became the qualified scheduling entity as of February 1,
2008.





PNM





Gas
Rate Case





On May
30, 2006, PNM filed a general gas rate case that asked the NMPRC to approve an
increase in the service fees charged to its 481,000 natural gas
customers.  The proposal would increase the set monthly fee, the
charge tied to monthly usage, and miscellaneous on-demand service
fees.  Those fees are separate from the cost of gas charged to
customers.  The monthly cost of gas charge would not be affected by
the fee increase.  The petition requested an increase in base gas
service rates of $22.6 million and an increase in miscellaneous on-demand
service rates of $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.  In addition, a number of issues on appeal could have impacts
on the outcome of the current electric rate case proceedings.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.  Initial briefs
were filed November 20, 2007.  Answer briefs were filed February 29,
2008.  On April 14, 2008 PNM filed its reply brief and request for
oral argument.  The Supreme Court has scheduled oral argument for July
21, 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
to 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.  On September 6, 2007, the NMPRC extended the
suspension of PNM’s proposed rates to May 7, 2008 and directed PNM to file
supplemental testimony and exhibits to correct certain errors in PNM’s filing
that PNM had brought to the




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)




NMPRC’s
attention. The NMPRC staff, the AG, and other intervenors filed testimony
and recommendations regarding PNM’s rate application that propose substantial
reductions to PNM’s proposed rates.  These parties also stated their
opposition to PNM’s proposal to implement a FPPAC.  Hearings were held
between December 5, 2007 and December 19, 2007.  At the hearing PNM
adjusted its revenue increase request to $76.9 million.  The
Recommended Decision of the hearing examiner issued March 6, 2008, recommended a
revenue increase of $24.2 million and denial of PNM’s request to reinstate a
FPPAC.  On April 24, 2008, the NMPRC issued a final order in the case
that incorporated a number of the findings and conclusions of the hearing
examiner, but also modified and disapproved others, resulting in a revenue
increase of $34.4 million.  New rates reflecting the $34.4 million
increase are effective for bills rendered on and after May 1,
2008.  In its final order, the NMPRC adopted the hearing examiner’s
recommendation to disallow 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
agreed with the hearing examiner that recovery of coal mine decommissioning
costs should be capped at $100 million.  The NMPRC has indicated that
recovery above the cap might be allowed if it was due to factors other than
general cost increases.  See Note 16 for a discussion of the $30.2
million write-down due to these regulatory disallowances.  As a result
of the separate proceeding to consider the motion to implement the Emergency
FPPAC described below, the NMPRC determined that it was unnecessary to address
the merits of the FPPAC proposed in PNM’s rate case filing.







PNM is
considering the filing of a motion for rehearing and a notice of appeal to the
New Mexico Supreme Court. Under New Mexico law an appeal is allowed without
filing for rehearing. PNM and other parties have 30 days from the issuance of
the final order to file for either rehearing or appeal. If a motion for
rehearing is filed, the NMPRC must act on the motion within 20 days or it is
deemed denied. If a motion for rehearing is filed, parties have 30 days to file
a notice of appeal after disposition of the motion. An appeal may be filed even
if a rehearing motion is pending.







Emergency
FPPAC





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 AG supported the motion and the NMPRC staff and some other
parties opposed the motion.  On March 25, 2008, the NMPRC issued an
order establishing a docket separate from the electric rate case to consider the
proposed Emergency FPPAC and set a procedural schedule, which was revised on
April 16, 2008.  A hearing is scheduled to begin May 12,
2008.  The motion requests 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.  Subject to
conditions stated in the motion, the Emergency FPPAC would permit PNM to recover
its actual fuel and purchased power costs up to $0.024972 per
kWh.  Using the base fuel rate of $0.014972/kWh approved in PNM’s
electric rate case, PNM estimates that  it would collect approximately
$72 million under the Emergency FPPAC in the first 12 months after
approval.  On April 29, 2008 the NMPRC issued an order directing staff
to file testimony addressing specified alternatives to the proposed Emergency
FPPAC, including several forms of partial FPPACs and denial of any FPPAC and
authorized other parties to also address these matters in
testimony.  PNM is unable to predict the outcome of this
proceeding.





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




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)




ALJ
issued an initial decision in that proceeding recommending that SPS make refunds
to customers, including PNM, for misapplication of charges in its fuel cost
adjustment clause. The parties in that proceeding filed their exceptions to the
initial decision, which is now pending FERC review.  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 Trial Staff filed comments on the proposed
settlement.  Only one party opposed the settlement, which was
supported or not opposed by the remaining active parties and the FERC Trial
Staff.  On October 19, 2006, PNM, SPS and FERC Trial Staff each filed
reply comments contending that opposition 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 Electric Coop filed a motion to delay the FERC action on the
initial decision to provide additional opportunity for the parties to reach
settlement.  PNM filed its opposition to the motion requesting the
FERC to proceed to issue an order on the initial decision.  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 filed a motion to defer FERC action on the initial decision to
provide yet additional time for them to reach settlement.  PNM and
another intervenor in the case filed their opposition to the motion requesting
the FERC to proceed to issue an order on the initial decision of the
ALJ.  However, FERC removed the Golden Spread item from its open
meeting agenda and did not issue an order on the initial decision.In November 2007,
SPS again filed a motion at FERC to defer action on the Golden Spread case
alleging it was close to settlement with Golden Spread.  The motion
was unopposed and granted.  In December 2007, SPS, Golden Spread and
Occidental Petroleum filed a settlement at FERC.  The settling parties
recognized the need for FERC to rule on the ALG’s recommended decision in the
Golden Spread complaint case.  PNM did not oppose the settlement.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.  The Company’s
preliminary review of the decision indicates that 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 continues to review FERC’s order and will make a determination of
whether to seek clarification and/or rehearing of the order.  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.  Hearings have been scheduled to begin August 19,
2008.  PNM is unable to predict the outcome of the case.


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)




NMPRC
Inquiry on Fuel and Purchased Power Adjustment Clauses







On
October 16, 2007, the NMPRC voted to open a notice
of inquiry that may eventually lead to establishing simple and
consistent rules for the implementation of FPPACs for all
investor-owned utilities and electric cooperatives in New
Mexico.  The investor-owned utilities and electric
cooperatives were asked to respond to a series of questions; the
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 Notice of Inquiry (“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.





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.





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.





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


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)




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 carrying cost rate of 8.06%. As this
calculation differs from TNMP’s methodology and result, TNMP filed exceptions on
July 2, 2007.  At the July 20, 2007 open meeting, the PUCT unanimously
rejected the proposed order regarding the calculation of TNMP’s on-going
carrying cost rate for the CTC. The PUCT approved the 8.31% rate proposed by
TNMP and the PUCT staff.  The PUCT issued a final order and TNMP made
a compliance filing to put the new rates that were to go into effect on February
1, 2008.  Intervenors have asserted objections to the compliance
filing and those objections are pending at the PUCT.  PUCT staff urges
that the PUCT make the new rate effective as of December 27, 2007 when the
PUCT’s order establishing the correct rate became final.  In response
to intervenors, the ALJ has suspended TNMP’s February 1, 2008 rate
implementation pending a hearing.





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.








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)








(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 March 31,2008
            
            
            2007(In
      thousands)Operating
      revenues
            
            $
            174,078
            
            
            $
            -Cost
      of sales
            
            
            197,170
            
            
            
            -Gross
      margin
            
            
            (23,092
            )
            
            
            -Non-fuel
      operations and maintenance expenses
            
            
            4,655
            
            
            
            -Administrative
      and general expenses
            
            
            6,102
            
            
            
            1,333Depreciation
      and amortization expense
            
            
            7,569
            
            
            
            -Interest
      expense
            
            
            6,568
            
            
            
            -Taxes
      other than income tax
            
            
            3,661
            
            
            
            -Other
      (income) and deductions
            
            
            (257
            )
            
            
            (9
            )Earnings
      (loss) before income taxes
            
            
            (51,390
            )
            
            
            (1,324
            )Income
      taxes (benefit)(1)
            
            
            (384
            )
            
            
            -Net
      earnings (loss)
            
            $
            (51,006
            )
            
            $
            (1,324
            )50
      percent of net earnings (loss)
            
            $
            (25,503
            )
            
            $
            (662
            )Plus
      amortization of basis difference in EnergyCo
            
            
            420
            
            
            
            -PNMR
      equity in net earnings (loss) of EnergyCo
            
            $
            (25,083
            )
            
            $
            (662
            )





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





Financial
Position





March
      31, 2008
            
            
            December
      31, 2007(In
      thousands)Current
      assets
            
            $
            165,858
            
            
            $
            119,255Net
      property plant and equipment
            
            
            876,271
            
            
            
            853,492Deferred
      assets
            
            
            286,424
            
            
            
            297,197Total
      assets
            
            
            1,328,553
            
            
            
            1,269,944Current
      liabilities
            
            
            191,850
            
            
            
            88,812Long-term
      debt
            
            
            700,778
            
            
            
            650,778Other
      long-term liabilities
            
            
            33,369
            
            
            
            34,344Total
      liabilities
            
            
            925,997
            
            
            
            773,934Owners’
      equity
            
            $
            402,556
            
            
            $
            496,01050
      percent of owners’ equity
            
            $
            201,278
            
            
            $
            248,005Unamortized
      PNMR basis difference in EnergyCo
            
            
            83
            
            
            
            89PNMR
      equity investment in EnergyCo
            
            $
            201,361
            
            
            $
            248,094






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)


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’ 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 significant market
value.  During the three months ended March 31, 2008, EnergyCo
recorded income from amortization of contracts acquired of $1.3 million, which
is recorded in operating revenues, and amortization expense on emission
allowances of $4.1 million, which is recorded in cost of sales.





