**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**


**______________________**


**FORM
          10-K/A**
 **(Amendment
          No. 1)**


**ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**




**For
        the Fiscal Year Ended December 31, 2005**


**Commission**
                **File
                  Number**
              
              **Registrants,
                  State of Incorporation,**
                **Address
                  and Telephone Number**
              
              **I.R.S.
                  Employer**
                **Identification
                  No.**001-32462
              
              PNM
                  Resources, Inc.
                (A
                  New Mexico Corporation)
                Alvarado
                  Square
                Albuquerque,
                  New Mexico 87158
                (505)
                  241-2700
              
              85-0468296001-06986
              
              Public
                  Service Company of New Mexico
                (A
                  New Mexico Corporation)
                Alvarado
                  Square
                Albuquerque,
                  New Mexico 87158
                (505)
                  241-2700
              
              85-0019030002-97230
              
              Texas-New
                  Mexico Power Company
                (A
                  Texas Corporation)
                4100
                  International Plaza,
                P.O.
                  Box 2943
                Fort
                  Worth, Texas 76113
                (817)
                  731-0099
              
              75-0204070
  **Securities
        Registered Pursuant To Section 12(b) Of The Act:**


**Name
                of Each Exchange****Registrant**
            
            **Title
                of Each Class**
            
            **on
                Which Registered**PNM
                Resources, Inc.
            
            Common
                Stock, no par value
            
            New
                York Stock ExchangePNM
                Resources, Inc.
            
            6.75%
                Equity Units, $50 stated value
            
            New
                York Stock Exchange





**Securities
      Registered Pursuant To Section 12(g) Of The Act:**





**Registrant**
            
            **Title
                of Each Class**Public
                Service Company of New Mexico
            
            1965
                Series, 4.58% Cumulative Preferred Stock($100
                stated value without sinking fund)





Indicate
      by check mark whether each registrant is a well-known seasoned issuer, as
      defined in Rule 405 of the Securities Act.


PNM
                  Resources, Inc. (“PNMR”)
              YES
              ü
              NOPublic
                  Service Company of New Mexico (“PNM”)
              YES
              
              NO
              üTexas-New
                  Mexico Power Company (“TNMP”)
              YES
              
              NO
              ü


Indicate
      by check mark if each registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.




PNMR
              YES
              
              NO
              üPNM
              YES
              
              NO
              üTNMP
              YES
              ü
              NO








Indicate
      by check mark whether PNMR and 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 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 if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S - K
      is not
      contained herein, and will not be contained, to the best of registrants’
knowledge, in definitive proxy or information statements incorporated by
      reference in Part III of this Form 10 - K
      or any
      amendment to this Form 10 - K.





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 filerü
            Accelerated
                filer__
            Non-accelerated
                filer__





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





Large
                accelerated filer__
            Accelerated
                filer__
            Non-accelerated
                filerü





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





As
      of
      February 28, 2006, 68,786,286 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 February 28, 2006
      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 February 28, 2006
      was
      9,615 all held indirectly by PNMR (and none held by
      non-affiliates).





On
      June
      30, 2005 the aggregate market value of the voting stock held by non-affiliates
      of PNMR as computed by reference to the New York Stock Exchange composite
      transaction closing price of $28.81 per share reported by The Wall Street
      Journal, was $1,980,440,339.


**EXPLANATORY
            NOTE REGARDING AMENDMENT NO. 1**
 
 This
            Form
            10-K/A (the “Amendment”) is being filed to amend Part II, Item 8 of the
            Registrants’ Annual Reports filed on Form 10-K for the fiscal year ended
            December 31, 2005, which was filed with the SEC on March 14, 2006 (the
“Original
            Filing”).
 
 The
            Amendment is being filed solely to correct an inadvertent typographical
            error
            that occurred during the conversion of the 10-K to the SEC’s EDGAR system
            software. After the Company submitted the Original Filing to the SEC,
            Company
            management noted a typographical error in the PNM Consolidated Statement
            of Cash
            Flows for the year ended December 31, 2005, on page B-26. The line item
            reported
            as "Change in intercompany borrowings"
 ii
 
 in
              the
              Cash Flows From Financing Activities was reported as $25,555 (in thousands)
              rather than $255 (in thousands). This typographical error did not have
              an impact
              on any other amounts reported in PNM’s Consolidated Statement of Cash Flows.
 
