10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2008
Commission	Name of Registrants, State of Incorporation,	I.R.S. Employer
File Number	Address and Telephone Number	Identification No.
001-32462	PNM Resources, Inc.	85-0468296
	(A New Mexico Corporation)
	Alvarado Square
	Albuquerque, New Mexico  87158
	(505) 241-2700
001-06986	Public Service Company of New Mexico	85-0019030
	(A New Mexico Corporation)
	Alvarado Square
	Albuquerque, New Mexico  87158
	(505) 241-2700
002-97230	Texas-New Mexico Power Company	75-0204070
	(A Texas Corporation)
	4100 International Plaza
	P.O. Box 2943
	Fort Worth, Texas  76113
	(817) 731-0099

Indicate by check mark whether 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	4
PART I.  FINANCIAL INFORMATION:
ITEM 1.  FINANCIAL STATEMENTS (Unaudited)
PNM RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)	6
CONDENSED CONSOLIDATED BALANCE SHEETS	7
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS	9
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS’ EQUITY	11
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)	12
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)	13
CONDENSED CONSOLIDATED BALANCE SHEETS	14
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS	16
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDER’S EQUITY	18
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)	19
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS	20
CONDENSED CONSOLIDATED BALANCE SHEETS	21
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS	23
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDER’S EQUITY	25
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME	26
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	27
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	66
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	86
ITEM 4.  CONTROLS AND PROCEDURES	95
PART II.  OTHER INFORMATION
ITEM 1.  LEGAL PROCEEDINGS	96
ITEM 1A.  RISK FACTORS	96
ITEM 6.  EXHIBITS	97
SIGNATURE	98

iii

GLOSSARY

Definitions:
Afton	Afton Generating Station
AG	New Mexico Attorney General
ALJ	Administrative Law Judge
Altura	Altura Power L.P.
APB	Accounting Principles Board
APS	Arizona Public Service Company
BART	Best Available Retrofit Technology
Board	Board of Directors of PNMR
BTU	British Thermal Unit
Cal PX	California Power Exchange
Cal ISO	California Independent System Operator
Cascade	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 Continental
CTC	Competition Transition Charge
Decatherm	Million BTUs
Delta	Delta-Person Limited Partnership
EaR	Earnings at Risk
ECJV	ECJV Holdings, LLC
EEI	Edison Electric Institute
EIP	Eastern Interconnection Project
EITF	Emerging Issues Task Force
EnergyCo	EnergyCo, LLC, a limited liability corporation, owned 50% by each of PNMR and ECJV
EPA	United States Environmental Protection Agency
ERCOT	Electric Reliability Council of Texas
ESPP	Employee Stock Purchase Plan
FASB	Financial Accounting Standards Board
FCPSP	First Choice Power Special Purpose, L.P.
FERC	Federal Energy Regulatory Commission
FIN	FASB Interpretation Number
FIP	Federal Implementation Plan
First Choice	First Choice Power, L. P. and Subsidiaries
Four Corners	Four Corners Power Plant
FPPAC	Fuel and Purchased Power Adjustment Clause
GAAP	Generally Accepted Accounting Principles in the United States of America
GWh	Gigawatt hours
ISO	Independent System Operator
LIBOR	London Interbank Offered Rate
Lordsburg	Lordsburg Generating Station
Luna	Luna Energy Facility
MD&A	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Moody’s	Moody’s Investor Services, Inc.
MW	Megawatt
Navajo Acts	Navajo Nation Air Pollution Prevention and Control Act, the Navajo Nation Safe Drinking Water Act, and the Navajo Nation Pesticide Act
NDT	Nuclear Decommissioning Trusts for PVNGS
Ninth Circuit	United States Court of Appeals for the Ninth Circuit
NMGC	New Mexico Gas Company, a subsidiary of Continental
NMED	New Mexico Environment Department
NMPRC	New Mexico Public Regulation Commission
NOPR	Notice of Proposed Rulemaking
NOX	Nitrogen Oxides
NOI	Notice of Inquiry
NRC	United States Nuclear Regulatory Commission
NSPS	New Source Performance Standards

4

NSR	New Source Review
OATT	Open Access Transmission Tariff
O&M	Operations and Maintenance
PGAC	Purchased Gas Adjustment Clause
PG&E	Pacific Gas and Electric Co.
PNM	Public Service Company of New Mexico and Subsidiaries
PNM Facility	PNM’s $400 Million Unsecured Revolving Credit Facility
PNMR	PNM Resources, Inc. and Subsidiaries
PNMR Facility	PNMR’s $600 Million Unsecured Revolving Credit Facility
PPA	Power Purchase Agreement
PSA	Power Supply Agreement
PSD	Prevention of Significant Deterioration
PUCT	Public Utility Commission of Texas
PVNGS	Palo Verde Nuclear Generating Station
Pyramid	Tri-State Pyramid Unit 4
REC	Renewable Energy Certificates
REP	Retail Electricity Provider
RMC	Risk Management Committee
RTO	Regional Transmission Organization
SCE	Southern Cal Edison Company
SDG&E	San Diego Gas and Electric Company
SEC	United States Securities and Exchange Commission
SFAS	FASB Statement of Financial Accounting Standards
SJCC	San Juan Coal Company
SJGS	San Juan Generating Station
SOAH	State Office of Administrative Hearings
SO2	Sulfur Dioxide
SPS	Southwestern Public Service Company
SRP	Salt River Project
S&P	Standard and Poors Ratings Services
TECA	Texas Electric Choice Act
TNMP	Texas-New Mexico Power Company and Subsidiaries
TNP	TNP Enterprises, Inc. and Subsidiaries
Tri-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 Facility
VaR	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 share amounts)
Operating Revenues:
Electric	$	364,403		$	436,834
Other		100			210
Total operating revenues		364,503			437,044
Operating Expenses:
Cost of energy sold		234,380			216,812
Administrative and general		47,362			58,327
Energy production costs		51,204			47,382
Regulatory disallowances		30,248			-
Depreciation and amortization		34,037			34,841
Transmission and distribution costs		13,376			14,655
Taxes other than income taxes		12,867			16,572
Total operating expenses		423,474			388,589
Operating income (loss)		(58,971	)		48,455
Other Income and Deductions:
Interest income		5,530			9,792
Gains (losses) on investments held by NDT		(3,705	)		44
Other income		890			1,904
Equity in net earnings (loss) of EnergyCo		(25,083	)		(662	)
Other deductions		(3,882	)		(975	)
Net other income and deductions		(26,250	)		10,103
Interest Charges:
Interest on long-term debt		18,908			21,063
Other interest charges		8,927			13,838
Total interest charges		27,835			34,901
Earnings (Loss) before Income Taxes		(113,056	)		23,657
Income Taxes (Benefit)		(42,053	)		8,381
Preferred Stock Dividend Requirements of Subsidiary		132			132
Earnings (Loss) from Continuing Operations		(71,135	)		15,144
Earnings from Discontinued Operations, net of Income
Taxes of $13,655 and $9,517		22,499			14,522
Net Earnings (Loss)	$	(48,636	)	$	29,666
Earnings (Loss) from Continuing Operations per Common Share:
Basic	$	(0.93	)	$	0.20
Diluted	$	(0.93	)	$	0.19
Net Earnings (Loss) per Common Share:
Basic	$	(0.63	)	$	0.39
Diluted	$	(0.63	)	$	0.38
Dividends 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)
ASSETS
Current Assets:
Cash and cash equivalents	$	27,724	$	17,763
Special deposits		2,727		1,717
Accounts receivable, net of allowance for uncollectible accounts of $5,923 and $6,021		125,680		134,325
Unbilled revenues		67,356		74,896
Other receivables		71,567		90,002
Materials, supplies, and fuel stock		42,429		41,312
Regulatory assets		117		157
Derivative instruments		237,398		49,257
Income taxes receivable		40,958		39,189
Current assets of discontinued operations		114,954		120,061
Other current assets		50,549		37,198
Total current assets		781,459		605,877
Other Property and Investments:
Investment in PVNGS lessor notes		180,547		192,226
Equity investment in EnergyCo		201,361		248,094
Investments held by NDT		130,227		139,642
Other investments		43,696		47,749
Non-utility property, net of accumulated depreciation of $1,712 and $1,570		9,533		6,968
Total other property and investments		565,364		634,679
Utility Plant:
Electric plant in service		4,083,907		3,920,071
Common plant in service and plant held for future use		140,217		128,119
		4,224,124		4,048,190
Less accumulated depreciation and amortization		1,480,788		1,464,625
		2,743,336		2,583,565
Construction work in progress		170,217		299,574
Nuclear fuel, net of accumulated amortization of $18,420 and $15,395		59,117		52,246
Net utility plant		2,972,670		2,935,385
Deferred Charges and Other Assets:
Regulatory assets		448,364		481,872
Pension asset		20,149		17,778
Goodwill		495,664		495,664
Other intangible assets, net of accumulated amortization of $3,690 and $3,362		75,564		75,892
Derivative instruments		16,075		45,694
Non-current assets of discontinued operations		535,196		526,539
Other deferred charges		53,096		52,756
Total 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’ EQUITY
Current Liabilities:
Short-term debt	$	737,000		$	665,900
Current installments of long-term debt		619,212			449,219
Accounts payable		159,319			148,955
Accrued interest and taxes		47,395			57,766
Derivative instruments		251,678			53,832
Current liabilities of discontinued operations		63,979			96,003
Other current liabilities		100,585			112,394
Total current liabilities		1,979,168			1,584,069
Long-term Debt		1,064,253			1,231,859
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		571,474			600,187
Accumulated deferred investment tax credits		26,078			26,825
Regulatory liabilities		334,015			332,372
Asset retirement obligations		68,352			66,466
Accrued pension liability and postretirement benefit cost		59,489			60,022
Derivative instruments		13,079			55,206
Non-current liabilities of discontinued operations		90,035			89,848
Other deferred credits		124,947			121,342
Total deferred credits and other liabilities		1,287,469			1,352,268
Total liabilities		4,330,890			4,168,196
Commitments and Contingencies (See Note 9)
Cumulative Preferred Stock of Subsidiary
without mandatory redemption requirements ($100 stated value, 10,000,000 shares authorized:
issued and outstanding 115,293 shares)		11,529			11,529
Common Stockholders’ Equity:
Common stock outstanding (no par value, 120,000,000 shares authorized: issued
and outstanding 76,914,254 and 76,814,491 shares)		1,044,861			1,042,974
Accumulated other comprehensive income (loss), net of income tax		(6,018	)		11,208
Retained earnings		582,339			638,229
Total 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	)	$	29,666
Adjustments to reconcile net earnings (loss) to net cash flows from operating activities:
Depreciation and amortization		39,855			47,772
Deferred income tax expense (benefit)		(24,849	)		14,282
Equity in net (earnings) loss of EnergyCo		25,083			662
Net 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			4,381
Regulatory disallowances		30,248			-
Other, net		(2,961	)		(928	)
Changes in certain assets and liabilities:
Customer accounts receivable and unbilled revenues		10,161			2,909
Materials, supplies, fuel stock, and natural gas stored		525			(6,155	)
Other current assets		9,156			23,560
Other assets		(360	)		4,721
Accounts 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			43,622
Cash Flows From Investing Activities:
Utility plant additions		(77,793	)		(89,484	)
Proceeds from sales of investments held by NDT		36,635			31,803
Purchases of investments held by NDT		(36,760	)		(36,365	)
Proceeds from sales of utility plant		-			4,572
Return of principal on PVNGS lessor notes		10,645			11,612
Reduction in restricted special deposits		2,554			-
Investments in EnergyCo		-			(2,500	)
Other, net		(3,183	)		4,290
Net 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			1,070
Proceeds from stock option exercise		86			6,509
Purchase of common stock to satisfy stock awards		(1,140	)		(11,587	)
Excess tax benefits (tax shortfall) from stock-based payment arrangements		(380	)		6
Dividends 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			123,419
Cash and Cash Equivalents at End of Period	$	27,751		$	44,986
Supplemental Cash Flow Disclosures:
Interest paid, net of capitalized interest	$	41,321		$	37,218
Income 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)

						Accumulated
	Common Stock					Other						Total Common
	Number 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		$	1,692,411
Adoption of SFAS 157		-		-			-			10,422			10,422
Exercise of stock options		-		(1,025	)		-			-			(1,025	)
Tax shortfall from stock-based compensation arrangements		-		(380	)		-			-			(380	)
Stock based compensation expense		-		1,983			-			-			1,983
Sale of common stock		75,519		1,022			-			-			1,022
Common stock issued to ESPP		24,244		287			-			-			287
Net 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	)	$	29,666
Other Comprehensive Income (Loss):
Unrealized Gain (Loss) on Investment Securities:
Unrealized holding gains (losses) arising during
the period, net of income tax (expense) benefit
of $1,501 and $(1,420)		(2,291	)		2,167
Reclassification adjustment for (gains) included in
net earnings (loss), net of income tax expense
of $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 in
net earnings (loss), net of income tax expense (benefit)
of $2,251 and $(954)		(3,352	)		1,554
Total 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		$	240,352
Operating Expenses:
Cost of energy sold		135,693			103,173
Administrative and general		26,826			31,503
Energy production costs		53,583			40,387
Regulatory disallowances		30,248			-
Depreciation and amortization		20,970			20,755
Transmission and distribution costs		8,907			9,729
Taxes other than income taxes		7,019			6,638
Total operating expenses		283,246			212,185
Operating income (loss)		(30,582	)		28,167
Other Income and Deductions:
Interest income		6,091			7,706
Gains (losses) on investments held by NDT		(3,705	)		44
Other income		547			1,021
Other deductions		(2,314	)		(597	)
Net other income and deductions		619			8,174
Interest Charges:
Interest on long-term debt		10,530			9,491
Other interest charges		3,573			3,655
Total interest charges		14,103			13,146
Earnings (Loss) before Income Taxes		(44,066	)		23,195
Income Taxes (Benefit)		(17,089	)		8,837
Earnings (Loss) from Continuing Operations		(26,977	)		14,358
Earnings from Discontinued Operations, net of Income
Taxes of $13,655 and $9,517		22,499			14,522
Net Earnings (Loss)		(4,478	)		28,880
Preferred Stock Dividends Requirements		132			132
Net 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)
ASSETS
Current Assets:
Cash and cash equivalents	$	21,708	$	4,303
Special deposits		2,407		1,397
Accounts receivable, net of allowance for uncollectible accounts of $778 and $729		80,697		78,094
Unbilled revenues		28,115		32,039
Other receivables		59,194		79,842
Affiliate accounts receivable		188		271
Materials, supplies, and fuel stock		40,999		39,771
Regulatory assets		117		157
Derivative instruments		112,838		14,859
Current assets of discontinued operations		114,954		120,061
Other current assets		33,433		28,926
Total current assets		494,650		399,720
Other Property and Investments:
Investment in PVNGS lessor notes		218,244		231,582
Investments held by NDT		130,227		139,642
Other investments		17,546		20,733
Non-utility property		976		976
Total other property and investments		366,993		392,933
Utility Plant:
Electric plant in service		3,204,859		3,055,953
Common plant in service and plant held for future use		18,237		18,237
		3,223,096		3,074,190
Less accumulated depreciation and amortization		1,165,047		1,157,775
		2,058,049		1,916,415
Construction work in progress		149,646		259,386
Nuclear fuel, net of accumulated amortization of $18,420 and $15,395		59,117		52,246
Net utility plant		2,266,812		2,228,047
Deferred Charges and Other Assets:
Regulatory assets		317,537		348,719
Pension asset		4,509		2,859
Derivative instruments		2,468		37,359
Goodwill		102,775		102,775
Non-current assets of discontinued operations		535,196		526,539
Other deferred charges		64,760		64,449
Total 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 EQUITY
Current Liabilities:
Short-term debt	$	345,000	$	321,000
Current installments of long-term debt		299,980		299,969
Accounts payable		91,065		72,864
Affiliate accounts payable		34,502		19,948
Accrued interest and taxes		28,924		26,385
Derivative instruments		104,215		17,896
Current liability of discontinued operations		63,979		96,003
Other current liabilities		43,956		59,468
Total current liabilities		1,011,621		913,533
Long-term Debt		705,705		705,701
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		407,684		409,430
Accumulated deferred investment tax credits		25,934		26,634
Regulatory liabilities		287,065		285,782
Asset retirement obligations		67,596		65,725
Accrued pension liability and postretirement benefit cost		55,693		56,101
Derivative instruments		77		47,597
Non-current liabilities of discontinued operations		90,035		89,848
Other deferred credits		99,373		98,295
Total deferred credits and liabilities		1,033,457		1,079,412
Total liabilities		2,750,783		2,698,646
Commitments and Contingencies (See Note 9)
Cumulative Preferred Stock
without mandatory redemption requirements ($100 stated value, 10,000,000 authorized:
issued and outstanding 115,293 shares)		11,529		11,529
Common Stockholder’s Equity:
Common stock outstanding (no par value, 40,000,000 shares authorized: issued
and outstanding 39,117,799 shares)		932,523		932,523
Accumulated other comprehensive income, net of income tax		1,931		7,580
Retained earnings		458,934		453,122
Total 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	)	$	28,880
Adjustments to reconcile net earnings (loss) to net cash flows from operating activities:
Depreciation and amortization		25,077			32,854
Deferred income tax expense		(5,574	)		7,137
Net 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	)		5,570
Materials, supplies, fuel stock, and natural gas stored		414			(6,171	)
Other current assets		25,757			18,042
Other assets		(565	)		3,927
Accounts payable		(9,917	)		(12,482	)
Accrued interest and taxes		2,076			9,418
Other current liabilities		(3,567	)		(6,191	)
Other liabilities		799			(6,446	)
Net cash flows from operating activities		47,250			67,513
Cash Flows From Investing Activities:
Utility plant additions		(68,566	)		(80,335	)
Proceeds from sales of NDT investments		36,635			31,803
Purchases of NDT investments		(36,760	)		(36,365	)
Proceeds from sales of utility plant		-			4,572
Return of principal on PVNGS lessor notes		12,304			11,612
Reduction in restricted special deposits		2,554			-
Other, net		423			871
Net 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			11,886
Cash and Cash Equivalents at End of Period	$	21,735		$	6,433
Supplemental Cash Flow Disclosures:
Interest paid, net of capitalized interest	$	23,110		$	21,883
Income 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	$	15,444
Other property and investments		10
Utility plant, net		96,468
Goodwill		102,775
Deferred charges		1,377
Total assets transferred from TNMP		216,074
Current liabilities		17,313
Long-term debt		1,065
Deferred credits and other liabilities		30,673
Total liabilities transferred from TNMP		49,051
Net 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)

					Accumulated
	Common Stock				Other						Total Common
	Number of		Aggregate		Comprehensive			Retained			Stockholder’s
	Shares		Value		Income			Earnings			Equity
			(Dollars in thousands)
Balance at December 31, 2007		39,117,799	$	932,523	$	7,580		$	453,122		$	1,393,225
Adoption of SFAS 157		-		-		-			10,422			10,422
Net 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	)	$	28,748
Other Comprehensive Income (Loss):
Unrealized Gain (Loss) on Investment Securities:
Unrealized holding gains (losses) arising during
the period, net of income tax (expense) benefit
of $1,501 and $(1,420)		(2,291	)		2,167
Reclassification adjustment for (gains) included in
net earnings, net of income tax expense
of $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	)		1,545
Reclassification adjustment for (gains) losses included in
net earnings, net of income tax expense (benefit)
of $599 and $(610)		(914	)		931
Total Other Comprehensive Income (Loss)		(5,649	)		3,980
Comprehensive 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		$	40,928
Operating Expenses:
Cost of energy sold		7,812			7,171
Administrative and general		6,570			8,902
Depreciation and amortization		8,359			7,000
Transmission and distribution costs		4,464			4,923
Taxes, other than income taxes		4,440			4,825
Total operating expenses		31,645			32,821
Operating income		10,583			8,107
Other Income and Deductions:
Interest income		2			88
Other income		414			276
Other deductions		(19	)		(27	)
Net other income and deductions		397			337
Interest Charges:
Interest on long-term debt		4,408			6,432
Other interest charges		581			646
Net interest charges		4,989			7,078
Earnings Before Income Taxes		5,991			1,366
Income Taxes		2,261			428
Net 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)
ASSETS
Current Assets:
Cash and cash equivalents	$	87	$	187
Special deposits		50		50
Accounts receivable		9,949		8,789
Unbilled revenues		3,829		4,392
Other receivables		1,650		1,063
Affiliate accounts receivable		7,252		8,005
Materials and supplies		1,430		1,425
Income taxes receivable		-		881
Other current assets		238		501
Total current assets		24,485		25,293
Other Property and Investments:
Other investments		554		554
Non-utility property		2,111		2,111
Total other property and investments		2,665		2,665
Utility Plant:
Electric plant in service		796,285		781,355
Common plant in service and plant held for future use		488		488
		796,773		781,843
Less accumulated depreciation and amortization		278,783		274,128
		517,990		507,715
Construction work in progress		14,639		22,493
Net utility plant		532,629		530,208
Deferred Charges and Other Assets:
Regulatory assets		130,826		133,154
Goodwill		261,121		261,121
Pension asset		15,640		14,919
Other deferred charges		5,148		5,432
Total 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 EQUITY
Current Liabilities:
Short-term debt – affiliate	$	500	$	3,404
Current installments of long-term debt		316,543		148,882
Accounts payable		4,105		5,666
Affiliate accounts payable		6,853		3,456
Accrued interest and taxes		31,279		35,204
Other current liabilities		2,626		1,785
Total current liabilities		361,906		198,397
Long-term Debt		-		167,609
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		118,838		120,274
Accumulated deferred investment tax credits		143		191
Regulatory liabilities		46,950		46,590
Asset retirement obligations		676		662
Accrued pension liability and postretirement benefit cost		3,796		3,922
Other deferred credits		3,027		1,699
Total deferred credits and other liabilities		173,430		173,338
Total liabilities		535,336		539,344
Commitments 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		64
Paid-in-capital		427,320		427,320
Accumulated other comprehensive income, net of income tax		823		823
Retained earnings		8,971		5,241
Total 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		$	938
Adjustments to reconcile net earnings to
net cash flows from operating activities:
Depreciation and amortization		9,321			7,843
Deferred 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			1,002
Other 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	)		29,200
Other, net		(50	)		1
Net cash flows from financing activities		(2,954	)		29,201
Change in Cash and Cash Equivalents		(100	)		(2,450	)
Cash and Cash Equivalents at Beginning of Period		187			2,542
Cash and Cash Equivalents at End of Period	$	87		$	92
Supplemental Cash Flow Disclosures:
Interest paid, net of capitalized interest	$	5,269		$	5,912
Income 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	$	15,444
Other property and investments		10
Utility plant, net		96,468
Goodwill		102,775
Deferred charges		1,377
Total assets transferred to PNM		216,074
Current liabilities		17,313
Long-term debt		1,065
Deferred credits and other liabilities		30,673
Total liabilities transferred to PNM		49,051
Net 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				Total
	Common Stock						Other				Common
	Number of		Aggregate		Paid-in		Comprehensive		Retained		Stockholder’s
	Shares		Value		Capital		Income		Earnings		Equity
					(Dollars in thousands)
Balance at December 31, 2007		6,358	$	64	$	427,320	$	823	$	5,241	$	433,448
Net earnings		-		-		-		-		3,730		3,730
Balance 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			Corporate
Three Months Ended March 31, 2008	Electric			Electric			Choice			and Other			Consolidated
							(In thousands)
Operating revenues	$	252,639		$	27,818		$	84,169		$	(123	)	$	364,503
Intersegment revenues		25			14,410			-			(14,435	)		-
Total revenues		252,664			42,228			84,169			(14,558	)		364,503
Cost of energy		135,693			7,812			105,268			(14,393	)		234,380
Gross margin		116,971			34,416			(21,099	)		(165	)		130,123
Operating expenses		126,583			15,474			15,455			(2,455	)		155,057
Depreciation and amortization		20,970			8,359			470			4,238			34,037
Operating income (loss)		(30,582	)		10,583			(37,024	)		(1,948	)		(58,971	)
Interest income		6,091			2			476			(1,039	)		5,530
Equity 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			-			-			-			132
Segment 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		$	5,313,451
Goodwill	$	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			Corporate
Three 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		$	437,044
Intersegment revenues		-			16,767			-			47			(16,814	)		-
Total revenues		240,352			40,928			36,803			135,565			(16,604	)		437,044
Cost of energy		103,173			7,171			12,166			110,816			(16,514	)		216,812
Gross margin		137,179			33,757			24,637			24,749			(90	)		220,232
Operating expenses		88,257			18,650			12,260			15,157			2,612			136,936
Depreciation and amortization		20,755			7,000			4,609			471			2,006			34,841
Operating income (loss)		28,167			8,107			7,768			9,121			(4,708	)		48,455
Interest income		7,706			88			117			483			1,398			9,792
Equity in net earnings (loss) of EnergyCo		-			-			-			-			(662	)		(662	)
Other income (deductions)		468			249			-			(42	)		298			973
Net 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	)		23,657
Income taxes (benefit)		8,837			428			944			3,564			(5,392	)		8,381
Preferred stock dividend requirements		132			-			-			-			-			132
Segment earnings (loss) from continuing operations	$	14,226		$	938		$	1,442		$	5,883		$	(7,345	)	$	15,144
At March 31, 2007:
Total Assets*	$	3,426,868		$	1,007,234		$	654,141		$	344,685		$	104,862		$	5,537,790
Goodwill	$	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			2007
Type of Derivative	Mark-to-Market Instruments						Hedge Instruments
				(In thousands)
Current Assets
Energy contracts	$	90,915		$	14,486		$	-		$	864
Fixed-for-float swaps and futures		78,579			25,653			3,480			524
Options		60,981			7,372			3,443			358
Total current assets		230,475			47,511			6,923			1,746
Deferred Charges
Energy 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			1,746
Current Liabilities
Energy 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 Liabilities
Energy 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			2007
Type of Derivative	Mark-to-Market Instruments						Hedge Instruments
				(In thousands)
Current Assets
Energy contracts	$	23,830		$	2,587		$	-		$	864
Fixed-for-float swaps		42,386			6,650			3,068			422
Options		43,554			4,336			-			-
Total current assets		109,770			13,573			3,068			1,286
Deferred Charges
Energy 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			1,286
Current Liabilities
Energy 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 Liabilities
Energy 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)
PNMR
Assets
Commodity derivatives	$	253,473		$	20,574		$	176,184		$	56,715
NDT		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			56,715
Liabilities
Commodity 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	)	$	32,946
PNM
Assets
Commodity derivatives	$	115,306		$	-		$	58,889		$	56,417
NDT		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			56,417
Liabilities
Commodity 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, 2008
	PNMR		PNM
	(In thousands)
Level 3 Fair Value Assets and Liabilities
Balance at December 31, 2007	$	417	$	1,035
Adoption of SFAS 157		16,407		16,407
Balance at January 1, 2008		16,824		17,442
Total gains (losses)  included in earnings1		15,584		15,906
Purchases, issuances, and settlements2		538		-
Balance at March 31, 20083	$	32,946	$	33,348
Total gains included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the end of the period	$	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 Energy
Total gains (losses) included in earnings	$	(7,163	)	$	22,747
Change in unrealized gains or losses relating to asset still held at reporting date	$	(6,582	)	$	22,877
PNM
Total gains (losses) included in earnings	$	(6,925	)	$	22,831
Change 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	)	$	15,144
Earnings from discontinued operations		22,499			14,522
Net Earnings (Loss)	$	(48,636	)	$	29,666
Average Number of Common Shares Outstanding		76,850			76,659
Dilutive Effect of Common Stock Equivalents (a):
Stock options and restricted stock		-			701
Equity-linked units		-			739
Average Common and Common Equivalent Shares
Outstanding		76,850			78,099
Per Share of Common Stock – Basic:
Earnings (loss) from continuing operations	$	(0.93	)	$	0.20
Earnings from discontinued operations		0.30			0.19
Net Earnings (Loss)	$	(0.63	)	$	0.39
Per Share of Common Stock – Diluted:
Earnings (loss) from continuing operations	$	(0.93	)	$	0.19
Earnings from discontinued operations		0.30			0.19
Net 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			Average
				Average		Intrinsic			Remaining
				Exercise		Value			Contract Life
Options for PNMR Common Stock	Shares			Price		(In thousands)			(Years)
Outstanding at beginning of period		3,264,898		$	23.26
Granted		538,361			11.82
Exercised		(5,001	)		16.13
Forfeited		(9,607	)		27.18
Outstanding at end of period		3,788,651		$	21.60	$	(34,586	)		6.79
Options exercisable at end of period		2,484,479		$	21.66	$	(22,843	)		5.42
Options 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	$	4.70
Total 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-
				Average
Nonvested Restricted				Grant-Date
PNMR Common Stock	Shares			Fair Value
Nonvested at beginning of period		169,750		$	26.09
Granted		111,250		$	13.17
Vested		(72,656	)	$	25.65
Forfeited		(5,005	)	$	26.44
Nonvested 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)
PNM
Commercial paper	$	-	$	-
Revolving credit facility		345,000		321,000
		345,000		321,000
PNMR
Commercial paper		-		-
Revolving credit facility		392,000		343,500
Local 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 Program
	2008			2007			2008			2007			2008		2007
							(In thousands)
Components of Net Periodic
Benefit Cost (Income)
Service cost	$	-		$	36		$	178		$	632		$	14	$	14
Interest cost		8,317			7,953			2,086			1,928			284		272
Expected long-term return on assets		(10,336	)		(10,195	)		(1,532	)		(1,464	)		-		-
Amortization of net loss		481			972			1,204			1,461			13		24
Amortization of prior service cost		79			79			(1,422	)		(1,422	)		3		3
Net 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 Program
	2008			2007			2008			2007			2008		2007
							(In thousands)
Components of Net Periodic
Benefit Cost (Income)
Service cost	$	-		$	-		$	71		$	98		$	-	$	-
Interest cost		1,061			1,057			179			165			19		19
Expected 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

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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			1,333
Depreciation 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	$	119,255
Net property plant and equipment		876,271		853,492
Deferred assets		286,424		297,197
Total assets		1,328,553		1,269,944
Current liabilities		191,850		88,812
Long-term debt		700,778		650,778
Other long-term liabilities		33,369		34,344
Total liabilities		925,997		773,934
Owners’ equity	$	402,556	$	496,010
50 percent of owners’ equity	$	201,278	$	248,005
Unamortized PNMR basis difference in EnergyCo		83		89
PNMR 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.  Economic hedges that do not qualify for or are not designated as cash flow hedges under SFAS 133 are derivative instruments that are required to be marked to market.  Changes in the fair value of these instruments resulted in a reduction of net earnings of $47.1 million as a result of higher power prices.  For the quarter ending March 31, 2008, forward power prices in the ERCOT Houston and North zones increased approximately 45 percent.  EnergyCo also realized speculative trading losses of $2.4 million for the period.  Due to the extreme market volatility experienced in the first quarter in the ERCOT market, EnergyCo has made the decision to exit the speculative trading business and close out the speculative trading positions.