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 ended March 31, 2008, the basis
difference adjustment detailed above of $0.4 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.





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)








(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 EndedMarch
      31,2008
            
            
            2007(In
      thousands)Electricity,
      transmission and related services billings:PNM
      to TNMP
            
            $
            -
            
            
            $
            126TNMP
      to PNMR
            
            
            14,410
            
            
            
            16,513Shared
      services billings from PNMR to:PNM*
            
            
            22,867
            
            
            
            25,800TNMP
            
            
            4,777
            
            
            
            5,512Services
      billings from PNMR to EnergyCo
            
            
            2,475
            
            
            
            1,070Income
      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
            
            
            89
            
            
            
            267





* PNM
shared services include billings to PNM Gas of $6.1 million and $8.5 million for
the three months ended March 31, 2008 and 2007.





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)








(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.  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.





(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:





Results
of Operations





Three
      Months Ended
              March
      31,2008
            
            
            2007Operating
      revenues
            
            $
            220,455
            
            
            $
            216,457Cost
      of energy
            
            
            160,828
            
            
            
            161,708Gross
      margin
            
            
            59,627
            
            
            
            54,749Operating
      expenses
            
            
            21,443
            
            
            
            23,281Depreciation
      and amortization
            
            
            -
            
            
            
            5,601Operating
      income
            
            
            38,184
            
            
            
            25,867Other
      income (deductions)
            
            
            941
            
            
            
            1,118Net
      interest charges
            
            
            2,971
            
            
            
            2,946Segment
      earnings before income taxes
            
            
            36,154
            
            
            
            24,039Income
      taxes
            
            
            13,655
            
            
            
            9,517Segment
      earnings
            
            $
            22,499
            
            
            $
            14,522








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)








Financial
Position





March
      31,
            
            
            December
      31,2008
            
            
            2007(In
      thousands)ASSETSCash
      and cash equivalents
            
            $
            27
            
            
            $
            28Accounts
      receivable and unbilled revenues, net
            
            
            95,794
            
            
            
            89,699Regulatory
      and other current assets
            
            
            19,133
            
            
            
            30,334Total
      current assets
            
            
            114,954
            
            
            
            120,061Gas
      plant in service
            
            
            750,385
            
            
            
            743,664Accumulated
      depreciation and amortization
            
            
            (244,016
            )
            
            
            (245,741
            )Construction
      work in progress
            
            
            22,552
            
            
            
            22,411Net
      utility plant
            
            
            528,921
            
            
            
            520,334Regulatory
      and other assets
            
            
            6,275
            
            
            
            6,205$
            650,150
            
            
            $
            646,600LIABILITIES
      AND EQUITYAccounts
      payable and accrued expenses
            
            $
            39,574
            
            
            $
            68,458Regulatory
      and other current liabilities
            
            
            24,405
            
            
            
            27,545Total
      current liabilities
            
            
            63,979
            
            
            
            96,003Regulatory
      liabilities
            
            
            73,267
            
            
            
            72,727Deferred
      credits and other liabilities
            
            
            16,768
            
            
            
            17,121Total
      deferred credits and other liabilities
            
            
            90,035
            
            
            
            89,848Equity
            
            
            496,136
            
            
            
            460,749$
            650,150
            
            
            $
            646,600





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 March 31, 2008, PNM Gas had $3.8 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 March 31, 2008, all PNM Gas derivatives were
valued using Level 2 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.




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)




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 March 31, 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 ended March 31, 2008, the Company
recorded pre-tax severance benefits payable of $0.3 million and other costs,
primarily consulting fees, related to the business improvement plan of $1.9
million.  Substantially all of these costs were recorded by
PNMR.  As additional phases of the business improvement plan are
developed, the associated costs will be analyzed and recorded.





(16)
            Subsequent
      Events





See Note
7 for information concerning additional short-term credit facilities for PNM and
TNMP.





In April
2008, PNM entered into three separate contracts for the sale of capacity and
energy from its 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 are 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 will be recorded to a
deferred revenue account and amortized over the life of the
contracts.





As
discussed in Note 10, the NMPRC issued a final order in PNM’s electric rate case
on April 24, 2008.  In that order, the NMPRC ruled that, unless PNM is
able to successfully demonstrate certain criteria in future rate proceedings,
PNM could not recover costs deferred for RECs and capped the recovery of coal
mine decommissioning expense.  PNM is evaluating whether it will be
successful in meeting the criteria set forth by the NMPRC, as well as whether it
will appeal the NMPRC order.  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.  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.








65




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 and expanding
through the acquisition of CRHC, which has regulated electric operations in
Texas.  The CRHC transaction is conditioned upon the sale of the gas
operations, but both transactions are expected to close near the end of
2008.  PNMR expects to use the net proceeds to retire debt, fund
future electric capital expenditures and for other corporate
purposes.  The growth of the unregulated electric business is expected
from First Choice and 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.





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 a biomass power plant 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
will be accomplished in several steps.  On January 18, 2008, PNMR
announced the pending sale of certain wholesale power, natural gas and
transmission contracts as an initial step in separating its merchant plant
activities from PNM.  The sale is expected to be completed about June
30, 2008.  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 from its 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 are 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 will be recorded to a deferred revenue account and
be 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.  PNM has filed for new electric rates
designed to increase operating revenues $76.9 million on an annual
basis.  In addition, PNM has asked for reinstatement of its FPPAC,
which it voluntarily relinquished in 1994 under dramatically different
circumstances.  Hearings were concluded in December of 2007 and briefs
of the parties were filed in January of 2008.  NMPRC staff and
intervenors have opposed PNM’s request for a fuel clause despite the fact that
all other utilities in New Mexico have one and it is standard practice
throughout the utility industry.  The hearing examiner’s recommended
decision was issued on March 6, 2008. The recommendation included a base rate
increase of $24.2 million and a rejection of the fuel-adjustment clause. As
discussed in Note 10, on April 24, 2008, the NMPRC issued a final order in the
case that incorporated a number of the findings and conclusions of the hearing
examiner, but also modified and disapproved others, resulting in a revenue
increase of $34.4 million.  New rates reflecting the $34.4 million
increase are effective for bills rendered on and after May 1,
2008.  In its final order, the NMPRC also agreed with the hearing
examiner’s recommended decision to disallow recovery of costs associated with
the PNM’s REC that are being deferred as regulatory assets and to cap the
recovery of coal mine decommissioning costs at $100 million. As described in
Note 16, 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.   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.




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)





On March
20, 2008, PNM, together with the International Brotherhood of Electrical Workers
Local 611, filed a joint motion to implement an Emergency FPPAC. PNM requested
an expedited process for consideration of the clause. However, certain
intervenors in the case asked for a 60-day delay in order to review PNM’s
request and file testimony. In an effort to address the emergency nature of
PNM’s request and provide intervenors more time, the NMPRC delayed the case by a
month. A public hearing is scheduled to begin on May 12, 2008. The Company
cannot predict the ultimate outcome of this case.





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 lines will consist
of:





·
            Competitive
      retail energy sales;


·
            Development,
      operation and ownership of diverse generation assets;
  and


·
            Wholesale
      marketing to optimize its assets.





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 PNM Resources and ECJV.  PNM Resources and ECJV are
evaluating the potential contribution to EnergyCo of PNMR's ownership
of the subsidiaries that hold the First Choice unregulated operations in
Texas.





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 ended March 31,
2008, PNMR recorded a pre-tax expense of $2.2 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.





67





RESULTS
OF OPERATIONS





Executive
Summary





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





Three
      Months Ended March 31,2008
            
            
            2007
            
            
            Change
            
            
            %(In
      millions)Earnings
      (loss) from continuing operations
            
            $
            (71,135
            )
            
            $
            15,144
            
            
            $
            (86,279
            )
            
            
            (569.7
            )Earnings
      from discontinued operations, net of income taxes
            
            
            22,499
            
            
            
            14,522
            
            
            
            7,977
            
            
            
            54.9Net
      earnings (loss)
            
            $
            (48,636
            )
            
            $
            29,666
            
            
            $
            (78,302
            )
            
            
            (263.9
            )Average
      common and common equivalent shares outstanding
            
            
            76,948
            
            
            
            78,099
            
            
            
            (1,151
            )
            
            
            (1.5
            )Earnings
      (loss) from continuing operations per diluted share
            
            $
            (0.93
            )
            
            $
            0.19
            
            
            $
            (1.12
            )
            
            
            (589.5
            )Net
      earnings (loss) per diluted share
            
            $
            (0.63
            )
            
            $
            0.38
            
            
            $
            (1.01
            )
            
            
            (265.8
            )





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





PNM
      Electric
            
            $
            (41,335
            )TNMP
      Electric
            
            
            2,792Altura
            
            
            (1,442
            )First
      Choice
            
            
            (29,947
            )Corporate
      and Other
            
            
            (1,594
            )EnergyCo
            
            
            (14,753
            )Net
      change
            
            $
            (86,279
            )





The major
after-tax decreases in net earnings from continuing operations include reduced
generation at regulated power plants of $20.5 million, write-offs resulting from
regulatory disallowances of $18.2 million, and increased generation and
purchased power costs of $5.2 million at PNM Electric. Speculative trading
losses at First Choice of $30.5 million and PNMR’s share of losses at EnergyCo
due to changes in the fair value of economic hedges of $14.2 were also major
factors.