 For
              the
              convenience of the reader, the Amendment sets forth the Original Filing
              in its
              entirety, with the exception of the correction described above. In
              addition,
              this Amendment has been signed as of a current date and all certifications
              of
              the Registrants’ Chief Executive Officer and Chief Financial Officer are given
              as of a current date. This Amendment does not reflect events occurring
              after the
              filing of the Original Filing or modify or update the Original Filing
              in any way
              other than to correct the inadvertent typographical error described
              above.
  **PNM
          AND TNMP MEET THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS (I) (1)
          (a) AND
          (b) OF FORM 10-K AND ARE THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
          FORMAT PURSUANT TO GENERAL INSTRUCTION (I)
          (2).**





**DOCUMENTS
      INCORPORATED BY REFERENCE**





Portions
      of the following document are incorporated by reference into Part III of this
      report:





Proxy
      Statement to be filed by PNMR with the SEC pursuant to Regulation 14A relating
      to the annual meeting of stockholders of PNMR to be held on May 16,
      2006.




This
      Form 10-K represents separate filings by PNMR, PNM and TNMP. Information herein
      relating to an individual registrant is filed by that registrant on its own
      behalf. PNM makes no representations as to the information relating to PNMR
      and
      its subsidiaries other than PNM. TNMP makes no representations as to the
      information relating to PNMR and its subsidiaries other than TNMP. When this
      Form 10-K is incorporated by reference into any filing with the SEC made by
      PNM
      or TNMP, the portions of this Form 10-K that relate to PNMR and its subsidiaries
      other than PNM or TNMP, respectively, are not incorporated by reference
      therein.





On
      June 6, 2005, PNMR completed its acquisition of TNP Enterprises, Inc. and
      Subsidiaries. See Note 2 in the Notes to Consolidated Financial Statements
      under
      Part II, Item 8. “Financial Statements and Supplementary Data,” of this report
      for further information. Commencing with the Form 10-Q for the quarter ended
      June 30, 2005, TNMP was included in the filing of PNMR and PNM.








iii




**PNM
      RESOURCES, INC. AND SUBSIDIARIES**


**PUBLIC
      SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**


**TEXAS-NEW
      MEXICO POWER COMPANY AND SUBSIDIARIES**





**INDEX**




**Page**GLOSSARY
              vi**PART
                  I**ITEM  1.
              BUSINESS
              A-1THE
                  COMPANY
              A-1COMPANY
                  WEBSITE
              A-1REGULATED
                  OPERATIONS
              A-2PNM
                  Electric
              A-2TNMP
                  Electric
              A-3PNM
                  Gas
              A-4UNREGULATED
                  OPERATIONS
              A-5PNM
                  Wholesale
              A-5First
                  Choice
              A-6CORPORATE
                  AND OTHER
              A-6SOURCES
                  OF POWER
              A-7MARKET
                  REACH
              A-8FUEL
                  AND WATER SUPPLY
              A-9RATES
                  AND REGULATION
              A-10ENVIRONMENTAL
                  MATTERS
              A-13COMPETITION
              A-13EMPLOYEES
              A-14ITEM  1A.
              RISK
                  FACTORS
              A-15ITEM  1B.
              UNRESOLVED
                  STAFF COMMENTS
              A-24ITEM  2.
              PROPERTIES
              A-25ITEM  3.
              LEGAL
                  PROCEEDINGS
              A-27ITEM  4.
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY HOLDERS
              A-28**PART
                  II**ITEM  5.
              MARKET
                  FOR THE COMPANY’S COMMON EQUITY, RELATEDSTOCKHOLDER MATTERS
                  AND ISSUER PURCHASES OFEQUITY
                  SECURITIES
              A-30ITEM  6.
              SELECTED
                  FINANCIAL DATA
              A-32ITEM  7.
              MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OF FINANCIALCONDITION
                  AND RESULTS OF OPERATION
              A-36ITEM  7A.
              QUANTITATIVE
                  AND QUALITATIVE DISCLOSURE ABOUTMARKET
                  RISK
              A-80ITEM  8.
              FINANCIAL
                  STATEMENTS AND SUPPLEMENTARY DATA
              B-1ITEM  9.
              CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING
                  AND FINANCIAL DISCLOSURE
              C-1ITEM
                  9A.
              CONTROLS
                  AND PROCEDURES
              C-1ITEM
                  9B.
              OTHER
                  INFORMATION
              C-1


iv




**PART
                III**ITEM 10.
            DIRECTORS
                AND EXECUTIVE OFFICERS OF THE COMPANY
            D-1ITEM 11.
            EXECUTIVE
                COMPENSATION
            D-1ITEM 12.
            SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENTAND
                RELATED STOCKHOLDER MATTERS
            D-1ITEM 13.
            CERTAIN
                RELATIONSHIPS AND RELATED TRANSACTIONS
            D-1ITEM
                14.
            PRINCIPAL
                ACCOUNTANT FEES AND SERVICES
            D-1**PART
                IV**ITEM 15.
            EXHIBITS,
                FINANCIAL STATEMENT SCHEDULES
            E-1SIGNATURES
            E-25





