TXNM

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2008, for PNM Resources, Inc. (PNMR) and its subsidiaries, Public Service Company of New Mexico (PNM) and Texas-New Mexico Power Company (TNMP). The Company operates regulated electric utilities in New Mexico and Texas, an unregulated retail electric provider (First Choice), and holds a 50% interest in EnergyCo. The reporting period was significantly impacted by the global credit crisis, the sale of PNM Gas (classified as discontinued operations), and substantial goodwill impairments.

Key Financial Metrics (Nine Months Ended Sept 30, 2008)

Material Changes vs. Prior Period

• Significant Losses: The Company reported a net loss of $197.6 million compared to net earnings of $58.3 million in the prior year. This reversal was primarily driven by non-cash goodwill and intangible asset impairments totaling $144.1 million.
• Impairments: Goodwill impairments were recorded for First Choice ($49.5 million), PNM ($51.1 million), and TNMP ($34.5 million). Additionally, the First Choice trade name was impaired by $9.0 million.
• Regulatory Disallowances: PNM recorded $30.2 million in regulatory disallowances related to the NMPRC's 2008 electric rate order, specifically write-offs for coal mine decommissioning costs ($19.6 million) and Renewable Energy Certificate (REC) costs ($10.6 million).
• First Choice Trading Losses: First Choice incurred significant losses from speculative trading activities ($48.9 million loss year-to-date) and recognized a $3.9 million loss due to the bankruptcy of Lehman Brothers Commodity Services (LBCS).
• EnergyCo Performance: EnergyCo reported a net loss of $58.9 million, largely due to a $31.7 million write-off of emission allowances following the invalidation of the CAIR program and a $21.8 million impairment of Twin Oaks expansion rights.
• Dividend Reduction: The Board reduced the quarterly dividend from $0.23 to $0.125 per share to improve liquidity.

Guidance, Outlook, and Risks

• Liquidity and Credit Markets: The Company faces significant liquidity challenges due to the global credit crisis. While management believes current resources are sufficient, access to capital markets is difficult and costly. Credit ratings for PNMR, PNM, and TNMP were downgraded by S&P and Moody's to below investment grade (BB- to BB+).
• Debt Maturities: The Company has $205.6 million in long-term debt maturing before September 30, 2009, including $167.7 million for TNMP due in January 2009. A $100 million equity-linked unit remarketing is scheduled for November 2008; failure to remarket could result in a cash shortfall.
• Regulatory Proceedings: PNM filed a new electric rate case in September 2008 seeking a $123.3 million revenue increase. The NMPRC suspended the proposed rates for nine months. PNM also faces appeals regarding the Emergency Fuel and Purchased Power Adjustment Clause (FPPAC).
• Environmental and Climate Change: The Company anticipates future costs related to greenhouse gas (GHG) regulations and the Western Regional Climate Action Initiative. New Mexico requires utilities to factor carbon costs into resource planning.
• Discontinued Operations: The sale of PNM Gas for $620 million is pending regulatory approval, with closing expected in late 2008 or early 2009. Proceeds are intended to retire debt and fund capital expenditures.

Investor Verification Checklist

• Debt Refinancing: Verify the Company's ability to refinance the $167.7 million TNMP notes due in January 2009 and the $100 million equity-linked units due in November 2008 amidst tight credit markets.
• Regulatory Approvals: Monitor the outcome of the NMPRC proceedings regarding the 2008 electric rate case and the Emergency FPPAC, which are critical for PNM's revenue recovery.
• Goodwill Impairment: Assess the likelihood of further goodwill impairments if First Choice or EnergyCo performance does not improve, given the current market volatility.
• Pension Funding: Review the impact of the 2008 equity market decline on pension trust funds, which may require increased cash contributions and higher expenses in 2009.
• First Choice Strategy: Evaluate the long-term viability of First Choice following the cessation of speculative trading and the decision to retain the business despite market headwinds.