Detailed
information regarding the changes in earnings (loss) from continuing and
discontinued operations are included in the segment information below. The
decrease in the number of common and common equivalent shares is primarily due
to a reduced number of dilutive shares due to changes in share
price.





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.








68








PNM
Electric





The table
below summarizes operating results for PNM Electric:





Three
      Months Ended March 31,2008
            
            
            2007
            
            
            Change
            
            
            %(In
      millions)Total
      operating revenues
            
            $
            252.7
            
            
            $
            240.4
            
            
            $
            12.3
            
            
            
            5.1Cost
      of energy
            
            
            135.7
            
            
            
            103.2
            
            
            
            32.5
            
            
            
            31.5Gross
      margin
            
            
            117.0
            
            
            
            137.2
            
            
            
            (20.2
            )
            
            
            (14.7
            )Operating
      expenses
            
            
            126.6
            
            
            
            88.3
            
            
            
            38.3
            
            
            
            43.4Depreciation
      and amortization
            
            
            21.0
            
            
            
            20.8
            
            
            
            0.2
            
            
            
            1.0Operating
      income (loss)
            
            
            (30.6
            )
            
            
            28.2
            
            
            
            (58.8
            )
            
            
            (208.5
            )Interest
      income
            
            
            6.1
            
            
            
            7.7
            
            
            
            (1.6
            )
            
            
            (20.8
            )Other
      income (deductions)
            
            
            (5.5
            )
            
            
            0.5
            
            
            
            (6.0
            )
            
            
            (1,200.0
            )Net
      interest charges
            
            
            (14.1
            )
            
            
            (13.1
            )
            
            
            (1.0
            )
            
            
            7.6Earnings
      (loss) before income taxes
            
            
            (44.1
            )
            
            
            23.2
            
            
            
            (67.3
            )
            
            
            (290.1
            )Income
      taxes (benefit)
            
            
            (17.1
            )
            
            
            8.8
            
            
            
            (25.9
            )
            
            
            (294.3
            )Preferred
      stock dividend requirements
            
            
            0.1
            
            
            
            0.1
            
            
            
            -
            
            
            
            -Segment
      earnings (loss)
            
            $
            (27.1
            )
            
            $
            14.2
            
            
            $
            (41.3
            )
            
            
            (290.8
            )








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





2008/2007
      ChangeEarnings
      (Loss)Before
            
            
            SegmentTotal
            
            
            Gross
            
            
            Income
            
            
            EarningsRevenues
            
            
            Margin
            
            
            Taxes
            
            
            (Loss)Regulated
      sales growth
            
            $
            5.8
            
            
            $
            1.3
            
            
            $
            1.3
            
            
            $
            0.8Generation
      price increases
            
            
            -
            
            
            
            (3.8
            )
            
            
            (3.8
            )
            
            
            (2.3
            )Purchased
      power cost increases
            
            
            -
            
            
            
            (4.8
            )
            
            
            (4.8
            )
            
            
            (2.9
            )Regulated
      plant availability
            
            
            (15.4
            )
            
            
            (21.6
            )
            
            
            (33.9
            )
            
            
            (20.5
            )Unregulated
      margins
            
            
            31.9
            
            
            
            3.3
            
            
            
            2.7
            
            
            
            1.6Operational
      costs
            
            
            -
            
            
            
            -
            
            
            
            2.6
            
            
            
            1.6NDT
            
            
            -
            
            
            
            -
            
            
            
            (4.6
            )
            
            
            (2.8
            )Net
      unrealized mark-to-market
            
            
            (12.0
            )
            
            
            6.9
            
            
            
            6.9
            
            
            
            4.2Regulatory
      disallowances
            
            
            -
            
            
            
            -
            
            
            
            (30.2
            )
            
            
            (18.3
            )Other
            
            
            2.0
            
            
            
            (1.5
            )
            
            
            (3.5
            )
            
            
            (2.7
            )Total
      increase (decrease)
            
            $
            12.3
            
            
            $
            (20.2
            )
            
            $
            (67.3
            )
            
            $
            (41.3
            )








69








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





Three
      Months Ended March 31,2008
            
            
            2007
            
            
            Change
            
            
            %(In
      millions, except customers)Residential
            
            $
            71.2
            
            
            $
            67.8
            
            
            $
            3.4
            
            
            
            5.0Commercial
            
            
            67.5
            
            
            
            64.7
            
            
            
            2.8
            
            
            
            4.3Industrial
            
            
            25.8
            
            
            
            23.4
            
            
            
            2.4
            
            
            
            10.3Transmission
            
            
            5.3
            
            
            
            6.7
            
            
            
            (1.4
            )
            
            
            (20.9
            )Other
      retail
            
            
            5.4
            
            
            
            5.4
            
            
            
            -
            
            
            
            -Wholesale
      long-term sales
            
            
            36.5
            
            
            
            30.0
            
            
            
            6.5
            
            
            
            21.7Wholesale
      short-term sales
            
            
            41.0
            
            
            
            42.4
            
            
            
            (1.4
            )
            
            
            (3.3
            )$
            252.7
            
            
            $
            240.4
            
            
            $
            12.3
            
            
            
            5.1Average
      customers (thousands)
            
            
            494.0
            
            
            
            487.0
            
            
            
            7.0
            
            
            
            1.4





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





Three
      Months Ended March 31,2008
            
            
            2007
            
            
            Change
            
            
            %(Gigawatt
      hours)Residential
            
            
            857.7
            
            
            
            820.6
            
            
            
            37.1
            
            
            
            4.5Commercial
            
            
            910.3
            
            
            
            877.0
            
            
            
            33.3
            
            
            
            3.8Industrial
            
            
            441.8
            
            
            
            470.3
            
            
            
            (28.5
            )
            
            
            (6.1
            )Other
            
            
            59.6
            
            
            
            56.0
            
            
            
            3.6
            
            
            
            6.4Wholesale
      long-term sales
            
            
            654.1
            
            
            
            543.5
            
            
            
            110.6
            
            
            
            20.3Wholesale
      short-term sales
            
            
            1,079.3
            
            
            
            1,167.0
            
            
            
            (87.7
            )
            
            
            (7.5
            )4,002.8
            
            
            
            3,934.4
            
            
            
            68.4
            
            
            
            1.7





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.  The increase in regulated load requirements was primarily
served by Afton, which completed a conversion to a combined cycle plant in 2007
and was designated to serve regulated customers.





The
increase in segment earnings associated with sales growth was more than offset
by increases in generation prices and purchased power costs that are not
recovered through retail rates.  Increased generation prices, largely
due to higher coal costs at SJGS, along with increases in purchased power
contract costs and market prices for purchases required to serve load decreased
gross margin and segment earnings.





Reduced
generation at regulated power plants also decreased gross margin and segment
earnings.  The weighted-average equivalent availability factor at
regulated base-load power plants (SJGS, Four Corners, and two-thirds of PVNGS)
was 64.6% in the first quarter of 2008, compared to 85.8% in the first quarter
of 2007, due to an increase in both planned and unplanned
outages.  The reduction in generation significantly reduced off-system
sales opportunities and required replacement energy from Afton and market
purchases.  Planned outages, including major 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, comprised over 90% of the decrease in generation at regulated base-load
plants and reduced margin by $20.9 million and earnings before income taxes by
$32.3 million.  An increase in forced outages resulting from various
performance issues at SJGS, partially offset by a reduction in forced outages at
Four Corners and PVNGS, reduced margin by $0.7 million and earnings before
income taxes by $1.6 million.  Increases in O&M costs related to
regulated plant performance resulted from increased maintenance work performed
during the current year outages in addition to increased costs for labor,
materials and supplies.





Unregulated
margins increased over prior year levels due to increased market prices, which
allowed for greater marketing opportunities around unregulated gas plants, and
increased availability at PVNGS Unit 3.





70




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





Income
related to NDT assets in the first quarter of 2008, consisting of realized gains
and losses, interest and dividend income and any associated fees and taxes, was
a loss of $2.1 million, compared to a gain of $0.7 million in the first quarter
of 2007.  Additionally, $2.0 million of other than temporary
impairment losses were recognized in accordance with SFAS 115 in the first
quarter of 2008, compared to $0.2 million of impairment losses in the first
quarter of 2007.





Changes
in net unrealized mark-to-market gains and losses were driven by increased
gas and electric price movements during the first quarter of 2008 compared to
the first quarter of 2007.  These changesresulted in a
decrease to revenues, but were more than offset by a decrease in costs,
resulting in a net increase to gross margin and earnings for the first quarter
of 2008.  This increase was primarily driven by net unrealized
mark-to-market gains on economic hedges associated with gas options of $6.1
million.





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.