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 Ended
	March 31,
	2008		2007
	(In thousands)
Electricity, transmission and related services billings:
PNM to TNMP	$	-	$	126
TNMP to PNMR		14,410		16,513
Shared services billings from PNMR to:
PNM*		22,867		25,800
TNMP		4,777		5,512
Services billings from PNMR to EnergyCo		2,475		1,070
Income tax sharing payments from:
PNMR to PNM		1,855		-
PNMR to TNMP		858		-
Capital expenditure billings from PNMR to:
PNM		-		99
TNMP		-		18
Interest 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		2007
Operating revenues	$	220,455	$	216,457
Cost of energy		160,828		161,708
Gross margin		59,627		54,749
Operating expenses		21,443		23,281
Depreciation and amortization		-		5,601
Operating income		38,184		25,867
Other income (deductions)		941		1,118
Net interest charges		2,971		2,946
Segment earnings before income taxes		36,154		24,039
Income taxes		13,655		9,517
Segment 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)
ASSETS
Cash and cash equivalents	$	27		$	28
Accounts receivable and unbilled revenues, net		95,794			89,699
Regulatory and other current assets		19,133			30,334
Total current assets		114,954			120,061
Gas plant in service		750,385			743,664
Accumulated depreciation and amortization		(244,016	)		(245,741	)
Construction work in progress		22,552			22,411
Net utility plant		528,921			520,334
Regulatory and other assets		6,275			6,205
	$	650,150		$	646,600
LIABILITIES AND EQUITY
Accounts payable and accrued expenses	$	39,574		$	68,458
Regulatory and other current liabilities		24,405			27,545
Total current liabilities		63,979			96,003
Regulatory liabilities		73,267			72,727
Deferred credits and other liabilities		16,768			17,121
Total deferred credits and other liabilities		90,035			89,848
Equity		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			54.9
Net 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		2,792
Altura		(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			5.1
Cost of energy		135.7			103.2			32.5			31.5
Gross margin		117.0			137.2			(20.2	)		(14.7	)
Operating expenses		126.6			88.3			38.3			43.4
Depreciation and amortization		21.0			20.8			0.2			1.0
Operating 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	)		7.6
Earnings (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 Change
							Earnings (Loss)
							Before			Segment
	Total			Gross			Income			Earnings
	Revenues			Margin			Taxes			(Loss)
Regulated sales growth	$	5.8		$	1.3		$	1.3		$	0.8
Generation 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			1.6
Operational costs		-			-			2.6			1.6
NDT		-			-			(4.6	)		(2.8	)
Net unrealized mark-to-market		(12.0	)		6.9			6.9			4.2
Regulatory 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			5.0
Commercial		67.5		64.7		2.8			4.3
Industrial		25.8		23.4		2.4			10.3
Transmission		5.3		6.7		(1.4	)		(20.9	)
Other retail		5.4		5.4		-			-
Wholesale long-term sales		36.5		30.0		6.5			21.7
Wholesale short-term sales		41.0		42.4		(1.4	)		(3.3	)
	$	252.7	$	240.4	$	12.3			5.1
Average 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			4.5
Commercial		910.3		877.0		33.3			3.8
Industrial		441.8		470.3		(28.5	)		(6.1	)
Other		59.6		56.0		3.6			6.4
Wholesale long-term sales		654.1		543.5		110.6			20.3
Wholesale 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 changes resulted 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			3.2
Cost of energy		7.8			7.2			0.6			8.3
Gross margin		34.4			33.8			0.6			1.8
Operating expenses		15.5			18.7			(3.2	)		(17.1	)
Depreciation and amortization		8.4			7.0			1.4			20.0
Operating income		10.6			8.1			2.5			30.9
Interest income		-			0.1			(0.1	)		(100.0	)
Other income (deductions)		0.4			0.2			0.2			100.0
Net interest charges		(5.0	)		(7.1	)		2.1			(29.6	)
Earnings before income taxes		6.0			1.4			4.6			328.6
Income taxes		2.3			0.4			1.9			475.0
Segment 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 Change
					Earnings (Loss)
					Before			Segment
	Total		Gross		Income			Earnings
	Revenues		Margin		Taxes			(Loss)
Retail growth/weather	$	0.6	$	0.6	$	0.6		$	0.4
Synergy savings credits		-		-		0.8			0.5
Debt reduction		-		-		1.5			1.0
Operational costs		-		-		2.1			1.4
Other		0.7		-		(0.4	)		(0.5	)
Total increase (decrease)	$	1.3	$	0.6	$	4.6		$	2.8

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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			3.4
Commercial		16.6		16.0		0.6			3.8
Industrial		3.2		1.7		1.5			88.2
Other		7.1		8.4		(1.3	)		(15.5	)
	$	42.2	$	40.9	$	1.3			3.2
Average 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		3.2
Industrial		543.1		407.3		135.8		33.3
Other		26.5		24.1		2.4		10.0
		1,581.8		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			1.8
Cost of energy		160.8			161.7			(0.9	)		(0.6	)
Gross margin		59.6			54.8			4.8			8.8
Operating 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			47.5
Interest 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	)		3.4
Earnings before income taxes		36.2			24.0			12.2			50.8
Income taxes		13.7			9.5			4.2			44.2
Segment 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 Change
							Earnings (Loss)
							Before			Segment
	Total			Gross			Income			Earnings
	Revenues			Margin			Taxes			(Loss)
Gas prices	$	(7.9	)	$	-		$	-		$	-
Rate increase		3.4			3.4			3.4			2.1
Retail growth/weather		10.5			1.5			1.5			0.9
Off-system activities		(1.6	)		(0.1	)		(0.1	)		(0.1	)
Operational costs		-			-			1.9			1.1
Discontinuation of depreciation on assets		-			-			5.6			3.4
Other		(0.4	)		-			-			0.6
Total increase (decrease)	$	4.0		$	4.8		$	12.3		$	8.0

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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			2.9
Commercial		44.6		45.2		(0.6	)		(1.3	)
Industrial		0.8		0.6		0.2			33.3
Transportation(1)		6.1		5.0		1.1			22.0
Other		12.3		13.4		(1.1	)		(8.2	)
	$	220.5	$	216.5	$	4.0			1.8
Average 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			2.5
Commercial		4,594.1		4,634.4		(40.3	)		(0.9	)
Industrial		91.9		63.1		28.8			45.6
Transportation(1)		11,376.5		10,799.7		576.8			5.3
Other		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.

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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			2.0
Depreciation 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	)		200.0
Earnings (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, 2008
							Earnings (Loss)
							Before			Segment
	Total			Gross			Income			Earnings
	Revenues			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			5.5
Operational costs		-			-			(0.3	)		(0.3	)
Other		-			-			(0.2	)		(0.2	)
Total increase (decrease)	$	(51.4	)	$	(45.8	)	$	(46.3	)	$	(30.0	)

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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			15.2
Trading gains (losses)		(47.1	)		0.2		(47.3	)		N/M
Other		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			5.8
Other		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 and has 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. 

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Corporate and Other

	2008/2007 Change
	Total 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			0.7
Other		-		-		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,							2008/2007
	2008			2007			Change
				(In millions)
Total operating revenues	$	174.1		$	-		$	174.1
Cost of energy		197.2			-			197.2
Gross margin		(23.1	)		-			(23.1	)
Operating expenses		14.4			1.3			13.1
Depreciation and amortization		7.6			-			7.6
Operating income (loss)		(45.1	)		(1.3	)		(43.8	)
Other income		0.3			-			0.3
Net 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			-			0.4
PNMR 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

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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.  Economic hedges that do not qualify for or are not designated as cash flow hedges under SFAS 133 are derivative instruments that are required to be marked to market.  Changes in the fair value of these instruments resulted in a reduction of net earnings of $47.1 million as a result of higher power prices.  For the quarter ending March 31, 2008, forward power prices in the ERCOT Houston and North zones increased approximately 45 percent.  EnergyCo also realized speculative trading losses of $2.4 million for the period.  Due to the extreme market volatility experienced in the first quarter in the ERCOT market, EnergyCo has made the decision to exit the speculative trading business and close out the speculative trading positions.  For this reason, management excludes these losses in their evaluation of EnergyCo’s financial performance.

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	)		8.2
Net cash flows from financing activities		53.2				(45.9	)		99.1
Net 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.

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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.

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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.

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

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

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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	TNMP
S&P
Senior unsecured notes	BB	BB+	BB+
Commercial paper	B-1	B-1	*
Preferred stock	*	B+	*
Moody’s
Senior unsecured notes	Ba2	Baa3	Baa3
Commercial 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.

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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			2007
PNMR
Common 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	%

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

TNMP
Common 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.

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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.

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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,

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·   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).

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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.

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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			Total
Mark-to-market energy contracts:
Current asset	$	105,692		$	124,783		$	230,475
Long-term asset		13,608			2,467			16,075
Total mark-to-market assets		119,300			127,250			246,550
Current 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			Total
Mark-to-market energy contracts:
Current asset	$	32,451		$	15,060		$	47,511
Long-term asset		8,335			37,359			45,694
Total mark-to-market assets		40,786			52,419			93,205
Current 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.

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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, 2008
	Trading			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			17,253
Adjusted beginning fair value		(1,577	)		4,117			2,540
Amount 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			3,409
Net fair value at end of period	$	(32,976	)	$	20,773		$	(12,203	)

	March 31, 2007 Mark-to-market instruments
	Trading		Economic Hedges			Total
	(In thousands)
Sources of fair value gain (loss):
Fair value at beginning of year	$	926	$	2,540		$	3,466
Amount realized on contracts delivered during period		1,924		(1,425	)		499
Changes in fair value		769		2,527			3,296
Net change recorded as mark-to-market		2,693		1,102			3,795
Net 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 than
	1 year			1-3 Years		4+ Years		Total
				(In thousands)
Trading	$	(33,670	)	$	694	$	-	$	(32,976	)
Economic hedges		18,367			374		2,032		20,773
Total	$	(15,303	)	$	1,068	$	2,032	$	(12,203	)

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

	Three Months Ended
	March 31,
	2008			2007
Type 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			8,118
Change in the fair value of options		3,115			109
Net 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

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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.

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PNMR

Schedule of Credit Risk Exposure

March 31, 2008

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

(a)   The Ratingincluded 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		Total
	Less than				than		Net
Rating	2 Years		2-5 Years		5 Years		Exposure
			(In thousands)
External ratings:
Investment grade	$	126,895	$	58,599	$	12,779	$	198,273
Non-investment grade		849		-		-		849
Split		2,169		-		-		2,169
Internal ratings:
Investment grade		1		-		-		1
Non-investment grade		3,846		-		-		3,846
Total	$	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.

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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.

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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.

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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.

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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 agent
12.1	PNMR	Ratio of Earnings to Fixed Charges
12.2	PNM	Ratio of Earnings to Fixed Charges
12.3	PNM	Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
31.1	PNMR	Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	PNMR	Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.3	PNM	Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.4	PNM	Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.5	TNMP	Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.6	TNMP	Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	PNMR	Chief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	PNMR	Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.3	PNM	Chief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.4	PNM	Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.5	TNMP	Chief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.6	TNMP	Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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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. Sategna
	Thomas G. Sategna
	Vice President and Corporate Controller
	(Officer duly authorized to sign this report)

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EX-10.1

Exhibit 10.1

$150,000,000

TERM LOAN CREDIT AGREEMENT

among

TEXAS-NEW MEXICO POWER COMPANY,

as the Borrower,

THE LENDERS IDENTIFIED HEREIN,

AND

JPMORGAN CHASE BANK, N.A.,

as Administrative Agent

DATED AS OF MARCH 7, 2008

J.P. MORGAN SECURITIES INC.

and

UNION BANK OF CALIFORNIA, N.A.,

as Joint Lead Arrangers and Co-Book Managers

TABLE OF CONTENTS

SECTION 1		DEFINITIONS AND ACCOUNTING TERMS	1
	1.1	Definitions.	1
	1.2	Computation of Time Periods and Other Definitional Provisions.	14
	1.3	Accounting Terms/Calculation of Financial Covenants.	14
	1.4	Time.	14
	1.5	Rounding of Financial Covenants.	14
	1.6	References to Agreements and Requirement of Laws.	14
	1.7	Letter of Credit Amounts.	14
SECTION 2		CREDIT FACILITY	15
	2.1	Revolving Loans.	15
	2.2	Letter of Credit Subfacility.	16
	2.3	Continuations and Conversions.	16
	2.4	Minimum Amounts.	16
	2.5	Extension Option.	16
	2.6	Designation and Termination of Subsidiary Borrower.	17
	2.7	Evidence of Debt.
SECTION 3		GENERAL PROVISIONS APPLICABLE TO REVOLVING LOANS	17
	3.1	Interest.	17
	3.2	Payments Generally.	18
	3.3	Prepayments.	19
	3.4	Fees.	19
	3.5	Payment in full at Maturity.	20
	3.6	Computations of Interest and Fees.	20
	3.7	Pro Rata Treatment.	21
	3.8	Sharing of Payments.	21
	3.9	Capital Adequacy.	22
	3.10	Eurodollar Provisions.	22
	3.11	Illegality.	22
	3.12	Requirements of Law; Reserves on Eurodollar Loans.	22
	3.13	Taxes.	23
	3.14	Compensation.	25
	3.15	Determination and Survival of Provisions.	26
SECTION 4		CONDITIONS PRECEDENT TO CLOSING	26
	4.1	Closing Conditions.	26
SECTION 5		CONDITIONS TO ALL EXTENSIONS OF CREDIT	28
	5.1	Funding Requirements.	28
SECTION 6		REPRESENTATIONS AND WARRANTIES	29
	6.1	Organization and Good Standing.	29
	6.2	Due Authorization.	29
	6.3	No Conflicts.	29
	6.4	Consents.	29
	6.5	Enforceable Obligations.	30
	6.6	Financial Condition.	30
	6.7	No Material Change.	30
	6.8	No Default.	30

i

	6.9	Litigation.	30
	6.10	Taxes.	30
	6.11	Compliance with Law.	31
	6.12	ERISA.	31
	6.13	Use of Proceeds; Margin Stock.	32
	6.14	Government Regulation.	32
	6.15	Solvency.	32
	6.16	Disclosure.	32
	6.17	Environmental Matters.	32
	6.18	Material Leases.	32
	6.19	Material Lease Interest Payments and Discount Rate.	32
SECTION 7		AFFIRMATIVE COVENANTS	33
	7.1	Information Covenants.	33
	7.2	Financial Covenants.	35
	7.3	Preservation of Existence and Franchises.	35
	7.4	Books and Records.	35
	7.5	Compliance with Law.	35
	7.6	Payment of Taxes and Other Indebtedness.	35
	7.7	Insurance.	36
	7.8	Performance of Obligations.	36
	7.9	Use of Proceeds.	36
	7.10	Audits/Inspections.	36
	7.11	Ownership of Certain Subsidiaries.	36
SECTION 8		NEGATIVE COVENANTS	36
	8.1	Nature of Business.	36
	8.2	Consolidation and Merger.	37
	8.3	Sale or Lease of Assets.	37
	8.4	Affiliate Transactions.	37
	8.5	Liens.	37
	8.6	Accounting Changes.	38
	8.7	Burdensome Agreements.	38
SECTION 9		EVENTS OF DEFAULT	38
	9.1	Events of Default.	38
	9.2	Acceleration; Remedies.	40
	9.3	Allocation of Payments After Event of Default.	41
SECTION 10		AGENCY PROVISIONS	42
	10.1	Appointment and Authority.	42
	10.2	Rights as a Lender.	42
	10.3	Exculpatory Provisions.	42
	10.4	Reliance by Administrative Agent.	43
	10.5	Delegation of Duties.	43
	10.6	Resignation of Administrative Agent.	44
	10.7	Non-Reliance on Administrative Agent and Other Lenders.	44
	10.8	No Other Duties, Etc.	44
	10.9	Administrative Agent May File Proofs of Claim.	44

ii

SECTION 11		MISCELLANEOUS	45
	11.1	Notices; Effectiveness; Electronic Communication.	45
	11.2	Right of Set-Off.	47
	11.3	Successors and Assigns.	47
	11.4	No Waiver; Remedies Cumulative.	50
	11.5	Attorney Costs, Expenses, Taxes and Indemnification by Borrower.	50
	11.6	Amendments, Etc.	52
	11.7	Counterparts.	53
	11.8	Headings.	53
	11.9	Survival of Indemnification and Representations and Warranties.	53
	11.10	Governing Law; Venue; Service.	53
	11.11	Waiver of Jury Trial; Waiver of Consequential Damages.	54
	11.12	Severability.	54
	11.13	Further Assurances.	54
	11.14	Confidentiality.	54
	11.15	Entirety.	55
	11.16	Binding Effect; Continuing Agreement.	55
	11.17	Regulatory Statement.	55
	11.18	USA Patriot Act Notice.	55
	11.19	Acknowledgment.	56
	11.20	Replacement of Lenders.	56

iii

SCHEDULES

Schedule 1.1(a)	Pro Rata Shares
Schedule 11.1	Notices
Schedule 11.3	Processing and Recording Fees

EXHIBITS

Exhibit 2.1(b)	Form of Notice of Borrowing
Exhibit 2.1(e)	Form of Note
Exhibit 2.3	Form of Notice of Continuation/Conversion
Exhibit 7.1(c)	Form of Compliance Certificate
Exhibit 11.3(b)	Form of Assignment and Assumption

iv

TERM LOAN CREDIT AGREEMENT

THIS TERM LOAN CREDIT AGREEMENT (this “Credit Agreement”) is entered into as of  March 7, 2008 among TEXAS-NEW MEXICO POWER COMPANY, a Texas corporation (the “Borrower”), the Lenders and JPMORGAN CHASE BANK, N.A., as Administrative Agent.

RECITALS

WHEREAS, the Borrower has requested that the Lenders make available a $150,000,000 senior term loan credit facility; and

WHEREAS, the Lenders party hereto have agreed to make the senior term loan credit facility available on the terms and conditions hereinafter set forth.

NOW, THEREFORE, IN CONSIDERATION of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

SECTION 1

DEFINITIONS AND ACCOUNTING TERMS

1.1           Definitions.

The following terms shall have the meanings specified herein unless the context otherwise requires.  Defined terms herein shall include in the singular number the plural and in the plural the singular:

“Adjusted Eurodollar Rate” means the Eurodollar Rate plus the Applicable Percentage.

“Administrative Agent” means JPMCB or any successor administrative agent appointed pursuant to Section 10.9.

“Administrative Agent’s Office” means the Administrative Agent’s address and, as appropriate, account as set forth on Schedule 11.1 or such other address or account with as the Administrative Agent may from time to time notify the Borrower and the Lenders.

“Administrative Questionnaire” means an Administrative Questionnaire in a form supplied by the Administrative Agent.

“Affiliate” means, with respect to any Person, any other Person directly or indirectly controlling (including but not limited to all directors and officers of such Person), controlled by or under direct or indirect common control with such Person.  A Person shall be deemed to control another Person if such Person possesses, directly or indirectly, the power (a) to vote 10% or more of the securities having ordinary voting power for the election of directors of such Person or (b) to direct or cause direction of the management and policies of such other Person, whether through the ownership of voting securities, by contract or otherwise.

“Agent-Related Persons” means the Administrative Agent, together with its Affiliates and the officers, directors, employees, agents and attorneys-in-fact of the Administrative Agent and its Affiliates.

“Applicable Percentage” means, for Eurodollar Loans, 0.75% per annum; provided that the Applicable Percentage shall equal 1.25% per annum for each day that any Lien (other than any right of set-off or similar Lien of the type described in Section 11.2 of the Existing Credit Agreement) shall exist upon any property in favor of the administrative agent for the benefit of the lenders under the Existing Credit Agreement (as it may be amended, supplemented or otherwise modified from time to time) securing Indebtedness thereunder.

“Approved Fund” means any Fund that is administered or managed by (a)a Lender, (b)an Affiliate of a Lender or (c)an entity or an Affiliate of an entity that administers or manages a Lender.

“Arrangers” means JP Morgan Securities Inc. and Union Bank of California, N.A., in each case together with its successors and/or assigns.

“Assignee Group” means two or more Eligible Assignees that are Affiliates of one another or two or more Approved Funds managed by the same investment advisor.

“Assignment and Assumption” means an Assignment and Assumption substantially in the form of Exhibit 11.3(b).

“Authorized Officer” means any of the president, chief executive officer, chief financial officer or treasurer of the Borrower.

“Bankruptcy Code” means the Bankruptcy Code in Title 11 of the United States Code, as amended, modified, succeeded or replaced from time to time.

“Base Rate” means for any day a fluctuating rate per annum equal to the higher of (a) the Federal Funds Rate plus 1/2 of 1% and (b) the rate of interest in effect for such day as publicly announced from time to time by the Administrative Agent as its “prime rate” (the “Prime Rate”).  The Prime Rate is a rate publicly announced from time to time by the Administrative Agent as its prime rate in effect at its principal office in New York City, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate.  Any change in such rate announced by the Administrative Agent shall take effect at the opening of business on the day specified in the public announcement of such change.

“Base Rate Loan” means any Loan bearing interest at a rate determined by reference to the Base Rate.

“Borrower Obligations” means, with respect to the Borrower, without duplication, all of the obligations of the Borrower to the Lenders and the Administrative Agent, whenever arising, under this Credit Agreement, the Notes, or any of the other Credit Documents.

“Borrowing” means a borrowing consisting of simultaneous Loans of the same Type and, in the case of Eurodollar Loans, having the same Interest Period made by each of the Lenders pursuant to Section 2.1.

2

“Business Day” means any day other than a Saturday, a Sunday, a legal holiday or a day on which banking institutions are authorized or required by Law or other governmental action to close in New York, New York; provided that in the case of Eurodollar Loans such day is also a day on which dealings are conducted by and between banks in the London interbank market.

“Capital Stock” means (a) in the case of a corporation, all classes of capital stock of such corporation, (b) in the case of a partnership, partnership interests (whether general or limited), (c) in the case of a limited liability company, membership interests and (d) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person; including, in each case, all warrants, rights or options to purchase any of the foregoing.

“Change of Control” means the occurrence of any of the following:  (a) any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, but excluding any employee benefit plan of such person or its subsidiaries, and any person or entity acting in its capacity as trustee, agent or other fiduciary or administrator of any such plan) becomes the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, except that a person or group shall be deemed to have “beneficial ownership” of all Capital Stock that such person or group has the right to acquire (such right, an “option right”), whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of  twenty-five (25%) of the Capital Stock of the Parent entitled to vote for members of the board of directors or equivalent governing body of the Parent on a fully diluted basis (and taking into account all such securities that such person or group has the right to acquire pursuant to any option right); (b) during any period of 24 consecutive months, a majority of the members of the board of directors or other equivalent governing body of the Parent cease to be composed of individuals (i) who were members of that board or equivalent governing body on the first day of such period, (ii) whose election or nomination to that board or equivalent governing body was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body or (iii) whose election or nomination to that board or other equivalent governing body was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body (excluding, in the case of both clause (ii) and clause (iii), any individual whose initial nomination for, or assumption of office as, a member of that board or equivalent governing body occurs as a result of an actual or threatened solicitation of proxies or consents for the election or removal of one or more directors by any person or group other than a solicitation for the election of one or more directors by or on behalf of the board of directors); (c) any Person or two or more Persons acting in concert shall have acquired by contract or otherwise, or shall have entered into a contract or arrangement that, upon consummation thereof, will result in its or their acquisition of the power to exercise, directly or indirectly, a controlling influence over the management or policies of the Parent, or control over the Voting Stock of the Parent on a fully-diluted basis (and taking into account all such Voting Stock that such Person or group has the right to acquire pursuant to any option right) representing twenty-five (25%)  or more of the combined voting power of such Voting Stock; or (d) the Parent shall cease to own, directly or indirectly, and free and clear of all Liens or other encumbrances (other than any Lien in favor of the administrative agent for the benefit of the lenders under the Existing Credit Agreement (as it may be amended, supplemented or otherwise modified from time to time) securing Indebtedness thereunder), at least 100% of the outstanding Voting Stock of the Borrower on a fully diluted basis.

“Closing Date” means the date of this Credit Agreement, which is the first date all the conditions precedent in Section 5.1 are satisfied or waived in accordance with Section 5.1.

3

“Code” means the Internal Revenue Code of 1986 and the rules and regulations promulgated thereunder, as amended, modified, succeeded or replaced from time to time.

“Commitment” means, as to each Lender, its obligation to make Loans to the Borrower pursuant to Section 2.1, in an aggregate principal amount at any one time outstanding not to exceed such Lender’s Pro Rata Share of the Committed Amount as set forth opposite such Lender’s name on Schedule 1.1(a) or in the Assignment and Assumption pursuant to which such Lender becomes a party hereto, as applicable, as such amount may be adjusted from time to time in accordance with this Credit Agreement.

“Committed Amount” means ONE HUNDRED FIFTY MILLION DOLLARS ($150,000,000), as it may be reduced from time to time in accordance with Section 2.1(d).

“Compensation Period” has the meaning set forth in Section 3.2(c)(ii).

“Compliance Certificate” means a fully completed and duly executed officer’s certificate in the form of Exhibit 7.1(c), together with a Covenant Compliance Worksheet.

“Consolidated Capitalization” means, with respect to any Person, the sum of (a) all of the shareholders’ equity or net worth of such Person and its Subsidiaries, as determined in accordance with GAAP plus (b) Consolidated Indebtedness of such Person and its Subsidiaries plus (c) the outstanding principal amount of Preferred Stock plus (d) 75% of the outstanding principal amount of Specified Securities of such Person and its Subsidiaries.

