ITEM 1.

BUSINESS

THE COMPANY

Overview

PNMR is an investor-owned holding company of energy and energy-related businesses.  PNMR’s primary subsidiaries are PNM, TNMP, First Choice and, through May 31, 2007, Altura.  PNM is a public utility with regulated operations primarily engaged in the generation, transmission and distribution of electricity and, through January 29, 2009, the transmission and distribution and sale of natural gas.  PNM began service to TNMP’s New Mexico customers effective January 1, 2007.  TNMP is a regulated utility operating in Texas and through December 31, 2006 in New Mexico.  In Texas, TNMP provides regulated transmission and distribution services.  First Choice is a competitive REP operating in Texas.  PNMR owns 50% of Optim Energy (formerly, EnergyCo), which is focused on unregulated electric operations, principally within the areas of Texas covered by ERCOT, including the development, operation and ownership of diverse generation assets and wholesale marketing.

On January 12, 2008, PNM entered into an agreement to sell its natural gas operations, which comprise the PNM Gas segment, to NMGC, a subsidiary of Continental, for $620 million in cash, subject to adjustment based on the level of working capital at closing.  Financial information regarding PNM’s gas operations, which are reflected as discontinued operations herein, is presented in Note 23.  In a separate transaction conditioned upon the sale of the natural gas operations, PNMR proposed to acquire CRHC, Continental’s regulated Texas electric transmission and distribution business, for $202.5 million in cash.  On July 22, 2008, PNMR and Continental agreed to terminate the agreement for the acquisition of CRHC.  The termination agreement provided that Continental pay PNMR $15.0 million upon the closing of the PNM Gas transaction.  PNMR completed the sale of its gas operations on January 30, 2009.  PNM used proceeds from the sale to retire short-term debt and paid a dividend of $220.0 million to PNMR. The remaining proceeds were invested in a money market fund and will be used to pay income taxes on the gain from the sale.  PNMR used the dividend from PNM and the $15.0 million from Continental to retire debt.

PNMR’s common stock trades on the New York Stock Exchange under the symbol PNM.  PNMR was incorporated in the State of New Mexico in 2000.

Other Information

These filings for PNMR, PNM and TNMP 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.  A reference to “MD&A” in this report refers to Part II, Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operation in this report.  A reference to a “Note” in this Part I refers to the accompanying Notes to Consolidated Financial Statements.

Financial information relating to amounts of sales, revenue, net income and total assets of reportable segments is contained in Part II, Item 7. - Management’s Discussion and Analysis of Financial Condition and Results of Operation and Note 3.

WEBSITES

PNMR’s Internet address is http://www.pnmresources.com; PNM’s Internet address is http://www.pnm.com; TNMP’s Internet address is http://www.tnpe.com.  The contents of these websites are not a part of this Form 10-K.  The filings of PNMR, PNM, and TNMP with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, are accessible free of charge at http://www.pnmresources.com as soon as reasonably practicable after they are filed with, or furnished to, the SEC.  These reports are also available upon request in print from PNMR free of charge.  Additionally, PNMR's Corporate Governance Principles, code of ethics ( Do the Right Thing-Principles of Business Conduct ) and charters of its Audit and Ethics Committee, Board Governance and Human Resources Committee, Finance Committee, and Public Policy

 

and Sustainability Committee  are available at http://www.pnmresources.com/investors/governance.cfm and such information is available in print, without charge, to any shareholder who requests it.

OPERATIONS

PNM Electric

PNM Electric is an electric utility that is primarily focused on providing service to its rate-regulated customers.  PNM Electric’s operations consist of generation, transmission and distribution of electricity for retail electric customers in New Mexico subject to the jurisdiction of the NMPRC and for wholesale customers in New Mexico and Arizona subject to the jurisdiction of FERC.  PNM Electric also provides transmission services to third parties and, through December 31, 2006, to TNMP at which time TNMP’s operations in New Mexico were transferred to PNM.  PNM Electric also includes the generation and sale of electricity into the wholesale market.  This includes the sale of excess energy from PNM’s jurisdictional assets, primarily SJGS, PVNGS Units 1 and 2, and Four Corners, as well as the energy of its generating plants excluded from retail rates.  PNM Electric provides retail electric service to a large area of north central New Mexico, including the cities of Albuquerque and Santa Fe, and certain other areas of New Mexico, which are located in Southern New Mexico.  PNM Electric owns or leases transmission lines, interconnected with other utilities in New Mexico, Texas, Arizona, Colorado and Utah.  The largest non-affiliated retail electric customer served by PNM Electric accounted for 2.0% of the PNM Electric’s revenues for the year ended December 31, 2008. PNM was incorporated in the State of New Mexico in 1917.