TNMP
Electric





The table
below summarizes the operating results for TNMP Electric:





Three
      Months Ended March 31,2008
            
            
            2007
            
            
            Change
            
            
            %Total
      operating revenues
            
            $
            42.2
            
            
            $
            40.9
            
            
            $
            1.3
            
            
            
            3.2Cost
      of energy
            
            
            7.8
            
            
            
            7.2
            
            
            
            0.6
            
            
            
            8.3Gross
      margin
            
            
            34.4
            
            
            
            33.8
            
            
            
            0.6
            
            
            
            1.8Operating
      expenses
            
            
            15.5
            
            
            
            18.7
            
            
            
            (3.2
            )
            
            
            (17.1
            )Depreciation
      and amortization
            
            
            8.4
            
            
            
            7.0
            
            
            
            1.4
            
            
            
            20.0Operating
      income
            
            
            10.6
            
            
            
            8.1
            
            
            
            2.5
            
            
            
            30.9Interest
      income
            
            
            -
            
            
            
            0.1
            
            
            
            (0.1
            )
            
            
            (100.0
            )Other
      income (deductions)
            
            
            0.4
            
            
            
            0.2
            
            
            
            0.2
            
            
            
            100.0Net
      interest charges
            
            
            (5.0
            )
            
            
            (7.1
            )
            
            
            2.1
            
            
            
            (29.6
            )Earnings
      before income taxes
            
            
            6.0
            
            
            
            1.4
            
            
            
            4.6
            
            
            
            328.6Income
      taxes
            
            
            2.3
            
            
            
            0.4
            
            
            
            1.9
            
            
            
            475.0Segment
      earnings
            
            $
            3.7
            
            
            $
            0.9
            
            
            $
            2.8
            
            
            
            311.1





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





2008/2007
      ChangeEarnings
      (Loss)Before
            
            
            SegmentTotal
            
            
            Gross
            
            
            Income
            
            
            EarningsRevenues
            
            
            Margin
            
            
            Taxes
            
            
            (Loss)Retail
      growth/weather
            
            $
            0.6
            
            
            $
            0.6
            
            
            $
            0.6
            
            
            $
            0.4Synergy
      savings credits
            
            
            -
            
            
            
            -
            
            
            
            0.8
            
            
            
            0.5Debt
      reduction
            
            
            -
            
            
            
            -
            
            
            
            1.5
            
            
            
            1.0Operational
      costs
            
            
            -
            
            
            
            -
            
            
            
            2.1
            
            
            
            1.4Other
            
            
            0.7
            
            
            
            -
            
            
            
            (0.4
            )
            
            
            (0.5
            )Total
      increase (decrease)
            
            $
            1.3
            
            
            $
            0.6
            
            
            $
            4.6
            
            
            $
            2.8








71








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





Three
      Months Ended March 31,2008
            
            
            2007
            
            
            Change
            
            
            %(In
      millions, except customers)Residential
            
            $
            15.3
            
            
            $
            14.8
            
            
            $
            0.5
            
            
            
            3.4Commercial
            
            
            16.6
            
            
            
            16.0
            
            
            
            0.6
            
            
            
            3.8Industrial
            
            
            3.2
            
            
            
            1.7
            
            
            
            1.5
            
            
            
            88.2Other
            
            
            7.1
            
            
            
            8.4
            
            
            
            (1.3
            )
            
            
            (15.5
            )$
            42.2
            
            
            $
            40.9
            
            
            $
            1.3
            
            
            
            3.2Average
      customers (thousands) (1)
            
            
            227.4
            
            
            
            225.4
            
            
            
            2.0
            
            
            
            0.9





(1)
            Under
      TECA, customers of TNMP Electric in Texas have the ability to choose First
      Choice or any other REP to provide energy.  The average
      customers reported above include (in thousands) 124.3 and 143.9 customers
      of TNMP Electric for the three months ended March 31, 2008 and 2007, who
      have chosen First Choice as their REP.  These customers are also
      included in the First Choice
segment.








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





Three
      Months Ended March 31,2008
            
            
            2007
            
            
            Change
            
            
            %(Gigawatt
      hours(1))Residential
            
            
            538.5
            
            
            
            538.5
            
            
            
            -
            
            
            
            -Commercial
            
            
            473.7
            
            
            
            459.1
            
            
            
            14.6
            
            
            
            3.2Industrial
            
            
            543.1
            
            
            
            407.3
            
            
            
            135.8
            
            
            
            33.3Other
            
            
            26.5
            
            
            
            24.1
            
            
            
            2.4
            
            
            
            10.01,581.8
            
            
            
            1,429.0
            
            
            
            152.8
            
            
            
            10.7





(1)
            The
      GWh sales reported above include 395.0 and 473.0 GWhs for the three months
      ended March 31, 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 higher per-customer usage, partially offset by
milder temperatures, resulted 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.





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





Operational
costs include costs for materials and supplies, self-insurance, depreciation 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.





72








PNM
Gas





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





Three
      Months Ended March 31,2008
            
            
            2007
            
            
            Change
            
            
            %(In
      millions)Total
      operating revenues
            
            $
            220.5
            
            
            $
            216.5
            
            
            $
            4.0
            
            
            
            1.8Cost
      of energy
            
            
            160.8
            
            
            
            161.7
            
            
            
            (0.9
            )
            
            
            (0.6
            )Gross
      margin
            
            
            59.6
            
            
            
            54.8
            
            
            
            4.8
            
            
            
            8.8Operating
      expenses
            
            
            21.4
            
            
            
            23.3
            
            
            
            (2.1
            )
            
            
            (9.0
            )Depreciation
      and amortization
            
            
            -
            
            
            
            5.6
            
            
            
            (5.6
            )
            
            
            (100.0
            )Operating
      income
            
            
            38.2
            
            
            
            25.9
            
            
            
            12.3
            
            
            
            47.5Interest
      income
            
            
            0.9
            
            
            
            1.0
            
            
            
            (0.1
            )
            
            
            (10.0
            )Other
      income (deductions)
            
            
            -
            
            
            
            0.1
            
            
            
            (0.1
            )
            
            
            (100.0
            )Net
      interest charges
            
            
            (3.0
            )
            
            
            (2.9
            )
            
            
            (0.1
            )
            
            
            3.4Earnings
      before income taxes
            
            
            36.2
            
            
            
            24.0
            
            
            
            12.2
            
            
            
            50.8Income
      taxes
            
            
            13.7
            
            
            
            9.5
            
            
            
            4.2
            
            
            
            44.2Segment
      earnings
            
            $
            22.5
            
            
            $
            14.5
            
            
            $
            8.0
            
            
            
            55.2





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





2008/2007
      ChangeEarnings
      (Loss)Before
            
            
            SegmentTotal
            
            
            Gross
            
            
            Income
            
            
            EarningsRevenues
            
            
            Margin
            
            
            Taxes
            
            
            (Loss)Gas
      prices
            
            $
            (7.9
            )
            
            $
            -
            
            
            $
            -
            
            
            $
            -Rate
      increase
            
            
            3.4
            
            
            
            3.4
            
            
            
            3.4
            
            
            
            2.1Retail
      growth/weather
            
            
            10.5
            
            
            
            1.5
            
            
            
            1.5
            
            
            
            0.9Off-system
      activities
            
            
            (1.6
            )
            
            
            (0.1
            )
            
            
            (0.1
            )
            
            
            (0.1
            )Operational
      costs
            
            
            -
            
            
            
            -
            
            
            
            1.9
            
            
            
            1.1Discontinuation
      of depreciation on assets
            
            
            -
            
            
            
            -
            
            
            
            5.6
            
            
            
            3.4Other
            
            
            (0.4
            )
            
            
            -
            
            
            
            -
            
            
            
            0.6Total
      increase (decrease)
            
            $
            4.0
            
            
            $
            4.8
            
            
            $
            12.3
            
            
            $
            8.0








73








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 March 31,2008
            
            
            2007
            
            
            Change
            
            
            %(In
      millions, except customers)Residential
            
            $
            156.7
            
            
            $
            152.3
            
            
            $
            4.4
            
            
            
            2.9Commercial
            
            
            44.6
            
            
            
            45.2
            
            
            
            (0.6
            )
            
            
            (1.3
            )Industrial
            
            
            0.8
            
            
            
            0.6
            
            
            
            0.2
            
            
            
            33.3Transportation(1)
            
            
            6.1
            
            
            
            5.0
            
            
            
            1.1
            
            
            
            22.0Other
            
            
            12.3
            
            
            
            13.4
            
            
            
            (1.1
            )
            
            
            (8.2
            )$
            220.5
            
            
            $
            216.5
            
            
            $
            4.0
            
            
            
            1.8Average
      customers (thousands)
            
            
            498.0
            
            
            
            492.0
            
            
            
            6.0
            
            
            
            1.2





(1)
            Customer-owned
      gas.