“Consolidated Indebtedness” means, as of any date of determination, with respect to any Person and its Subsidiaries on a consolidated basis, an amount equal to (a) all Indebtedness of such Person and its Subsidiaries as of such date minus (b)the outstanding principal amount of stranded cost securitization bonds of such Person and its Subsidiaries minus (c) an amount equal to the lesser of (i) 75% of the outstanding principal amount of Specified Securities of such Person and its Subsidiaries or (ii) 10% of Consolidated Capitalization (calculated assuming clause (i) above is applicable).

“Contingent Obligation” means, with respect to any Person, any direct or indirect liability of such Person with respect to any Indebtedness, liability or other obligation (the “primary obligation”) of another Person (the “primary obligor”), whether or not contingent, (a) to purchase, repurchase or otherwise acquire such primary obligation or any property constituting direct or indirect security therefor, (b) to advance or provide funds (i) for the payment or discharge of any such primary obligation or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor in respect thereof to make payment of such primary obligation or (d) otherwise to assure or hold harmless the owner of any such primary obligation against loss or failure or inability to perform in respect thereof; provided, however, that, with respect to the Borrower and its Subsidiaries, the term Contingent Obligation shall not include endorsements for collection or deposit in the ordinary course of business.  The amount of any Contingent Obligation of any Person shall be deemed to be an amount equal to the maximum amount of such Person’s liability with respect to the stated or determinable amount of the primary obligation for which such Contingent Obligation is incurred or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder).

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“Covenant Compliance Worksheet” shall mean a fully completed worksheet in the form of Schedule I to Exhibit 7.1(c).

“Credit Agreement” has the meaning set forth in the Preamble hereof.

“Credit Documents” means this Credit Agreement, the Notes, any Notice of Borrowing, any Notice of Continuation/Conversion, and any other document, agreement or instrument entered into or executed in connection with the foregoing.

“Credit Exposure” has the meaning set forth in the definition of “Required Lenders”.

“Credit Extension” means a Borrowing.

“Debtor Relief Laws” means the Bankruptcy Code, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief Laws of the United States or other applicable jurisdictions from time to time in effect and affecting the rights of creditors generally.

“Default” means any event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default.

“Default Rate” means an interest rate equal to two percent (2%) plus the rate that otherwise would be applicable (or if no rate is applicable, the Base Rate plus two percent (2%) per annum).

“Defaulting Lender” means, at any time, any Lender that, has failed to make a Loan (but only for so long as such Loan is not made), (b) has failed to pay to the Administrative Agent or any Lender an amount owed by such Lender pursuant to the terms of this Credit Agreement (but only for so long as such amount has not been repaid) or (c) has been deemed insolvent or has become subject to a bankruptcy or insolvency proceeding or to a receiver, trustee or similar official.

“Dollars” and “$” means dollars in lawful currency of the United States of America.

“Eligible Assignee” means (a) a Lender, (b) an Affiliate of a Lender, (c) an Approved Fund and (d) any other Person (other than a natural person) approved by the Administrative Agent and the Borrower (such approval not to be unreasonably withheld or delayed); provided that (i) the Borrower’s consent is not required during the existence and continuation of a Default or an Event of Default, (ii) approval by the Borrower shall be deemed given if no objection is received by the assigning Lender and the Administrative Agent from the Borrower within five Business Days after notice of such proposed assignment has been delivered to the Borrower and (iii) neither the Borrower nor any Subsidiary or Affiliate of the Borrower shall qualify as an Eligible Assignee.

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“Environmental Claims” means any and all administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, accusations, allegations, notices of noncompliance or violation, investigations (other than internal reports prepared by any Person in the ordinary course of its business and not in response to any third party action or request of any kind) or proceedings relating in any way to any actual or alleged violation of or liability under any Environmental Law or relating to any permit issued, or any approval given, under any such Environmental Law (collectively, “Claims”), including, without limitation, (a) any and all Claims by Governmental Authorities for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law and (b) any and all Claims by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from Hazardous Substances or arising from alleged injury or threat of injury to human health or the environment.

“Environmental Laws” shall mean any and all federal, state and local laws, statutes, ordinances, rules, regulations, permits, licenses, approvals, rules of common law and orders of courts or Governmental Authorities, relating to the protection of human health or occupational safety or the environment, now or hereafter in effect and in each case as amended from time to time, including, without limitation, requirements pertaining to the manufacture, processing, distribution, use, treatment, storage, disposal, transportation, handling, reporting, licensing, permitting, investigation or remediation of Hazardous Substances.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor statute, and all rules and regulations from time to time promulgated thereunder.

“ERISA Affiliate” means, with respect to the Borrower, any Person (including any trade or business, whether or not incorporated) that would be deemed to be under “common control” with, or a member of the same “controlled group” as, the Borrower or any of its Subsidiaries, within the meaning of Sections 414(b), (c), (m) or (o) of the Code or Section 4001 of ERISA.

“ERISA Event” means, with respect to the Borrower: (a) a Reportable Event with respect to a Plan or a Multiemployer Plan, (b) a complete or partial withdrawal by the Borrower, any of its Subsidiaries or any ERISA Affiliate from a Multiemployer Plan, or the receipt by the Borrower, any of its Subsidiaries or any ERISA Affiliate of notice from a Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA or that it intends to terminate or has terminated under Section 4041A of ERISA, (c) the distribution by the Borrower, any of its Subsidiaries or any ERISA Affiliate under Section 4041 or 4041A of ERISA of a notice of intent to terminate any Plan or the taking of any action to terminate any Plan, (d) the commencement of proceedings by the PBGC under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Borrower, any of its Subsidiaries or any ERISA Affiliate of a notice from any Multiemployer Plan that such action has been taken by the PBGC with respect to such Multiemployer Plan, (e) the institution of a proceeding by any fiduciary of any Multiemployer Plan against the Borrower, any of its Subsidiaries or any ERISA Affiliate to enforce Section 515 of ERISA, which is not dismissed within thirty (30) days, (f) the imposition upon the Borrower, any of its Subsidiaries or any ERISA Affiliate of any liability under Title IV of ERISA, other than for PBGC premiums due but not delinquent under Section 4007 of ERISA, or the imposition or threatened imposition of any Lien upon any assets of the Borrower, any of its Subsidiaries or any ERISA Affiliate as a result of any alleged failure to comply with the Code or ERISA in respect of any Plan, (g) the engaging in or otherwise becoming liable for a nonexempt Prohibited Transaction by the Borrower, any of its Subsidiaries or any ERISA Affiliate, (h) a violation of the applicable requirements of Section 404 or 405 of ERISA or the exclusive benefit rule under Section 401(a) of the Code by any fiduciary of any Plan for which the Borrower, any of its Subsidiaries or any ERISA Affiliate may be directly or indirectly liable, (i) the adoption of an amendment to any Plan that, pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA, would result in the loss of tax-exempt status of the trust of which such Plan is a part if the Borrower, any of its Subsidiaries or any ERISA Affiliate fails to timely provide security to such Plan in accordance with the provisions of such sections or (j) the withdrawal of the Borrower, any of its Subsidiaries or any ERISA Affiliate from a Multiple Employer Plan during a play year in which it was a substantial employer (as such term is defined in Section 4001(a)(2) of ERISA), or the termination of a Multiple Employer Plan.

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“Eurodollar Loan” means a Loan bearing interest based at a rate determined by reference to the Adjusted Eurodollar Rate.

“Eurodollar Rate” means, for any Interest Period with respect to a Eurodollar Loan, the rate per annum equal to the British Bankers Association LIBOR Rate (“BBA LIBOR”), as published by Reuters (or other commercially available source providing quotations of BBA LIBOR as designated by the Administrative Agent from time to time) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, for Dollar deposits (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period.  If such rate is not available at such time for any reason, then the “Eurodollar Rate” for such Interest Period shall be the rate per annum determined by the Administrative Agent to be the rate at which deposits in Dollars for delivery on the first day of such Interest Period in same day funds in the approximate amount of the Eurodollar Loan being made, continued or converted by JPMCB and with a term equivalent to such Interest Period would be offered by JPMCB’s London Branch to major banks in the London interbank eurodollar market at their request at approximately 4:00 p.m. (London time) two Business Days prior to the commencement of such Interest Period.

“Event of Default” has the meaning set forth in Section 9.1.

“Exchange Act” means the Securities Exchange Act of 1934, and the rules and regulations promulgated thereunder, as amended, modified, succeeded or replaced from time to time.

“Existing Credit Agreement” means that certain Amended and Restated Credit Agreement, dated as of August 15, 2005, by and among the Parent, First Choice Power, L.P., and the Borrower, as borrowers, the lenders and financial institutions parties thereto, Bank of America, N.A., as administrative agent, Wachovia Bank, National Association, as syndication agent, and Citibank, N.A., JPMCB and Union Bank of California, N.A., as co-documentation agents, as it has been amended prior to the Closing Date.

“Federal Funds Rate” means, for any day, the rate per annum equal to the weighted average (rounded upward, if necessary, to a whole multiple of 1/100 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank on the Business Day next succeeding such day; provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate (rounded upward, if necessary, to a whole multiple of 1/100 of 1%) charged to JPMCB on such day on such transactions as determined by the Administrative Agent.

“Financial Officer” means the chief financial officer, principal accounting officer or treasurer of the Borrower.

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“Fiscal Quarter” means each of the calendar quarters ending as of the last day of each March, June, September and December.

“Fiscal Year” means the calendar year ending December 31.

“Foreign Lender” has the meaning set forth in Section 3.13(f).

“Fund” means any Person (other than a natural person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business.

“Funding Date” has the meaning set forth in Section 2.1(a).

“GAAP” means generally accepted accounting principles in the United States set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession) or that are promulgated by any Governmental Authority having appropriate jurisdiction.

“Governmental Authority” means any domestic or foreign nation or government, any state or other political subdivision thereof and any central bank thereof, any municipal, local, city or county government, and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government (including, without limitation, any state dental board) and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing.

“Granting Lender” has the meaning specified in Section 11.3(h).

 “Hazardous Substances” means any substances or materials (a) that are or become defined as hazardous wastes, hazardous substances, pollutants, contaminants or toxic substances under any Environmental Law, (b) that are defined by any Environmental Law as toxic, explosive, corrosive, ignitable, infectious, radioactive, mutagenic or otherwise hazardous, (c) the presence of which require investigation or response under any Environmental Law, (d) that constitute a nuisance, trespass or health or safety hazard to Persons or neighboring properties, (e) that consist of underground or aboveground storage tanks, whether empty, filled or partially filled with any substance, or (f) that contain, without limitation, asbestos, polychlorinated biphenyls, urea formaldehyde foam insulation, petroleum hydrocarbons, petroleum derived substances or wastes, crude oil, nuclear fuel, natural gas or synthetic gas.

“Hedging Agreements” means, collectively, interest rate protection agreements, equity index agreements, foreign currency exchange agreements, option agreements or other interest or exchange rate or commodity price hedging agreements (other than forward contracts for the delivery of power or gas written by the Borrower to its jurisdictional and wholesale customers in the ordinary course of business).

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“Indebtedness” means, with respect to any Person (without duplication), (a) all indebtedness and obligations of such Person for borrowed money or in respect of loans or advances of any kind, (b) all obligations of such Person evidenced by notes, bonds, debentures or similar instruments, (c) all reimbursement obligations of such Person with respect to surety bonds, letters of credit and bankers’ acceptances (in each case, whether or not drawn or matured and in the stated amount thereof), (d) all obligations of such Person to pay the deferred purchase price of property or services, (e) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person, (f) all obligations of such Person as lessee under leases that are or are required to be, in accordance with GAAP, recorded as capital leases, to the extent such obligations are required to be so recorded, (g) the net termination obligations of such Person under any Hedging Agreements, calculated as of any date as if such agreement or arrangement were terminated as of such date in accordance with the applicable rules under GAAP, (h) all Contingent Obligations of such Person, (i) all obligations and liabilities of such Person incurred in connection with any transaction or series of transactions providing for the financing of assets through one or more securitizations or in connection with, or pursuant to, any synthetic lease or similar off-balance sheet financing, (j) the aggregate amount of uncollected accounts receivable of such Person subject at the time of determination to a sale of receivables (or similar transaction) to the extent such transaction is effected with recourse to such Person (whether or not such transaction would be reflected on the balance sheet of such Person in accordance with GAAP), (k) all Specified Securities and (l) all indebtedness referred to in clauses (a) through (k) above secured by any Lien on any property or asset owned or held by such Person regardless of whether the indebtedness secured thereby shall have been assumed by such Person or is nonrecourse to the credit of such Person.

“Indemnified Liabilities” has the meaning set forth in Section 11.5(b).

“Indemnitees” has the meaning set forth in Section 11.5(b).

“Interest Payment Date” means, (a) as to any Eurodollar Loan, the last day of each Interest Period applicable to such Loan and the Maturity Date and (b) as to any Base Rate Loan, the last Business Day of each Fiscal Quarter and the Maturity Date.

“Interest Period” means, as to each Eurodollar Loan, the period commencing on the date such Eurodollar Loan is disbursed or converted to or continued as a Eurodollar Loan and ending on the date one, two or three months thereafter, as selected by the Borrower in its Notice of Borrowing or Notice of Continuation/Conversion; provided that:

(a)           any Interest Period that would otherwise end on a day that is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Business Day;

(b)           any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; and

(c)           no Interest Period shall extend beyond the Maturity Date.

“JPMCB” means JPMorgan Chase Bank, N.A., together with its successors and/or assigns.

“Laws” means, collectively, all international, foreign, federal, state and local statutes, treaties, rules, guidelines, regulations, ordinances, codes and administrative or judicial precedents or authorities, including the interpretation or administration thereof by any Governmental Authority charged with the enforcement, interpretation or administration thereof, and all applicable administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authority, in each case whether or not having the force of law.

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“Lender” means any of the Persons identified as a “Lender” on the signature pages hereto, any Eligible Assignee which may become a Lender by way of assignment in accordance with the terms hereof, together with their successors and permitted assigns.

“Lending Office” means, as to any Lender, the office or offices of such Lender described as such in such Lender’s Administrative Questionnaire, or such other office or offices as a Lender may from time to time notify the Borrower and the Administrative Agent.

“Lien” means any mortgage, pledge, hypothecation, assignment, security interest, lien (statutory or otherwise), preference, priority, charge or other encumbrance of any nature, whether voluntary or involuntary, including, without limitation, the interest of any vendor or lessor under any conditional sale agreement, title retention agreement, capital lease or any other lease or arrangement having substantially the same effect as any of the foregoing.

“Loans” has the meaning set forth in Section 2.1(a).

“Margin Stock” has the meaning ascribed to such term in Regulation U.

“Material Adverse Change” means a material adverse change in the condition (financial or otherwise), operations, business, performance, properties or assets of the Borrowerand its Subsidiaries, taken as a whole.

“Material Adverse Effect” means, with respect to the Borrower, a material adverse effect upon (a) the business, assets, liabilities (actual or contingent), operations, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries, taken as a whole, (b) the ability of the Borrower or any of its Subsidiaries to perform its obligations under this Credit Agreement or any of the other Credit Documents or (c) the legality, validity or enforceability of this Credit Agreement or any of the other Credit Documents or the rights and remedies of the Administrative Agent and the Lenders hereunder and thereunder.

“Maturity Date” means the six-month anniversary of the Funding Date or any later date as may be specified as the Maturity Date in accordance with Section 2.5.

“Moody’s” means Moody’s Investors Service, Inc. and its successors.

“Multiemployer Plan” means, with respect to the Borrower, any “multiemployer plan” within the meaning of Section 4001(a)(3) of ERISA to which the Borrower, any of its Subsidiaries or any ERISA Affiliate makes, is making or is obligated to make contributions or has made or been obligated to make contributions.

“Multiple Employer Plan” means, with respect to the Borrower, a Single Employer Plan to which the Borrower, any of its Subsidiaries or any ERISA Affiliate and at least one employer other than the Borrower, any of its Subsidiaries or any ERISA Affiliate are contributing sponsors.

“Notes” means the promissory notes of the Borrower in favor of each of the Lenders evidencing the Loans made to the Borrower provided pursuant to Section 2.1, individually or collectively, as appropriate, as such promissory notes may be amended, modified, supplemented, extended, renewed or replaced from time to time and as evidenced in the form of Exhibit 2.1(e).

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“Notice of Borrowing” means the request by the Borrower for the Loans in the form of Exhibit 2.1(b).

“Notice of Continuation/Conversion” means a request by the Borrower to continue an existing Eurodollar Loan to a new Interest Period or to convert a Eurodollar Loan to a Base Rate Loan or a Base Rate Loan to a Eurodollar Loan, in the form of Exhibit 2.3.

“Other Taxes” has the meaning set forth in Section 3.13(b).

“PBGC” means the Pension Benefit Guaranty Corporation and any successor thereto.

“Parent” means PNM Resources, Inc., a New Mexico corporation, together with its successors and permitted assigns.

“Participant” has the meaning set forth in Section 11.3(d).

“Person” means any individual, partnership, joint venture, firm, corporation, limited liability company, association, trust or other enterprise (whether or not incorporated), or any Governmental Authority.

“Plan” means, with respect to the Borrower, any “employee benefit plan” (within the meaning of Section 3(3) of ERISA) which is covered by ERISA and with respect to which the Borrower, any of its Subsidiaries or any ERISA Affiliate is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an “employer” within the meaning of Section 3(5) of ERISA.

“Preferred Stock” means, with respect to any Person, all preferred Capital Stock issued by such Person in which the terms thereof do not require such Capital Stock to be redeemed or to make mandatory sinking fund payments.

“Prime Rate” has the meaning set forth in the definition of Base Rate in this Section 1.1.

“Pro Rata Share” means, with respect to each Lender at any time, a fraction (expressed as a percentage, carried out to the ninth decimal place), the numerator of which is the amount of the Commitment of such Lender at such time and the denominator of which is the amount of the Committed Amount at such time; provided that if the Commitment of each Lender to make Loans have been terminated pursuant to Section 9.2 or otherwise, then the Pro Rata Share of each Lender shall be determined based on such Lender’s percentage ownership of the sum of the aggregate amount of outstanding Loans.  The initial Pro Rata Share of each Lender is set forth opposite the name of such Lender on Schedule 1.1(a) or in the Assignment and Assumption pursuant to which such Lender becomes a party hereto, as applicable.

“Prohibited Transaction” means any transaction described in (a) Section 406 of ERISA that is not exempt by reason of Section 408 of ERISA or by reason of a Department of Labor prohibited transaction individual or class exemption or (b) Section 4975(c) of the Code that is not exempt by reason of Section 4975(c)(2) or 4975(d) of the Code.

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“Property” means any right, title or interest in or to any property or asset of any kind whatsoever, whether real, personal or mixed and whether tangible or intangible.

“Register” has the meaning set forth in Section 11.3(c).

“Regulations T, U and X” means Regulations T, U and X, respectively, of the Federal Reserve Board, and any successor regulations.

“Reportable Event” means (a) any “reportable event” within the meaning of Section 4043(c) of ERISA for which the notice under Section 4043(a) of ERISA has not been waived by the PBGC (including any failure to meet the minimum funding standard of, or timely make any required installment under, Section 412 of the Code or Section 302 of ERISA, regardless of the issuance of any waivers in accordance with Section 412(d) of the Code), (b) any such “reportable event” subject to advance notice to the PBGC under Section 4043(b)(3) of ERISA, (c) any application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the Code, and (d) a cessation of operations described in Section 4062(e) of ERISA.

“Required Lenders” means Lenders whose aggregate Credit Exposure (as hereinafter defined) constitutes more than 50% of the Credit Exposure of all Lenders at such time; provided, however, that if any Lender shall be a Defaulting Lender at such time then there shall be excluded from the determination of Required Lenders the aggregate principal amount of Credit Exposure of such Lender at such time.  For purposes of the preceding sentence, the term “Credit Exposure” as applied to each Lender shall mean (a) at any time prior to the termination of the Commitments, the Pro Rata Share of such Lender of the Committed Amount multiplied by the Committed Amount and (b) at any time after the termination of the Commitments, the principal balance of the outstanding Loans of such Lender.

“Requirement of Law” means, with respect to any Person, the organizational documents of such Person and any Law applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject or otherwise pertaining to any or all of the transactions contemplated by this Credit Agreement and the other Credit Documents.

“Responsible Officer” means, with respect to the Borrower, the president, the chief executive officer, the chief financial officer, any executive officer, principal accounting officer or treasurer of the Borrower, and any other officer or similar official thereof responsible for the administration of the obligations of the Borrower in respect of this Credit Agreement and the other Credit Documents.

“Restricted Payment” means, with respect to any Person, any dividend or other distribution (whether in cash, securities or other property) with respect to any Capital Stock of such Person.

“S&P” means Standard & Poor’s Rating Service, a division of The McGraw-Hill Companies, Inc. and its successors.

“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

“Single Employer Plan” means any Plan which is covered by Title IV of ERISA, but which is not a Multiemployer Plan or Multiple Employer Plan.

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“Solvent” means, with respect to any Person as of a particular date, that on such date (a) such Person is able to pay its debts and other liabilities, Contingent Obligations and other commitments as they mature in the normal course of business, (b) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person’s ability to pay as such debts and liabilities mature in their ordinary course, (c) such Person is not engaged in a business or a transaction, and is not about to engage in a business or a transaction, for which such Person’s assets would constitute unreasonably small capital after giving due consideration to the prevailing practice in the industry in which such Person is engaged or is to engage, (d) the fair value of the assets of such Person is greater than the total amount of liabilities, including, without limitation, Contingent Obligations, of such Person and (e) the present fair saleable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured.

“SPC” has the meaning set forth in Section 11.3(h).

“Specified Securities” means, with respect to any Person, (a) all preferred Capital Stock issued by such Person and required by the terms thereof to be redeemed or for which mandatory sinking fund payments are due, (b) all securities issued by such Person that contain two distinct components, typically medium-term debt and a forward contract for the issuance of common stock prior to the debt maturity, including such securities commonly referred to by their tradenames as “FELINE PRIDES”, “PEPS”, “HITS”, “SPACES” and “DECS” and generally referred to as “equity units” and (c) all other securities issued by such Person that are similar to those described in the forgoing clauses (a) and (b).

“Subsidiary” means, as to any Person, (a) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time, any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person directly or indirectly through Subsidiaries, and (b) any partnership, association, joint venture or other entity in which such person directly or indirectly through Subsidiaries has more than a 50% equity interest at any time.  Any reference to Subsidiary herein, unless otherwise identified, shall mean a Subsidiary, direct or indirect, of the Borrower.  Any reference to a Subsidiary of the Borrower herein shall not include any Subsidiary that is inactive, has minimal or no assets and does not generate revenues.

“Taxes” has the meaning set forth in Section 3.13(a).

“Total Assets” means all assets of the Borrower and its Subsidiaries as shown on its most recent quarterly consolidated balance sheet, as determined in accordance with GAAP.

“Type” means, with respect to a Loan, its character as a Base Rate Loan or a Eurodollar Loan.

“Unused Commitment” means, for any date of determination, the amount by which (a) the aggregate Committed Amount on such date exceeds (b) the sum of the aggregate principal amount of outstanding Loans.

“Voting Stock” means the Capital Stock of a Person that is then outstanding and normally entitled to vote in the election of directors and other securities of such Person convertible into or exercisable for such Capital Stock (whether or not such securities are then currently convertible or exercisable).

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1.2           Computation of Time Periods and Other Definitional Provisions.

For purposes of computation of periods of time hereunder, the word “from” means “from and including” and the words “to” and “until” each mean “to but excluding.”  References in this Credit Agreement to “Articles”, “Sections”, “Schedules” or “Exhibits” shall be to Articles, Sections, Schedules or Exhibits of or to this Credit Agreement unless otherwise specifically provided.

1.3           Accounting Terms/Calculation of Financial Covenants.

Except as otherwise expressly provided herein, all accounting terms used herein or incorporated herein by reference shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Administrative Agent or the Lenders hereunder shall be prepared, in accordance with GAAP applied on a consistent basis. Notwithstanding anything to the contrary in this Credit Agreement, for purposes of calculation of the financial covenant set forth in Section 7.2, all accounting determinations and computations thereunder shall be made in accordance with GAAP as in effect as of the date of this Credit Agreement applied on a basis consistent with the application used in preparing the most recent financial statements of the Borrower referred to in Section 4.1(d).  In the event that any changes in GAAP after such date are required to be applied to the Borrower,  and would affect the computation of the financial covenant contained in Section 7.2, such changes shall be followed only from and after the date this Credit Agreement shall have been amended to take into account any such changes.

1.4           Time.

All references to time herein shall be references to Central Standard Time or Central Daylight Time, as the case may be, unless specified otherwise.

1.5           Rounding of Financial Covenants.

Any financial ratios required to be maintained by the Borrower pursuant to this Credit Agreement shall be calculated by dividing the appropriate component by the other component, carrying the result to one place more than the number of places by which such ratio is expressed herein and rounding the result up or down to the nearest number (with a rounding-up if there is no nearest number).

1.6           References to Agreements and Requirement of Laws.

Unless otherwise expressly provided herein: (a) references to organization documents, agreements (including the Credit Documents) and other contractual instruments shall be deemed to include all subsequent amendments, restatements, extensions, supplements and other modifications thereto, but only to the extent that such amendments, restatements, extensions, supplements and other modifications are not prohibited by any Credit Document and (b) references to any Requirement of Law shall include all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting such Requirement of Law.

1.7           [Reserved]

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SECTION 2

CREDIT FACILITY

2.1           Loans.

(a)           Commitment.   Subject to the terms and conditions set forth herein, each Lender severally agrees to make term loans (each a “Loan” and collectively the “Loans”) in Dollars to the Borrower in a single draw on any date prior to the thirty-fifth (35th) day after the Closing Date (the “Funding Date”) (or such earlier date if the Commitments have been terminated as provided herein); provided, however, that after giving effect to any Borrowing (i) the sum of the aggregate principal amount of outstanding Loans shall not exceed the Committed Amount, and (ii) with respect to each individual Lender, the sum of the aggregate principal amount of outstanding Loans of such Lender shall not exceed such Lender’s Pro Rata Share of the Committed Amount.  No amount of the Loans may be reborrowed after repayment.  The unused Commitments hereunder shall automatically terminate after giving effect to the initial Borrowing on the Funding Date, and no Commitment Fee shall be due under Section 3.4(a) for any day after the Funding Date.

(b)           Method of Borrowing for Loans.  By no later than 11:00 a.m. (i) on the date of the requested Borrowing of Loans that will be Base Rate Loans and (ii) three Business Days prior to the date of the requested Borrowing of Loans that will be Eurodollar Loans, the Borrower shall telephone the Administrative Agent as well as submit a written Notice of Borrowing in the form of Exhibit 2.1(b) to the Administrative Agent setting forth (A) the amount requested, (B) the date of the requested Borrowing, (C) the Type of Loan, (D) with respect to Loans that will be Eurodollar Loans, the Interest Period applicable thereto, and (E) certification that the Borrower has complied in all respects with Section 5.  If the Borrower shall fail to specify (1) an Interest Period in the case of a Eurodollar Loan, then such Eurodollar Loan shall be deemed to have an Interest Period of one month or (2) the Type of Loan requested, then such Loan shall be deemed to be a Base Rate Loan.

(c)           Funding of Loans.  Upon receipt of the Notice of Borrowing, the Administrative Agent shall promptly inform the Lenders as to the terms thereof.  Each such Lender shall make its Pro Rata Share of the requested Loans available to the Administrative Agent in immediately available funds at the Administrative Agent’s Office not later than 1:00 p.m. on the Business Day specified in the Notice of Borrowing.  Upon satisfaction of the conditions set forth in Section 5, the amount of the requested Loans will then be made available to the Borrower by the Administrative Agent either by (i) crediting the account of the Borrower on the books of the Administrative Agent with the amount of such funds or (ii) wire transfer of such funds, in each case in accordance with instructions provided to (and reasonably acceptable to) the Administrative Agent by the Borrower.