v





**GLOSSARY**




Afton
              Afton
                  Generating StationALJ
              Administrative
                  Law JudgeAltura
              Altura
                  Power L.P.APB
              Accounting
                  Principles BoardAPS
              Arizona
                  Public Service CompanyARO
              Asset
                  Retirement ObligationAvistar
              Avistar,
                  Inc.BLM
              U.S.
                  Department of the Interior Bureau of Land ManagementBNCC
              BHP
                  Navajo Coal CompanyBoard
              Board
                  of DirectorsBTU
              British
                  Thermal UnitCal
                  PX
              California
                  Power ExchangeCal
                  ISO
              California
                  Independent System OperatorCCN
              Certificate
                  of Public Convenience and NecessityCompany
              PNM
                  Resources, Inc. and SubsidiariesCongress
              United
                  States CongressConstellation
              Constellation
                  Energy Commodities Group, Inc.Decatherm
              1,000,000
                  BTUsDelta
              Delta-Person
                  Limited PartnershipDOJ
              United
                  States Department of JusticeDuke
              Duke
                  Energy CorporationEaR
              Earnings
                  at RiskEIP
              Eastern
                  Interconnection ProjectEITF
              Emerging
                  Issues Task ForceEPE
              El
                  Paso Electric CompanyEPA
              United
                  States Environmental Protection AgencyERCOT
              Electric
                  Reliability Council of TexasESPP
              Employee
                  Stock Purchase PlanFASB
              Financial
                  Accounting Standards BoardFarmington
              City
                  of Farmington, New MexicoFCPSP
              First
                  Choice Power Special Purpose, L.P.FERC
              Federal
                  Energy Regulatory CommissionFirst
                  Choice
              First
                  Choice Power, L. P. and SubsidiariesFIP
              Federal
                  Implementation PlanFour
                  Corners
              Four
                  Corners Power PlantFPL
              FPL
                  Energy New Mexico Wind, LLCGAAP
              Generally
                  Accepted Accounting Principles in the UnitedStates
                  of AmericaGCT
              Grand
                  Canyon TrustGlobal
                  Electric Agreement
              Signed
                  by PNMR and other parties in 2003; provides for a five-year rate
                  path for
                  New Mexico jurisdictional customers that began in September
                  2003Great
                  Southwestern
              Great
                  Southwestern Construction, Inc.IBLA
              Interior
                  Board of Land AppealsIRS
              United
                  States Internal Revenue ServiceISO
              Independent
                  System OperatorLIBOR
              London
                  Interbank Offered RateLordsburg
              Lordsburg
                  Generating StationLuna
              Luna
                  Energy FacilityMMBTUs
              Million
                  British Thermal UnitsMoody's
              Moody’s
                  Investor Services, Inc.
   vi
  MW
              MegawattMWh
              Megawatt
                  HourNavajo
                  Acts
              Navajo
                  Nation Air Pollution Prevention and Control Act, theNavajo
                  Nation Safe Drinking Water Act, and the NavajoNation
                  Pesticide ActNinth
                  Circuit
              United
                  States Court of Appeals for the Ninth CircuitNMED
              New
                  Mexico Environment DepartmentNMPRC
              New
                  Mexico Public Regulation CommissionNNHPD
              Navajo
                  Nation Historic Preservation DepartmentNRC
              United
                  States Nuclear Regulatory CommissionNSPS
              New
                  Source Performance StandardsNSR
              New
                  Source ReviewOASIS
              Open
                  Access Same Time Information SystemOATT
              Open
                  Access Transmission TariffO&M
              Operations
                  and MaintenancePGAC
              Purchased
                  Gas Adjustment ClausePG&E
              Pacific
                  Gas and Electric Co.PNM
              Public
                  Service Company of New Mexico and SubsidiaryPNMR
              PNM
                  Resources, Inc. and SubsidiariesPPA
              Power
                  Purchase AgreementPRG
              Power
                  Resource Group, Inc.PSA
              Power
                  Supply AgreementPSD
              Prevention
                  of Significant DeteriorationPUCT
              Public
                  Utility Commission of TexasPUHCA
              The
                  Public Utility Holding Company ActPURPA
              Public
                  Utility Regulatory Policy Act of 1978PVNGS
              Palo
                  Verde Nuclear Generating StationReeves
              Reeves
                  Generating StationREP
              Retail
                  Electricity ProviderRestructuring
                  Act
              New
                  Mexico Electric Utility Industry Restructuring Act of 1999,as
                  amendedRMC
              Risk
                  Management CommitteeRMRR
              Routine
                  Maintenance, Repair or ReplacementRTO
              Regional
                  Transmission OrganizationSCE
              Southern
                  California Edison CompanySCPPA
              Southern
                  California Public Power AuthoritySDG&E
              San
                  Diego Gas and Electric CompanySEC
              United
                  States Securities and Exchange CommissionSempra
              Sempra
                  EnergySenate
                  Bill 7
              Legislation
                  that established retail competition in TexasSESCO
              San
                  Angelo Electric Service CompanySFAS
              Statement
                  of Financial Accounting StandardsSJCC
              San
                  Juan Coal CompanySJGS
              San
                  Juan Generating StationSO2
              Sulfur
                  DioxideS&P
              Standard
                  and Poors Ratings ServicesSPS
              Southwestern
                  Public Service CompanySW
                  Acquisition
              SW
                  Acquisition, L.P.TCEQ
              Texas
                  Commission on Environmental QualityTECA
              Texas
                  Electric Choice Act (also known as Senate Bill 7)TNMP
              Texas-New
                  Mexico Power Company and SubsidiariesTNP
              TNP
                  Enterprises, Inc. and SubsidiariesThroughput
              Volumes
                  of gas delivered, whether or not owned by the CompanyTri-State
              Tri-State
                  Generation and Transmission Association, Inc.Tucson
              Tucson
                  Electric Power Company
   vii
  Twin
                  Oaks
              Assets
                  of Twin Oaks Power, LP and Twin Oaks Power III, LPUAMPS
              Utah
                  Associated Municipal Power SystemsUSBR
              United
                  States Bureau of ReclamationUSFS
              United
                  States Forest ServiceVaR
              Value
                  at RiskWood
                  River
              Wood
                  River Partners, L.P.WSPP
              Western
                  Systems Power Pool