Customer rates for retail electric service are set by the NMPRC.  In February 2007, PNM filed a general rate case with the NMPRC for all of its New Mexico retail customers except those formerly served by TNMP.  Following NMPRC approvals, PNM implemented new electric rates reflecting an annual $34.4 million rate increase in May 2008 and an Emergency FPPAC through which changes in the cost of fuel and purchased power, above or below the costs included in base rates, are passed through to customers on a monthly basis beginning in June 2008.   In September 2008, PNM filed its 2008 Electric Rate Case requesting an increase in electric rates of $123.3 million and requesting a FPPAC in the general form authorized by the NMPRC .  In this rate case, PNM is proposing that its Luna and Lordsburg generating plants, as well as the Valencia PPA and the portion of PVNGS Unit 2 currently owned by another subsidiary of PNMR and leased to PNM, be included in resources subject to NMPRC jurisdiction and recovered through rates charged to retail customers.  The Company is unable to predict the outcome of this rate proceeding.  See Note 17.  PNM can not request a rate increase that would go into effect prior to January 1, 2011 for customers transferred from TNMP.

Weather-normalized retail electric loads decreased by 1.8% in 2008.  PNM Electric’s system peak demands for its retail customers and firm requirements customers in the summer and the winter for the last three years are shown in the following table:

PNM holds long-term, non-exclusive franchise agreements for its electric retail operations, with varying expiration dates.  These franchise agreements allow PNM to access public rights-of-way for placement of PNM’s electric facilities.  Franchise agreements have expired in some areas PNM serves, including Albuquerque, Santa Fe, and the City of Rio Rancho.  PNM remains obligated under New Mexico state law to provide service to customers in these franchise areas despite the absence of an effective franchise agreement, so there should be no direct impact on PNM’s business.  The Albuquerque, Rio Rancho, and Santa Fe metropolitan areas accounted for 32.4%, 6.8%, and 6.4% of PNM Electric’s 2008 revenues and no other franchise area represents more than 5%.  Although PNM does not collect or pay franchise fees in some areas it serves, PNM continues to collect and pay franchise fees in certain parts of its service territory, including Albuquerque, Santa Fe, and the City of Rio Rancho.

PNM Electric owns or leases 3,165 circuit miles of electric transmission lines, interconnected with other utilities in New Mexico, Arizona, Colorado, Texas and Utah.  Due to rapid load growth in PNM Electric’s service

 

territory in recent years and the lack of transmission development, most of the capacity on this transmission system is fully committed during peak hours and there is very little or no additional access available on a firm commitment basis. These factors result in physical constraints on the system and limit the ability to wheel power into PNM Electric’s service area from outside of New Mexico.

PNM Electric includes wholesale activities that consist of the generation and sale of electricity into the wholesale market from Luna, Lordsburg, and PNM’s share of Unit 3 at PVNGS, which are excluded from retail rates.   PNMR embarked on a strategy to move away from certain wholesale activities within PNM Electric.  In June 2008, PNM completed the sale of certain wholesale power, natural gas and transmission contracts as the first step of separating its wholesale activities from PNM. See Note 8.  In addition, the Luna and Lordsburg assets are required to be separated from PNM Electric by January 1, 2010, under an existing NMPRC regulatory order.  PNM is proposing that these assets be included in retail rates beginning with PNM’s 2008 Electric Rate Case.  See Note 17.  Because PNM's share of Unit 3 at the PVNGS is excluded from the regulatory separation requirement, it can remain within PNM  and its power can continue to be sold on the wholesale market.  PNM Electric also engages in activities to optimize its existing jurisdictional assets and long-term purchase power agreements through spot market, hour ahead, day ahead, week ahead and other sales of any excess generation not required to fulfill PNM Electric’s retail load and contractual commitments.  In April 2008, PNM entered into three separate contracts for the sale of capacity and energy related to its entire ownership interest in PVNGS Unit 3, which is 135 MW, through December 31, 2010.  

PNM Electric has entered into various firm-requirements wholesale electric sales contracts.  These contracts contain fixed capacity charges in addition to energy charges.  Capacity charges are fixed monthly payments for a commitment of resources to service the contract requirements.  Energy charges are payments based on the amount of electricity delivered to the customer intended to compensate PNM Electric for its variable costs incurred to provide the energy.  PNM Electric’s firm-requirements demand was 162 MW in 2008, and is expected, based solely on existing contracts, to be 102 MW in 2009, 105 MW in 2010, 108 MW in 2011, and 110 MW in 2012.  No firm-requirements customer of PNM Electric accounted for more than 1.5% of the PNM Electric's revenues for the year ended December 31, 2008.