The
following table shows PNM Gas throughput by customer class:





Three
      Months Ended March 31,2008
            
            
            2007
            
            
            Change
            
            
            %(Thousands
      of Decatherms)Residential
            
            
            14,287.5
            
            
            
            13,944.1
            
            
            
            343.4
            
            
            
            2.5Commercial
            
            
            4,594.1
            
            
            
            4,634.4
            
            
            
            (40.3
            )
            
            
            (0.9
            )Industrial
            
            
            91.9
            
            
            
            63.1
            
            
            
            28.8
            
            
            
            45.6Transportation(1)
            
            
            11,376.5
            
            
            
            10,799.7
            
            
            
            576.8
            
            
            
            5.3Other
            
            
            1,032.7
            
            
            
            1,325.6
            
            
            
            (292.9
            )
            
            
            (22.1
            )31,382.7
            
            
            
            30,766.9
            
            
            
            615.8
            
            
            
            2.0





(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 first quarter of 2007 totaled $1.7
million.  Beginning in 2008, these costs were reallocated among all
PNMR business segments.





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 and an overall increase in the average usage per customer 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.





Reduced
off-system activity decreased revenues and slightly decreased gross margin, as
the decreases in revenues were largely offset by the decreases in costs for the
transactions.





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.





74


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 $5.3 million would have been recorded
in the three months ended March 31, 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 ended March 31, 2007, but
not in 2008.





First
Choice





The table
below summarizes the operating results for First Choice:





Three
      Months Ended March 31,2008
            
            
            2007
            
            
            Change
            
            
            %(In
      millions)Total
      operating revenues
            
            $
            84.2
            
            
            $
            135.6
            
            
            $
            (51.4
            )
            
            
            (37.9
            )Cost
      of energy
            
            
            105.3
            
            
            
            110.8
            
            
            
            (5.5
            )
            
            
            (5.0
            )Gross
      margin
            
            
            (21.1
            )
            
            
            24.7
            
            
            
            (45.8
            )
            
            
            (185.4
            )Operating
      expenses
            
            
            15.5
            
            
            
            15.2
            
            
            
            0.3
            
            
            
            2.0Depreciation
      and amortization
            
            
            0.5
            
            
            
            0.5
            
            
            
            -
            
            
            
            -Operating
      income (loss)
            
            
            (37.0
            )
            
            
            9.1
            
            
            
            (46.1
            )
            
            
            (506.6
            )Interest
      income
            
            
            0.5
            
            
            
            0.5
            
            
            
            -
            
            
            
            -Other
      income (deductions)
            
            
            (0.1
            )
            
            
            -
            
            
            
            (0.1
            )
            
            
            -Net
      interest charges
            
            
            (0.3
            )
            
            
            (0.1
            )
            
            
            (0.2
            )
            
            
            200.0Earnings
      (loss) before income taxes
            
            
            (36.9
            )
            
            
            9.4
            
            
            
            (46.3
            )
            
            
            (492.6
            )Income
      taxes (benefit)
            
            
            (12.8
            )
            
            
            3.6
            
            
            
            (16.4
            )
            
            
            (455.6
            )Segment
      earnings (loss)
            
            $
            (24.1
            )
            
            $
            5.9
            
            
            $
            (30.0
            )
            
            
            (508.5
            )








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





Three
      Months Ended March 31, 2008Earnings
      (Loss)Before
            
            
            SegmentTotal
            
            
            Gross
            
            
            Income
            
            
            EarningsRevenues
            
            
            Margin
            
            
            Taxes
            
            
            (Loss)Usage/weather
            
            $
            (7.9
            )
            
            $
            (3.7
            )
            
            $
            (3.7
            )
            
            $
            (2.4
            )Retail
      margins
            
            
            1.6
            
            
            
            (3.3
            )
            
            
            (3.3
            )
            
            
            (2.1
            )Trading
      margin
            
            
            (47.3
            )
            
            
            (47.3
            )
            
            
            (47.3
            )
            
            
            (30.5
            )Unrealized
      economic hedges
            
            
            2.2
            
            
            
            8.5
            
            
            
            8.5
            
            
            
            5.5Operational
      costs
            
            
            -
            
            
            
            -
            
            
            
            (0.3
            )
            
            
            (0.3
            )Other
            
            
            -
            
            
            
            -
            
            
            
            (0.2
            )
            
            
            (0.2
            )Total
      increase (decrease)
            
            $
            (51.4
            )
            
            $
            (45.8
            )
            
            $
            (46.3
            )
            
            $
            (30.0
            )





75








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





Three
      Months Ended March 31,2008
            
            
            2007
            
            
            Change
            
            
            %(In
      millions, except customers)Residential
            
            $
            76.7
            
            
            $
            85.6
            
            
            $
            (8.9
            )
            
            
            (10.4
            )Mass-market
            
            
            15.9
            
            
            
            16.2
            
            
            
            (0.3
            )
            
            
            (1.9
            )Mid-market
            
            
            35.6
            
            
            
            30.9
            
            
            
            4.7
            
            
            
            15.2Trading
      gains (losses)
            
            
            (47.1
            )
            
            
            0.2
            
            
            
            (47.3
            )
            
            
            N/MOther
            
            
            3.1
            
            
            
            2.7
            
            
            
            0.4
            
            
            
            14.8$
            84.2
            
            
            $
            135.6
            
            
            $
            (51.4
            )
            
            
            (37.9
            )Actual
      customers (thousands) (1,2)
            
            
            257.1
            
            
            
            256.9
            
            
            
            0.2
            
            
            
            0.1





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





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





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





Three
      Months Ended March 31,2008
            
            
            2007
            
            
            Change
            
            
            %(Gigawatt
      hours) (1)Residential
            
            
            563.7
            
            
            
            614.9
            
            
            
            (51.2
            )
            
            
            (8.3
            )Mass-market
            
            
            94.9
            
            
            
            100.3
            
            
            
            (5.4
            )
            
            
            (5.4
            )Mid-market
            
            
            278.8
            
            
            
            263.6
            
            
            
            15.2
            
            
            
            5.8Other
            
            
            4.4
            
            
            
            5.2
            
            
            
            (0.8
            )
            
            
            (15.4
            )941.8
            
            
            
            984.0
            
            
            
            (42.2
            )
            
            
            (4.3
            )





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





Milder weather, along with
changing customer mix in 2008 compared with 2007, resulted in lower sales
volumes and reduced segment earnings for the first quarter of
2008.An increase in the average 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.  Gains on unrealized economic hedges in the
current period 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
first quarter, a decrease in trading margins from a $0.2 million gain in 2007 to
a $47.1 million loss in 2008 resulted in an after-tax $30.5 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.  These trades were negatively affected by
extreme transmission congestion within the ERCOT market during the first
quarter.  This congestion resulted in historically high basis
positions between the various delivery zones.  As a result, First
Choice incurred pre-tax cash-settled losses of $13.0 million and incurred
unrealized losses of $34.1 million on its remaining forward
positions.  Because of continued market volatility and the concern
that the forward basis market would continue to deteriorate, First Choice is in the process of
closing out its speculative positions andhas ended any further
speculative trading.





Operational
costs include costs for customer acquisition and service, as well as shared
services, employee labor, pension, and benefits.  In 2008 compared to
2007, increased costs associated with customer service operations were partially
offset by a decrease in incentive-based compensation.





76





Corporate
and Other





2008/2007
      ChangeTotal
      Revenues
            
            
            Gross
      Margin
            
            
            Earnings
      (Loss) Before Income Taxes
            
            
            Segment
      Earnings (Loss)(In
      millions)Intercompany
      eliminations
            
            $
            2.1
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Equity
      in earnings of EnergyCo
            
            
            -
            
            
            
            -
            
            
            
            (24.4
            )
            
            
            (14.7
            )Business
      improvement plan
            
            
            -
            
            
            
            -
            
            
            
            (2.2
            )
            
            
            (1.3
            )EnergyCo
      formation costs
            
            
            -
            
            
            
            -
            
            
            
            1.2
            
            
            
            0.7Other
            
            
            -
            
            
            
            -
            
            
            
            0.1
            
            
            
            (1.0
            )Total
      increase  (decrease)
            
            $
            2.1
            
            
            $
            -
            
            
            $
            (25.3
            )
            
            $
            (16.3
            )





The
Corporate and Other Segment includes eliminations of revenue and expense between
TNMP Electric and FCP.  In 2007, PNMR incurred costs associated with
the formation of EnergyCo, which are included in the corporate and other
segment.  Corporate and other results also include earnings (loss)
associated with EnergyCo.  Further explanation of equity in earnings
(loss) of EnergyCo is shown below.  As part of the business
improvement plan to reduce costs and improve processes in future years, initial
costs to achieve these savings such as severance and consulting charges were
incurred in 2008.  PNMR also incurred increased interest expense in
2008 due to higher short-term borrowings partially offset by lower interest
rates.