(d)           Reductions of Committed Amount.  Upon at least three Business Days’ notice, the Borrower shall have the right to permanently terminate or reduce the aggregate unused amount of the Committed Amount at any time or from time to time; provided that (i) each partial reduction shall be in an aggregate amount at least equal to $5,000,000 and in integral multiples of $1,000,000 above such amount and (ii) no reduction shall be made which would reduce the Committed Amount to an amount less than the sum of the aggregate principal amount of outstanding Loans.  Any reduction in (or termination of) the Committed Amount shall be permanent and may not be reinstated.

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(e)           Notes.  At the request of any Lender, the Loans made by such Lender shall be evidenced by duly executed promissory notes of the Borrower in favor of such Lender in substantially the form of Exhibit 2.1(e).  Each Lender may attach schedules to its Note and endorse thereon the date, Type (if applicable), amount and maturity of its Loans and payments with respect thereto.

(f)           [Reserved].

(g)           [Reserved].

2.2           [Reserved].

2.3           Continuations and Conversions.

Subject to the terms below, the Borrower shall have the option, on any Business Day prior to the Maturity Date, to continue existing Eurodollar Loans for a subsequent Interest Period, to convert Base Rate Loans into Eurodollar Loans or to convert Eurodollar Loans into Base Rate Loans.  By no later than 11:00 a.m. (a) on the date of the requested conversion of a Eurodollar Loan to a Base Rate Loan and (b) three Business Days prior to the date of the requested continuation of a Eurodollar Loan or conversion of a Base Rate Loan to a Eurodollar Loan, the Borrower shall provide telephonic notice to the Administrative Agent, followed promptly by a written Notice of Continuation/Conversion in the form of Exhibit 2.3, setting forth whether the Borrower wishes to continue or convert such Loans.  Notwithstanding anything herein to the contrary, (A) except as provided in Section 3.11, Eurodollar Loans may only be continued or converted into Base Rate Loans on the last day of the Interest Period applicable thereto, (B) Eurodollar Loans may not be continued nor may Base Rate Loans be converted into Eurodollar Loans during the existence and continuation of a Default or an Event of Default and (C) any request to continue a Eurodollar Loan that fails to comply with the terms hereof or any failure to request a continuation of a Eurodollar Loan at the end of an Interest Period shall be deemed a request to convert such Eurodollar Loan to a Base Rate Loan on the last day of the applicable Interest Period.

2.4           Minimum Amounts.

Each request for a borrowing, conversion or continuation shall be subject to the requirements that (a) each Eurodollar Loan shall be in a minimum amount of $5,000,000 and in integral multiples of $1,000,000 in excess thereof, (b) each Base Rate Loan shall be in a minimum amount of $3,000,000 and in integral multiples of $100,000 in excess thereof (or the remaining amount of outstanding  Loans) and (c) no more than five Eurodollar Loans shall be outstanding hereunder at any one time.  For the purposes of this Section 2.4, separate Eurodollar Loans that begin and end on the same date, as well as Eurodollar Loans that begin and end on different dates, shall all be considered as separate Eurodollar Loans.

2.5           Extension Option.

(a)           Request for Extension.  At any time prior to the 30th day immediately preceding the then effective Maturity Date, the Borrower may by notice to the Lenders (such notice being an “Extension Request”), request that the Lenders extend the Maturity Date for a period (which period shall not exceed six months) as set forth in such notice.   Each Lender shall, by notice to the Borrower and the Administrative Agent not later than the 10th day following the date of any such request from the Borrower, advise the Borrower whether or not it agrees to extend the Maturity Date as requested.  Each decision by a Lender shall be in the sole discretion of such Lender, and any Lender that has not so advised the Administrative Agent by the 10th day following the date of such request from the Borrower shall be deemed to have declined to agree to such extension.  Each of the parties hereto acknowledges and agrees that no Lender shall be obligated to extend the Maturity Date pursuant to the terms of this Section 2.5.  Any Lender who fails to agree to the Extension Request of the Borrower, as set forth herein, shall be referred to, for purposes of this Section, as a “Non-Extending Lender”.

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(b)           Extension.  If Lenders holding Commitments representing at least 50% of the aggregate outstanding principal amount of the Loans agree to any such request for extension of the Maturity Date (collectively, the “Approving Lenders”), then the Borrower may extend the Maturity Date for the period set forth in the Extension Request solely as to the Approving Lenders.  If Non-Extending Lenders hold Commitments representing more than 50% of the aggregate outstanding principal amount of the Loans then the Borrower shall withdraw its Extension Request and the Maturity Date will remain unchanged.  With respect to the Non-Extending Lenders, it is understood and agreed that the Maturity Date relating to the Non-Extending Lenders shall remain unchanged and the repayment of all obligations owed to them and the termination of their Commitments shall occur on the then existing Maturity Date without giving effect to such Extension Request.

2.6           [Reserved].

2.7           Evidence of Debt.

The Credit Extensions made by each Lender shall be evidenced by one or more accounts or records maintained by such Lender and by the Administrative Agent in the ordinary course of business.  The accounts or records maintained by the Administrative Agent and each Lender shall be conclusive absent manifest error of the amount of the Credit Extensions made by the Lenders to the Borrower and the interest and payments thereon.  Any failure to so record or any error in doing so shall not, however, limit or otherwise affect the obligation of the Borrower hereunder to pay any amount owing with respect to its Borrower Obligations.  In the event of any conflict between the accounts and records maintained by any Lender and the accounts and records of the Administrative Agent in respect of such matters, the accounts and records of the Administrative Agent shall control in the absence of manifest error.

SECTION 3

GENERAL PROVISIONS APPLICABLE

TO LOANS

3.1           Interest.

(a)           Interest Rate.  Subject to Sections 3.1(b), (i) all Base Rate Loans shall accrue interest at the Base Rate and (ii) all Eurodollar Loans shall accrue interest at the Adjusted Eurodollar Rate.

(b)           Default Rate of Interest.

(i) After the occurrence, and during the continuation, of an Event of Default pursuant to Section 9.1(a), the principal of and, to the extent permitted by Law, interest on the Loans and any other amounts owing hereunder or under the other Credit Documents (including without limitation fees and expenses) shall bear interest, payable on demand, at the Default Rate.

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(ii)           After the occurrence, and during the continuation, of an Event of Default (other than an Event of Default pursuant to Section 9.1(a)), at the request of the Required Lenders, the principal of and, to the extent permitted by Law, interest on the Loan and any other amounts owing hereunder or under the other Credit Documents (including without limitation fees and expenses) shall bear interest, payable on demand, at the Default Rate.

(c)           Interest Payments.  Interest on Loans shall be due and payable in arrears on each Interest Payment Date.

3.2           Payments Generally.

(a)           No Deductions; Place and Time of Payments.  All payments to be made by the Borrower shall be made without condition or deduction for any counterclaim, defense, recoupment or setoff.  Except as otherwise expressly provided herein, all payments by the Borrower hereunder shall be made to the Administrative Agent, for the account of the respective Lenders to which such payment is owed, at the Administrative Agent’s Office in Dollars and in immediately available funds not later than 2:00 p.m. on the date specified herein.  The Administrative Agent will promptly distribute to each Lender its Pro Rata Share (or other applicable share as provided herein) of such payment in like funds as received by wire transfer to such Lender’s Lending Office.  All payments received by the Administrative Agent after 2:00 p.m. shall be deemed received on the next succeeding Business Day and any applicable interest or fee shall continue to accrue.

(b)           Payment Dates.  Subject to the definition of “Interest Period,” if any payment to be made by the Borrower shall come due on a day other than a Business Day, payment shall be made on the next following Business Day, and such extension of time shall be reflected in computing interest or fees, as the case may be.

(c)           Advances by Administrative Agent.  Unless the Borrower or any Lender has notified the Administrative Agent, prior to the time any payment is required to be made by it to the Administrative Agent hereunder, that the Borrower or such Lender, as the case may be, will not make such payment, the Administrative Agent may assume that the Borrower or such Lender, as the case may be, has timely made such payment and may (but shall not be so required to), in reliance thereon, make available a corresponding amount to the Person entitled thereto.  If and to the extent that such payment was not in fact made to the Administrative Agent in immediately available funds, then:

(i)           if the Borrower failed to make such payment, each Lender shall forthwith on demand repay to the Administrative Agent the portion of such assumed payment that was made available to such Lender in immediately available funds, together with interest thereon in respect of each day from and including the date such amount was made available by the Administrative Agent to such Lender to the date such amount is repaid to the Administrative Agent in immediately available funds at the Federal Funds Rate from time to time in effect; and

(ii)           if any Lender failed to make such payment, such Lender shall forthwith on demand pay to the Administrative Agent the amount thereof in immediately available funds, together with interest thereon for the period from the date such amount was made available by the Administrative Agent to the Borrower to the date such amount is recovered by the Administrative Agent (the “Compensation Period”) at a rate per annum equal to the Federal Funds Rate from time to time in effect.  If such Lender pays such amount to the Administrative Agent, then such amount shall constitute such Lender’s Loan included in the applicable Borrowing.  If such Lender does not pay such amount forthwith upon the Administrative Agent’s demand therefor, the Administrative Agent may make a demand therefor upon the Borrower, and the Borrower shall pay such amount to the Administrative Agent, together with interest thereon for the Compensation Period at a rate per annum equal to the rate of interest applicable to such Borrowing.  Nothing herein shall be deemed to relieve any Lender from its obligation to fulfill its Commitment or to prejudice any rights which the Administrative Agent or the Borrower may have against any Lender as a result of any default by such Lender hereunder.

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A notice of the Administrative Agent to any Lender or the Borrower with respect to any amount owing under this subsection (c) shall be conclusive, absent manifest error.

(d)           Several Obligations.  The obligations of the Lenders hereunder to make Loans are several and not joint.  The failure of any Lender to make any Loan on any date required hereunder shall not relieve any other Lender of its corresponding obligation to do so on such date, and no Lender shall be responsible for the failure of any other Lender to so make its Loan.

(e)           Funding Offices.  Nothing herein shall be deemed to obligate any Lender to obtain the funds for any Loan in any particular place or manner or to constitute a representation by any Lender that it has obtained or will obtain the funds for any Loan in any particular place or manner.

3.3           Prepayments.

(a)           Voluntary Prepayments.  The Borrower shall have the right to prepay its outstanding Loans in whole or in part from time to time without premium or penalty; provided, however, that (i) all prepayments under this Section 3.3(a) shall be subject to Section 3.14, (ii) Eurodollar Loans may only be prepaid on three Business Days’ prior written notice to the Administrative Agent, (iii) each such partial prepayment of Eurodollar Loans shall be in the minimum principal amount of $5,000,000 and integral multiples of $1,000,000 and (iv) each such partial prepayment of Base Rate Loans shall be in the minimum principal amount of $500,000 and integral multiples of $100,000 or, in the case of clauses (iii) and (iv), if less than such minimum amounts, the entire principal amount thereof then outstanding.  Amounts prepaid pursuant to this Section 3.3(a) shall be applied as the Borrower may elect based on the Lenders’ Pro Rata Shares; provided, however, if the Borrower fails to specify, such prepayment shall be applied by the Administrative Agent, subject to Section 3.7, in such manner as it deems reasonably appropriate.

(b)           Mandatory Prepayments.  If at any time (i) the sum of the aggregate principal amount of Loans outstanding exceeds the Committed Amount, the Borrower shall immediately make a principal payment to the Administrative Agent in an amount in Dollars as is necessary to be in compliance with Section 2.1 and as directed by the Administrative Agent.  All amounts required to be prepaid pursuant to this Section 3.3(b) shall be applied first to Base Rate Loans, and second to Eurodollar Loans in direct order of Interest Period maturities.  All prepayments pursuant to this Section 3.3(b) shall be subject to Section 3.14.

3.4           Fees.

(a)           Commitment Fees.  In consideration of the Committed Amount being made available by the Lenders hereunder, the Borrower agrees to pay to the Administrative Agent, for each day prior to the Funding Date and for the pro rata benefit of each Lender based on its Pro Rata Share, a per annum fee equal to 0.15% multiplied by the Unused Commitment for each such day (the “Commitment Fees”).  The Commitment Fees shall commence to accrue on the Closing Date and shall be due and payable in arrears on the Funding Date, and if earlier, any date that the Committed Amount is reduced, for the period then ending.

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3.5           Payment in full at Maturity.

Subject to the terms of Section 2.5, on the Maturity Date, the entire outstanding principal balance of all Loans, together with accrued but unpaid interest and all fees and other sums owing under the Credit Documents, shall be due and payable in full, unless accelerated sooner pursuant to Section 9.2; provided that if the Maturity Date is not a Business Day, then such principal, interest, fees and other sums shall be due and payable in full on the next preceding Business Day.

3.6           Computations of Interest and Fees.

(a)           Calculation of Interest and Fees.  Except for Base Rate Loans that are based upon the Prime Rate, in which case interest shall be computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be, all computations of interest and fees hereunder shall be made on the basis of the actual number of days elapsed over a year of 360 days.  Interest shall accrue from and including the first date of Borrowing (or continuation or conversion) to but excluding the last day occurring in the period for which such interest is payable.  Each determination by the Administrative Agent of an interest rate or fee hereunder shall be conclusive and binding for all purposes, absent manifest error.

(b)           Usury.  It is the intent of the Lenders and the Borrower to conform to and contract in strict compliance with applicable usury Law from time to time in effect.  All agreements between the Lenders and the Borrower are hereby limited by the provisions of this subsection which shall override and control all such agreements, whether now existing or hereafter arising and whether written or oral.  In no way, nor in any event or contingency (including but not limited to prepayment or acceleration of the maturity of any Borrower Obligation), shall the interest taken, reserved, contracted for, charged, or received under this Credit Agreement, under the Notes or otherwise, exceed the maximum nonusurious amount permissible under applicable Law.  If, from any possible construction of any of the Credit Documents or any other document, interest would otherwise be payable in excess of the maximum nonusurious amount, any such construction shall be subject to the provisions of this subsection and such documents shall be automatically reduced to the maximum nonusurious amount permitted under applicable Law, without the necessity of execution of any amendment or new document.  If any Lender shall ever receive anything of value which is characterized as interest on the Loans under applicable Law and which would, apart from this provision, be in excess of the maximum nonusurious amount, an amount equal to the amount which would have been excessive interest shall, without penalty, be applied to the reduction of the principal amount owing on the Loans and not to the payment of interest, or refunded to the Borrower or the other payor thereof if and to the extent such amount which would have been excessive exceeds such unpaid principal amount of the Loans.  The right to demand payment of the Loans or any other Indebtedness evidenced by any of the Credit Documents does not include the right to accelerate the payment of any interest which has not otherwise accrued on the date of such demand, and the Lenders do not intend to charge or receive any unearned interest in the event of such demand.  All interest paid or agreed to be paid to the Lenders with respect to the Loans shall, to the extent permitted by applicable Law, be amortized, prorated, allocated, and spread throughout the full stated term (including any renewal or extension) of the Loans so that the amount of interest on account of the Loans does not exceed the maximum nonusurious amount permitted by applicable Law.

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3.7           Pro Rata Treatment.

Except to the extent otherwise provided herein, each Borrowing, each payment or prepayment of principal of any Loan, each payment of interest, each payment of fees (other than administrative fees paid to the Administrative Agent), each conversion or continuation of any Loans and each reduction in the Committed Amount, shall be allocated pro rata among the relevant Lenders in accordance with their Pro Rata Shares; provided that, if any Lender shall have failed to pay its Pro Rata Share of any Loan, then any amount to which such Lender would otherwise be entitled pursuant to this Section 3.7 shall instead be payable to the Administrative Agent until the share of such Loan by such Lender has been repaid.  In the event any principal, interest, fee or other amount paid to any Lender pursuant to this Credit Agreement or any other Credit Document is rescinded or must otherwise be returned by the Administrative Agent, (a) such principal, interest, fee or other amount that had been satisfied by such payment shall be revived, reinstated and continued in full force and effect as if such payment had not occurred and (b) such Lender shall, upon the request of the Administrative Agent, repay to the Administrative Agent the amount so paid to such Lender, with interest for the period commencing on the date such payment is returned by the Administrative Agent until the date the Administrative Agent receives such repayment at a rate per annum equal to the Federal Funds Rate if repaid within two (2) Business Days after such request and thereafter the Base Rate.

3.8           Sharing of Payments.

The Lenders agree among themselves that, except to the extent otherwise provided herein, in the event that any Lender shall obtain payment in respect of any Loan, or any other obligation owing to such Lender under this Credit Agreement through the exercise of a right of setoff, banker’s lien or counterclaim, or pursuant to a secured claim under Section 506 of the Bankruptcy Code or other security or interest arising from, or in lieu of, such secured claim, received by such Lender under any applicable Debtor Relief Law or other similar Law or otherwise, or by any other means, in excess of its Pro Rata Share of such payment as provided for in this Credit Agreement, such Lender shall promptly pay in cash or purchase from the other Lenders a participation in such Loans, and other obligations in such amounts, and make such other adjustments from time to time, as shall be equitable to the end that all Lenders share such payment in accordance with their Pro Rata Shares.  The Lenders further agree among themselves that if payment to a Lender obtained by such Lender through the exercise of a right of setoff, banker’s lien, counterclaim or other event as aforesaid shall be rescinded or must otherwise be returned, each Lender which shall have shared the benefit of such payment shall, by payment in cash or a repurchase of a participation theretofore sold, return its share of that benefit (together with its share of any accrued interest payable with respect thereto) to each Lender whose payment shall have been rescinded or otherwise returned.  The Borrower agrees that (a) any Lender so purchasing such a participation may, to the fullest extent permitted by Law, exercise all rights of payment, including setoff, banker’s lien or counterclaim, with respect to such participation as fully as if such Lender were a holder of such Loan, or other obligation in the amount of such participation and (b) the Borrower Obligations that have been satisfied by a payment that has been rescinded or otherwise returned shall be revived, reinstated and continued in full force and effect as if such payment had not occurred.  Except as otherwise expressly provided in this Credit Agreement, if any Lender or the Administrative Agent shall fail to remit to any other Lender an amount payable by such Lender or the Administrative Agent to such other Lender pursuant to this Credit Agreement on the date when such amount is due, such payments shall be made together with interest thereon for each date from the date such amount is due until the date such amount is paid to the Administrative Agent or such other Lender at a rate per annum equal to the Federal Funds Rate.  If under any applicable Debtor Relief Law or other similar Law, any Lender receives a secured claim in lieu of a setoff to which this Section 3.8 applies, such Lender shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Lenders under this Section 3.8 to share in the benefits of any recovery on such secured claim.

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3.9           Capital Adequacy.

If any Lender determines that the introduction after the Closing Date of any Law, rule or regulation or other Requirement of Law regarding capital adequacy or any change therein or in the interpretation thereof, or compliance by such Lender (or its Lending Office) therewith, has or would have the effect of reducing the rate of return on the capital or assets of such Lender or any corporation controlling such Lender as a consequence of such Lender’s obligations hereunder (taking into consideration its policies with respect to capital adequacy and such Lender’s desired return on capital), then from time to time upon demand of such Lender (with a copy of such demand to the Administrative Agent), the Borrower shall pay to such Lender such additional amounts as will compensate such Lender for such reduction.

3.10                      Eurodollar Provisions.

If the Administrative Agent determines (which determination shall be conclusive and binding upon the Borrower) in connection with any request for a Eurodollar Loan or a conversion to or continuation thereof that (i) deposits in Dollars are not being offered to banks in the applicable offshore interbank market for the applicable amount and Interest Period of such Eurodollar Loan, (ii) adequate and reasonable means do not exist for determining the Eurodollar Rate for such Eurodollar Loan, or (iii) the Eurodollar Rate for such Eurodollar Loan in such does not adequately and fairly reflect the cost to the Lenders of funding such Eurodollar Loan, the Administrative Agent will promptly notify the Borrower and the Lenders.  Thereafter, the obligation of the Lenders to make or maintain Eurodollar Loans shall be suspended until the Administrative Agent revokes such notice.  Upon receipt of such notice, the Borrower may revoke any pending Notice of Borrowing or Notice of Continuation/Conversion with respect to Eurodollar Loans or, failing that, will be deemed to have converted such request into a request for a Borrowing of or, to the extent permitted hereunder, conversion into a Base Rate Loan in the amount specified therein.

3.11                      Illegality.

If any Lender determines that any Requirement of Law has made it unlawful, or that any Governmental Authority has asserted that it is unlawful, for any Lender or its applicable Lending Office to make, maintain or fund Eurodollar Loans, or materially restricts the authority of such Lender to purchase or sell, or to take deposits of Dollars in the London interbank market, or to determine or charge interest rates based upon the Eurodollar Rate, then, on notice thereof by such Lender to the Borrower through the Administrative Agent, any obligation of such Lender to make or continue Eurodollar Loans or to convert Base Rate Loans to Eurodollar Loans shall be suspended until such Lender notifies the Administrative Agent and the Borrower that the circumstances giving rise to such determination no longer exist.  Upon receipt of such notice, the Borrower shall, upon demand to the Borrower from such Lender (with a copy to the Administrative Agent), prepay or, if applicable, convert all Eurodollar Loans of such Lender to Base Rate Loans, either on the last day of the Interest Period thereof, if such Lender may lawfully continue to maintain such Eurodollar Loans to such day, or immediately, if such Lender may not lawfully continue to maintain such Eurodollar Loans.  Upon any such prepayment or conversion, the Borrower shall also pay interest on the amount so prepaid or converted, together with any amounts due with respect thereto pursuant to Section 3.14.

3.12                      Requirements of Law; Reserves on Eurodollar Loans.

(a)           Changes in Law.  If any Lender determines that as a result of the introduction of or any change in, or in the interpretation of, any Requirement of Law, or such Lender’s compliance therewith, there shall be any increase in the cost to such Lender of agreeing to make or making, funding or maintaining Eurodollar Loans, or a reduction in the amount received or receivable by such Lender in connection with any of the foregoing (excluding for purposes of this Section 3.12 any such increased costs or reduction in amount resulting from (i) Taxes or Other Taxes (as to which Section 3.13 shall govern) and (ii) reserve requirements contemplated by subsection (b) below), then from time to time, upon demand of such Lender (through the Administrative Agent), the Borrower shall pay to such Lender such additional amounts as will compensate such Lender for such increased cost or reduction in yield.

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(b)           Reserves.  The Borrower shall pay to each Lender (to the extent such Lender has not otherwise been compensated therefor hereunder), as long as such Lender shall be required to maintain reserves with respect to liabilities or assets consisting of or including Eurodollar funds or deposits (currently known as “Eurodollar liabilities”), additional interest on the unpaid principal amount of each Eurodollar Loan equal to the actual costs of such reserves allocated to such Loan by such Lender (as determined by such Lender in good faith, which determination shall be conclusive absent demonstrable error), which, shall be due and payable on each date on which interest is payable on such Loan; provided that the Borrower shall have received at least 15 days’ prior notice (with a copy to the Administrative Agent) of such additional interest from such Lender.  If a Lender fails to give notice 15 days prior to the relevant Interest Payment Date, such additional interest shall be due and payable 15 days from receipt of such notice.

3.13                      Taxes.

(a)           Payment of Taxes.  Any and all payments by the Borrower to or for the account of the Administrative Agent or any Lender under any Credit Document shall be made free and clear of and without deduction for any and all present or future income, stamp or other taxes, duties, levies, imposts, deductions, assessments, fees, withholdings or similar charges, and all liabilities with respect thereto, but excluding, in the case of the Administrative Agent and each Lender, taxes imposed on or measured by its net income, and franchise taxes imposed on it (in lieu of net income taxes), by the jurisdiction (or any political subdivision thereof) under the Laws of which the Administrative Agent or such Lender, as the case may be, is organized or maintains its Lending Office (all such non-excluded present or future income, stamp or other taxes, duties, levies, imposts, deductions, assessments, fees, withholdings or similar charges, and liabilities being hereinafter referred to as “Taxes”).  If the Borrower shall be required by any Requirement of Law to deduct any Taxes from or in respect of any sum payable under any Credit Document to the Administrative Agent or any Lender, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 3.13(a)), the Administrative Agent or such Lender, as the case may be, receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other Governmental Authority in accordance with applicable Requirements of Law, and (iv) within 30 days after the date of such payment, the Borrower shall furnish to the Administrative Agent (which shall forward the same to such Lender, if applicable) the original or a certified copy of a receipt evidencing payment thereof, to the extent such receipt is issued therefor, or other written proof of payment thereof that is reasonably satisfactory to the Administrative Agent.

(b)           Additional Taxes.  In addition, the Borrower agrees to pay any and all present or future stamp, court or documentary taxes and any other excise or property taxes or charges or similar levies which arise from any payment made under any Credit Document or from the execution, delivery, performance, enforcement or registration of, or otherwise with respect to, any Credit Document (hereinafter referred to as “Other Taxes”).

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(c)           No Deduction for Taxes.  If the Borrower shall be required to deduct or pay any Taxes or Other Taxes from or in respect of any sum payable under any Credit Document to the Administrative Agent or any Lender, the Borrower shall also pay to the Administrative Agent (for the account of such Lender) or to such Lender, at the time interest is paid, such additional amount that such Lender specifies as necessary to preserve the after-tax yield (after factoring in all taxes, including taxes imposed on or measured by net income) such Lender would have received if such Taxes or Other Taxes had not been imposed.

(d)           Indemnification.  The Borrower agrees to indemnify the Administrative Agent and each Lender for (i) the full amount of Taxes and Other Taxes (including any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 3.13(d)) paid by the Administrative Agent and such Lender, and (ii) any liability (including penalties, interest and expenses) arising therefrom or with respect thereto.

(e)           Exemption from Taxes.  In the case of any payment hereunder or under any other Credit Document by or on behalf of the Borrower through an account or branch outside the United States, or on behalf of the Borrower by a payor that is not a United States person, if the Borrower determines that no taxes are payable in respect thereof, the Borrower shall furnish, or shall cause such payor to furnish, to the Administrative Agent, an opinion of counsel reasonably acceptable to the Administrative Agent stating that such payment is exempt from Taxes.  For purposes of this subsection (e), the terms “United States” and “United States person” shall have the meanings specified in Section 7701 of the Code.

(f)           Foreign Lenders.  Each Lender that is a foreign corporation, foreign partnership or foreign trust within the meaning of the Code (a “Foreign Lender”) shall deliver to the Administrative Agent, prior to receipt of any payment subject to withholding under the Code, two duly signed completed copies of either IRS Form W-8BEN or any successor thereto (relating to such Lender and entitling it to an exemption from, or reduction of, withholding tax on all payments to be made to such Lender by the Borrower pursuant to this Credit Agreement), as appropriate, or IRS Form W-8ECI or any successor thereto (relating to all payments to be made to such Lender by the Borrower pursuant to this Credit Agreement) or such other evidence satisfactory to the Borrower and the Administrative Agent that such Lender is entitled to an exemption from, or reduction of, United States withholding tax. Thereafter and from time to time, each such Lender shall (i) promptly submit to the Administrative Agent such additional duly completed and signed copies of one of such forms (or such successor forms as shall be adopted from time to time by the relevant United States taxing authorities), as appropriate, as may reasonably be requested by the Borrower or the Administrative Agent and then be available under then current United States Laws and regulations to avoid, or such evidence as is satisfactory to the Borrower and the Administrative Agent of any available exemption from or reduction of, United States withholding taxes in respect of all payments to be made to such Lender by the Borrower pursuant to this Credit Agreement, (ii) promptly notify the Administrative Agent of any change in circumstances which would modify or render invalid any claimed exemption or reduction, and (iii) take such steps as shall not be materially disadvantageous to it, in the reasonable judgment of such Lender, and as may be reasonably necessary (including the re-designation of its Lending Office) to avoid any Requirement of Law that the Borrower make any deduction or withholding for taxes from amounts payable to such Lender.  If the forms or other evidence provided by such Lender at the time such Lender first becomes a party to this Credit Agreement indicate a United States interest withholding tax rate in excess of zero, withholding tax at such rate shall be considered excluded from Taxes unless and until such Lender provides the appropriate forms certifying that a lesser rate applies, whereupon

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withholding tax at such lesser rate only shall be considered excluded from Taxes for periods governed by such forms; provided, however, that, if at the date of any assignment pursuant to which a Lender becomes a party to this Credit Agreement, the assignor Lender was entitled to payments under Section 3.13(a) in respect of United States withholding tax with respect to interest paid at such date, then, to such extent, the term Taxes shall include (in addition to withholding taxes that may be imposed in the future or other amounts otherwise includable in Taxes) United States withholding tax, if any, applicable with respect to the assignee Lender on such date.  If such Lender fails to deliver the above forms or other evidence, then the Administrative Agent may withhold from any interest payment to such Lender an amount equal to the applicable withholding tax imposed by Sections 1441 and 1442 of the Code, without reduction.  If any Governmental Authority asserts that the Administrative Agent did not properly withhold any tax or other amount from payments made in respect of such Lender, such Lender shall indemnify the Administrative Agent therefor, including all penalties and interest, any taxes imposed by any jurisdiction on the amounts payable to the Administrative Agent under this Section 3.13(f), and costs and expenses (including the reasonable fees and expenses of legal counsel) of the Administrative Agent.  For any period with respect to which a Lender has failed to provide the Borrower with the above forms or other evidence (other than if such failure is due to a change in the applicable Law, or in the interpretation or application thereof, occurring after the date on which such form or other evidence originally was required to be provided or if such form or other evidence otherwise is not required), such Lender shall not be entitled to indemnification under subsection (a) or (c) of this Section 3.13 with respect to Taxes imposed by the United States by reason of such failure; provided, however, that should a Lender become subject to Taxes because of its failure to deliver such form or other evidence required hereunder, the Borrower shall take such steps as such Lender shall reasonably request to assist such Lender in recovering such Taxes.  The obligation of the Lenders under this Section 3.13(f) shall survive the payment of all Borrower Obligations and the resignation or replacement of the Administrative Agent.