TNMP Electric

TNMP Electric consists of all the operations of TNMP.  TNMP is a regulated utility operating in Texas and, through December 31, 2006, in New Mexico. TNMP’s predecessor was organized in 1925 and TNMP is incorporated in the State of Texas.

In New Mexico, TNMP provided integrated electricity services that included the transmission, distribution, purchase and sale of electricity to its customers in southwest and south central New Mexico as well as transmission to third parties and to PNM through December 31, 2006.  PNM Electric began serving these customers on January 1, 2007 when the TNMP New Mexico assets were transferred to PNM.

In Texas, TNMP Electric provides regulated transmission and distribution services under the provisions of TECA and the Texas Public Utility Regulatory Act.  TNMP Electric serves a market of small-to-medium-sized communities.  Most of the communities in TNMP Electric’s service territory have populations of less than 50,000.  In most areas that TNMP Electric serves, it is the exclusive provider of transmission and distribution services.

TNMP Electric’s Texas territory consists of three non-contiguous areas.  One portion of this territory extends from Lewisville, which is approximately 10 miles north of the Dallas-Fort Worth International Airport, eastward to municipalities near the Red River, and to communities north, west and south of Fort Worth.  The second portion of its territory includes the area along the Texas Gulf Coast between Houston and Galveston, and the third portion includes areas of far west Texas between Midland and El Paso.  TNMP Electric’s Texas operations lie entirely within the ERCOT region.  ERCOT is the independent system operator that is responsible for maintaining reliable operations for the bulk electric power supply system in the ERCOT region, which is located entirely within Texas.  See Rates and Regulation below for more information about ERCOT.

TNMP Electric provides transmission and distribution services at regulated rates to various REPs that, in turn, provide retail electric service within TNMP Electric’s Texas service area.  As of December 31, 2008, 65 active REPs served customers that receive transmission and distribution services from TNMP Electric.  First Choice, TNMP Electric’s affiliated REP, was TNMP Electric’s largest customer and accounted for 29.0% of TNMP's revenues for the year ended December 31, 2008.  Revenues of TNMP’s next largest customer accounted for 22.0% of revenues

 

and no other customers accounted for more than 10% of revenues.

In August 2008, TNMP filed with the PUCT for an $8.7 million increase in revenues, which would be TNMP’s first increase in rates since 2002.  Hurricane Ike, which struck the Texas Gulf Coast on September 13, 2008, caused extensive damage to the city of Galveston and the surrounding communities.  Storm-related outages lowered TNMP sales volumes, decreasing revenues, margins, and earnings. In addition, TNMP estimates power restoration costs to be in the range of $18 million to $19 million. As a provider of regulated transmission and distribution services under the provisions of TECA, TNMP expects to recover prudently incurred storm-related restoration costs in accordance with applicable regulatory and legal principles.  On October 10, 2008, the PUCT issued a preliminary order permitting TNMP to file supplemental testimony on costs caused by Hurricane Ike. These costs may be included in rates or captured as a regulatory asset for review and approval in a subsequent proceeding. TNMP’s rate case is currently being held in abatement, pending the final determination of the costs related to Hurricane Ike as well as anticipated debt financing costs to be included in rates charged to customers.  TNMP is unable to predict the outcome of this matter.

TNMP holds long-term, non-exclusive franchise agreements for its electric transmission and distribution services, with varying expiration dates.  TNMP intends to negotiate and execute new or amended franchise agreements with municipalities as they expire.  Since TNMP Electric is the exclusive provider of transmission and distribution services in most areas that it serves, the need to renew or renegotiate franchise agreements should not have a material adverse impact on TNMP’s business.  The remainder of TNMP's revenues is earned from service provided to facilities in its service area that lie outside the territorial jurisdiction of the municipalities with which TNMP has franchise agreements.

PNM Gas

PNM Gas distributed natural gas to most of the major communities in New Mexico, including Albuquerque and Santa Fe, through January 29, 2009 under rates that were subject to traditional rate regulation by the NMPRC.  On January 12, 2008, PNM entered into an agreement to sell PNM Gas.   On January 30, 2009, PNM completed the sale.  See Note 2 and Note 23.

The Albuquerque metropolitan area accounted for approximately 51.2% of the total gas revenues in 2008.  No single sales-service customer accounted for more than 1.0% of PNM Gas’ therm sales in 2008.  PNM Gas held non-exclusive franchises with varying expiration dates.  Franchise agreements had expired for the City of Rio Rancho and several smaller municipalities, although PNM continued to collect and pay franchise fees to each of these communities.  Franchise agreements had also expired for several counties that PNM Gas serves.  PNM Gas remained obligated to serve these franchise areas pursuant to state law.