EnergyCo





The table
below summarizes the operating results for EnergyCo:





Three
      Months Ended March 31,
            
            
            
            2008/20072008
            
            
            2007
            
            
            Change(In
      millions)Total
      operating revenues
            
            $
            174.1
            
            
            $
            -
            
            
            $
            174.1Cost
      of energy
            
            
            197.2
            
            
            
            -
            
            
            
            197.2Gross
      margin
            
            
            (23.1
            )
            
            
            -
            
            
            
            (23.1
            )Operating
      expenses
            
            
            14.4
            
            
            
            1.3
            
            
            
            13.1Depreciation
      and amortization
            
            
            7.6
            
            
            
            -
            
            
            
            7.6Operating
      income (loss)
            
            
            (45.1
            )
            
            
            (1.3
            )
            
            
            (43.8
            )Other
      income
            
            
            0.3
            
            
            
            -
            
            
            
            0.3Net
      interest charges
            
            
            (6.6
            )
            
            
            -
            
            
            
            (6.6
            )Earnings
      (loss) before income taxes
            
            
            (51.4
            )
            
            
            (1.3
            )
            
            
            (50.1
            )Income
      tax (benefit) on margin
            
            
            (0.4
            )
            
            
            -
            
            
            
            (0.4
            )Net
      earnings (loss)
            
            $
            (51.0
            )
            
            $
            (1.3
            )
            
            $
            (49.7
            )50
      percent of net earnings (loss)
            
            $
            (25.5
            )
            
            $
            (0.7
            )
            
            $
            (24.8
            )Plus
      amortization of basis difference in EnergyCo
            
            
            0.4
            
            
            
            -
            
            
            
            0.4PNMR
      Equity in net earnings (loss) of EnergyCo
            
            $
            (25.1
            )
            
            $
            (0.7
            )
            
            $
            (24.4
            )








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’ 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 significant market
value.  Amortization related to out of market contracts increased the






77




above
total operating revenues by $1.3 million for the three months ended March 31,
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 $4.1 million
of amortization related to emission allowances acquired in the transactions for
the three months ended March 31, 2008.  The amortizations for emission
allowances are recorded as the allowances are used in plant operations, sold or
expire.





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.





Results
of operations for EnergyCo for the three months ended March 31, 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 quarter 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 three months ended March
31, 2007 only reflect start-up costs.





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 ended March 31, 2008, the basis
difference adjustment detailed above of $0.4 million relates mainly to contract
amortization with insignificant offsets related to the other minor basis
difference components.





LIQUIDITY
AND CAPITAL RESOURCES





Statements
of Cash Flows





The
changes in PNMR’s cash flows for the three months ended March 31, 2008 compared
to 2007 are summarized as follows:





Three
      Months Ended March 31,2008
            
            
            2007
            
            
            Change(In
      millions)Net
      cash flows from operating activities
            
            $
            24.7
            
            
            $
            43.6
            
            
            $
            (18.9
            )Net
      cash flows from investing activities
            
            
            (67.9
            )
            
            
            (76.1
            )
            
            
            8.2Net
      cash flows from financing activities
            
            
            53.2
            
            
            
            (45.9
            )
            
            
            99.1Net
      change in cash and cash equivalents
            
            $
            10.0
            
            
            $
            (78.4
            )
            
            $
            88.4





The
change in PNMR’s cash flows from operating activities reflects higher generation
and purchased power costs combined with lower plant availability. 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
changes in cash flows from investing activities relates primarily to less cash
used for utility plant additions in 2008 compared to 2007 when the expansion of
the Afton plant and corporate software upgrades impacted cash
flows.





78


The
changes in cash flows from financing activities relate primarily to higher
short-term borrowings in 2008 to fund construction expenditures compared to
repayments in 2007 of short-term debt related to financing the acquisition of
Twin Oaks in 2006. In addition, fewer exercises of stock awards in 2008 resulted
in fewer purchases of common stock to satisfy awards which also contributed to
the change.





Capital
Requirements





Total
capital requirements consist of construction expenditures and cash dividend
requirements for both common and preferred stock.  The main focus of
PNMR’s current construction program is upgrading generation resources, including
pollution control equipment, upgrading and expanding the electric and gas
transmission and distribution systems, and purchasing nuclear
fuel.  Projections, including amounts expended through March 31, 2008,
for total capital requirements for 2008 are $453.4 million, including
construction expenditures of $377.9 million.  Total capital
requirements for the years 2008-2012 are projected to be $2,102.0 million,
including construction expenditures of $1,689.1 million.  This
projection includes $84.3 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.





During
the first three months of 2008, the Company utilized cash generated from
operations and cash on hand, as well as its liquidity arrangements, to meet its
capital requirements and construction expenditures.  PNM received $2.6
million from draws under its $20 million of PRCBs issued by the City of
Farmington, New Mexico during the three months ended March 31,
2008.





On
February 26, 2008, the Board of Directors of TNMP authorized TNMP to enter into
a $150 million short-term loan agreement with two banks.  This term
loan credit facility was executed on March 7, 2008.  On April 9, 2008,
TNMP borrowed $150 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 plans to ultimately replace the
$150 million short-term bank loan, which is due on October 9, 2008, by issuing
long-term debt in the form of additional senior unsecured notes.





PNMR and
PNM have an aggregate of $462.0 million and $340.0 million of borrowings under
revolving credit facilities and TNMP has $150.0 million of short-term debt,
excluding inter-company borrowings, which matures October 9, 2008, as of April
30, 2008.  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 $347.3 million in the debt components of
its equity-linked units that mature in 2010, but as discussed below, the debt
components of the equity-linked units will be remarketed in 2008 and the
maturities may be extended if the remarketings are successful.  PNMR
and its subsidiaries have no other debt that comes due prior to 2016, except for
$13.2 million that is due in installments through 2013.





As discussed in Note 11,
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.PNMR
currently anticipates that the remaining amounts for financing the
co-development will be obtained from EnergyCo’s credit facility.  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
required or, if required, the amount or timing of additional funds that would be
provided to EnergyCo.





PNMR’s
equity-linked units contain mandatory obligations under which the holders are
required to purchase for cash, $247.3 million of PNMR equity securities in May
2008 and $100.0 million 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 May 9, 2008 for the publicly held units and August
16, 2008 for the privately held units.  The maturity dates may be
extended in the remarketings and the interest rate will be reset to a level
designed to achieve a successful remarketing of the notes.  If the
remarketings are successful, PNMR would receive $347.3 million in cash for its
equity securities and the debt would continue to mature in 2010, or such later
date established in the remarketings.  If the remarketings are
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 remarketings will be successful.







79


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. In a separate transaction that is conditioned upon the sale of the
natural gas operations, PNMR will acquire the Texas electric distribution and
transmission business of the purchaser of the gas operations for $202.5 million
in cash.  The parties may terminate the agreements under certain
circumstances.  PNMR expects to use the net after-tax proceeds of
these transactions 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 equity-linked units, the transactions described
above, and its internal cash generation, the Company anticipates that it will be
necessary to obtain additional long-term financing in the form of debt
refinancing, new debt 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 April
30, 2008, the Company had short-term debt outstanding of $952.0
million.  In addition, the Company has scheduled maturities of
long-term debt aggregating $470.3 million prior to March 31,
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 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





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





PNMR has
a commercial paper program under which it may issue commercial paper for up to
270 days and PNM has a commercial paper program under which it may issue
commercial paper for up to 365 days.  The commercial paper is
unsecured and the proceeds are used for short-term cash management
needs.  The PNMR Facility and the PNM Facility serve as support for
the outstanding commercial paper.  Operationally, this means the
aggregate borrowings under the commercial paper program and the revolving credit
facility for each of PNMR and PNM cannot exceed the maximum amount of that
entity’s revolving credit facility.





80








A summary
of these arrangements as of April 30, 2008 is as follows:




PNMR
              
              
              PNM
              
              
              TNMP
              
              
              PNMRSeparate
              
              
              Separate
              
              
              Separate
              
              
              Consolidated(In
      millions)Financing
      Capacity:Revolving
      credit facility
              
              $
              600.0
              
              
              $
              400.0
              
              
              $
              -
              
              
              $
              1,000.0Local
      lines of credit
              
              
              15.0
              
              
              
              13.5
              
              
              
              -
              
              
              
              28.5Term
      loan credit facility
              
              
              -
              
              
              
              -
              
              
              
              150.0
              
              
              
              150.0Total
      financing capacity
              
              $
              615.0
              
              
              $
              413.5
              
              
              $
              150.0
              
              
              $
              1,178.5Commercial
      paper program maximum
              
              $
              400.0
              
              
              $
              300.0
              
              
              $
              -
              
              
              $
              700.0Amounts
      outstanding as of April 30, 2008:Commercial
      paper program
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -Revolving
      credit facility
              
              
              462.0
              
              
              
              340.0
              
              
              
              -
              
              
              
              802.0Local
      lines of credit
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Term
      loan credit facility
              
              
              -
              
              
              
              -
              
              
              
              150.0
              
              
              
              150.0Total
      short-term debt outstanding
              
              
              462.0
              
              
              
              340.0
              
              
              
              150.0
              
              
              
              952.0Letters
      of credit
              
              
              86.4
              
              
              
              14.8
              
              
              
              -
              
              
              
              101.2Total
      short term-debt and letters of credit
              
              $
              548.4
              
              
              $
              354.8
              
              
              $
              150.0
              
              
              $
              1,053.2Remaining
      availability as of April 30, 2008
              
              $
              66.6
              
              
              $
              58.7
              
              
              $
              -
              
              
              $
              125.3Cash
      balances as of April 30, 2008
              
              $
              29.8
              
              
              $
              49.0
              
              
              $
              -
              
              
              $
              78.8


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.  Between
January 1, 2008 and April 30, 2008, availability averaged $185.4 million under
the PNMR Facility and $89.9 million under the PNM Facility.  During
the same period, cash balances averaged $8.8 million at PNMR (parent company
only) and $23.3 million at PNM .