(g)           Reimbursement.  In the event that an additional payment is made under Section 3.13(a) or (c) for the account of any Lender and such Lender, in its reasonable judgment, determines that it has finally and irrevocably received or been granted a credit against or release or remission for, or repayment of, any tax paid or payable by it in respect of or calculated with reference to the deduction or withholding giving rise to such payment, such Lender shall, to the extent that it determines that it can do so without prejudice to the retention of the amount of such credit, relief, remission or repayment, pay to the Borrower such amount as such Lender shall, in its reasonable judgment, have determined to be attributable to such deduction or withholding and which will leave such Lender (after such payment) in no worse position than it would have been in if the Borrower had not been required to make such deduction or withholding.  Nothing herein contained shall interfere with the right of a Lender to arrange its tax affairs in whatever manner it thinks fit nor oblige any Lender to claim any tax credit or to disclose any information relating to its tax affairs or any computations in respect thereof or require any Lender to do anything that would prejudice its ability to benefit from any other credits, reliefs, remissions or repayments to which it may be entitled.

3.14                      Compensation.

Upon the written demand of any Lender, the Borrower shall promptly compensate such Lender for and hold such Lender harmless from any loss, cost or expense incurred by it as a result of:

(a)           any continuation, conversion, payment or prepayment of any Eurodollar Loan of the Borrower on a day other than the last day of the Interest Period for such Eurodollar Loan (whether voluntary, mandatory, automatic, by reason of acceleration, or otherwise); or

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(b)           any failure by the Borrower (for a reason other than the failure of such Lender to make a Eurodollar Loan) to prepay, borrow, continue or convert any Eurodollar Loan on the date or in the amount previously requested by the Borrower.

The amount each such Lender shall be compensated pursuant to this Section 3.14 shall include, without limitation, (i) any loss incurred by such Lender in connection with the re-employment of funds prepaid, repaid, not borrowed or paid, as the case may be and (ii) any reasonable out-of-pocket expenses (including the reasonable fees and expenses of legal counsel) incurred and reasonably attributable thereto.

For purposes of calculating amounts payable by the Borrower to the Lenders under this Section 3.14, each Lender shall be deemed to have funded each Eurodollar Loan made by it at the Eurodollar Rate for such Loan by a matching deposit or other borrowing in the London interbank market for a comparable amount and for a comparable period, whether or not such Eurodollar Loan was in fact so funded.

3.15                      Determination and Survival of Provisions.

All determinations by the Administrative Agent or a Lender of amounts owing under Sections 3.9 through 3.14, inclusive, shall, absent manifest error, be conclusive and binding on the parties hereto and all amounts owing thereunder shall be due and payable within ten Business Days of demand therefor.  In determining such amount, the Administrative Agent or such Lender may use any reasonable averaging and attribution methods.  Sections 3.9 through 3.14, inclusive, shall survive the termination of this Credit Agreement and the payment of all Borrower Obligations.

SECTION 4

CONDITIONS PRECEDENT TO CLOSING

4.1           Closing Conditions.

The obligation of the Lenders to enter into this Credit Agreement and make the initial Loans is subject to satisfaction of the following conditions:

(a)           Executed Credit Documents.  Receipt by the Administrative Agent of duly executed copies of:  (i) this Credit Agreement, (ii) the requested Notes, and (iii) all other Credit Documents, each in form and substance reasonably acceptable to the Lenders in their sole discretion.

(b)           Authority Documents.  Receipt by the Administrative Agent of the following:

(i)           Organizational Documents.  Copies of the articles of incorporation of the Borrower, certified to be true and complete as of a recent date by the appropriate Governmental Authority of the state or other jurisdiction of its formation and copies of the bylaws of the Borrower, certified by a secretary or assistant secretary (or the equivalent) of the Borrower to be true and correct as of the Closing Date.

(ii)           Resolutions.  Copies of resolutions of the board of directors of the Borrower approving and adopting this Credit Agreement and the other Credit Documents to which it is a party, the transactions contemplated herein and therein and authorizing execution and delivery hereof and thereof, certified by a secretary or assistant secretary (or the equivalent) of the Borrower to be true and correct and in full force and effect as of the Closing Date.

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(iii)          Good Standing.  Copies of certificates of good standing, existence or its equivalent with respect to the Borrower certified as of a recent date by the appropriate Governmental Authority of the state or other jurisdiction of its formation.

(iv)          Incumbency.  An incumbency certificate of the Borrower certified by a secretary or assistant secretary (or the equivalent) of the Borrower to be true and correct as of the Closing Date.

(c)           Opinions of Counsel.   Receipt by the Administrative Agent of opinions of counsel from outside counsel to the Borrower, in form and substance acceptable to the Administrative Agent, addressed to the Administrative Agent and the Lenders and dated as of the Closing Date.

(d)           Financial Statements.  Receipt by the Administrative Agent of a copy of the annual consolidated financial statements (including balance sheets, income statements and cash flow statements) of the Parent and its Subsidiaries for Fiscal Years 2006 and 2007, audited by independent public accountants of recognized national standing and (ii) such other financial information regarding the Borrower as the Administrative Agent may reasonably request.

(e)           Material Adverse Effect.  Since December 31, 2007, there shall have been no development or event relating to or affecting the Borrower or any of its Subsidiaries that has had or could be reasonably expected to have a Material Adverse Effect and no Material Adverse Change in the facts and information regarding the Borrower and its Subsidiaries as represented to date.

(f)           Absence of Market Disruption.  There shall not have occurred a material adverse change in or material disruption of conditions in the financial, banking or capital markets which the Administrative Agent and the Arrangers, in their sole discretion, deem material in connection with the syndication of the Credit Agreement.

(g)           Litigation.  There shall not exist any material order, decree, judgment, ruling or injunction or any material pending or threatened action, suit, investigation or proceeding against the Borrower or any of its Subsidiaries except as represented to date.

(h)           Consents.  All necessary governmental, shareholder and third party consents and approvals, if any, with respect to this Credit Agreement and the Credit Documents and the transactions contemplated herein and therein have been received and no condition or Requirement of Law exists which would reasonably be likely to restrain, prevent or impose any material adverse conditions on the transactions contemplated hereby and by the other Credit Documents.

(i)           Officer’s Certificates.  Receipt by the Administrative Agent of a certificate or certificates executed by an Authorized Officer of the Borrower as of the Closing Date stating that (i) the Borrower and each of its Subsidiaries are in compliance in all material respects with all existing material financial obligations and all material Requirements of Law, (ii) there does not exist any material order, decree, judgment, ruling or injunction or any material pending or threatened action, suit, investigation or proceeding against the Borrower or any of its Subsidiaries, (iii) the financial statements and information delivered to the Administrative Agent on or before the Closing Date were prepared in good faith and in accordance with GAAP and (iv) immediately after giving effect to this Credit Agreement, the other Credit Documents and all the transactions contemplated

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herein or therein to occur on such date, (A) Borrower is Solvent, (B) no Default or Event of Default exists, (C) all representations and warranties contained herein and in the other Credit Documents are true and correct in all material respects, (D) since December 31, 2007, there has been no development or event relating to or affecting the Borrower or any of its Subsidiaries that has had or could be reasonably expected to have a Material Adverse Effect and there exists no event, condition or state of facts that could result in or reasonably be expected to result in a Material Adverse Change and (E) the Borrower is in compliance with the financial covenant set forth in Section 7.2, as of December 31, 2007, as demonstrated in the Covenant Compliance Worksheet attached to such certificate.

(j)           Fees and Expenses.  Unless waived by the Person entitled thereto, payment by the Borrower of all fees and expenses owed by them to the Administrative Agent, the Arrangers and the Lenders on or before the Closing Date.

(k)           Other.  Receipt by the Lenders of such other documents, instruments, agreements or information as reasonably requested by any Lender.

Without limiting the generality of the provisions of Section 10.4, for purposes of determining compliance with the conditions specified in this Section, each Lender that has signed this Credit Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to a Lender unless the Administrative Agent shall have received notice from such Lender prior to the proposed Closing Date specifying its objection thereto.

SECTION 5

CONDITIONS TO ALL EXTENSIONS OF CREDIT

5.1           Funding Requirements.

In addition to the conditions precedent stated elsewhere herein, the Lenders shall not be obligated to make Loans unless:

(a)           Notice. The Borrower shall have delivered the Notice of Borrowing, duly executed and completed, by the time specified in Section 2.1.

(b)           Representations and Warranties.  The representations and warranties made by the Borrower in any Credit Document (other than the representation and warranties in Section 6.7(a) (but only with respect to clause (a) of the definition of Material Adverse Effect) and Section 6.9 of the Credit Agreement) are true and correct in all material respects at and as if made as of such date except to the extent they expressly and exclusively relate to an earlier date.

(c)           No Default.  No Default or Event of Default as to the Borrower shall exist and be continuing either prior to or after giving effect to such Credit Extension.

(d)           Availability.  Immediately after giving effect to such Credit Extension (and the application of the proceeds thereof), (i) the aggregate principal amount of outstanding Loans shall not exceed the Committed Amount, and (ii) with respect to each individual Lender, the sum of outstanding principal amount of Loans of such Lender shall not exceed such Lender’s Pro Rata Share of the Committed Amount.

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The delivery of each Notice of Borrowing shall constitute a representation and warranty by the Borrower of the correctness of the matters specified in subsections (b), (c) and (d) above.

SECTION 6

REPRESENTATIONS AND WARRANTIES

To induce the Administrative Agent and the Lenders to enter into this Credit Agreement and to induce the Lenders to extend the credit contemplated hereby, the Borrower represents and warrants to the Administrative Agent and the Lenders as follows:

6.1           Organization and Good Standing.

The Borrower and its Subsidiaries (a) are duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) are duly qualified and in good standing as a foreign entity authorized to do business in every other jurisdiction where the failure to so qualify would have a Material Adverse Effect and (c) have the requisite power and authority to own its properties and to carry on its business as now conducted and as proposed to be conducted.

6.2           Due Authorization.

The Borrower and any of its Subsidiaries party to any Credit Document (a) has the requisite power and authority to execute, deliver and perform this Credit Agreement and the other Credit Documents to which it is a party and to incur the obligations herein and therein provided for and (b) has been authorized by all necessary action to execute, deliver and perform this Credit Agreement and the other Credit Documents to which it is a party.

6.3           No Conflicts.

Neither the execution and delivery of this Credit Agreement and the other Credit Documents, nor the consummation of the transactions contemplated herein and therein, nor performance of and compliance with the terms and provisions hereof and thereof by the Borrower will (a) violate or conflict with any provision of its organizational documents, (b) violate, contravene or conflict with any law (including without limitation, the Public Utility Holding Company Act of 1935, as amended), regulation (including without limitation, Regulation U and Regulation X), order, writ, judgment, injunction, decree or permit applicable to it, (c) violate, contravene or conflict with contractual provisions of, or cause an event of default under, any indenture, loan agreement, mortgage, deed of trust, contract or other agreement or instrument to which it is a party or by which it may be bound, the violation of which would have or would be reasonably expected to have a Material Adverse Effect or (d) result in or require the creation of any Lien upon or with respect to its properties.

6.4           Consents.

No consent, approval, authorization or order of, or filing, registration or qualification with, any court or Governmental Authority or third party is required in connection with the execution, delivery or performance of this Credit Agreement or any of the other Credit Documents that has not been obtained or completed.

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6.5           Enforceable Obligations.

This Credit Agreement and the other Credit Documents to which it is a party have been duly executed and delivered and constitute the legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms, except as may be limited by Debtor Relief Laws or similar laws affecting creditors’ rights generally or by general equitable principles.

6.6           Financial Condition.

The financial statements delivered to the Lenders pursuant to Section 4.1(d) and pursuant to Sections 7.1(a) and (b): (i) have been prepared in accordance with GAAP except that the quarterly financial statements are subject to year-end adjustments and have fewer footnotes than annual statements and (ii) present fairly the financial condition, results of operations and cash flows of the Borrower and its Subsidiaries as of such date and for such periods.  No opinion provided with respect to the Borrower’s financial statements pursuant to Section 7.1 (or as to any prior annual financial statements) has been withdrawn.

6.7           No Material Change.

(a)           Since December 31, 2007, there has been no development or event relating to or affecting the Borrower or any of its Subsidiaries which would have or would reasonably be expected to have a Material Adverse Effect.

(b)           Since December 31, 2007, there has been no sale, transfer or other disposition by the Borrower or any of its Subsidiaries of any material part of its business or property, and no purchase or other acquisition by the Borrower or any of its Subsidiaries of any business or property (including the Capital Stock of any other Person) material in relation to the financial condition of the Borrower or any of its Subsidiaries, in each case which is not (i) reflected in the most recent financial statements delivered to the Lenders pursuant to Section 4.1(d) or 7.1 or in the notes thereto or (ii) otherwise permitted by the terms of this Credit Agreement and communicated to the Lenders.

6.8           No Default.

Neither the Borrower nor any of its Subsidiaries is in default in any respect under any contract, lease, loan agreement, indenture, mortgage, security agreement or other agreement or obligation to which it is a party or by which any of its properties is bound which default would have or would reasonably be expected to have a Material Adverse Effect.  No Default or Event of Default presently exists and is continuing.

6.9           Litigation.

There are no actions, suits, investigations or legal, equitable, arbitration or administrative proceedings, pending or, to the knowledge of the Borrower, threatened against the Borrower or any of its Subsidiaries which would have or would reasonably be expected to have a Material Adverse Effect.

6.10                      Taxes.

The Borrower and its Subsidiaries have filed, or caused to be filed, all material tax returns (federal, state, local and foreign) required to be filed and paid all amounts of taxes shown thereon to be due (including interest and penalties) and has paid all other taxes, fees, assessments and other governmental charges (including mortgage recording taxes, documentary stamp taxes and intangibles taxes) owing by it, except for such taxes which are not yet delinquent or that are being contested in good faith and by proper proceedings, and against which adequate reserves are being maintained in accordance with GAAP.

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6.11                      Compliance with Law.

The Borrower and its Subsidiaries are in compliance with all laws, rules, regulations, orders and decrees applicable to it or to its properties, unless such failure to comply would not have or would not reasonably be expected to have a Material Adverse Effect.

6.12                      ERISA.

Except as would not result or reasonably be expected to result in a Material Adverse Effect:

(a)           During the five-year period prior to the date on which this representation is made or deemed made: (i) no ERISA Event has occurred, and, to the best knowledge of the Borrower, no event or condition has occurred or exists as a result of which any ERISA Event would be reasonably expected to occur, with respect to any Plan; (ii) no “accumulated funding deficiency,” as such term is defined in Section 302 of ERISA and Section 412 of the Code, whether or not waived, has occurred with respect to any Plan; (iii) each Plan has been maintained, operated, and funded in compliance with its own terms and in material compliance with the provisions of ERISA, the Code, and any other applicable federal or state laws; and (iv) no Lien in favor or the PBGC or a Plan has arisen or is reasonably likely to arise on account of any Plan.

(b)           The actuarial present value of all “benefit liabilities” under each Single Employer Plan (determined within the meaning of Section 401(a)(2) of the Code, utilizing the actuarial assumptions used to fund such Plans), whether or not vested, did not, as of the last annual valuation date prior to the date on which this representation is made or deemed made, exceed the current value of the assets of such Plan allocable to such accrued liabilities, except as disclosed in the Borrower’s financial statements.

(c)           Neither the Borrower nor any ERISA Affiliate has incurred, or, to the best knowledge of the Borrower, is reasonably expected to incur, any withdrawal liability under ERISA to any Multiemployer Plan or Multiple Employer Plan.  Neither the Borrower nor any ERISA Affiliate has received any notification that any Multiemployer Plan is in reorganization (within the meaning of Section 4241 of ERISA), is insolvent (within the meaning of Section 4245 of ERISA), or has been terminated (within the meaning of Title IV of ERISA), and no Multiemployer Plan is, to the best knowledge of the Borrower, reasonably expected to be in reorganization, insolvent, or terminated.

(d)           No prohibited transaction (within the meaning of Section 406 of ERISA or Section 4975 of the Code) or breach of fiduciary responsibility has occurred with respect to a Plan which has subjected or would be reasonably likely to subject the Borrower or any ERISA Affiliate to any liability under Sections 406, 409, 502(i), or 502(l) of ERISA or Section 4975 of the Code, or under any agreement or other instrument pursuant to which the Borrower or any ERISA Affiliate has agreed or is required to indemnify any person against any such liability.

(e)           The present value (determined using actuarial and other assumptions which are reasonable with respect to the benefits provided and the employees participating) of the liability of the Borrower and each ERISA Affiliate for post-retirement welfare benefits to be provided to their current and former employees under Plans which are welfare benefit plans (as defined in Section 3(1) of ERISA), net of all assets under all such Plans allocable to such benefits, are reflected on the financial statements referenced in Section 7.1 in accordance with FASB 106.

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(f)           Each Plan which is a welfare plan (as defined in Section 3(1) of ERISA) to which Sections 601-609 of ERISA and Section 4980B of the Code apply has been administered in compliance in all material respects with such sections.

6.13                      Use of Proceeds; Margin Stock.

The proceeds of the Credit Extensions to the Borrower hereunder will be used solely for the purposes specified in  Section 7.9.  None of such proceeds will be used for the purpose of (a) (i) purchasing or carrying any Margin Stock or (ii) reducing or retiring any Indebtedness which was originally incurred to purchase or carry Margin Stock, or (iii) for any other purpose that might constitute this transaction a “purpose credit” within the meaning of Regulation U or (b) for the acquisition of another Person unless the board of directors (or other comparable governing body) or stockholders, as appropriate, of such Person has approved such acquisition.

6.14                      Government Regulation.

The Borrower is not an “investment company” registered or required to be registered under the Investment Company Act of 1940, as amended, or controlled by such a company.

6.15                      Solvency.

The Borrower is and, after the consummation of the transactions contemplated by this Credit Agreement, will be Solvent.

6.16                      Disclosure.

Neither this Credit Agreement nor any financial statements delivered to the Administrative Agent or the Lenders nor any other document, certificate or statement furnished to the Administrative Agent or the Lenders by or on behalf of the Borrower in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein or herein, taken as a whole, not misleading.

6.17                      Environmental Matters.

Except as would not result or reasonably be expected to result in a Material Adverse Effect:  (a) each of the properties of the Borrower and its Subsidiaries (the “Properties”) and all operations at the Properties are in substantial compliance with all applicable Environmental Laws, (b) there is no undocumented or unreported violation of any Environmental Law with respect to the Properties or the businesses operated by the Borrower and its Subsidiaries (the “Businesses”) that the Borrower is aware of, and (c) there are no conditions relating to the Businesses or Properties that have given rise to or would reasonably be expected to give rise to a liability under any applicable Environmental Laws.

6.18                      [Reserved].

6.19                      [Reserved].

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SECTION 7

AFFIRMATIVE COVENANTS

The Borrower covenants and agrees that, until the termination of the Commitments and the payment in full of all of its Borrower Obligations:

7.1           Information Covenants.

The Borrower will furnish, or cause to be furnished, to the Lenders:

(a)           Annual Financial Statements. As soon as available, and in any event within 120 days after the close of each Fiscal Year of the Borrower commencing with the 2007 Fiscal Year, a consolidated balance sheet and income statement of the Borrower and its Subsidiaries, as of the end of such Fiscal Year, together with the related consolidated statements of income and of cash flows for such Fiscal Year, setting forth in comparative form figures for the preceding Fiscal Year, all such financial information described above to be in reasonable form and detail and, in each case, audited by independent certified public accountants of recognized national standing reasonably acceptable to the Required Lenders and whose opinion shall be furnished to the Lenders, and shall be to the effect that such financial statements have been prepared in accordance with GAAP (except for changes with which such accountants concur) and shall not be limited as to the scope of the audit or qualified in any respect.

(b)           Quarterly Financial Statements. As soon as available, and in any event within 60 days after the close of each Fiscal Quarter of the Borrower (other than the fourth Fiscal Quarter), a consolidated balance sheet and income statement of the Borrower and its Subsidiaries as of the end of such Fiscal Quarter, together with the related consolidated statement of income for such Fiscal Quarter and a year to date statement of cash flows, in each case setting forth in comparative form figures for the corresponding period of the preceding Fiscal Year, all such financial information described above to be in reasonable form and detail and reasonably acceptable to the Required Lenders, and, in each case, accompanied by a certificate of a Financial Officer of the Borrower to the effect that such quarterly financial statements fairly present in all material respects the financial condition of such Person and have been prepared in accordance with GAAP, subject to changes resulting from audit and normal year-end audit adjustments and except that the quarterly financial statements have fewer footnotes than annual statements.

(c)           Officer’s Certificate.  At the time of delivery of the financial statements provided for in Sections 7.1(a) and 7.1(b) above, a certificate of a Financial Officer substantially in the form of Exhibit 7.1(c): (i) setting forth calculations demonstrating compliance by the Borrower with the financial covenant set forth in Section 7.2 as of the end of such fiscal period and (ii) stating that no Default or Event of Default exists, or if any Default or Event of Default does exist, specifying the nature and extent thereof and what action the Borrower proposes to take with respect thereto.

(d)           Reports.  Notice of the filing by the Borrower of any Form 10-Q, Form 10-K or Form 8-K with the SEC promptly upon the filing thereof and copies of all financial statements, proxy statements, notices and reports as the Borrower shall send to its shareholders concurrently with the mailing of any such statements, notices or reports to its shareholders.

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(e)           Notices.  Upon the Borrower obtaining knowledge thereof, the Borrower will give written notice to the Administrative Agent within ten days of (i) the occurrence of a Default or Event of Default, specifying the nature and extent thereof and what action the Borrower proposes to take with respect thereto and (ii) the occurrence of any of the following with respect to the Borrower or any of its Subsidiaries (A) the pendency or commencement of any litigation, arbitration or governmental proceeding against the Borrower or any of its Subsidiaries which, if adversely determined, would have or would reasonably be expected to have a Material Adverse Effect, (B) one or more judgments, orders, or decrees shall be entered against the Borrower or any of its Subsidiaries involving a liability of $5,000,000 or more, in the aggregate or (C) the institution of any proceedings against the Borrower or any of its Subsidiaries with respect to, or the receipt of notice by such Person of potential liability or responsibility for violation or alleged violation of, any federal, state or local law, rule or regulation (including, without limitation, any Environmental Law), the violation of which would have or would reasonably be expected to have a Material Adverse Effect.

(f)           ERISA.  Upon the Borrower or any ERISA Affiliate obtaining knowledge thereof, the Borrower will give written notice to the Administrative Agent promptly (and in any event within ten days) of any of the following which would result in or reasonably would be expected to result in a Material Adverse Effect: (i) any event or condition, including, but not limited to, any Reportable Event, that constitutes, or would be reasonably expected to lead to, an ERISA Event; (ii) with respect to any Multiemployer Plan, the receipt of notice as prescribed in ERISA or otherwise of any withdrawal liability assessed against the Borrower or any of its ERISA Affiliates, or of a determination that any Multiemployer Plan is in reorganization or insolvent (both within the meaning of Title IV of ERISA); (iii) the failure to make full payment on or before the due date (including extensions) thereof of all amounts which the Borrower or any of its Subsidiaries or ERISA Affiliates is required to contribute to each Plan pursuant to its terms and as required to meet the minimum funding standard set forth in ERISA and the Code with respect thereto; or (iv) a change in the funding status of any Plan, in each case together with a description of any such event or condition or a copy of any such notice and a statement by an officer of the Borrower briefly setting forth the details regarding such event, condition, or notice, and the action, if any, which has been or is being taken or is proposed to be taken with respect thereto.  Promptly upon request, the Borrower shall furnish the Lenders with such additional information concerning any Plan as may be reasonably requested, including, but not limited to, copies of each annual report/return (Form 5500 series), as well as all schedules and attachments thereto required to be filed with the Department of Labor and/or the Internal Revenue Service pursuant to ERISA and the Code, respectively, for each “plan year” (within the meaning of Section 3(39) of ERISA).

(g)           Debt Ratings.   Prompt notice of any change in the Debt Ratings of the Borrower.

(h)           Other Information.  With reasonable promptness upon any such request, such other information regarding the business, properties or financial condition of the Borrower as the Lenders may reasonably request.

Documents required to be delivered pursuant to Section 7.1(a), (b) or (d) (to the extent any such documents are included in materials otherwise filed with the Securities and Exchange Commission) may be delivered electronically and if so delivered, shall be deemed to have been delivered on the date (i) on which the Parent posts such documents, or provides a link thereto on the Parent’s website on the Internet at the website address listed on Schedule 11.1; or (ii) on which such documents are posted on the Borrower’s behalf on an Internet or intranet website, if any, to which each Lender and the Administrative Agent have access (whether a commercial, third-party website or whether sponsored by the Administrative Agent); provided that: (A) the Borrower shall deliver paper copies of such documents to the Administrative Agent or any Lender that requests the Borrower to deliver such paper copies until a written request to cease delivering paper copies is given by the Administrative Agent or such Lender and (B) the Borrower shall notify the Administrative Agent and each Lender (by telecopier or electronic mail) of the posting of any such documents and provide to the Administrative Agent by electronic mail electronic versions (i.e., soft copies) of such documents.  Notwithstanding anything contained herein, in every instance the Borrower shall be required to provide paper copies of the Officer’s Certificate required by Section 7.1(c) to the Administrative Agent.  Except for such Officer’s Certificate, the Administrative Agent shall have no obligation to request the delivery or to maintain copies of the documents referred to above, and in any event shall have no responsibility to monitor compliance by the Borrower with any such request for delivery, and each Lender shall be solely responsible for requesting delivery to it or maintaining its copies of such documents.

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7.2           Financial Covenant.

(a) [Reserved].

(b) Debt Capitalization.  At all times the ratio of (i) Consolidated Indebtedness of the Borrower to (ii) Consolidated Capitalization of the Borrower shall be less than or equal to 0.65 to 1.0.

7.3           Preservation of Existence and Franchises.

(a)           Except in a transaction permitted by Section 8.2, the Borrower will do (and will cause each of its Subsidiaries to do) all things necessary to preserve and keep in full force and effect its existence and rights, franchises and authority.

(b)           The Borrower will maintain (and will cause each of its Subsidiaries to maintain) its properties in good condition and not waste or otherwise permit such properties to deteriorate, reasonable wear and tear excepted.

7.4           Books and Records.

The Borrower will keep (and will cause each of its Subsidiaries to keep) complete and accurate books and records of its transactions in accordance with good accounting practices on the basis of GAAP (including the establishment and maintenance of appropriate reserves).

7.5           Compliance with Law.

The Borrower will comply (and will cause each of its Subsidiaries to comply) with all laws (including, without limitation, all Environmental Laws and ERISA laws), rules, regulations and orders, and all applicable restrictions imposed by all Governmental Authorities, applicable to it and its properties, if the failure to comply would have or would reasonably be expected to have a Material Adverse Effect.