PNM Gas had a customer base that included both sales-service customers and transportation-service customers.  Sales-service customers purchased natural gas and received transportation and delivery services from PNM Gas for which PNM Gas received both cost-of-gas and cost-of-service revenues.  Cost-of-gas revenues collected from its sales-service customers were recovered in accordance with NMPRC regulations through the PNM Gas PGAC and represented a pass-through of the cost of natural gas to the customer.  As a result, increases or decreases in gas revenues resulting from wholesale gas price fluctuations did not impact gross margin.  The NMPRC had approved an agreement regarding the hedging strategy of PNM Gas and the implementation of a price management fund program which included a continuous monthly balancing account with a carrying charge.  This carrying charge had the effect of keeping PNM Gas whole on purchases of gas since it was compensated for the time value of money that existed due to any delay in collections from customers.  Additionally, PNM Gas made occasional gas sales to off-system sales customers.  Off-system sales deliveries generally occured at pipeline interconnections with the PNM Gas system and profits were shared between PNM Gas and its regulated customers on a 30%/70% basis.

PNM Gas had 39 transportation-service customers in 2008, which procured gas for their end users independently of PNM Gas end users.  Transportation-service customers were gas marketers and producers contracting with PNM Gas for transportation services to their end users and for other related services that provided PNM Gas with cost-of-service revenues only.  Transportation services were provided to transportation-service customers at locations throughout the PNM Gas distribution system, as well as points on and off PNM Gas transmission pipelines.  Through its transportation-service customers, PNM Gas provided gas transportation deliveries to 2,624 end users that were not PNM Gas customers at the end of 2008.

In 2008, 41% of the total gas throughput of PNM Gas was related to transportation gas deliveries.  The transportation rates of PNM Gas were unbundled, and transportation customers only paid for the service they received.  In 2008, revenues from transportation customers accounted for 3.2% of the total gas revenues of PNM Gas.  Revenues from sales-service customers accounted for the remaining 96.8%.  Cost of gas, on which PNM Gas made no margin, accounted for 71.8% of total sales-service revenue.  Because a major portion of the PNM Gas load was related to heating, sales levels were affected by the weather.  In 2008, 63.1% of the total sales occurred in the months of January, February, March and December.

PNM Gas obtained its supply of natural gas primarily from sources within New Mexico by contracting with third party producers and marketers.  These contracts were generally sufficient to meet peak-day demand.  PNM Gas served certain cities that depend on El Paso Natural Gas Company or Transwestern Pipeline Company for transportation of gas supplies.  Because these cities were not directly connected to the transmission facilities of PNM Gas, gas transported by these companies was the sole supply source for these cities.  Such gas transportation was regulated by the FERC.

Altura

On April 18, 2006, PNMR’s wholly owned subsidiary, Altura, purchased Twin Oaks, which included a 305 MW coal-fired power plant located 150 miles south of Dallas, Texas.  PNMR acquired Twin Oaks to expand its merchant generation capacity in order to serve a growing wholesale market in the Southwest. Effective June 1, 2007, PNMR contributed Altura, including Twin Oaks, to Optim Energy.  See Note 2 and Note 22.  The results of Twin Oaks operations have been included in the Consolidated Financial Statements of PNMR from April 18, 2006 through May 31, 2007.

Optim Energy

In January 2007, PNMR and ECJV created EnergyCo to serve expanding U.S. markets, principally the areas of Texas covered by ERCOT.  In February 2009, the name of EnergyCo was changed to Optim Energy and references to Optim Energy herein encompass periods prior to the name change.  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 Optim Energy, a limited liability company.  On June 1, 2007, PNMR contributed its ownership of Altura, including the Twin Oaks plant, to Optim Energy at fair value of $549.6 million, as adjusted to reflect changes in working capital.  ECJV made a cash contribution to Optim Energy equal to 50% of the fair value amount and Optim Energy distributed that cash to PNMR. In August 2007, Optim Energy completed the acquisition of the Altura Cogen plant, a cogeneration electric and steam generating plant, and is co-developing another electric generating unit at Cedar Bayou that is scheduled to be completed in the summer of 2009.