viii




**PART
      I**





**ITEM
      1.**  **BUSINESS**





**THE
      COMPANY**





PNMR
      was
      incorporated in the State of New Mexico in 2000. The Company’s three primary
      subsidiaries are PNM, TNMP and First Choice. PNM was incorporated in the State
      of New Mexico in 1917. Upon the completion in 2001 of a one-for-one share
      exchange between PNM and PNMR, PNMR became the parent company of PNM. Prior
      to
      the share exchange, PNMR had existed as a subsidiary of PNM. The new parent
      company began trading on the New York Stock Exchange under the same PNM symbol
      beginning in December 2001.





On
      June
      6, 2005, PNMR completed the acquisition of TNP. Prior to the consummation of
      the
      acquisition, TNP was a privately owned holding company based in Fort Worth,
      Texas. TNP’s principal subsidiaries are TNMP and First Choice. TNMP’s
      predecessor was organized in the State of Texas in 1925 and First Choice was
      organized in the State of Texas in 2000. See Note 2 in the Notes to Consolidated
      Financial Statements for details about the acquisition of TNP.


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 clearly indicated as such.


In
      December 2004, PNMR became a registered holding company under PUHCA. As a result
      of the requirement to register as a holding company, PNMR created PNMR Services
      Company, a wholly owned services company, which began operation in January
      2005.
      PNMR’s status as a registered holding company did not change the utility
      operations of the Company. Effective with the acquisition of TNP on June 6,
      2005, all TNMP employees who were providing corporate support to TNP and First
      Choice became employees of PNMR Services Company. Energy legislation enacted
      in
      August 2005 resulted in the repeal of PUHCA effective February 2006. PNMR is
      in
      the process of evaluating the effects of that repeal, along with the other
      provisions of the legislation.





PNMR
      is
      an investor-owned holding company of energy and energy-related businesses.
      PNM
      is an integrated public utility with regulated and unregulated operations
      primarily engaged in (i) the generation, transmission and distribution of
      electricity, (ii) transmission, distribution and sale of natural gas within
      New
      Mexico, and (iii) unregulated operations primarily focused on the sale and
      marketing of electricity in the western United States. TNMP is a regulated
      utility operating in Texas and New Mexico. In Texas, TNMP provides regulated
      transmission and distribution services. In New Mexico, TNMP provides integrated
      electric services that include the transmission, distribution, purchase and
      sale
      of electricity. First Choice is a competitive retail electric provider operating
      in Texas. In addition, PNMR provides energy and technology related services
      through its wholly owned subsidiary, Avistar.