7.6           Payment of Taxes and Other Indebtedness.

The Borrower will (and will cause each of its Subsidiaries to) pay, settle or discharge (a) all taxes, assessments and governmental charges or levies imposed upon it, or upon its income or profits, or upon any of its properties, before they shall become delinquent, (b) all lawful claims (including claims for labor, materials and supplies) which, if unpaid, might give rise to a Lien upon any of its properties, and (c) all of its other Indebtedness as it shall become due (to the extent such repayment is not otherwise prohibited by this Credit Agreement); provided, however, that the Borrower and its Subsidiaries shall not be required to pay any such tax, assessment, charge, levy, claim or Indebtedness which is being contested in good faith by appropriate proceedings and as to which adequate reserves therefor have been established in accordance with GAAP, unless the failure to make any such payment (i) would give rise to an immediate right to foreclose or collect on a Lien securing such amounts or (ii) would have or would be reasonably expected to have a Material Adverse Effect.

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7.7           Insurance.

The Borrower will (and will cause each of its Subsidiaries to) at all times maintain in full force and effect insurance (including worker’s compensation insurance and general liability insurance) in such amounts, covering such risks and liabilities and with such deductibles or self-insurance retentions as are in accordance with normal industry practice.

7.8           Performance of Obligations.

The Borrower will perform (and will cause each of its Subsidiaries to perform) in all material respects all of its obligations under the terms of all material agreements, indentures, mortgages, security agreements or other debt instruments to which it is a party or by which it is bound.

7.9           Use of Proceeds.

The proceeds of the Credit Extensions may be used solely to finance the redemption of the Borrower’s 6.125% notes due June 1, 2008, including expenses.

7.10                      Audits/Inspections.

Upon reasonable notice and during normal business hours, the Borrower will permit representatives appointed by the Administrative Agent or the Lenders, including, without limitation, independent accountants, agents, attorneys, and appraisers to visit and inspect the Borrower’s property, including its books and records, its accounts receivable and inventory, the Borrower’s facilities and its other business assets, and to make photocopies or photographs thereof and to write down and record any information such representative obtains and shall permit the Administrative Agent or such Lender or its representatives to investigate and verify the accuracy of information provided to it and to discuss all such matters with the officers, employees and representatives of the Borrower; provided, that an officer or authorized agent of the Borrower shall be present during any such discussions between the officers, employees or representatives of the Borrower and the representatives of the Administrative Agent or any Lender.

7.11                      [Reserved].

SECTION 8

NEGATIVE COVENANTS

Unless otherwise approved in writing by the Required Lenders, the Borrower covenants and agrees that, until the termination of the Commitments and the payment in full of its Borrower Obligations:

8.1           Nature of Business.

The Borrower will not materially alter the character of its business from that conducted as of the Closing Date.

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8.2           Consolidation and Merger.

The Borrower will not (a) enter into any transaction of merger or (b) consolidate, liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution); provided that, so long as no Default or Event of Default shall exist or be caused thereby a Person may be merged or consolidated with or into the Borrower so long as the Borrower shall be the continuing or surviving Person.

8.3           Sale or Lease of Assets.

The Borrower will not (nor will it permit its Subsidiaries to) sell, lease, transfer or otherwise dispose of, any of its assets (including, without limitation, all or substantially all of its assets, whether in one transaction or a series of related transactions) except (a) sales or other transfers of assets for fair value, if the aggregate value of all such transactions in any calendar year, does not exceed 25%of the book value of Total Assets of the Borrower, as calculated as of the end of the most recent FiscalQuarter, and (b) sales, leases, transfers or other dispositions, at less than fair value, of any other assets of the Borrower and its Subsidiaries, provided that the aggregate book value of such assets shall not exceed $10,000,000 in any calendar year.

8.4           Affiliate Transactions.

The Borrower will not enter into any transaction or series of transactions, whether or not in the ordinary course of business, with any Affiliate other than on terms and conditions substantially as favorable as would be obtainable in a comparable arm’s-length transaction with a Person other than an Affiliate.

8.5           Liens.

The Borrower will not (nor will it permit its Subsidiaries to) contract, create, incur, assume or permit to exist any Lien with respect to any of its property or assets of any kind (whether real or personal, tangible or intangible), whether now owned or hereafter acquired, securing any Indebtedness other than the following: (a) Liens securing Borrower Obligations, (b) Liens for taxes not yet due or Liens for taxes being contested in good faith by appropriate proceedings for which adequate reserves determined in accordance with GAAP have been established (and as to which the property subject to any such Lien is not yet subject to foreclosure, sale or loss on account thereof), (c) Liens in respect of property imposed by law arising in the ordinary course of business such as materialmen’s, mechanics’, warehousemen’s, carrier’s, landlords’ and other nonconsensual statutory Liens which are not yet due and payable, which have been in existence less than 90 days or which are being contested in good faith by appropriate proceedings for which adequate reserves determined in accordance with GAAP have been established (and as to which the property subject to any such Lien is not yet subject to foreclosure, sale or loss on account thereof), (d) pledges or deposits made in the ordinary course of business to secure payment of worker’s compensation insurance, unemployment insurance, pensions or social security programs, (e) Liens arising from good faith deposits in connection with or to secure performance of tenders, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations incurred in the ordinary course of business (other than obligations in respect of the payment of borrowed money), (f) Liens arising from good faith deposits in connection with or to secure performance of statutory obligations and surety and appeal bonds, (g) easements, rights-of-way, restrictions (including zoning restrictions), minor defects or irregularities in title and other similar charges or encumbrances not, in any material respect, impairing the use of the encumbered property for its intended purposes, (h) judgment Liens that would not constitute an Event of Default, (i) Liens arising by virtue of any statutory or common law provision relating to banker’s liens, rights of setoff or similar rights as to deposit accounts or other funds maintained with a creditor depository institution, (j) any Lien created or arising over any property which is acquired, constructed or created by the Borrower or its Subsidiaries, but only if

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 (i) such Lien secures only principal amounts (not exceeding the cost of such acquisition, construction or creation) raised for the purposes of such acquisition, construction or creation, together with any costs, expenses, interest and fees incurred in relation thereto or a guarantee given in respect thereof, (ii) such Lien is created or arises on or before 180 days after the completion of such acquisition, construction or creation, (iii) such Lien is confined solely to the property so acquired, constructed or created and any improvements thereto and (iv) the aggregate principal amount of all Indebtedness at any one time outstanding that is secured by such Liens shall not exceed $25,000,000, (k) any Lien on Margin Stock, (l) the assignment of, or Liens on, demand, energy or wheeling revenues, or on capacity reservation or option fees, payable to the Borrower or any of its Subsidiaries with respect to any wholesale electric service or transmission agreements, the assignment of, or Liens on, revenues from energy services contracts, and the assignment of, or Liens on, capacity reservation or option fees payable to the Borrower or such Subsidiary with respect to asset sales permitted herein, (m) any extension, renewal or replacement (or successive extensions, renewals or replacements), as a whole or in part, of any Liens referred to in the foregoing clauses (a) through (l), for amounts not exceeding the principal amount of the Indebtedness secured by the Lien so extended, renewed or replaced, provided that such extension, renewal or replacement Lien is limited to all or a part of the same property or assets that were covered by the Lien extended, renewed or replaced (plus improvements on such property or assets), (n) Liens securing obligations under Hedging Agreements entered into in the ordinary course of business and not for speculative purposes, (o) Liens granted by bankruptcy-remote special purpose Subsidiaries to secure stranded cost securitization bonds, (p) Liens upon any property in favor of the administrative agent for the benefit of the lenders under the Existing Credit Agreement (as it may be amended, supplemented or otherwise modified from time to time) securing Indebtedness thereunder, and (q) Liens on Property, in addition to those otherwise permitted by clauses (a) through (p) above, securing, directly or indirectly, Indebtedness or obligations of the Borrower and its Subsidiaries arising pursuant to other agreements entered into in the ordinary course of business which do not exceed, in the aggregate at any one time outstanding, $25,000,000.

8.6           Accounting Changes.

The Borrower will not (nor will it permit any of its Subsidiaries to) make or permit any change in accounting policies or reporting practices, except as required by GAAP, or as permitted by GAAP, if the amounts involved are not material.

8.7           Burdensome Agreements.

The Borrower will not (nor will it permit any of its Subsidiaries to) enter into any contractual obligation (other than (i) the Credit Documents and (ii) the Existing Credit Agreement (as it may be amended, supplemented or otherwise modified from time to time) that limits the ability (a) of any Subsidiary of the Borrower to make Restricted Payments to the Borrower or to otherwise transfer property to the Borrower or (b) of the Borrower to create, incur, assume or suffer to exist Liens on its property in favor of the Administrative Agent, for the benefit of the Lenders.

SECTION 9

EVENTS OF DEFAULT

9.1           Events of Default.

An Event of Default with respect to the Borrower shall exist upon the occurrence of any of the following specified events (each an “Event of Default”):

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(a)           Payment.  The Borrower shall:  (i) default in the payment when due of any principal of any of its Loans; or (ii) default, and such default shall continue for three or more Business Days, in the payment when due of any interest on its Loans or of any fees or other amounts owing by it hereunder, under any of the other Credit Documents or in connection herewith or therewith.

(b)           Representations.  Any representation, warranty or statement made or deemed to be made by the Borrower herein, in any of the other Credit Documents, or in any statement or certificate delivered or required to be delivered pursuant hereto or thereto shall prove untrue in any material respect on the date as of which it was deemed to have been made.

(c)           Covenants.  The Borrower shall:

(i)           default in the due performance or observance of any term, covenant or agreement contained in Sections 7.1(e)(i), 7.2, 7.3(a) (solely with respect to the existence of the Borrower), 7.9, 7.10 or 8.1 through 8.7, inclusive; or

(ii)           default in the due performance or observance by it of any term, covenant or agreement (other than those referred to in subsections (a), (b) or (c)(i) of this Section 9.1) contained in this Credit Agreement or any other Credit Document and the default shall continue unremedied for a period of at least 10 days after the earlier of the Borrower becoming aware of such default or notice thereof given by the Administrative Agent.

(d)           Credit Documents.  Any Credit Document shall fail to be in force and effect or the Borrower shall so assert or any Credit Document shall fail to give the Administrative Agent or the Lenders the rights, powers, liens and privileges purported to be created thereby.

(e)           Bankruptcy, etc.  The occurrence of any of the following with respect to the Borrower or any of its Subsidiaries (i) a court or governmental agency having jurisdiction in the premises shall enter a decree or order for relief in respect of the Borrower or any of its Subsidiaries in an involuntary case under any applicable Debtor Relief Law now or hereafter in effect, or appoint a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Borrower or any of its Subsidiaries or for any substantial part of their property or ordering the winding up or liquidation of its affairs; or (ii) an involuntary case under any applicable Debtor Relief Law now or hereafter in effect is commenced against the Borrower or any of its Subsidiaries and such petition remains unstayed and in effect for a period of 60 consecutive days; or (iii) the Borrower or any of its Subsidiaries shall commence a voluntary case under any applicable Debtor Relief Law now or hereafter in effect, or consent to the entry of an order for relief in an involuntary case under any such law, or consent to the appointment or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of such Person or any substantial part of its property or make any general assignment for the benefit of creditors; or (iv) the Borrower or any of its Subsidiaries admit in writing its inability to pay its debts generally as they become due or any action shall be taken by any Person in furtherance of any of the aforesaid purposes.

(f)           Defaults under Other Agreements.

(i)           The Borrower or any of its Subsidiaries shall default in the due performance or observance (beyond the applicable grace period with respect thereto) of any material obligation or condition of any contract or lease to which it is a party, if such default would have or would reasonably be expected to have a Material Adverse Effect.

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(ii)           With respect to any Indebtedness of the Borrower or any of its Subsidiaries (other than Indebtedness outstanding under this Credit Agreement) in excess of $20,000,000in the aggregate (A) the Borrower or any of its Subsidiaries shall (x) default in any payment (beyond the applicable grace period with respect thereto, if any) with respect to such Indebtedness, or (y) default (after giving effect to any applicable grace period) in the observance or performance of any covenant or agreement relating to such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event or condition shall occur or condition exist, the effect of which default or other event or condition is to cause or permit the holder or the holders of such Indebtedness (or any trustee or agent on behalf of such holders) to cause (determined without regard to whether any notice or lapse of time is required) such Indebtedness to become due prior to its stated maturity; or (B) such Indebtedness shall be declared due and payable, or required to be prepaid other than by a regularly scheduled required prepayment prior to the stated maturity thereof; or (C) such Indebtedness shall mature and remain unpaid.

(g)           Judgments.  Any judgment, order or decree involving a liability of $20,000,000 or more, or one or more judgments, orders, or decrees involving a liability of $40,000,000 or more, in the aggregate, shall be entered against the Borrower or any of its Subsidiaries and such judgments, orders or decrees shall continue unsatisfied, undischarged and unstayed for a period ending on the first to occur of (i) the last day on which such judgment, order or decree becomes final and unappealable and, where applicable, with the status of a judicial lien or (ii) 60 days; provided that if such judgment, order or decree provides for periodic payments over time then the Borrower or such Subsidiary shall have a grace period of 30 days with respect to each such periodic payment.

(h)           ERISA.  The occurrence of any of the following events or conditions if any of the same would have or would be reasonably expected to have a Material Adverse Effect:  (i) any “accumulated funding deficiency,” as such term is defined in Section 302 of ERISA and Section 412 of the Code, whether or not waived, shall exist with respect to any Plan, or any lien shall arise on the assets of the Borrower or any ERISA Affiliate in favor of the PBGC or a Plan; (ii) an ERISA Event shall occur with respect to a Single Employer Plan which is, in the reasonable opinion of the Required Lenders, likely to result in the termination of such Plan for purposes of Title IV of ERISA; (iii) an ERISA Event shall occur with respect to a Multiemployer Plan or Multiple Employer Plan which is, in the reasonable opinion of the Required Lenders, likely to result in (A) the termination of such Plan for purposes of Title IV of ERISA, or (B) the Borrower or any ERISA Affiliate incurring any liability in connection with a withdrawal from, reorganization of (within the meaning of Section 4241 of ERISA), or insolvency (within the meaning of Section 4245 of ERISA) of such Plan; or (iv) any prohibited transaction (within the meaning of Section 406 of ERISA or Section 4975 of the Code) or breach of fiduciary responsibility shall occur which would be reasonably expected to subject the Borrower or any ERISA Affiliate to any liability under Sections 406, 409, 502(i), or 502(l) of ERISA or Section 4975 of the Code, or under any agreement or other instrument pursuant to which the Borrower or any ERISA Affiliate has agreed or is required to indemnify any person against any such liability.

(i)           Change of Control.  There shall occur a Change of Control.

9.2           Acceleration; Remedies.

Upon the occurrence and during the continuation of an Event of Default, the Administrative Agent may or, upon the request and direction of the Required Lenders, shall take the following actions without prejudice to the rights of the Administrative Agent or any Lender to enforce its claims against the Borrower, except as otherwise specifically provided for herein:

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(a)           Termination of Commitments.  Declare the Commitments terminated whereupon the Commitments shall be immediately terminated.

(b)           Acceleration of Loans.  Declare the unpaid principal of and any accrued interest in respect of all Loans and any and all other Borrower Obligations of any and every kind owing by the Borrower to the Administrative Agent or the Lenders under the Credit Documents to be due, whereupon the same shall be immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower.

(c)           [Reserved].

(d)           Enforcement of Rights.  To the extent permitted by Law enforce any and all rights and interests created and existing under applicable Law and under the Credit Documents.

Notwithstanding the foregoing, if an Event of Default specified in Section 9.1(e) shall occur, then the Commitments shall automatically terminate and all Loans, all accrued interest in respect thereof, all accrued and unpaid fees and other Borrower Obligations owing to the Administrative Agent and the Lenders by the Borrower hereunder shall immediately become due and payable without the giving of any notice or other action by the Administrative Agent or the Lenders, which notice or other action is expressly waived by the Borrower.

Notwithstanding the fact that enforcement powers reside primarily with the Administrative Agent, each Lender has, to the extent permitted by Law, a separate right of payment and shall be considered a separate “creditor” holding a separate “claim” within the meaning of Section 101(5) of the Bankruptcy Code or any other insolvency statute.

9.3           Allocation of Payments After Event of Default.

Notwithstanding any other provisions of this Credit Agreement, after the occurrence and during the continuation of an Event of Default, all amounts collected or received by the Administrative Agent or any Lender from the Borrower or any of its Subsidiaries on account of amounts outstanding under any of the Credit Documents shall be paid over or delivered as follows:

FIRST, to the payment of all reasonable out-of-pocket costs and expenses (including the reasonable fees and expenses of legal counsel) of the Administrative Agent or any of the Lenders in connection with enforcing the rights of the Administrative Agent and the Lenders under the Credit Documents against the Borrower, ratably among them in proportion to the amounts described in this clause “FIRST” payable to them;

SECOND, to payment of any fees owed to the Administrative Agent, or any Lender by the Borrower, ratably among them in proportion to the amounts described in this clause “SECOND” payable to them;

THIRD, to the payment of all accrued interest payable to the Lenders hereunder by the Borrower, ratably among them in proportion to the amounts described in this clause “THIRD” payable to them;

FOURTH, to the payment of the outstanding principal amount of the Loans, ratably among them in proportion to the amounts described in this clause “FOURTH” payable to them;

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FIFTH, to all other Borrower Obligations of the Borrower which shall have become due and payable under the Credit Documents and not repaid pursuant to clauses “FIRST” through “FOURTH” above, ratably among the holders of such Borrower Obligations in proportion to the amounts described in this clause “FIFTH” payable to them; and

SIXTH, the payment of the surplus, if any, to whomever may be lawfully entitled to receive such surplus.

SECTION 10

AGENCY PROVISIONS

10.1                      Appointment and Authority.

Each of the Lenders hereby irrevocably appoints JPMCB to act on its behalf as the Administrative Agent hereunder and under the other Credit Documents and authorizes the Administrative Agent to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms hereof or thereof, together with such actions and powers as are reasonably incidental thereto.  The provisions of this Section are solely for the benefit of the Administrative Agent and the Lenders, and the Borrower shall have no rights as a third party beneficiary of any of such provisions.

10.2                      Rights as a Lender.

The Person serving as the Administrative Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Administrative Agent and the term “Lender” or “Lenders” shall, unless otherwise expressly indicated or unless the context otherwise requires, include the Person serving as the Administrative Agent hereunder in its individual capacity.  Such Person and its Affiliates may accept deposits from, lend money to, act as the financial advisor or in any other advisory capacity for and generally engage in any kind of business with the Borrower or any Subsidiary or other Affiliate thereof as if such Person were not the Administrative Agent hereunder and without any duty to account therefor to the Lenders.

10.3                      Exculpatory Provisions.

The Administrative Agent shall not have any duties or obligations except those expressly set forth herein and in the other Credit Documents.  Without limiting the generality of the foregoing, the Administrative Agent:

(a)           shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing;

(b)           shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby or by the other Credit Documents that the Administrative Agent is required to exercise as directed in writing by the Required Lenders (or such other number or percentage of the Lenders as shall be expressly provided for herein or in the other Credit Documents), provided that the Administrative Agent shall not be required to take any action that, in its opinion or the opinion of its counsel, may expose the Administrative Agent to liability or that is contrary to any Credit Document or applicable law; and

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(c)           shall not, except as expressly set forth herein and in the other Credit Documents, have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to the Borrower, its Subsidiaries or any of its Affiliates that is communicated to or obtained by the Person serving as the Administrative Agent or any of its Affiliates in any capacity.

The Administrative Agent shall not be liable for any action taken or not taken by it (a) with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary, or as the Administrative Agent shall believe in good faith shall be necessary, under the circumstances as provided in Sections 11.6 and 9.2) or (b) in the absence of its own gross negligence or willful misconduct.  The Administrative Agent shall be deemed not to have knowledge of any Default unless and until notice describing such Default is given to the Administrative Agent by the Borrower or Lender.

The Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement or any other Credit Document, (ii) the contents of any certificate, report or other document delivered hereunder or thereunder or in connection herewith or therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein or therein or the occurrence of any Default, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement, any other Credit Document or any other agreement, instrument or document or (v) the satisfaction of any condition set forth in Section 4 or Section 5 or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent.

10.4                      Reliance by Administrative Agent.

The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing (including any electronic message, Internet or intranet website posting or other distribution) believed by it to be genuine and to have been signed, sent or otherwise authenticated by the proper Person.  The Administrative Agent also may rely upon any statement made to it orally or by telephone and believed by it to have been made by the proper Person, and shall not incur any liability for relying thereon.  In determining compliance with any condition hereunder to the making of a Loan, that by its terms must be fulfilled to the satisfaction of a Lender, the Administrative Agent may presume that such condition is satisfactory to such Lender unless the Administrative Agent shall have received notice to the contrary from such Lender prior to the making of such Loan.  The Administrative Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts.

10.5                      Delegation of Duties.

The Administrative Agent may perform any and all of its duties and exercise its rights and powers hereunder or under any other Credit Document by or through any one or more sub-agents appointed by the Administrative Agent.  The Administrative Agent and any such sub-agent may perform any and all of its duties and exercise its rights and powers by or through their respective Agent-Related Parties.  The exculpatory provisions of this Section shall apply to any such sub-agent and to the Agent-Related Parties of the Administrative Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Administrative Agent.

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10.6                      Resignation of Administrative Agent.

The Administrative Agent may at any time give notice of its resignation to the Lenders, and the Borrower.  Upon receipt of any such notice of resignation, the Required Lenders shall have the right, in consultation with the Borrower, to appoint a successor, which shall be a bank with an office in the United States, or an Affiliate of any such bank with an office in the United States.  If no such successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent may on behalf of the Lenders, appoint a successor Administrative Agent meeting the qualifications set forth above; provided that if the Administrative Agent shall notify the Borrower and the Lenders that no qualifying Person has accepted such appointment, then such resignation shall nonetheless become effective in accordance with such notice and (a) the retiring Administrative Agent shall be discharged from its duties and obligations hereunder and under the other Credit Documents and (b) all payments, communications and determinations provided to be made by, to or through the Administrative Agent shall instead be made by or to each Lender directly, until such time as the Required Lenders appoint a successor Administrative Agent as provided for above in this Section.  Upon the acceptance of a successor’s appointment as Administrative Agent hereunder, such successor shall succeed to and become vested with all of the rights, powers, privileges and duties of the retiring (or retired) Administrative Agent, and the retiring Administrative Agent shall be discharged from all of its duties and obligations hereunder or under the other Credit Documents (if not already discharged therefrom as provided above in this Section).  The fees payable by the Borrower to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor.  After the retiring Administrative Agent’s resignation hereunder and under the other Credit Documents, the provisions of this Section and Section 11.5 shall continue in effect for the benefit of such retiring Administrative Agent, its sub-agents and their respective Agent Related Persons in respect of any actions taken or omitted to be taken by any of them while the retiring Administrative Agent was acting as Administrative Agent.

10.7                      Non-Reliance on Administrative Agent and Other Lenders.

Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender or any of their Agent-Related Persons and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement.  Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender or any of their Agent-Related Persons and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any other Credit Document or any related agreement or any document furnished hereunder or thereunder.

10.8                      No Other Duties, Etc.

Anything herein to the contrary notwithstanding, none of the bookrunners, arrangers or agents listed on the cover page hereof shall have any powers, duties or responsibilities under this Agreement or any of the other Credit Documents, except in its capacity, as applicable, as the Administrative Agent or Lender hereunder.

10.9                      Administrative Agent May File Proofs of Claim.

In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Borrower, the Administrative Agent (irrespective of whether the principal of any Loan shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether the Administrative Agent shall have made any demand on the Borrower) shall be entitled and empowered, by intervention in such proceeding or otherwise

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(a)           to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the Loans and all other Borrower Obligations that are owing and unpaid and to file such other documents as may be necessary or advisable in order to have the claims of the Lenders and the Administrative Agent (including any claim for the reasonable compensation, expenses, disbursements and advances of the Lenders and the Administrative Agent and their respective agents and counsel and all other amounts due the Lenders and the Administrative Agent under Sections 3.4 and 11.5) allowed in such judicial proceeding; and

(b)           to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same;

and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Lender to make such payments to the Administrative Agent and, in the event that the Administrative Agent shall consent to the making of such payments directly to the Lenders, to pay to the Administrative Agent any amount due for the reasonable compensation, expenses, disbursements and advances of the Administrative Agent and its agents and counsel, and any other amounts due the Administrative Agent under Sections 3.4 and 11.5.

Nothing contained herein shall be deemed to authorize the Administrative Agent to authorize or consent to or accept or adopt on behalf of any Lender any plan of reorganization, arrangement, adjustment or composition affecting the Borrower Obligations or the rights of any Lender or to authorize the Administrative Agent to vote in respect of the claim of any Lender in any such proceeding.

SECTION 11

MISCELLANEOUS

11.1                      Notices; Effectiveness; Electronic Communication.

(a)           Notices Generally.  Except in the case of notices and other communications expressly permitted to be given by telephone (and except as provided in subsection (b) below), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopier as follows, and all notices and other communications expressly permitted hereunder to be given by telephone shall be made to the applicable telephone number, as follows:

(i)           if to the Borrower or the Administrative Agent, to the address, telecopier number, electronic mail address or telephone number specified for such Person on Schedule 11.1; and

(ii)           if to any other Lender, to the address, telecopier number, electronic mail address or telephone number specified in its Administrative Questionnaire.

Notices sent by hand or overnight courier service, or mailed by certified or registered mail, shall be deemed to have been given when received; notices sent by telecopier shall be deemed to have been given when sent (except that, if not given during normal business hours for the recipient, shall be deemed to have been given at the opening of business on the next business day for the recipient).  Notices delivered through electronic communications to the extent provided in subsection (b) below, shall be effective as provided in such subsection (b).

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(b)           Electronic Communications.  Notices and other communications to the Lenders hereunder may be delivered or furnished by electronic communication (including e-mail and Internet or intranet websites) pursuant to procedures approved by the Administrative Agent, provided that the foregoing shall not apply to notices to any Lender pursuant to Section 2 if such Lender has notified the Administrative Agent that it is incapable of receiving notices under such Section by electronic communication.  The Administrative Agent or the Borrower may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it, provided that approval of such procedures may be limited to particular notices or communications.

Unless the Administrative Agent otherwise prescribes, (i) notices and other communications sent to an e-mail address shall be deemed received upon the sender’s receipt of an acknowledgement from the intended recipient (such as by the “return receipt requested” function, as available, return e-mail or other written acknowledgement), provided that if such notice or other communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next business day for the recipient, and (ii) notices or communications posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its e-mail address as described in the foregoing clause (i) of notification that such notice or communication is available and identifying the website address therefor.

(c)           Borrower Materials/The Platform.  The Borrower hereby acknowledges that (i) the Administrative Agent and/or the Arrangers will make available to the Lenders materials and/or information provided by or on behalf of the Borrower hereunder (collectively, “Borrower Materials”) by posting the Borrower Materials on IntraLinks or another similar electronic system (the “Platform”). THE PLATFORM IS PROVIDED “AS IS” AND “AS AVAILABLE.”  THE AGENT PARTIES (AS DEFINED BELOW) DO NOT WARRANT THE ACCURACY OR COMPLETENESS OF THE BORROWER MATERIALS OR THE ADEQUACY OF THE PLATFORM, AND EXPRESSLY DISCLAIM LIABILITY FOR ERRORS IN OR OMISSIONS FROM THE BORROWER MATERIALS.  NO WARRANTY OF ANY KIND, EXPRESS, IMPLIED OR STATUTORY, INCLUDING ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT OF THIRD PARTY RIGHTS OR FREEDOM FROM VIRUSES OR OTHER CODE DEFECTS, IS MADE BY ANY AGENT PARTY IN CONNECTION WITH THE BORROWER MATERIALS OR THE PLATFORM.  In no event shall the Administrative Agent or any of its Agent-Related Parties (collectively, the “Agent Parties”) have any liability to the Borrower, any Lender, or any other Person for losses, claims, damages, liabilities or expenses of any kind (whether in tort, contract or otherwise) arising out of the Borrower’s or the Administrative Agent’s transmission of Borrower Materials through the Internet, except to the extent that such losses, claims, damages, liabilities or expenses are determined by a court of competent jurisdiction by a final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Agent Party; provided, however, that in no event shall any Agent Party have any liability to the Borrower, any Lender or any other Person for indirect, special, incidental, consequential or punitive damages (as opposed to direct or actual damages).