Optim Energy’s strategy is focused on unregulated operations in one of the nation’s growing power markets.  Optim Energy’s business consists of development, operation and ownership of diverse generation assets, and wholesale marketing and trading to optimize its assets.  PNMR accounts for its 50% ownership interest in Optim Energy using the equity method of accounting because PNMR’s ownership interest results in significant influence, but not control, over Optim Energy and its operations.  PNMR records as income its percentage share of earnings or losses of Optim Energy and carries its investment at cost, adjusted for its share of undistributed earnings or losses.  Accordingly, Optim Energy’s revenues and expenses are not included in PNMR’s consolidated revenues and expenses. See Note 22.

First Choice

First Choice is a certified REP operating in ERCOT, which provides electricity to residential, small commercial and governmental customers.  First Choice’s services include acquiring retail customers, setting up retail accounts, handling customer inquiries and complaints, and acting as a liaison between the transmission and distribution companies and retail customers.  First Choice focuses its competitive customer acquisition efforts in the major Texas metropolitan areas that are open to electric choice within ERCOT, including Dallas-Fort Worth, Houston, Corpus Christi, and McAllen-Harlingen.  Due to the competitive nature of the Texas market, First Choice, along with other REPs, experiences significant turnover in its customer base.  There is no provision under Texas regulation that requires customers to pay their previous REP before obtaining service from another REP.  This has been exacerbated by the impacts of Hurricane Ike and depressed economic conditions and has resulted in significant increases in the levels of uncollectible accounts and bad debt expense.  Although First Choice is regulated in certain respects by the PUCT under ERCOT, its business is not subject to traditional rate of return regulation.

First Choice’s load fluctuates continuously due to, among other things, customer additions and losses, changes in customer usage, and seasonality of weather.  First Choice continually monitors and revises its load forecast to account for changing competitive customer loads.  First Choice develops short-term load forecasts to identify short-term load surpluses and shortages, and to ensure that hedges are in place to cover forecasted sales.  To the extent these short-term load forecasts identify shortages, First Choice covers shortages through short-term power purchases or through purchases on the ERCOT balancing market.

First Choice experiences increased sales and operating revenues during the summer months as a result of increased air conditioner usage in hot weather.  In 2008, approximately 41% of First Choice’s consolidated annual revenues were recorded in June, July, and August.

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.

Corporate and Other

PNMR Services Company provides corporate services through shared services agreements to PNMR, to all of PNMR's business units, including First Choice, PNM and TNMP, and to Optim Energy.  These services are charged and billed on a monthly basis to the business units.  Billings are at cost, except for Optim Energy, which includes a profit element.  PNMR Services Company is included in the Corporate and Other segment.

SOURCES OF POWER

PNMR

First Choice assumed the energy supply activities of TNMP in Texas in 2002.  Constellation was 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 PSA beyond the date when that commitment expired.  The obligations of Constellation were extended until January 31, 2008.  First Choice has no long-term power supply agreements.  Therefore, First Choice is exposed to market risk if power prices increase faster or in excess of its ability to increase rates to its customers.  Since January 1, 2008, power to serve its customers has been obtained through short-term market purchases.

PNM

As of December 31, 2008, the total net generation capacity of facilities owned or leased by PNM was 2,313 MW.  See Item 2. Properties.  PNM also obtains power under long-term PPAs as described below.  PNM Electric’s total generation capacity from these sources is:

 

 

 

Owned and Leased

SJGS’ equivalent availability was 76.5% and 80.4% for the years ended December 31, 2008 and 2007.  PVNGS’ equivalent availability was 83.0% and 77.3% for the years ended December 31, 2008 and 2007.  Four Corners’ equivalent availability was 78.8% and 78.5% for the years ended December 31, 2008 and 2007.  SJGS is operated by PNM. Four Corners and PVNGS are operated by APS.

PNM’s Lordsburg plant was built to serve wholesale customers and other sales rather than New Mexico retail customers.  In 2004, a subsidiary of PNMR purchased a one-third interest in Luna, a 570 MW, partially constructed, natural gas-fired power plant near Deming in southern New Mexico.  In 2005, the one-third interest in Luna was transferred to PNM.  Although these plants are not currently included in the retail rates, PNM is proposing that they be included in rates charged to retail customers beginning with the 2008 Electric Rate Case.   See Note 17.

In 2007, PNM Electric completed the conversion of Afton to a combined cycle plant.  The NMPRC has approved bringing Afton into retail rates, with 50% of Afton's capacity designated to serve TNMP's former New Mexico customers, which were transferred to PNM effective January 1, 2007, and the other 50% designated to serve PNM Electric's other regulated customers.