In
      January 2006, Altura, an indirect, wholly owned subsidiary of PNMR, entered
      into
      an agreement to purchase Twin Oaks no earlier than April 17, 2006. The Twin
      Oaks
      facility is a 305 MW coal-fired plant located in Texas. See Note 22 in the
      Notes
      to Consolidated Financial Statements for further details about the proposed
      acquisition of Twin Oaks.





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





**COMPANY
      WEBSITE**




The
      Company’s Internet address is http://www.pnmresources.com .
      The
      contents of the website are not a part of this Form 10-K. The Company’s filings
      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 the Company electronically files such material
      with, or furnishes it to, the SEC. These reports are also available upon request
      in print from the Company free of charge. Additionally, the Company's Corporate
      Governance Principles, code of ethics ( *Do
      the Right Thing-*




A-1


*Principles
      of Business Conduct* )
      and
      charters of the Company's Audit and Ethics Committee, Governance and Public
      Policy Committee, Human Resources and Compensation Committee and Finance
      Committee are available on the Company's website at http://www.pnmresources.com/ge/index and such
      information is available in print, without charge, to any shareholder who
      requests it.





**REGULATED
      OPERATIONS**





**PNM
      Electric**




PNM
      Electric is an integrated electric utility that consists of generation,
      transmission and distribution of electricity for retail electric customers
      in
      New Mexico and the sale of transmission to third parties as well as to PNM
      Wholesale and TNMP. 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. PNM Electric owns or leases
      transmission lines, interconnected with other utilities in New Mexico, south
      and
      east into Texas, west into Arizona, and north into Colorado and Utah. The
      Company’s largest non-affiliated retail electric customer was served by PNM
      Electric and accounted for approximately 8.3% of the Company’s total retail
      electric revenues for the year ended December 31, 2005.





In
      1990,
      the NMPRC established an off-system sales methodology that provided for a
      sharing mechanism whereby a certain amount of revenues from off-system sales
      were credited to reduce retail cost of service. Off-system sales above the
      amounts credited to retail customers accrue to the benefit of shareholders.
      Subsequent rate case settlements have continued to utilize this methodology.





Customer
      rates for retail electric service are set by the NMPRC based on the provisions
      of the Global Electric Agreement. In 2003, the NMPRC approved the Global
      Electric Agreement that set a rate path through 2007. PNM agreed to decrease
      retail electric rates by 6.5% in two phases over three years. The first phase
      of
      the rate reductions became effective in September 2003 and the second phase
      became effective September 1, 2005. (See Note 17 in the Notes to Consolidated
      Financial Statements.)








A-2




Weather-normalized
      retail electric load growth was 2.5% in 2005. 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:





**System
      Peak Demands**





**2005**
            
            **2004**
            
            **2003**(Megawatts)Summer
            1,779
            
            1,655
            
            1,661Winter
            1,530
            
            1,481
            
            1,434




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 Albuquerque, Santa Fe, Bernalillo County,
        Sandoval County, San Miguel County, Village of Bosque Farms, Pueblo de Cochiti,
        Village of Tijeras, McKinley County and the City of Las Vegas. 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.
        The
        Albuquerque metropolitan area accounted for approximately 53% of PNM Electric’s
        2005 electric utility operating revenues (excluding transmission revenues),
        and
        no other franchise area represents more than approximately 10%. PNM continues
        to
        collect and pay franchise fees to Albuquerque and Santa Fe, Village of Bosque
        Farms, Village of Tijeras and the City of Las Vegas. PNM currently does not
        pay
        franchise fees to Bernalillo County, Luna County, Sandoval County, McKinley
        County, Pueblo de Cochiti or San Miguel County.


PNM
      Electric owns or leases 2,897 circuit miles of electric transmission lines,
      interconnected with other utilities in New Mexico, east and south into Texas,
      west into Arizona, and north into Colorado 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
      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.




**TNMP
      Electric**




TNMP
      Electric consists of the operations of TNMP. TNMP is a regulated utility
      operating in Texas and New Mexico. In Texas, TNMP Electric provides regulated
      transmission and distribution services under the provisions of TECA in
      accordance with Senate Bill 7. TNMP Electric serves a market niche of
      small-to-medium-sized communities. Only three of the 84 communities in TNMP
      Electric’s service territory have populations exceeding 50,000. TNMP Electric’s
      service territory is organized into two operating areas: Texas and New Mexico.
      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 and
      serves approximately 85% of the electrical load in ERCOT. See “Rates and
      Regulation” below for more information about ERCOT. In New Mexico, TNMP provides
      integrated electricity services that include 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.