(d)           Change of Address, Etc. The Borrower and the  Administrative Agent may change its address, telecopier or telephone number for notices and other communications hereunder by notice to the other parties hereto.  Each other Lender may change its address, telecopier or telephone number for notices and other communications hereunder by notice to the Borrower and the Administrative Agent.  In addition, each Lender agrees to notify the Administrative Agent from time to time to ensure that the Administrative Agent has on record (i) an effective address, contact name, telephone number, telecopier number and electronic mail address to which notices and other communications may be sent and (ii) accurate wire instructions for such Lender.

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(e)           Reliance by Administrative Agent and Lenders.  The Administrative Agent and the Lenders shall be entitled to rely and act upon any notices (including telephonic Notices of Borrowing) purportedly given by or on behalf of the Borrower even if (i) such notices were not made in a manner specified herein, were incomplete or were not preceded or followed by any other form of notice specified herein, or (ii) the terms thereof, as understood by the recipient, varied from any confirmation thereof.  The Borrower shall indemnify the Administrative Agent, each Lender and the Agent-Related Parties of each of them from all losses, costs, expenses and liabilities resulting from the reliance by such Person on each notice purportedly given by or on behalf of the Borrower.  All telephonic notices to and other telephonic communications with the Administrative Agent may be recorded by the Administrative Agent, and each of the parties hereto hereby consents to such recording.

11.2                      Right of Set-Off.

In addition to any rights now or hereafter granted under applicable Law or otherwise, and not by way of limitation of any such rights, upon the occurrence of an Event of Default and the commencement of remedies described in Section 9.2, each Lender is authorized at any time and from time to time, without presentment, demand, protest or other notice of any kind (all of which rights being hereby expressly waived), to set-off and to appropriate and apply any and all deposits (general or special) and any other indebtedness at any time held or owing by such Lender (including, without limitation, branches, agencies or Affiliates of such Lender wherever located) to or for the credit or the account of the Borrower against obligations and liabilities of the Borrower to the Lenders hereunder, under the Notes, the other Credit Documents or otherwise, irrespective of whether the Administrative Agent or the Lenders shall have made any demand hereunder and although such obligations, liabilities or claims, or any of them, may be contingent or unmatured, and any such set-off shall be deemed to have been made immediately upon the occurrence of an Event of Default even though such charge is made or entered on the books of such Lender subsequent thereto.  The Borrower hereby agrees that any Person purchasing a participation in the Loans and Commitments hereunder pursuant to Sections 3.8 or 11.3(d) may exercise all rights of set-off with respect to its participation interest as fully as if such Person were a Lender hereunder.

11.3                      Successors and Assigns.

(a)           Successors and Assigns Generally.  The provisions of this Credit Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of the Administrative Agent and each Lender (except as contemplated by Section 8.2), and no Lender may assign or otherwise transfer any of its rights or obligations hereunder except (i) to an Eligible Assignee in accordance with the provisions of subsection (b) of this Section, (ii) by way of participation in accordance with the provisions of subsection (d) of this Section, (iii) by way of pledge or assignment of a security interest subject to the restrictions of subsection (f) of this Section, or (iv) to an SPC in accordance with the provisions of subsection (h) of this Section (and any other attempted assignment or transfer by any party hereto shall be null and void).  Nothing in this Credit Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby, Participants to the extent provided in subsection (d) of this Section and, to the extent expressly contemplated hereby, the Agent-Related Parties of each of the Administrative Agent and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Credit Agreement.

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(b)           Assignments by Lenders.  Any Lender may at any time assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Credit Agreement (including all or a portion of its Commitment and the Loans at the time owing to it); provided that

(i)           except in the case of an assignment of the entire remaining amount of the assigning Lender’s Commitment and the Loans at the time owing to it or in the case of an assignment to a Lender or an Affiliate of a Lender or an Approved Fund with respect to a Lender, the aggregate amount of the Commitment (which for this purpose includes Loans outstanding thereunder) or, if the Commitment is not then in effect, the principal outstanding balance of the Loans of the assigning Lender subject to each such assignment, determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent or, if “Trade Date” is specified in the Assignment and Assumption, as of the Trade Date, shall not be less than $5,000,000unless each of the Administrative Agent and, so long as no Event of Default has occurred and is continuing, the Borrower otherwise consents (each such consent not to be unreasonably withheld or delayed); provided, however, that concurrent assignments to members of an Assignee Group and concurrent assignments from members of an Assignee Group to a single Eligible Assignee (or to an Eligible Assignee and members of its Assignee Group) will be treated as a single assignment for purposes of determining whether such minimum amount has been met;

(ii)           each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender’s rights and obligations under this Credit Agreement with respect to the Loans or the Commitment assigned;

(iii)                      any assignment of a Commitment must be approved by the Administrative Agent, unless the Person that is the proposed assignee is itself a Lender (whether or not the proposed assignee would otherwise qualify as an Eligible Assignee); and

(iv)                      the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and recordation fee in the amount, if any, required as set forth in Schedule 11.3, and the Eligible Assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire.

Subject to acceptance and recording thereof by the Administrative Agent pursuant to subsection (c) of this Section, from and after the effective date specified in each Assignment and Assumption, the Eligible Assignee thereunder shall be a party to this Credit Agreement and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Credit Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Credit Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender’s rights and obligations under this Credit Agreement, such Lender shall cease to be a party hereto) but shall continue to be entitled to the benefits of Sections 3.9, 3.12, 3.13, 3.14, and 11.5(b) with respect to facts and circumstances occurring prior to the effective date of such assignment.  Upon request, the Borrower (at its expense) shall execute and deliver a Note to the assignee Lender.  Any assignment or transfer by a Lender of rights or obligations under this Credit Agreement that does not comply with this subsection shall be treated for purposes of this Credit Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with subsection (d) of this Section.

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(c)           Register.  The Administrative Agent, acting solely for this purpose as an agent of the Borrower, shall maintain at the Administrative Agent’s Office a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitments of, and principal amounts of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the “Register”).  The entries in the Register shall be conclusive, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Credit Agreement, notwithstanding notice to the contrary.  The Register shall be available for inspection by the Borrower at any reasonable time and from time to time upon reasonable prior notice.  In addition, at any time that a request for a consent for a material or substantive change to the Credit Documents is pending, any Lender may request and receive from the Administrative Agent a copy of the Register.

(d)           Participations.  Any Lender may at any time, without the consent of, or notice to, the Borrower or the Administrative Agent, sell participations to any Person (other than a natural person or the Borrower or any of the Borrower’s Affiliates or Subsidiaries) (each, a “Participant”) in all or a portion of such Lender’s rights and/or obligations under this Credit Agreement (including all or a portion of its Commitment and/or the Loans owing to it); provided that (i) such Lender’s obligations under this Credit Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Borrower, the Administrative Agent and the Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Credit Agreement.

Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Credit Agreement and to approve any amendment, modification or waiver of any  provision of this Credit Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, waiver or other modification described in the first proviso to Section 11.6 that affects such Participant.  Subject to subsection (e) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 3.9, 3.12 3.13 and 3.14to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to subsection (b) of this Section.  To the extent permitted by Law, each Participant also shall be entitled to the benefits of Section 3.7as though it were a Lender, provided such Participant agrees to be subject to Section 3.8 as though it were a Lender.

(e)           Limitations upon Participant Rights.  A Participant shall not be entitled to receive any greater payment under Section 3.9, 3.12, 3.13, or 3.14than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower’s prior written consent.  A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 3.13 unless the Borrower is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrower, to comply with Section 3.13(f) as though it were a Lender.

(f)           Certain Pledges.  Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Credit Agreement (including under its Note, if any) to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank; provided that no such pledge or assignment shall release such Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.

(g)           Electronic Execution of Assignments.  The words “execution,” “signed,” “signature,” and words of like import in any Assignment and Assumption shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable law, including the Federal Electronic Signatures in Global and National Commerce Act, the New York State Electronic Signatures and Records Act, or any other similar state laws based on the Uniform Electronic Transactions Act.

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(h)           Special Purpose Funding Vehicles.  Notwithstanding anything to the contrary contained herein, any Lender (a “Granting Lender”) may grant to a special purpose funding vehicle identified as such in writing from time to time by the Granting Lender to the Administrative Agent and the Borrower (an “SPC”) the option to provide all or any part of any Loan that such Granting Lender would otherwise be obligated to make pursuant to this Credit Agreement; provided that (i) nothing herein shall constitute a commitment by any SPC to fund any Loan, and (ii) if an SPC elects not to exercise such option or otherwise fails to make all or any part of such Loan, the Granting Lender shall be obligated to make such Loan pursuant to the terms hereof.  Each party hereto hereby agrees that (i) neither the grant to any SPC nor the exercise by any SPC of such option shall increase the costs or expenses or otherwise increase or change the obligations of the Borrower under this Agreement (including its obligations under Section 3.9, 3.12, 3.12 and 3.14), (ii) no SPC shall be liable for any indemnity or similar payment obligation under this Credit Agreement for which a Lender would be liable, and (iii) the Granting Lender shall for all purposes, including the approval of any amendment, waiver or other modification of any provision of any Credit Document, remain the lender of record hereunder.  The making of a Committed Loan by an SPC hereunder shall utilize the Commitment of the Granting Lender to the same extent, and as if, such Loan were made by such Granting Lender.  In furtherance of the foregoing, each party hereto hereby agrees (which agreement shall survive the termination of this Credit Agreement) that, prior to the date that is one year and one day after the payment in full of all outstanding commercial paper or other senior debt of any SPC, it will not institute against, or join any other Person in instituting against, such SPC any bankruptcy, reorganization, arrangement, insolvency, or liquidation proceeding under the laws of the United States or any State thereof.  Notwithstanding anything to the contrary contained herein, any SPC may (A) with notice to, but without prior consent of the Borrower and the Administrative Agent and with the payment of a processing fee in the amount of $2,500, assign all or any portion of its right to receive payment with respect to any Loan to the Granting Lender and (B) disclose on a confidential basis any non-public information relating to its funding of Loans to any rating agency, commercial paper dealer or provider of any surety or guarantee or credit or liquidity enhancement to such SPC.

11.4                      No Waiver; Remedies Cumulative.

No failure or delay on the part of the Administrative Agent or any Lender in exercising any right, power or privilege hereunder or under any other Credit Document and no course of dealing between the Borrower and the Administrative Agent or any Lender shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Credit Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder.  The rights and remedies provided herein are cumulative and not exclusive of any rights or remedies which the Administrative Agent or any Lender would otherwise have.  No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Administrative Agent or the Lenders to any other or further action in any circumstances without notice or demand.

11.5                      Attorney Costs, Expenses, Taxes and Indemnification by Borrower.

(a)           The Borrower agrees (i) to pay or reimburse the Administrative Agent and the Arrangers for all costs and expenses incurred in connection with the development, preparation, negotiation and execution of this Credit Agreement and the other Credit Documents and any amendment, waiver, consent or other modification of the provisions hereof and thereof (whether or not the transactions contemplated hereby or thereby are consummated), and the consummation and administration of the transactions contemplated hereby and thereby, including all reasonable fees and expenses of legal counsel, and (ii) to pay or reimburse the Administrative Agent and each Lender for all costs and expenses incurred in connection with the enforcement, attempted enforcement, or preservation of any rights or remedies under this Credit Agreement

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or the other Credit Documents (including all such costs and expenses incurred during any “workout” or restructuring in respect of the Borrower Obligations and during any legal proceeding, including any proceeding under any Debtor Relief Law), including all reasonable fees and expenses of legal counsel.  The foregoing costs and expenses shall include all search, filing, recording, and appraisal charges and fees and taxes related thereto, and other out-of-pocket expenses incurred by the Administrative Agent and the Arrangers and the cost of independent public accountants and other outside experts retained by the Administrative Agent, the Arrangers or any Lender.  Other than costs and expenses payable in connection with the closing of the transactions contemplated by this Credit Agreement pursuant to Section 11.5(a) (which shall be payable on the Closing Date unless otherwise agreed by the Administrative Agent and the Arrangers), all amounts due under this Section 11.5 shall be payable within ten Business Days after demand therefor.  The agreements in this Section shall survive the termination of the Commitments and repayment of all other Borrower Obligations.

(b)           Whether or not the transactions contemplated hereby are consummated, the Borrower shall  indemnify and hold harmless each Agent-Related Person, each Lender and their respective Affiliates, directors, officers, employees, counsel, agents and attorneys-in-fact (collectively the “Indemnitees”) from and against any and all liabilities, obligations, losses, damages, penalties, claims, demands, actions, judgments, suits, costs, expenses and disbursements (including the reasonable fees and expenses of legal counsel) of any kind or nature whatsoever which may at any time be imposed on, incurred by or asserted against any such Indemnitee in any way relating to or arising out of or in connection with (i) the execution, delivery, enforcement, performance or administration of any Credit Document or any other agreement, letter or instrument delivered in connection with the transactions contemplated thereby or the consummation of the transactions contemplated thereby, (ii) any Commitment or Loan or the use or proposed use of the proceeds therefrom, or (iii) any actual or alleged presence or release of Hazardous Substances on or from any property currently or formerly owned or operated by the Borrower, any Subsidiary of the Borrower, or any Environmental Claim related in any way to the Borrower or any Subsidiary of the Borrower, (iv) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory (including any investigation of, preparation for, or defense of any pending or threatened claim, investigation, litigation or proceeding) and regardless of whether any Indemnitee is a party thereto or (v) any civil penalty or fine assessed by the Office of Foreign Assets Control (the “OFAC”) against, and all reasonable costs and expenses (including counsel fees and disbursements) incurred in connection with defense thereof, by the Administrative Agent or any Lender as a result conduct of the Borrower that violates a sanction enforced by OFAC (all the foregoing, collectively, the “Indemnified Liabilities”), in all cases, whether or not caused by or arising, in whole or in part, out of the negligence of the Indemnitee; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such liabilities, obligations, losses, damages, penalties, claims, demands, actions, judgments, suits, costs, expenses or disbursements are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee.  No Indemnitee shall be liable for any damages arising from the use by others of any information or other materials obtained through IntraLinks or other similar information transmission systems in connection with this Credit Agreement, nor shall any Indemnitee have any liability for any indirect or consequential damages relating to this Credit Agreement or any other Credit Document or arising out of its activities in connection herewith or therewith (whether before or after the Closing Date).

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(c)           To the extent that the Borrower for any reason fails to indefeasibly pay any amount required under subsection (a) or (b) of this Section to be paid by it to the Administrative Agent (or any sub-agent thereof), or any Agent-Related Party of any of the foregoing, each Lender severally agrees to pay to the Administrative Agent (or any such sub-agent), or such Agent-Related Party, as the case may be, such Lender’sPro Rata Share (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount; provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent (or any such sub-agent) in its capacity as such, or against any Agent-Related Party of any of the foregoing acting for the Administrative Agent (or any such sub-agent) in connection with such capacity.  The obligations of the Lenders under this subsection (c) are subject to the provisions of Section 3.2(d).

All amounts due under this Section 11.5 shall be payable within ten Business Days after demand therefor.  The agreements in this Section shall survive the resignation of the Administrative Agent, the replacement of any Lender, the termination of the Commitments and the repayment, satisfaction or discharge of all the other Borrower Obligations.

11.6                      Amendments, Etc.

No amendment or waiver of any provision of this Credit Agreement or any other Credit Document, and no consent to any departure by the Borrower therefrom, shall be effective unless in writing signed by the Required Lenders and the Borrower and acknowledged by the Administrative Agent, and each such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such amendment, waiver or consent shall:

(a)           waive any condition set forth in Section 4.1 without the written consent of each Lender;

(b)           extend or increase the Commitment of any Lender (or reinstate any Commitment terminated pursuant to Section 9.2) without the written consent of such Lender;

(c)           postpone any date fixed by this Credit Agreement or any other Credit Document for any payment (excluding mandatory prepayments) of principal, interest, fees or other amounts due to the Lenders (or any of them) or any scheduled or mandatory reduction of the Committed Amount hereunder or under any other Credit Document without the written consent of each Lender directly affected thereby;

(d)           reduce the principal of, or the rate of interest specified herein on, any Loan, or any fees or other amounts payable hereunder or under any other Credit Document without the written consent of each Lender directly affected thereby; provided, however, that only the consent of the Required Lenders shall be necessary  to amend the definition of “Default Rate”;

(e)           change Section 3.8 or Section 9.3 in a manner that would alter the pro rata sharing of payments required thereby without the written consent of each Lender;

(f)           change any provision of this Section or the definition of “Required Lenders” or any other provision hereof specifying the number or percentage of Lenders required to amend, waive or otherwise modify any rights hereunder or make any determination or grant any consent hereunder without the written consent of each Lender; or

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(g)consent to the assignment by the Borrower of any of its rights and obligations under (or in respect of) the Credit Documents without the written consent of each Lender;

and, provided further, that (i) no amendment, waiver or consent shall, unless in writing and signed by the Administrative Agent in addition to the Lenders required above, affect the rights or duties of the Administrative Agent under this Credit Agreement or any other Credit Document; and (ii) Section 11.3(h) may not be amended, waived or otherwise modified without the consent of each Granting Lender all or any part of whose Loans are being funded by an SPC at the time of such amendment, waiver or other modification.  Notwithstanding anything to the contrary herein, no Defaulting Lender shall have any right to approve or disapprove any amendment, waiver or consent hereunder, except that the Commitment of such Lender may not be increased or extended without the consent of such Lender.

11.7                      Counterparts.

This Credit Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be an original, but all of which shall constitute one and the same instrument.

11.8                      Headings.

The headings of the sections and subsections hereof are provided for convenience only and shall not in any way affect the meaning or construction of any provision of this Credit Agreement.

11.9                      Survival of Indemnification and Representations and Warranties.

(a)           Survival of Indemnification.  All indemnities set forth herein shall survive the execution and delivery of this Credit Agreement, the making of any Credit Extension and the repayment of the Loans and other Borrower Obligations and the termination of the Commitments hereunder.

(b)           Survival of Representations and Warranties.  All representations and warranties made hereunder and in any other Credit Document or other document delivered pursuant hereto or thereto or in connection herewith or therewith shall survive the execution and delivery hereof and thereof.  Such representations and warranties have been or will be relied upon by the Administrative Agent and each Lender, regardless of any investigation made by the Administrative Agent or any Lender or on their behalf and notwithstanding that the Administrative Agent or any Lender may have had notice or knowledge of any Default or Event of Default at the time of any Credit Extension, and shall continue in full force and effect as long as any Loan or any other Borrower Obligation hereunder shall remain unpaid or unsatisfied.

11.10                      Governing Law; Venue; Service.

(a)           THIS CREDIT AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (INCLUDING SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW, BUT EXCLUDING ALL OTHER CHOICE OF LAW AND CONFLICTS OF LAW RULES).  Any legal action or proceeding with respect to this Credit Agreement or any other Credit Document may be brought in the courts of the State of New York or of the United States for the Southern District of New York, and, by execution and delivery of this Credit Agreement, the Borrower hereby irrevocably accepts for itself and in respect of its Property, generally and unconditionally, the jurisdiction of such courts.

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(b)           The Borrower irrevocably consents to the service of process in any action or proceeding with respect to this Credit Agreement or any other Credit Document by the mailing of copies thereof by registered or certified mail, postage prepaid, to it at the address for notices pursuant to Section 11.1, such service to become effective ten days after such mailing.  Nothing herein shall affect the right of a Lender to serve process in any other manner permitted by Law.

11.11                      Waiver of Jury Trial; Waiver of Consequential Damages.

EACH OF THE PARTIES TO THIS CREDIT AGREEMENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS CREDIT AGREEMENT, ANY OF THE OTHER CREDIT DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY.  Each of the parties to this Credit Agreement agrees not to assert any claim against any other party hereto, Administrative Agent, any Lender, any of their Affiliates, or any of their respective directors, officers, employees, attorneys or agents, on any theory of liability, for special, indirect, consequential or punitive damages arising out of or otherwise relating to any of the transactions contemplated herein and in the other Credit Documents.

11.12                      Severability.

If any provision of any of the Credit Documents is determined to be illegal, invalid or unenforceable, such provision shall be fully severable and the remaining provisions shall remain in full force and effect and shall be construed without giving effect to the illegal, invalid or unenforceable provisions.

11.13                      Further Assurances.

The Borrower agrees, upon the request of the Administrative Agent, to promptly take such actions, as reasonably requested, as is necessary to carry out the intent of this Credit Agreement and the other Credit Documents.

11.14                      Confidentiality.

Each of the Administrative Agent and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its Affiliates and to its and its Affiliates’ respective partners, directors, officers, employees, agents, advisors and representatives (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority purporting to have jurisdiction over it (including any self-regulatory authority, such as the National Association of Insurance Commissioners), (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party hereto, (e) in connection with the exercise of any remedies hereunder or under any other Credit Document or any action or proceeding relating to this Credit Agreement or any other Credit Document or the enforcement of rights hereunder or thereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to (i) any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Credit Agreement or (ii) any actual or prospective counterparty (or its advisors) to any swap or derivative transaction relating to the Borrower and its obligations, (g) with the consent of the Borrower or (h) to the extent such Information (x) becomes publicly available other than as a result of a breach of this Section or (y) becomes available to the Administrative Agent, any Lender, or any of their respective Affiliates on a nonconfidential basis from a source other than the Borrower.

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For purposes of this Section, “Information” means all information received from the Borrower or any Subsidiary or any of their respective businesses, other than any such information that is available to the Administrative Agent, any Lender on a nonconfidential basis prior to disclosure by the Borrower or any Subsidiary, provided that, in the case of information received from the Borrower or any Subsidiary after the date hereof, such information is clearly identified at the time of delivery as confidential.  Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information.

11.15                      Entirety.

This Credit Agreement together with the other Credit Documents represent the entire agreement of the parties hereto and thereto, and supersede all prior agreements and understandings, oral or written, if any, including any commitment letters or correspondence relating to the Credit Documents or the transactions contemplated herein and therein.

11.16                      Binding Effect; Continuing Agreement.

(a)           This Credit Agreement shall become effective at such time when all of the conditions set forth in Section 5.1 have been satisfied or waived by the Lenders and it shall have been executed by the Borrower and the Administrative Agent, and the Administrative Agent shall have received copies hereof (telefaxed or otherwise) which, when taken together, bear the signatures of each Lender, and thereafter this Credit Agreement shall be binding upon and inure to the benefit of the Borrower, the Administrative Agent and each Lender and their respective successors and assigns.

(b)           This Credit Agreement shall be a continuing agreement and shall remain in full force and effect until all Loans, interest, fees and other Borrower Obligations have been paid in full and all Commitments have been terminated.  Upon termination, the Borrower shall have no further obligations (other than the indemnification provisions and other provisions that by their terms survive) under the Credit Documents; provided that should any payment, in whole or in part, of the Borrower Obligations be rescinded or otherwise required to be restored or returned by the Administrative Agent or any Lender, whether as a result of any proceedings in bankruptcy or reorganization or otherwise, then the Credit Documents shall automatically be reinstated and all amounts required to be restored or returned and all costs and expenses incurred by the Administrative Agent or any Lender in connection therewith shall be deemed included as part of the Borrower Obligations.

11.17                      [Reserved].

11.18                      USA Patriot Act Notice.

Each Lender and the Administrative Agent (for itself and not on behalf of any Lender) hereby notifies the Borrower that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “Act”), it is required to obtain, verify and record information that identifies the Borrower, which information includes the names and addresses of the Borrower and other information that will allow such Lender or the Administrative Agent, as applicable, to identify the Borrower in accordance with the Act.

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11.19                      Acknowledgment.

Section 7 and Section 8 of this Credit Agreement contain affirmative and negative covenants applicable to the Borrower.  Each of the parties to this Credit Agreement acknowledges and agrees that any such covenants that require the Borrower to cause any of its Subsidiaries to take or to refrain from taking specified actions will be enforceable unless prohibited by applicable law or regulatory requirement.

11.20                      Replacement of Lenders.

If (a) any Lender requests compensation under Section 3.12, (b) the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 3.13, or (c) a Lender (a “Non-Consenting Lender”) does not consent to a proposed change, waiver, discharge or termination with respect to any Credit Document that has been approved by the Required Lenders as provided in Section 11.6 but requires unanimous consent of all Lenders or all Lenders directly affected thereby (as applicable) or (d) any Lender is a Defaulting Lender, then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in, and consents required by, Section 11.3), all of its interests, rights and obligations under this Agreement and the related Credit Documents to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment), provided that:

(i)           the Borrower shall have paid to the Administrative Agent the assignment fee specified in Section 11.3(b);

(ii)           such Lender shall have received payment of an amount equal to the outstanding principal of its Loans, accrued interest thereon, accrued fees and all other amounts payable to it hereunder and under the other Credit Documents (including any amounts under Section 3.14) from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts);

(iii)           in the case of any such assignment resulting from a claim for compensation under Section 3.12 or payments required to be made pursuant to Section 3.13, such assignment will result in a reduction in such compensation or payments thereafter; and

(iv)           such assignment does not conflict with applicable Laws; and

(v)           in the case of any such assignment resulting from a Non-Consenting Lender’s failure to consent to a proposed change, waiver, discharge or termination with respect to any Credit Document, the applicable replacement bank, financial institution or Fund consents to the proposed change, waiver, discharge or termination; provided that the failure by such Non-Consenting Lender to execute and deliver an Assignment and Assumption shall not impair the validity of the removal of such Non-Consenting Lender and the mandatory assignment of such Non-Consenting Lender’s Commitments and outstanding Loans pursuant to this Section shall nevertheless be effective without the execution by such Non-Consenting Lender of an Assignment and Assumption.

A Lender shall not be required to make any such assignment or delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrower to require such assignment and delegation cease to apply.

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Signature Page to Term Loan Credit Agreement

Texas-New Mexico Power Company

Each of the parties hereto has caused a counterpart of this Credit Agreement to be duly executed and delivered as of the date first above written.

BORROWER:

TEXAS-NEW MEXICO POWER COMPANY

a Texas corporation

By:                  /s/ Tom Sategna                                                      

Name:            Thomas G. Sategna

Title:               Vice President, Controller and Treasurer

S - 1

Signature Page to Term Loan Credit Agreement

Texas-New Mexico Power Company

AGENT:

JPMORGAN CHASE BANK, N.A.,

as Administrative Agent

By:           /s/ Helen D. Davis                                                                

Name:            Helen D. Davis                                                                

Title:              Vice President                                                                

LENDERS:

JPMORGAN CHASE BANK, N.A.,

as a Lender

By:           /s/ Helen D. Davis                                                                

Name:           Helen D. Davis                                                                

Title:             Vice President                                                                

UNION BANK OF CALIFORNIA, N.A.,

as a Lender

By:           /s/ Robert J. Cole                                                                

Name:            Robert J. Cole                                                                

Title:              Vice President                                                                

S - 2

SCHEDULE 1.1(a)

PRO RATA SHARES

Lender	Commitment	Pro Rata Share
JPMorgan Chase Bank, N.A.	$75,000,000	50.000000000%
Union Bank of California, N.A.	$75,000,000	50.000000000%
Total	$150,000,000	100.000000000%

SCHEDULE 11.1

NOTICES

COMPANY:

Texas-New Mexico Power Company

Alvarado Square

Albuquerque, NM  87158

Attention:  Thomas G. Sategna, Vice President, Controller and Treasurer

Telephone:  505.241.4615

Telecopier:  505.241.2371

Electronic Mail:  Thomas.Sategna@pnmresources.com

Website Address:  www.pnmresouces.com

ADMINISTRATIVE AGENT:

Administrative Agent’s Office

(for payments and Requests for Credit Extensions):

JPMorgan Chase Bank, N.A.

10 S. Dearborn St.

Chicago, IL  60603

Attention:  Credit Services

Telephone:  312.732.2647

Telecopier:  312.385.7096

Electronic Mail:  Rafaela.Valenciano@jpmchase.com

Account No. 9008109962C2236

Ref:  Texas New Mexico Power Company

Account Name:  LS2 Incoming Clearing Account

ABA#:  021000021

Other Notices as Administrative Agent:

JPMorgan Chase Bank, N.A.