PNM leases portions of PVNGS and the lease payments are being recovered through retail rates approved by the NMPRC.  PNM is proposing that it acquire the ownership of a portion of PVNGS Unit 2 leased to PNM that is currently owned by another PNMR subsidiary and that it be included in rates charged to retail customers on an ownership basis beginning with the 2008 Electric Rate Case.  See Item 2. Properties, Note 7, and Note 17 for additional information.

In 1996, PNM entered into an operating lease agreement for the rights to all the output of the Delta gas-fired generating plant for 20 years.  The plant received FERC approval for "exempt wholesale generator" status. The maximum dependable capacity under the lease is 132 MW.  The gas turbine generating unit is operated by Delta and is located on PNM’s retired Person Generating Station site in Albuquerque.  Primary fuel for the gas turbine generating unit is natural gas provided by wholesale gas purchases.  In addition, the unit has the capability to utilize low sulfur fuel oil if natural gas is neither available nor cost effective.

On April 18, 2007, PNM entered into a PPA to purchase all of the electric capacity and energy from Valencia, a natural gas-fired power plant near Belen, New Mexico.  Valencia became operational on May 30, 2008.  A third-party built, owns and operates the facility while PNM is the sole purchaser of the electricity generated. The term of the PPA is for 20 years beginning June 1, 2008.  Although Valencia is not currently included in retail rates, PNM is proposing that it be included in the Emergency FPPAC and included in retail rates charged to customers beginning with the 2008 Electric Rate Case.  PNM has evaluated the accounting treatment of this arrangement and concluded that the third party entity that owns Valencia is a variable interest entity and that PNM is the primary beneficiary of the entity under FIN 46R since PNM will absorb the majority of the variability in the cash flows of the plant.  As the primary beneficiary, PNM consolidates the entity in its financial statements.  Accordingly, the assets of Valencia are included in the consolidated financial statements of PNM although PNM has no legal ownership interest or voting control of the variable interest entity.  The 148 MW capacity of Valencia is reflected as owned in the above table.  See Note 9 and Note 17.

PPAs

In addition to generating its own power, PNM Electric purchases power in the open market under long-term PPAs.  PNM also purchases power in the forward, day-ahead and real-time markets.

 

     In 2003, PNM received approval from the NMPRC for a voluntary tariff that allows PNM retail customers to buy wind-generated electricity for a small monthly premium.  Power from the New Mexico Wind Energy Center is used to service load under the voluntary tariff and as part of PNM’s electric supply mix for meeting retail load.

In addition, PNM has long-term PPAs with SPS to purchase 150 MW interruptible power through May 2011 and with Tri-State to purchase 50 MW of firm power and capacity through June 2010.  See Owned and Leased above regarding the Valencia PPA.

A summary of purchased power is as follows:

TNMP

TNMP provides only transmission and distribution services and does not sell power.

FUEL AND WATER SUPPLY

PNMR

The coal requirements for Twin Oaks were supplied by a long-term fuel supply agreement during the period PNMR owned Twin Oaks.  PNMR and Altura are not responsible under this agreement for the decommissioning or reclamation costs of the supplying mine.  Upon PNMR’s contribution of Altura to Optim Energy, PNMR has no benefits or obligations under this fuel supply agreement.

The generation mix for 2009 is expected to be 63.7% coal, 25.6% nuclear and 10.7% gas and oil.  Due to locally available natural gas and oil supplies, the utilization of locally available coal deposits and the generally adequate supply of nuclear fuel, PNM believes that adequate sources of fuel are available for its generating stations into the foreseeable future.  See Sources of Power - PNM - PPAs for information concerning the cost of purchased power.

 

The natural gas used as fuel for the electric generating plants is procured on the open market and delivered by third party transportation providers and PNM Gas (through January 29, 2009 and thereafter by NMGC) through its transportation facilities.

Nuclear Fuel

PNM is one of several participants in PVNGS. See Note 14.  The fuel cycle for PVNGS is comprised of the following stages:

·	mining and milling of uranium ore to produce uranium concentrates;

·	conversion of uranium concentrates to uranium hexafluoride;

·	enrichment of uranium hexafluoride;

·	fabrication of fuel assemblies;

·	utilization of fuel assemblies in reactors; and

·	storage and disposal of spent nuclear fuel.

The PVNGS participants are continually identifying their future resource needs and negotiating arrangements to fill those needs.  The PVNGS participants have contracted for all of PVNGS’s requirements for uranium concentrates and conversion services through 2011.  The participants have also contracted for all of PVNGS’s enrichment services through 2013 and all of PVNGS’s fuel assembly fabrication services until at least 2015.

Water Supply

See Note 16 for information about PNM's water supply.