On May 1,
2008, PNMR announced that PNM entered into a binding commitment for a delayed
draw term loan facility that matures April 30, 2009 in an aggregate principal
amount of up to $300.0 million and that PNM entered into a binding commitment
for a 364 day letter of credit facility in an aggregate principal amount of up
to $100.0 million.  On that same day, PNMR announced that TNMP has entered
into a binding commitment for a revolving credit facility currently in an
aggregate principal amount of up to $80.0 million and is in the process of
syndicating additional amounts. On May 5, 2008, the loan agreement for PNM’s
delayed draw term loan facility was executed.  Each of the remaining
commitments is subject to conditions and final documentation.




PNMR has
an effective universal shelf registration statement for the issuance of debt
securities and equity securities, preferred stock, purchase contracts, purchase
contract units and warrants.  As of April 30, 2008, PNMR had
approximately $400.0 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.





81








PNMR
offers new shares of PNMR common stock through the plan and an equity
distribution agreement.  The equity distribution agreement is
currently suspended.  From January 1, 2008 through April 30, 2008,
PNMR had sold a total of 90,106 shares of its common stock through the PNMR
Direct Plan for net proceeds of $1.2 million.





PNM has
an effective universal shelf registration statement for the issuance of debt
securities and preferred stock.  As of April 30, 2008, PNM had $200.0
million of remaining unissued securities registered under this shelf
registration statement.  In addition, in April 2008, PNM filed a new
shelf registration statement for the issuance of debt securities that was
declared effective on April 29, 2008.  As of April 30, 2008, PNM had
the entire $750.0 million of remaining unissued securities registered under this
shelf registration statement.





The
Company’s ability, if required, to access the capital markets at a reasonable
cost and to provide for other capital needs is largely dependent upon its
ability to earn a fair return on equity, its results of operations, its credit
ratings, its ability to obtain required regulatory approvals and conditions in
the financial 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 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.  The ratings actions have increased short-term borrowing
costs for PNMR and PNM; could increase long-term borrowing costs for PNMR, PNM,
and TNMP, required the posting of approximately $16 million of letters of credit
or other collateral 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 April 30, 2008, ratings on the
Company’s securities were as follows:





PNMR
            
            PNM
            
            TNMPS&PSenior
      unsecured notes
            BB
            
            BB+
            
            BB+Commercial
      paper
            B-1
            
            B-1
            
            *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.   Each of the
units consists 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.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.





82


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 $16
million.  Based on additional credit facilities entered into by PNM
and commitments for additional facilities received by both PNM and TNMP, the
Company believes its financing arrangements are sufficient to meet the
requirements of the contingent provisions.





Capital
Structure





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








March
      31,
            
            
            December
      31,2008
            
            
            2007PNMRCommon
      equity
            
            
            48.9
            %
            
            
            50.0
            %Preferred
      stock of subsidiary
            
            
            0.3
            %
            
            
            0.3
            %Long-term
      debt
            
            
            50.8
            %
            
            
            49.7
            %Total
      capitalization
            
            
            100.0
            %
            
            
            100.0
            %





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





TNMPCommon
      equity
            
            
            58.0
            %
            
            
            57.8
            %Long-term
      debt
            
            
            42.0
            %
            
            
            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 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 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.






83





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 July 2008.  Reflecting the developing nature
of this issue, the NMPRC order states that these prices may be changed in the
future to account for additional information or changed
circumstances.   The Company is required, however, to use these
prices for planning purposes, and the prices may not reflect the costs that it
ultimately will incur.





On February
26, 2007 five western states (Arizona, California, New Mexico, Oregon and
Washington) entered into an accord, called the Western Regional Climate Action
Initiative (the “WCI”), to reduce GHG emissions from automobiles and certain
industries, including utilities.  Since then, Utah, British Columbia
and Manitoba have joined 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.  Currently, the WCI is in the process of developing the
design elements for a regional cap and trade program for the seven participating
states and two Canadian provinces.   A final recommendation on
the design of the regional cap and trade program will be completed by August
2008.  No determination has been made as to which states and provinces
will ultimately participate or the effective date of the WCI cap and trade
program. The Company is monitoring the WCI.





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
March 31, 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.





84





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, including
      PNM’s pending application for an emergency fuel adjustment
      clause,
 ·
              The
      risk that the closings of the pending sales of the PNM natural gas utility
      and certain wholesale electricity, natural gas and transmission contracts,
      and the pending purchase of certain Continental subsidiaries may not occur
      due to regulatory or other reasons,
 ·
              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,
 ·
              Collections
      experience,
 ·
              Insurance
      coverage available for claims made in
  litigation,
 ·
              Fluctuations
      in interest rates,
 ·
              Weather,
 ·
              Water
      supply,
 ·
              Changes
      in fuel costs,
 ·
              Availability
      of fuel supplies,
 ·
              The
      effectiveness of risk management and commodity risk
      transactions,
 ·
              Seasonality
      and other changes in supply and demand in the market for electric
      power,
 
  85
 
 ·
              Variability
      of wholesale power prices and natural gas
  prices,
 ·
              Volatility
      and liquidity in the wholesale power markets and the natural gas
      markets,
 ·
              Changes
      in the competitive environment in the electric and natural gas
      industries,
 ·
              The
      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 PNM’s pending gas rate case
      appeal,
 ·
              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, including commercial paper described in this report, have not been
registered under the Securities Act of 1933, as amended, or any state securities
laws and may not be reoffered or sold in the United States absent registration
or an applicable exemption from the registration requirements of the Securities
Act of 1933 and applicable state securities laws.  This Form 10-Q does
not constitute an offer to sell or the solicitation of an offer to buy any
securities.





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 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).





86




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 differently 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 that lock
in margin and do not have forward market risk.  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, PNMR is exposed to risks related to
fluctuations in the market price of energy that could impact the sales price or
purchase price of energy.  In 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.





87





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.





March
      31, 2008(In
      thousands)Trading
            
            
            Economic
              Hedges
            
            
            TotalMark-to-market
      energy contracts:Current
      asset
            
            $
            105,692
            
            
            $
            124,783
            
            
            $
            230,475Long-term
      asset
            
            
            13,608
            
            
            
            2,467
            
            
            
            16,075Total
      mark-to-market assets
            
            
            119,300
            
            
            
            127,250
            
            
            
            246,550Current
      liability
            
            
            (139,362
            )
            
            
            (106,416
            )
            
            
            (245,778
            )Long-term
      liability
            
            
            (12,914
            )
            
            
            (61
            )
            
            
            (12,975
            )Total
      mark-to-market liabilities
            
            
            (152,276
            )
            
            
            (106,477
            )
            
            
            (258,753
            )Net
      fair value of mark-to-market energy contracts
            
            $
            (32,976
            )
            
            $
            20,773
            
            
            $
            (12,203
            )





December
      31, 2007(In
      thousands)Trading
            
            
            Economic
              Hedges
            
            
            TotalMark-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.








88





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





March
      31, 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
            
            
            (8,898
            )
            
            
            863
            
            
            
            (8,035
            )Changes
      in fair value
            
            
            (25,689
            )
            
            
            15,572
            
            
            
            (10,117
            )Net
      change recorded as mark-to-market
            
            
            (34,587
            )
            
            
            16,435
            
            
            
            (18,152
            )Unearned/prepaid
      option premiums
            
            
            3,188
            
            
            
            221
            
            
            
            3,409Net
      fair value at end of period
            
            $
            (32,976
            )
            
            $
            20,773
            
            
            $
            (12,203
            )








March
      31, 2007
              Mark-to-market
      instrumentsTrading
            
            
            Economic
              Hedges
            
            
            Total(In
      thousands)Sources
      of fair value gain (loss):Fair
      value at beginning of year
            
            $
            926
            
            
            $
            2,540
            
            
            $
            3,466Amount
      realized on contracts delivered during period
            
            
            1,924
            
            
            
            (1,425
            )
            
            
            499Changes
      in fair value
            
            
            769
            
            
            
            2,527
            
            
            
            3,296Net
      change recorded as mark-to-market
            
            
            2,693
            
            
            
            1,102
            
            
            
            3,795Net
      fair value at end of period
            
            $
            3,619
            
            
            $
            3,642
            
            
            $
            7,261





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 March 31,
2008





Less
      than1
      year
            
            
            1-3
      Years
            
            
            4+
      Years
            
            
            Total(In
      thousands)Trading
            
            $
            (33,670
            )
            
            $
            694
            
            
            $
            -
            
            
            $
            (32,976
            )Economic
      hedges
            
            
            18,367
            
            
            
            374
            
            
            
            2,032
            
            
            
            20,773Total
            
            $
            (15,303
            )
            
            $
            1,068
            
            
            $
            2,032
            
            
            $
            (12,203
            )








89





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





Three
      Months EndedMarch
      31,2008
            
            
            2007Type
      of Derivative
            
            Hedge
      Instruments(In
      thousands)Change
      in fair value of energy contracts
            
            $
            (5,994
            )
            
            $
            (35,718
            )Change
      in fair value of gas fixed for float swaps
            
            
            3,172
            
            
            
            8,118Change
      in the fair value of options
            
            
            3,115
            
            
            
            109Net
      change in fair value
            
            $
            293
            
            
            $
            (27,491
            )





As of
March 31, 2008, PNMR had $32.9 million of net derivative assets and liabilities
measured using Level 3 inputs (as defined in SFAS 157); the fair value of these
net assets and liabilities is 27% of PNMR’s total fair value net asset and
liability positions.  Material increases in PNMR’s Level 3
transactions were primarily related to the $16.4 million, pre-tax inception
gains included as an adjustment to January 1, 2008 retained earnings for the
adoption of SFAS 157 and $15.2 million unrealized gains included in
earnings.  Most unrealized gains on Level 3 transactions relate to
transactions, which are included in the negotiated sale of wholesale contracts
described in Note 4.