TNMP
      Electric provides transmission and distribution services at regulated rates
      to
      various retail electric providers that, in turn, provide retail electric service
      within TNMP Electric’s Texas service area. As of December 31, 2005, 30 retail
      electric providers served customers that receive transmission and distribution
      services from TNMP Electric. First Choice, TNMP Electric’s affiliated retail
      electric provider, was TNMP Electric’s largest customer and accounted for
      approximately 56% of TNMP's total retail electric revenues for the year ended
      December 31, 2005.





A-3




TNMP holds
        long-term, non-exclusive franchise agreements for its electric transmission
        and
        distribution services, with varying expiration dates. These franchises accounted
        for approximately 7% of TNMP’s 2005 total electric utility operating revenues.
        TNMP intends to negotiate and execute new or amended franchise agreements
        with
        municipalities as they expire. Sales within the remaining 84 franchises
        contributed approximately 63% of TNMP’s 2005 total electric utility operating
        revenues. The remainder of TNMP's revenues are 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
      distributes natural gas to most of the major communities in New Mexico,
      including Albuquerque and Santa Fe. The Albuquerque metropolitan area accounted
      for approximately 50% of the total gas revenues in 2005. No single sales-service
      customer accounted for more than 0.9% of PNM Gas’ therm sales in 2005.
      PNM holds long-term non-exclusive franchises with varying expiration dates
      in all incorporated communities in New Mexico requiring franchise agreements
      except for the municipalities of Aztec, Bosque Farms, Eunice, Gallup, Grants,
      Hurley, Los Ranchos de Albuquerque, Milan, Santa Clara, Santa Fe County, and
      Silver City. PNM Gas remains obligated to serve these franchise areas pursuant
      to state law despite the absence of an effective franchise
      agreement.





PNM
      Gas
      has a customer base that includes both sales-service customers and
      transportation-service customers. Sales-service customers purchase natural
      gas
      and receive transportation and delivery services from PNM Gas for which PNM
      Gas receives both cost-of-gas and cost-of-service revenues. In 2005, the market
      price of natural gas across the United States increased significantly, due
      to a
      hot 2005 summer, which led to more demand from natural gas-fired power plants,
      as well as due to the hurricanes in the Gulf Coast region of the United States.
      Cost-of-gas revenues collected from its sales-service customers are recovered
      in
      accordance with NMPRC regulations through the PNM Gas PGAC and represent 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
      do
      not impact the Company’s consolidated gross margin (gross margin is equal to
      operating revenues minus cost of energy sold). An order was issued by the NMPRC
      in 2001 that approved an agreement regarding the hedging strategy of PNM Gas
      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 Gas 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. Additionally, PNM Gas makes occasional gas sales
      to
      off-system sales customers. Off-system sales deliveries generally occur at
      pipeline interconnections with the PNM Gas system and profits are shared between
      PNM Gas and its customers on a 30%/70% basis.





PNM
      Gas
      had 26 transportation-service customers in 2005, which procure gas for their
      end
      users independently of PNM Gas end users. Transportation-service customers
      are
      gas marketers and producers contracting with PNM Gas for transportation services
      to their end users and for other related services that provide PNM Gas with
      cost-of-service revenues only. Transportation services are 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 1,823 end users that were not PNM Gas customers
      during 2005.




In
      2005,
      38% of the total gas throughput of PNM Gas was related to transportation gas
      deliveries. The transportation rates of PNM Gas are unbundled, and
      transportation customers only pay for the service they receive. In 2005,
      revenues from transportation customers accounted for 3% of the total gas
      revenues of PNM Gas. Revenues from sales-service customers accounted for the
      remaining 97%. Cost of gas, on which PNM Gas makes no margin, accounted for
      71%
      of total sales-service revenue. Because a major portion of the PNM Gas load
      is
      related to heating, sales levels are affected by the weather. In 2005, 60%
      of
      the total sales occurred in the months of January, February, March and December.





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





A-4


**UNREGULATED
      OPERATIONS**


**PNM
      Wholesale**





PNM
      Wholesale consists of the generation and sale of electricity into the wholesale
      market based on two product lines, long-term contracts and short-term sales.
      The
      source of these sales is supply created by selling the unused capacity of PNM's
      jurisdictional assets as well as the capacity of PNM’s wholesale plants excluded
      from retail rates. Both regulated and unregulated generation is jointly
      dispatched in order to improve reliability, provide the most economic power
      to
      retail customers, and maximize profits on any wholesale
      transactions.