RATES AND REGULATION

The items below describe certain of the more significant rate and regulatory matters that are relevant to the Company.  See Notes 16 and 17 for a discussion of additional rate and regulatory matters.

PNMR

First Choice

First Choice is a member of ERCOT, the ISO responsible for maintaining reliable operations of the bulk electric power grid in the Texas deregulated electricity market.  ERCOT does not operate a centrally dispatched pool and does not procure energy on behalf of its members other than to maintain the reliable operation of the transmission system.  ERCOT also serves as a clearinghouse for procuring ancillary services.

Members of ERCOT include independent REPs, investor owned utilities, municipals, cooperatives, independent generators, independent power marketers, and consumers.  The electric market served by ERCOT operates under the reliability standards set by the North American Electric Reliability Council.  The PUCT has primary jurisdictional authority over the electric market served by ERCOT and the reliability of electricity across Texas' main interconnected power grid.

First Choice provides energy to retail customers in ERCOT.  As a result of the deregulated electricity market in Texas, there are no provisions for the specific recovery of fuel and purchased power costs by First Choice.  The rates charged to new customers acquired by First Choice are not regulated by the PUCT, but are negotiated by First Choice with each customer.  As a result, purchased power costs will affect First Choice’s operating results.

PNM

Regulation

 

 

PNM is subject to the jurisdiction of the NMPRC, with respect to its retail electric rates, service, accounting, issuances of securities, construction of major new generation, transmission, and distribution facilities and other matters regarding retail utility services provided in New Mexico.  The NMPRC approved PNM implementing new electric rates reflecting a $34.4 million rate increase in May 2008 and also implementing an Emergency FPPAC in June 2008.   In September 2008, PNM filed its 2008 Electric Rate Case requesting an increase in electric rates of $123.3 million and requesting a FPPAC in the general form authorized by the NMPRC.  See Note 17.  FERC has jurisdiction over rates and other matters related to wholesale electric sales and cost recovery for a portion of PNM’s transmission network.

Operations Transferred from TNMP

In connection with obtaining the approval of the NMPRC for PNMR’s acquisition of TNP, including TNMP, PNMR agreed to reduce rates for TNMP’s New Mexico customers, except one large industrial customer, by 1.851 cents per KWh in 2006 through 2007, by an additional 0.1 cents per KWh in 2008, and by a further 0.1 cents per KWh in 2009. No rate increase can be requested that would go into effect prior to January 1, 2011.  Effective January 1, 2007, the New Mexico utility operations of TNMP were transferred to PNM and these provisions regarding rates remain in effect.

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.

TNMP

Regulation

In Texas, TNMP provides regulated transmission and distribution services and is subject to the jurisdiction of the PUCT and certain municipalities with respect to rates and service.  TNMP is subject to traditional cost-of-service regulation in Texas.  TNMP’s transmission and distribution activities in Texas are not subject to FERC regulation, because those activities occur solely within the ERCOT system of Texas.

In August 2008, TNMP filed with the PUCT for an $8.7 million increase in revenues.  The rate case is currently being held in abatement, pending the final determination of the costs related to Hurricane Ike, as well as anticipated debt financing costs to be included in rates charged to customers.  See Note 17.

ENVIRONMENTAL MATTERS

Electric and gas utilities are subject to stringent laws and regulations for protection of the environment by local, state, federal and tribal authorities. In addition, PVNGS is subject to the jurisdiction of the NRC, which has the authority to issue permits and licenses and to regulate nuclear facilities in order to protect the health and safety of the public from radioactive hazards and to conduct environmental reviews pursuant to the National Environmental Policy Act.  The liabilities under these laws and regulations can be material and, in some instances, may be imposed without regard to fault, or may be imposed for past acts, whether or not such acts were lawful at the time they occurred.  See MD&A - Critical Accounting Policies for a discussion of applicable accounting policies and – Other Issues Facing the Company – Climate Change Issues for information on greenhouse gas emissions.  In addition, see Notes 16 and 18 for information related to the following matters, incorporated in this item by reference.

 

 

·	Environmental Matters under the caption “The Clean Air Act”

·	Santa Fe Generating Station

·	Coal Combustion Waste Disposal

·	Gila River Indian Reservation Superfund Site

Note 18

·	Environmental Issues

COMPETITION

Through certain of its subsidiaries, PNMR is a merchant utility and a regulated energy service provider.  Regulated utilities are generally not subject to competition from other utilities in areas that are under the jurisdiction of state regulatory commissions.  In New Mexico, PNM does not have competition for services provided to its retail electric customers.  In Texas, TNMP is not currently in any direct retail competition with any other regulated electric utility.  However, the Company is subject to customer conservation activities and initiatives to utilize alternative energy sources.  As a merchant utility, PNMR is subject to competition in the wholesale markets and the deregulated electricity market in Texas.  Additional information relating to the competitive environment in which the Company operates in is contained in MD&A.