10 S. Dearborn St.

Chicago, IL  60603

Mail Code:  IL1-0090

Attention:  Helen D. Davis

Telephone:  312.732.1759

Telecopier:  312.732.1762

Electronic Mail:  helen.d.davis@jpmchase.com

SCHEDULE 11.3

PROCESSING AND RECORDING FEES

The Administrative Agent will charge a processing and recordation fee (an “Assignment Fee”) in the amount of $2,500 for each assignment; provided, however, that in the event of two or more concurrent and assignments to members of the same Assignee Group (which may be effected by a suballocation of an assigned amount among members of such Assignee Group) or two or more concurrent assignments by members of the same Assignee Group to a single Eligible Assignee (or to an Eligible Assignee and members of its Assignee Group), the Assignment Fee will be $2,500 plus the amount set forth below:

Transaction	Assignment Fee
First four concurrent assignments or suballocations to members of an Assignee Group (or from members of an Assignee Group, as applicable)	-0-
Each additional concurrent assignment or suballocation to a member of such Assignee Group (or from a member of such Assignee Group, as applicable)	$500

EXHIBIT 2.1(b)

FORM OF

NOTICE OF BORROWING

TO: JPMORGAN CHASE BANK, N.A., as Administrative Agent

RE: Credit Agreement dated as of March 7, 2008 among Texas-New Mexico Power Company (the “Borrower”), JPMorgan Chase Bank, N.A., as Administrative Agent, and the Lenders identified therein (as the same may be amended, modified, extended or restated from time to time, the “Credit Agreement”)

DATE: __________________, 2008 (the “Funding Date”).

1.   This Notice of Borrowing is made pursuant to the terms of the Credit Agreement.  All capitalized terms used herein unless otherwise defined shall have the meanings set forth in the Credit Agreement

2.   Please be advised that the Borrower is requesting Loans on the terms set forth below:

(a)	Principal amount of requested
	Loans				$150,000,000
(b)	Date of requested Loans				__________________, 2008
(c)	Interest rate applicable to the
	requested Loans:
	( i)	________		Base Rate
	(ii)	________		Adjusted Eurodollar Rate for an Interest Period
			of:
				________ one month
				________ two months
				________ three months

3.   The representations and warranties made by the undersigned in any Credit Document (other than the representation and warranties in Section 6.7(a) (but only with respect to clause (a) of the definition of Material Adverse Effect) and Section 6.9 of the Credit Agreement) are true and correct in all material respects at and as if made on the date of the requested Loans except to the extent they expressly relate to an earlier date.

4.   No Default or Event of Default as to the undersigned exists or shall be continuing either prior to or after giving effect to the Loans made pursuant to this Notice of Borrowing.

TEXAS-NEW MEXICO POWER COMPANY

a Texas corporation

By:________________________________

Name:______________________________

Title:_______________________________

EXHIBIT 2. l(e)

FORM OF NOTE

Lender: _______________

FOR  VALUE  RECEIVED, Texas-New Mexico Power Company, a Texas corporation (the “Borrower”), hereby promises to pay to the order of the Lender referenced above (the “Lender”), at the Administrative Agent’s Office set forth in that certain Term Loan Credit Agreement dated as of March 7, 2008 (as amended, modified, extended or restated from time to time, the “Credit Agreement”) among the Borrower, the Lenders party thereto (including the Lender) and JPMorgan Chase Bank, N.A., as Administrative Agent (the “Administrative Agent”) (or at such other place or places as the holder of this Note may designate), the aggregate unpaid principal amount of the Loans made by the Lender to the Borrower under the Credit Agreement, in lawful money and in immediately available funds, on the dates and in the principal amounts provided in the Credit Agreement, and to pay interest on the unpaid principal amount of each Loan made by the Lender to the Borrower, at such office, in like money and funds, for the period commencing on the date of each such Loan until each such Loan shall be paid in full, at the rates per annum and on the dates provided in the Credit Agreement.

This Note is one of the Notes referred to in the Credit Agreement and evidences Loans made by the Lender to the Borrower thereunder. Capitalized terms used in this Note have the respective meanings assigned to them in the Credit Agreement and the terms and conditions of the Credit Agreement are expressly incorporated herein and made a part hereof.

The Credit Agreement provides for the acceleration of the maturity of the Loans evidenced by this Note upon the occurrence of certain events (and for payment of collection costs in connection therewith) and for prepayments of Loans upon the terms and conditions specified therein. In the event this Note is not paid when due at any stated or accelerated maturity, the Borrower agrees to pay, in addition to principal and interest, all costs of collection, including reasonable attorney fees.

The date, amount, type, interest rate and duration of Interest Period (if applicable) of each Loan made by the Lender to the Borrower, and each payment made on account of the principal thereof, shall be recorded by the Lender on its books; provided that the failure of the Lender to make any such recordation or endorsement shall not affect the obligations of the Borrower to make a payment when due of any amount owing under the Credit Agreement or under this Note in respect of the Loans to be evidenced by this Note, and each such recordation or endorsement shall be prima facie evidence of such information, absent manifest error.

Except as permitted by Section 11.3(b) of the Credit Agreement, this Note may not be assigned by the Lender to any other Person.

THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (INCLUDING SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW, BUT EXCLUDING ALL OTHER CHOICE OF LAW AND CONFLICTS OF LAW RULES).

IN WITNESS WHEREOF, the Borrower has caused this Note to be executed as of the date first above written.

TEXAS-NEW MEXICO POWER COMPANY

a Texas corporation

By:________________________________

Name:______________________________

Title:_______________________________

EXHIBIT 2.3

FORM OF

NOTICE OF CONTINUATION/CONVERSION

TO: JPMorgan Chase Bank, N.A., as Administrative Agent

RE: Credit Agreement dated as of March 7, 2008 among Texas-New Mexico Power Company, a Texas corporation (the “Borrower”), JPMorgan Chase Bank, N.A., as Administrative Agent, and the Lenders named therein (as the same may be amended, modified, extended or restated from time to time, the “Credit Agreement”)

DATE: _____________, 2008

____________________________________________________________

1.   This Notice of Continuation/Conversion is made pursuant to the terms of the Credit Agreement.  All capitalized terms used herein unless otherwise defined shall have the meanings set forth in the Credit Agreement.

2.   Please be advised that the Borrower is requesting that a portion of the current outstanding Loans advanced to it in the amount of $__________, currently accruing interest at ___________, be extended or converted as of ______, 2008 at the interest rate option set forth in paragraph 3 below.

3.   The interest rate option applicable to the extension or conversion of all or part of the existing Loans referenced above shall be:

a.	_________	the Base Rate
b.	_________	the Adjusted Eurodollar Rate for an Interest Period of:
		________ one month
		________ two months
		________ three months

4.   As of the date hereof, no Default or Event of Default has occurred and is continuing.

TEXAS-NEW MEXICO POWER COMPANY

a Texas corporation

By:________________________________

Name:______________________________

Title:_______________________________

EXHIBIT 7. l(c)

FORM OF

COMPLIANCE CERTIFICATE

TO: JPMorgan Chase Bank, N.A., as Administrative Agent

RE: Credit Agreement dated as of March 7, 2008 among Texas-New Mexico Power Company, a Texas corporation (the “Borrower”), JPMorgan Chase Bank, N.A., as Administrative Agent, and the Lenders named therein (as the same may be amended, modified, extended or restated from time to time, the “Credit Agreement”)

DATE: _____________, 2008

____________________________________________________________

Pursuant to the terms of the Credit Agreement, I, ______________, a Financial Officer of Texas-New Mexico Power Company (the “Borrower”), hereby certify on behalf of the Borrower that, as of the quarter ending ___________, 2008, the statements below are accurate and complete in all respects (all capitalized terms used below shall have the meanings set forth in the Credit Agreement):

a.           Attached hereto as Schedule 1 are calculations (calculated as of the date of the financial statements referred to in paragraph c. below) demonstrating compliance by the Borrower with the financial covenant contained in Section 7.2 of the Credit Agreement.

b.           No Default or Event of Default exists under the Credit Agreement, except as indicated on a separate page attached hereto, together with an explanation of the action taken or proposed to be taken by the Borrower with respect thereto.

c.           The quarterly/annual financial statements for the fiscal quarter/year ended __________, 2008 which accompany this certificate fairly present in all material respects the financial condition of the Borrower and its Subsidiaries and have been prepared in accordance with GAAP, subject to changes resulting from normal year-end audit adjustments and except that the quarterly financial statements have fewer footnotes than annual statements.

TEXAS-NEW MEXICO POWER COMPANY

a Texas corporation

By:________________________________

Name:______________________________

Title:_______________________________

SCHEDULE 1

TO EXHIBIT 7.1(c)

FINANCIAL COVENANT CALCULATIONS

A.Debt Capitalization

1.Consolidated Indebtedness of the Borrower	$________________
2.Consolidated Capitalization of the Borrower	$________________
3.Debt to Capitalization Ratio (Line A1 ÷ A2)	___________ to 1.0
Maximum Permitted	0.65 to 1.0

EXHIBIT 11.3(b)

FORM OF

ASSIGNMENT AND ASSUMPTION

This Assignment and Assumption (the “Assignment and Assumption”) is dated as of the Effective Date set forth below and is entered into by and between ____________ (the “Assignor”) and ________________ (the “Assignee”).  Capitalized terms used but not defined herein shall have the meanings given to them in the Credit Agreement identified below (as amended, the “Credit Agreement”), receipt of a copy of which is hereby acknowledged by the Assignee.  The Standard Terms and Conditions set forth in Schedule 1 attached hereto (the “Standard Terms and Conditions”) are hereby agreed to and incorporated herein by reference and made a part of this Assignment and Assumption as if set forth herein in full.

For an agreed consideration, the Assignor hereby irrevocably sells and assigns to the Assignee, and the Assignee hereby irrevocably purchases and assumes from the Assignor, subject to and in accordance with the Standard Terms and Conditions and the Credit Agreement, as of the Effective Date inserted by the Administrative Agent as contemplated below (a) all of the Assignor’s rights and obligations in its capacity as a Lender under the Credit Agreement and any other documents or instruments delivered pursuant thereto to the extent related to the amount and percentage interest identified below of all of such outstanding rights and obligations of the Assignor under the respective facilities identified below and (b) to the extent permitted to be assigned under applicable law, all claims, suits, causes of action and any other right of the Assignor (in its capacity as a Lender) against any Person, whether known or unknown, arising under or in connection with the Credit Agreement, any other documents or instruments delivered pursuant thereto or the loan transactions governed thereby or in any way based on or related to any of the foregoing, including, but not limited to, contract claims, tort claims, malpractice claims, statutory claims and all other claims at law or in equity related to the rights and obligations sold and assigned pursuant to clause (a) above (the rights and obligations sold and assigned pursuant to clauses (a) and (b) above being referred to herein collectively as, the “Assigned Interest”).  Such sale and assignment is without recourse to the Assignor and, except as expressly provided in this Assignment and Assumption, without representation or warranty by the Assignor.

1.           Assignor:	______________________________
2.           Assignee:	______________________________
	and is an Affiliate/Approved Fund of
3.           Borrower:	Texas-New Mexico Power Company
4.           Administrative Agent:	JPMorgan Chase Bank, N.A. as the Administrative Agent under the Credit Agreement

5.           Credit Agreement:	Term Loan Credit Agreement dated as of March 7, 2008 among the Borrower, the Lenders party thereto and the Administrative Agent.
6.           Assigned Interest:

Aggregate Amount of Commitment/Loans for all Lenders	Amount of Commitment/Loans Assigned	Percentage Assigned of Commitment/Loans
$	$		%

7.           After giving effect to the foregoing assignment, the Assignor and the Assignee shall have the following Commitments, Pro Rata Shares and outstanding Loans:

	Commitments	Pro Rata Share	Outstanding Loans
Assignor
Assignee

8.           Trade Date:                                                _____________

Effective Date:  ______________ ___, 2008

The terms set forth in this Assignment and Assumption are hereby agreed to:

	ASSIGNOR
	[NAME OF ASSIGNOR]
	By:
	Name:
	Title:
	ASSIGNEE
	[NAME OF ASSIGNEE]
	By:
	Name:
	Title:
Consented to and Accepted if applicable:
JPMorgan Chase Bank, N.A.,
as Administrative Agent
By:
Name:
Title:
Consented to if applicable:
TEXAS-NEW MEXICO POWER COMPANY
By:
Name:
Title:

SCHEDULE 1

TO EXHIBIT 11.3(b)

TERMS AND CONDITIONS FOR

ASSIGNMENT AND ASSUMPTION

1.Representations and Warranties.

1.1Assignor.  The Assignor (a) represents and warrants that (i) it is the legal and beneficial owner of the Assigned Interest, (ii) the Assigned Interest is free and clear of any lien, encumbrance or other adverse claim and (iii) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby; and (b) assumes no responsibility with respect to (i) any Agreement or statements, warranties or representations made in or in connection with the Credit Agreement or any other Credit Document, (ii) the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Documents or any collateral thereunder, (iii) the financial condition of the Borrower, any of its Subsidiaries or Affiliates or any other Person obligated in respect of any Credit Document or (iv) the performance or observance by the Borrower, any of its Subsidiaries or Affiliates or any other Person of any of their respective obligations under any Credit Document.

1.2Assignee.  The Assignee (a) represents and warrants that (i) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby and to become a Lender under the Credit Agreement, (ii) it meets all requirements of an Eligible Assignee under the Credit Agreement (subject to receipt of such consents as may be required under the Credit Agreement), (iii) from and after the Effective Date, it shall be bound by the provisions of the Credit Agreement as a Lender thereunder and, to the extent of the Assigned Interest, shall have the obligations of a Lender thereunder, (iv) it has received a copy of the Credit Agreement, together with copies of the most recent financial statements delivered pursuant to Section 7.1 thereof, as applicable, and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Assumption and to purchase the Assigned Interest on the basis of which it has made such analysis and decision independently and without reliance on the Administrative Agent or any other Lender, and (v) if it is a foreign lender, attached to the Assignment and Assumption is any documentation required to be delivered by it pursuant to the terms of the Credit Agreement, duly completed and executed by the Assignee; and (b) agrees that (i) it will, independently and without reliance on the Administrative Agent, the Assignor or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Documents, and (ii) it will perform in accordance with their terms all of the obligations which by the terms of the Credit Documents are required to be performed by it as a Lender.

2.Payments.  From and after the Effective Date, the Administrative Agent shall make all payments in respect of the Assigned Interest (including payments of principal, interest, fees and other amounts) to the Assignor for amounts which have accrued to but excluding the Effective Date and to the Assignee for amounts which have accrued from and after the Effective Date.

3.General Provisions.  This Assignment and Assumption shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns.  This Assignment and Assumption may be executed in any number of counterparts, which together shall constitute one instrument.  Delivery of an executed counterpart of a signature page of this Assignment and Assumption by telecopy shall be effective as delivery of a manually executed counterpart of this Assignment and Assumption.  This Assignment and Assumption shall be governed by, and construed in accordance with, the law of the State of New York.

EX-12.1

Exhibit 12.1

PNM RESOURCES, INC. AND SUBSIDIARIES

Ratio of Earnings to Fixed Charges

(In thousands, except ratio)

	Three Months Ended
	March 31,			Year Ended December 31,
	2008			2007			2006			2005			2004			2003
Fixed charges, as defined by the Securities and Exchange
Commission:
Interest on long-term debt	$	18,908		$	81,638		$	84,773		$	66,042		$	34,488		$	48,483
Amortization of debt premium, discount and expenses		1,758			6,566			4,729			3,962			3,036			2,990
Other interest		7,237			32,242			44,918			13,734			1,976			3,922
Estimated interest factor of lease rental charges		4,463			19,308			19,235			19,934			18,843			19,568
Interest capitalized		172			4,119			2,982			1,421			957			1,163
Preferred dividend requirements of subsidiaries		210			556			798			4,063			881			845
Total Fixed Charges	$	32,748		$	144,429		$	157,435		$	109,156		$	60,181		$	76,971
Earnings, as defined by the Securities and Exchange
Commission:
Earnings (loss) from continuing operations before income taxes	$	(113,056	)	$	63,112		$	164,018		$	76,502		$	107,060		$	68,267
(Earnings) loss of equity investee		25,083			(7,581	)		-			-			-			-
Earnings (loss) from continuing operations before income taxes and  investee earnings		(87,973	)		55,531			164,018			76,502			107,060			68,267
Fixed charges as above		32,748			144,429			157,435			109,156			60,181			76,971
Interest capitalized		(172	)		(4,119	)		(2,982	)		(1,421	)		(957	)		(1,163	)
Preferred dividend requirements of subsidiaries		(210	)		(556	)		(798	)		(4,063	)		(881	)		(845	)
Earnings (Loss) Available for Fixed Charges	$	(55,607	)	$	195,285		$	317,673		$	180,174		$	165,403		$	143,230
Ratio of Earnings to Fixed Charges		N/M	*		1.35			2.02			1.65			2.75			1.86

* The ratio of earnings to fixed charges for the three months ended March 31, 2008 is not meaningful since earnings available for fixed charges is negative. The shortfall in the earnings available for fixed charges to achieve a ratio of earnings to fixed charges of 1.00 amounted to $88.4 million for the three months ended March 31, 2008.

EX-12.2

Exhibit 12.2

PUBLIC SERVICE COMPANY OF NEW MEXICO

Ratio of Earnings to Fixed Charges

(In thousands, except ratio)

	Three Months
	Ended			Year Ended December 31,
	March 31, 2008			2007			2006			2005			2004			2003
Fixed charges, as defined by the Securities and Exchange
Commission:
Interest on long-term debt	$	10,530		$	38,534		$	40,541		$	39,408		$	36,801		$	48,067
Amortization of debt premium, discount and expenses		1,149			4,618			2,871			2,856			3,036			2,958
Other interest		2,492			9,799			3,956			1,921			1,719			3,859
Estimated interest factor of lease rental charges		3,964			16,630			16,448			16,954			16,406			17,007
Interest capitalized		114			3,738			1,946			1,054			752			909
Total Fixed Charges	$	18,249		$	73,319		$	65,762		$	62,193		$	58,714		$	72,800
Earnings, as defined by the Securities and Exchange
Commission:
Earnings (loss) before income taxes	$	(44,066	)	$	34,611		$	89,657		$	51,034		$	114,690		$	74,400
Fixed charges as above		18,249			73,319			65,762			62,193			58,714			72,800
Interest capitalized		(114	)		(3,738	)		(1,946	)		(1,054	)		(752	)		(909	)
Earnings (Loss) Available for Fixed Charges	$	(25,931	)	$	104,192		$	153,473		$	112,173		$	172,652		$	146,291
Ratio of Earnings to Fixed Charges		N/M	*		1.42			2.33			1.80			2.94			2.01

* The ratio of earnings to fixed charges for the three months ended March 31, 2008 is not meaningful since earnings available for fixed charges is negative. The shortfall in the earnings available for fixed charges to achieve a ratio of earnings to fixed charges of 1.00 amounted to $44.2 million for the three months ended March 31, 2008.

EX-12.3

Exhibit 12.3

PUBLIC SERVICE COMPANY OF NEW MEXICO

Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends

(In thousands, except ratio)

	Three Months
	Ended			Year Ended December 31,
	March 31, 2008			2007			2006			2005			2004			2003
Fixed charges, as defined by the Securities and Exchange
Commission:
Interest on long-term debt	$	10,530		$	38,534		$	40,541		$	39,408		$	36,801		$	48,067
Amortization of debt premium, discount and expenses		1,149			4,618			2,871			2,856			3,036			2,958
Other interest		2,492			9,799			3,956			1,921			1,719			3,859
Estimated interest factor of lease rental charges		3,964			16,630			16,448			16,954			16,406			17,007
Interest capitalized		114			3,738			1,946			1,054			752			909
Total Fixed Charges		18,249			73,319			65,762			62,193			58,714			72,800
Preferred dividend requirements		216			781			815			746			891			859
Total Fixed Charges and Preferred Dividend Requirements	$	18,465		$	74,100		$	66,577		$	62,939		$	59,605		$	73,659
Earnings, as defined by the Securities and Exchange
Commission:
Earnings (loss) before income taxes	$	(44,066	)	$	34,611		$	89,657		$	51,034		$	114,690		$	74,400
Fixed charges as above		18,249			73,319			65,762			62,193			58,714			72,800
Interest capitalized		(114	)		(3,738	)		(1,946	)		(1,054	)		(752	)		(909	)
Earnings (Loss) Available for Fixed Charges	$	(25,931	)	$	104,192		$	153,473		$	112,173		$	172,652		$	146,291
Ratio of Earnings to Fixed Charges and Preferred Stock Dividends		N/M	*		1.41			2.31			1.78			2.90			1.99

* The ratio of earnings to fixed charges for the three months ended March 31, 2008 is not meaningful since earnings available for fixed charges is negative. The shortfall in the earnings available for fixed charges to achieve a ratio of earnings to fixed charges of 1.00 amounted to $44.4 million for the three months ended March 31, 2008.

EX-31.1

PNM Resources

Alvarado Square

Albuquerque, NM  87158

www.pnmresources.com

[PNM Resources logo]

EXHIBIT 31.1

CERTIFICATION

I, Jeffry E. Sterba, certify that:

1.   I have reviewed this Quarterly Report on Form 10-Q of PNM Resources, Inc.;

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading;

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (each registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)   All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:   May 6, 2008

/s/ Jeffry E. Sterba

Jeffry E. Sterba

Chairman, President and

Chief Executive Officer

PNM Resources, Inc.

EX-31.2

PNM Resources

Alvarado Square

Albuquerque, NM  87158

www.pnmresources.com

[PNM Resources logo]

EXHIBIT 31.2

CERTIFICATION

I, Charles N. Eldred, certify that:

1.   I have reviewed this Quarterly Report on Form 10-Q of PNM Resources, Inc.;

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading;

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (each registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)   All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:   May 6, 2008

/s/ Charles N. Eldred

Charles N. Eldred

Executive Vice President and

Chief Financial Officer

PNM Resources, Inc.

EX-31.3

PNM Resources

Alvarado Square

Albuquerque, NM  87158

www.pnmresources.com

[PNM Resources logo]

EXHIBIT 31.3

CERTIFICATION

I, Patricia K. Collawn, certify that:

1.   I have reviewed this Quarterly Report on Form 10-Q of Public Service Company of New Mexico;

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading;

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (each registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)   All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:   May 6, 2008

/s/  Patricia K. Collawn

Patricia K. Collawn

Utilities President

Public Service Company of New Mexico

EX-31.4

PNM Resources

Alvarado Square

Albuquerque, NM  87158

www.pnmresources.com

[PNM Resources logo]

EXHIBIT 31.4

CERTIFICATION

I, Charles N. Eldred, certify that:

1.   I have reviewed this Quarterly Report on Form 10-Q of Public Service Company of New Mexico;

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading;

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (each registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)   All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:   May 6, 2008

/s/ Charles N. Eldred

Charles N. Eldred

Executive Vice President and

Chief Financial Officer

Public Service Company of New Mexico

EX-31.5

PNM Resources

Alvarado Square

Albuquerque, NM  87158

www.pnmresources.com

[PNM Resources logo]

EXHIBIT 31.5

CERTIFICATION

I, Patricia K. Collawn, certify that:

1.   I have reviewed this Quarterly Report on Form 10-Q of Texas-New Mexico Power Company;

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading;

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (each registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)   All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:   May 6, 2008

/s/ Patricia K. Collawn

Patricia K. Collawn

President and CEO

Texas-New Mexico Power Company

EX-31.6

PNM Resources

Alvarado Square

Albuquerque, NM  87158

www.pnmresources.com

[PNM Resources logo]

EXHIBIT 31.6

CERTIFICATION

I, Thomas G. Sategna, certify that:

1.   I have reviewed this Quarterly Report on Form 10-Q of Texas-New Mexico Power Company;

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading;

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (each registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)   All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:   May 6, 2008

/s/ Thomas G. Sategna

Thomas G. Sategna

Vice President,

Controller and Treasurer

Texas-New Mexico Power Company

EX-32.1

PNM Resources

Alvarado Square

Albuquerque, NM  87158

www.pnmresources.com

[PNM Resources logo]

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. § 1350, AS ADOPTED PURSUANT TO § 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q for the period ended March 31, 2008, for PNM Resources, Inc. (“Company”), as filed with the Securities and Exchange Commission on May 6, 2008 (“Report”), I, Jeffry E. Sterba, Chairman, President and Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. §1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of § 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:   May 6, 2008	By:	/s/ Jeffry E. Sterba
		Jeffry E. Sterba
		Chairman, President and
		Chief Executive Officer
		PNM Resources, Inc.

EX-32.2

PNM Resources

Alvarado Square

Albuquerque, NM  87158

www.pnmresources.com

[PNM Resources logo]

EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. § 1350, AS ADOPTED PURSUANT TO § 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q for the period ended March 31, 2008, for PNM Resources, Inc. (“Company”), as filed with the Securities and Exchange Commission on May 6, 2008 (“Report”), I, Charles N. Eldred, Executive Vice President and Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. §1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of § 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:   May 6, 2008	By:	/s/ Charles N. Eldred
		Charles N. Eldred
		Executive Vice President and
		Chief Financial Officer
		PNM Resources, Inc.

EX-32.3

PNM Resources

Alvarado Square

Albuquerque, NM  87158

www.pnmresources.com

[PNM Resources logo]

EXHIBIT 32.3

CERTIFICATION PURSUANT TO 18 U.S.C. § 1350, AS ADOPTED PURSUANT TO § 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q for the period ended March 31, 2008, for Public Service Company of New Mexico (“Company”), as filed with the Securities and Exchange Commission on May 6, 2008 (“Report”), I, Patricia K. Collawn, Utilities President of the Company, certify pursuant to 18 U.S.C. §1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of § 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:   May 6, 2008	By:	/s/ Patricia K. Collawn
		Patricia K. Collawn
		Utilities President
		Public Service Company of New Mexico

EX-32.4

PNM Resources

Alvarado Square

Albuquerque, NM  87158

www.pnmresources.com

[PNM Resources logo]

EXHIBIT 32.4

CERTIFICATION PURSUANT TO 18 U.S.C. § 1350, AS ADOPTED PURSUANT TO § 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q for the period ended March 31, 2008, for Public Service Company of New Mexico (“Company”), as filed with the Securities and Exchange Commission on May 6, 2008 (“Report”), I, Charles N. Eldred, Executive Vice President and Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. §1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of § 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  May 6, 2008	By:	/s/ Charles N. Eldred
		Charles N. Eldred
		Executive Vice President and
		Chief Financial Officer
		Public Service Company of New Mexico

EX-32.5

PNM Resources

Alvarado Square

Albuquerque, NM  87158

www.pnmresources.com

[PNM Resources logo]

EXHIBIT 32.5

CERTIFICATION PURSUANT TO 18 U.S.C. § 1350, AS ADOPTED PURSUANT TO § 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q for the period ended March 31, 2008, for Texas-New Mexico Power Company (“Company”), as filed with the Securities and Exchange Commission on May 6, 2008 (“Report”), I, Patricia K. Collawn, President and CEO, certify pursuant to 18 U.S.C. §1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of § 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:   May 6, 2008	By:	/s/ Patricia K. Collawn
		Patricia K. Collawn
		President and CEO
		Texas-New Mexico Power Company

EX-32.6

PNM Resources

Alvarado Square

Albuquerque, NM  87158

www.pnmresources.com

[PNM Resources logo]

EXHIBIT 32.6

CERTIFICATION PURSUANT TO 18 U.S.C. § 1350, AS ADOPTED PURSUANT TO § 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q for the period ended March 31, 2008, for Texas-New Mexico Power Company (“Company”), as filed with the Securities and Exchange Commission on May 6, 2008 (“Report”), I, Thomas G. Sategna, Vice President, Controller and Treasurer of the Company, certify pursuant to 18 U.S.C. §1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of § 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:   May 6, 2008	By:	/s/ Thomas G. Sategna
		Thomas G. Sategna
		Vice President,
		Controller and Treasurer
		Texas-New Mexico Power Company