Long-term
      contracts include sales to firm-requirements and other wholesale customers
      with
      multi-year arrangements. At December 31, 2005, these contracts ranged from
      1 to
      14.5 year terms with an average term of 5.3 years. Short-term sales include
      transactions entered into for less than one year. They include forward market
      opportunities, which transactions do not qualify as normal sales and purchases
      as defined in SFAS No. 133, as amended, *“Accounting
      for Derivative Instruments and Hedging Activities,”* (“SFAS
      133”) and, as a result, are marked to market. Also included in short-term sales
      are 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.





The
      PNM
      Wholesale strategy calls for increased asset-backed energy sales supported
      by
      long-term contracts in the wholesale market, where PNM’s aggregate net open
      forward electric sales position, including short-term sales and long-term
      contracts, is generally covered by its forecasted excess generation capacity.
      Company management actively monitors the asset-backed sales by the use of
      stringent risk management policies. The Company’s future growth plans call for
      approximately 75% of its new generation portfolio to be committed through
      long-term contracts. The 75% threshold is in compliance with the Global Electric
      Agreement. Growth is dependent on market development and on the Company’s
      ability to generate funds for the Company’s future expansion. The Company
      continues to operate in the wholesale market and seek appropriately priced
      asset
      additions such as the proposed acquisition of the Twin Oaks facility. Expansion
      of the Company’s generation portfolio is dependent on the Company’s ability to
      acquire favorably priced assets at strategic locations and to secure long-term
      commitments for the purchase of power from the acquired plants.





In
      2005
      and 2004, PNM Wholesale revenues stabilized following the preceding years when
      volatility was high. The Company has been successful in developing its wholesale
      power marketing activities in the western United States, even in times of market
      volatility. Management believes this success is due to its business strategy
      of
      providing electric power customized to meet the special needs of its customers.
      This marketing strategy is based on PNM Wholesale's net asset-backed
      methodology, which helps mitigate the risks inherent in wholesale power
      marketing activities. PNM Wholesale also utilizes long-term transactions to
      enhance its product offerings.





Certain
      of PNM’s generation resources are excluded from retail electric rates. As a
      result, PNM Wholesale developed a wholesale power marketing strategy in which
      it
      sells the generation from its resources that are excluded from retail rates.
      This strategy also includes the forward purchase and sale of electricity to
      take
      advantage of market price opportunities in the electric wholesale market. During
      2005, 2004 and 2003, PNM’s sales in the wholesale electric markets accounted for
      approximately 58%, 62% and 62%, respectively, of its total MWh sales. Of the
      total wholesale electric sales made in 2005, 2004 and 2003, 87%, 80% and 82%,
      respectively, were transacted through purchases for resale. (See Item 2.
      "Properties.")





PNM
      Wholesale has entered into various firm 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
      Wholesale for its variable costs incurred to provide the energy. PNM Wholesale’s
      firm-requirements demand was 281 MW in 2005, and is expected, based solely
      on
      existing contracts, to be 273 MW in 2006, 161 MW in 2007, 154 MW in 2008 and
      90
      MW in 2009. Firm requirements for TNMP’s New Mexico customers are included in
      these amounts through 2006. In accordance with the NMPRC’s stipulation approving
      PNMR’s acquisition of TNP, beginning January 1, 2007, TNMP’s New Mexico
      customers will be included in the PNM Electric load (see “Acquisition
      Agreements” below). No firm-requirements PNM Wholesale customer accounted for
      more than 6.9% of the Company's total electric sales for resale revenues for
      the
      year ended December 31, 2005.





A-5


**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. First Choice's responsibilities include acquiring
      new 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 was organized in
      2000
      to act as TNMP’s affiliated retail electric provider, as required by TECA.
      Although First Choice is regulated in certain respects by the PUCT under ERCOT,
      the Company includes First Choice in the unregulated portion of its business
      because First Choice is not subject to traditional rate of return
      regulation.





First
      Choice serves price-to-beat and competitive customers (residential, commercial,
      and aggregated municipalities) in Texas. The price-to-beat customers are former
      customers of TNMP that have chosen to remain with First Choice, TNMP’s
      affiliated retail electric provider. First Choice focuses its competitive
      customer acquisition efforts in the major metropolitan areas that are open
      to
      electric choice within ERCOT, including Dallas-Fort Worth, Houston, Corpus
      Christi, and McAllen-Harlingen.





First
      Choice experiences increased sales and operating revenues during the summer
      months as a result of increased air conditioner usage in hot weather. In 2005,
      approximately 43% of First Choice’s consolidated annual revenues were recorded
      in June, July, August and September.