The Company is subject to varying degrees of competition in certain territories adjacent to or within the areas it serves with other utilities in its region as well as with rural electric cooperatives and municipal utilities.  The Company is involved in the generation and sale of electricity into the wholesale market.  It is subject to competition from regional utilities with similar opportunities to generate and sell energy at market-based prices and larger trading entities that do not own or operate generating assets.   The Texas electricity market has been open to retail competition since 2002.  The Company is exposed to competition in the unregulated Texas retail electricity market through First Choice, which serves customers at competitive rates.  In order to compete effectively in the Texas retail electricity market, First Choice must be able to attract and retain customers on the basis of cost and service, while managing the cost of its energy supply. 

Since 2002, electric consumers in Texas have been encouraged to switch from their traditional retail energy provider, such as TNMP, to a competitive REP, such as First Choice.  Currently under TECA, consumers whose chosen retail energy provider has exited the Texas market are provided electric service by a “provider of last resort.”  Rates of the provider of last resort are regulated by the PUCT and are fixed for the two-year period that each provider of last resort serves.  First Choice Power and other REPs, formerly subject to price-to-beat rates, currently market retail electricity at competitive rates, which has resulted in increased pressure on margins. 

EMPLOYEES

The following table sets forth the number of employees of PNMR, PNM and TNMP and for each business segment as of December 31, 2008:

*   Represents employees of PNMR Services Company.

TNMP does not have any employees that are represented by unions.  The following table sets forth the number of employees of PNMR and PNM, by business segment, represented by unions as of December 31, 2008:

PNM Electric has 587 employees in its power plant and operations areas that are currently covered by a collective bargaining agreement with the IBEW that expires April 30, 2009.  Negotiations for a successor agreement began in February 2009.  It is anticipated that the successor agreement would cover approximately 90 additional employees, meter readers and collectors who voted for IBEW representation in 2008.  PNM Gas employees were represented by the United Association of Pipefitters and the IBEW. These gas employees became employed by NMGC on January 30, 2009. While the Company is optimistic that a timely agreement on a successor agreement will be reached, PNM cannot, at this time, predict the outcome of the negotiations.  The salaries and benefits for all PNM employees who are members of the IBEW are typically included in the rates charged to electric customers, subject to approval of the NMPRC.

Not all of the Company’s business segments are separate legal entities.  The employees disclosed in the tables above for PNM Electric and PNM Gas are allocated, in part, in a manner consistent with the allocation of labor costs to those segments.  On January 30, 2009, PNM completed the sale of PNM Gas.  See Note 23.

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 or Optim Energy’s access to additional debt financing following the utilization of its existing credit facility, including actions by ratings agencies affecting the Company’s credit ratings,

·	The recession and its consequent extreme disruption in the credit markets,

·	State and federal regulatory and legislative decisions and actions, including the PNM and TNMP electric rate cases filed in 2008, and appeals of prior regulatory proceedings,

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

 

 

	generating units, and transmission systems,
·	The risk that Optim Energy is unable to identify and implement profitable acquisitions, including development of the Cedar Bayou Generating Station Unit 4, or that PNMR and ECJV will not agree to make additional capital contributions to Optim Energy,

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

·	The impacts of the decline in the values of marketable equity securities on the trust funds maintained to provide nuclear decommissioning funding and pension and other postretirement benefits, including the levels of funding and expense,

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

·	Changes in ERCOT protocols,

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

·	Collections experience,

·	Insurance coverage available for claims made in litigation,

·	Fluctuations in interest rates,

·

Weather,

·	Water supply,

·	Changes in fuel costs,

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

·	Availability of fuel supplies,

·	The effectiveness of risk management and commodity risk transactions,

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

·	Variability of wholesale power prices and natural gas prices,

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

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

·	Changes in the competitive environment in the electric industry,

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

·	The risks associated with completion of generation, including pollution control equipment at SJGS, and the Optim Energy Cedar Bayou Generating Station Unit 4, transmission, distribution, and other projects, including construction delays and unanticipated cost overruns,

·	The outcome of legal proceedings,

·	Changes in applicable accounting principles, and

·	The performance of state, regional, and national economies.

See Item 7A. Quantitative and Qualitative Disclosure About Market Risk for information about the risks associated with the use of derivative financial instruments.

SECURITIES ACT DISCLAIMER

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