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 three months ended March 31, 2008, the average
VaR amount for these transactions was $0.1 million with high and low VaR amounts
for the period of $0.6 million and $0.0 million.  The VaR amount for
these transactions at March 31, 2008 was $0.6 million.  For the three
months ended March 31, 2007, the average VaR amount for these transactions was
$2.0 million with high and low VaR amounts for the period of $3.5 million and
$0.8 million.  The total VaR amount for these transactions at March
31, 2007 was $3.5 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






90




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
three months ended March 31, 2008, the average EaR amount was $25.8 million,
with high and low EaR amounts for the period of $44.3 million and $19.3
million.  The total EaR amount at March 31, 2008 was $20.3
million.  For the three months ended March 31, 2007, the average EaR
amount for these transactions was $15.5 million, with high and low EaR amounts
for the period of $20.5 million and $9.3 million.  The total EaR
amount for these transactions at March 31, 2007 was $16.3 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 $6.4 million at
March 31, 2008.  For the three months ended March 31, 2008, the high,
low and average mark-to-market VaR amounts were $12.1 million, $4.5 million and
$7.1 million.  The VaR amount for these transactions was $4.9 million
at March 31, 2007.  For the three months ended March 31, 2007, the
high, low and average mark-to-market VaR amounts were $6.2 million, $2.1 million
and $4.5 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 three-day holding period
and utilizes the same Monte Carlo simulation approach described above at a 95%
confidence level.  The VaR amount for these transactions was $1.9
million at March 31, 2008.  For the three months ended March 31, 2008,
the high, low and average mark-to-market VaR amounts were $3.5 million, $1.0
million and $1.6 million.  The VaR amount for these transactions was
$1.9 million at March 31, 2007.  For the three months ended March 31,
2007, the high, low and average mark-to-market VaR amounts were $2.4 million,
$0.7 million and $1.7 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
March 31, 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.





91








PNMR


Schedule
of Credit Risk Exposure


March
31, 2008





Net(b)
            
            
            Number
            
            
            ExposureNet
            
            
            of
            
            
            ofCredit
            
            
            Counter
            
            
            Counter-Risk
            
            
            -parties
            
            
            partiesRating
      (a)
            
            Exposure
            
            
            >10%
            
            
            >10%(Dollars
      in thousands)External
      ratings:Investment
      grade
            
            $
            198,273
            
            
            
            3
            
            
            $
            139,821Non-investment
      grade
            
            
            849
            
            
            
            -
            
            
            
            -Split
      Rating
            
            
            2,169
            
            
            
            -
            
            
            
            -Internal
      ratings:Investment
      grade
            
            
            1
            
            
            
            -
            
            
            
            -Non-investment
      grade
            
            
            3,846
            
            
            
            -
            
            
            
            -Total
            
            $
            205,138
            
            
            
            
            
            
            $
            139,821





(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


March
31, 2008





Greater
            
            
            TotalLess
      than
            
            
            
            
            
            than
            
            
            NetRating
            
            2
      Years
            
            
            2-5
      Years
            
            
            5
      Years
            
            
            Exposure(In
      thousands)External
      ratings:Investment
      grade
            
            $
            126,895
            
            
            $
            58,599
            
            
            $
            12,779
            
            
            $
            198,273Non-investment
      grade
            
            
            849
            
            
            
            -
            
            
            
            -
            
            
            
            849Split
            
            
            2,169
            
            
            
            -
            
            
            
            -
            
            
            
            2,169Internal
      ratings:Investment
      grade
            
            
            1
            
            
            
            -
            
            
            
            -
            
            
            
            1Non-investment
      grade
            
            
            3,846
            
            
            
            -
            
            
            
            -
            
            
            
            3,846Total
            
            $
            133,760
            
            
            $
            58,599
            
            
            $
            12,779
            
            
            $
            205,138





The
Company provides for losses due to market and credit risk.  Credit
risk for PNMR's largest counterparty as of March 31, 2008 and December 31, 2007
was $84.0 million and $77.2 million.





92





Interest
Rate Risk





PNMR’s
debt issued as part of the equity-linked units sold in March 2005 will be
remarketed beginning May 9, 2008 and debt issued as part of the equity-linked
units sold in October 2005 will be remarketed beginning August 16,
2008.  The maturity dates may be extended in the remarketings and the
interest rate will be reset to a level designed to achieve a successful
remarketing of the notes.If the remarketings of the
debt are 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.  There has
also been an overall deterioration of the credit markets in general. Although
there can be no assurance, PNMR believes the remarketings 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
1.6%, if interest rates were to decline by 50 basis points from their levels at
March 31, 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.





During
the three months ended March 31, 2008, PNM contributed cash of $1.0 million to
the trust for other post retirement benefits. For the three months ended March
31, 2008, PNM contributed $0.5 million to the NDT.  PNM made no
contributions to the trusts for the pension or executive retirement
plans.  The securities held by these trusts had an estimated fair
value of $662.8 million at March 31, 2008, of which 28.0% 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 March 31, 2008, the decrease in the fair value of the
fixed-rate securities would be 3.3%, or $6.1 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.





During
the three months ended March 31, 2008, TNMP contributed $0.2 million to the
trust for other postretirement benefits.  TNMP made no contributions
to the trust for its pension plan.  The securities held by the trusts
had an estimated fair value of $83.0 million at March 31, 2008, of which 23.7%
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 March 31, 2008, the decrease in the fair
value of the fixed-rate securities would be 4.0%, or $0.8
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
trusts established to fund PNM’s share of the decommissioning costs of PVNGS and
pension and other postretirement benefits hold certain equity securities at
March 31, 2008.  These equity securities also expose the Company to
losses in fair value.  55.1% of the securities held by the various
trusts were equity securities as of March 31, 2008.  Similar to the
debt securities held for funding decommissioning and certain pension and other
postretirement costs, PNM does not recover or earn a return through rates on any
losses or gains on these equity securities.





The
trusts established to fund TNMP’s pension and other postretirement benefits hold
certain equity securities at March 31, 2008.  These equity securities
also expose the Company to losses in fair value.  49.6% of the
securities held by the various trusts were equity securities as of March 31,
2008.  TNMP does not recover or earn a return through rates on any
losses or gains on these equity securities.





93








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.








94





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 March 31, 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 March 31, 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 March 31, 2008, that have materially affected, or are
reasonably likely to materially affect, TNMP’s internal control over financial
reporting.





95





PART
II – OTHER INFORMATION





ITEM
1.  LEGAL PROCEEDINGS





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





·
            Citizen
      Suit Under the Clean Air Act


·
            Navajo
      Nation Environmental Issues


·
            Four
      Corners Federal Implementation Plan
Litigation


·
            Santa
      Fe Generating Station


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


·
            TNMP
      True-Up Proceeding


·
            San
      Juan River Adjudication





ITEM
1A.  RISK FACTORS





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




As of
April 30, 2008, the Company had consolidated short-term debt outstanding of
$952.0 million.  In addition, as of April 30, 2008, PNMR’s
subsidiaries had scheduled maturities of long-term debt aggregating $467.7
million due prior to April 30, 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
$247.3 million of aggregate principal amount of 4.8% senior unsecured notes due
May 16, 2010 and $100.0 million aggregate principal amount of 5.1% senior
unsecured notes due August 1, 2010.  PNMR is obligated to
remarket these notes beginning May 9, 2008 and August 16, 2008,
respectively, and if we cannot remarket the notes, the holders of the notes have
the right to put the notes to us on May 16, 2008 and November 16, 2008 to
satisfy their obligations under the related purchase contracts to purchase PNMR
equity securities from us and we will not receive the $247 million and $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 we
currently believe that internal cash generation, credit arrangements, and access
to capital markets will provide sufficient resources to meet capital
requirements and retire or refinance the senior unsecured notes described above
at maturity.  To cover the difference in the amounts and timing of
cash generation and cash requirements, we intend to use short-term borrowings
under current liquidity arrangements and future liquidity arrangements that we
may enter into.




The
credit ratings for the debt of PNMR, PNM, and TNMP were recently downgraded and
are on watch for further downgrades.  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 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.








96





ITEM
6.  EXHIBITS





10.1
            TNMP
            Term
      Loan Agreement, dated as of March 7, 2008, among TNMP, as borrower, the
      lenders named therein, and JPMorgan Chase Bank, N.A., as administrative
      agent12.1
            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








97





SIGNATURE





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





PNM
      RESOURCES, INC.
              PUBLIC
      SERVICE COMPANY OF NEW MEXICO
              TEXAS-NEW
      MEXICO POWER COMPANY(Registrants)Date:   May
      6, 2008
            /s/
      Thomas G. SategnaThomas
      G. SategnaVice
      President and Corporate Controller(Officer
      duly authorized to sign this
report)