First
      Choice’s load fluctuates continuously due to among other things, customer
      additions and losses, changes in customer usage, unseasonal weather and customer
      switching. First Choice continually monitors and revises its load forecast
      to
      account for changing price-to-beat and 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.




In
      Texas,
      capacity auctions were a semi-regular event mandated by the TECA to promote
      liquidity in the marketplace. In the most recent auctions, First Choice was
      the
      successful bidder for four 25 MW baseload blocks of capacity in October 2005
      and
      two 25 MW cyclic blocks of capacity in September 2005.





**CORPORATE
      AND OTHER**




PNMR
        Services Company provides corporate services to PNMR and to all of PNMR's
        business units, including PNM, Avistar, TNP, TNMP and First Choice based
        on
        shared services agreements. These services are billed at cost on a monthly
        basis
        and allocated to the business units. PNMR Services Company and Avistar are
        included in the Corporate and Other segment.





A-6





**SOURCES
      OF POWER**





PNMR





The
      Company has sources of power from property it owns or leases and power purchased
      through various long-term PPAs. For the year ended December 31, 2005, the
      Company had a 2,393 MW generation capacity from these sources.




First
      Choice assumed the energy supply activities of TNMP in Texas in 2002. In 2003,
      First Choice and Constellation executed a PSA that resulted in Constellation
      being the primary supplier of power for First Choice’s customers through the end
      of 2007. Additionally, Constellation has agreed to supply power in certain
      transactions under the PSA beyond the date when that commitment expires. The
      Company’s basic strategy is to minimize its exposure to fluctuations in market
      energy prices by matching fixed price sales contracts with fixed price supply.
      In addition, First Choice uses various financial instruments to hedge against
      the risk of adverse changes in natural gas prices. The PSA with Constellation
      resulted in Constellation assuming weather related risks because the contract
      is
      based on customer usage profiles as determined by ERCOT. First Choice retained
      the risks associated with customer attrition. (See Note 17 in the Notes to
      Consolidated Financial Statements.)





PNM





*Sources
      of Power - Owned*





As
      of
      December 31, 2005, the total net generation capacity of facilities owned by
      PNM
      was 1,744 MW, which includes all of PNM's interests in PVNGS, portions of which
      are held under operating leases. (See Item 2. “Properties.”)





PNM
      is
      committed to increasing the utilization of its generation capacity at SJGS,
      Four
      Corners and PVNGS. SJGS is operated by PNM. SJGS’ equivalent availability was
      89.4% and 89.8% for the years ended December 31, 2005 and 2004, respectively.
      PVNGS’ equivalent availability was 76.0% and 81.7% for the years ended December
      31, 2005 and 2004, respectively. Four Corners’ equivalent availability was 86.3%
      and 82.4% for the years ended December 31, 2005 and 2004, respectively. Four
      Corners and PVNGS are operated by APS.





PNM’s
      Lordsburg and Afton plants were built to serve wholesale customers and other
      sales rather than New Mexico retail customers and, therefore, are not currently
      included in the retail rates. However, these plants may be needed in the future
      to serve the growing retail load as is the case for Afton, as described below.
      If so, these plants would have to be certified by the NMPRC and would then
      be
      subject to inclusion in PNM’s retail rates in a future rate case. These plants
      were built as part of PNM’s ongoing strategy of increasing generation capacity
      over time to serve increasing retail load, sales under long-term contracts
      and
      other sales. The plants owned by PNM are available through joint dispatch to
      support service to the retail customers of PNM.





In
      July
      2005, PNM filed with the NMPRC an application for a CCN in which PNM requested
      NMPRC approval to operate Afton as a public utility plant and include in PNM’s
      retail rate base in its next retail electric rate case the costs associated
      with
      the conversion of Afton from a combustion turbine to a combined cycle unit.
      In
      November 2005, PNM filed a joint stipulation with the NMPRC that would allow
      PNM
      to convert Afton to a combined cycle plant and bring Afton into retail rates,
      with 50% of Afton's capacity designated to serve PNM's customers and the other
      50% designated to serve TNMP's New Mexico customers. Hearings were held in
      February 2006 before the NMPRC.





In
      November 2004, PNMR Development, a subsidiary of PNMR, purchased a one-third
      interest in Luna. Luna is a 570 MW, partially constructed, natural gas-fired
      power plant near Deming in southern New Mexico. The purchasers are investing
      approximately $100.0 million, one-third from each purchaser, to complete
      construction. In November 2005, the one-third interest in Luna was transferred
      from PNMR Development to PNM. PNM will continue to develop Luna and will utilize
      it as merchant plant. Luna is expected to be operational no later than the
      second quarter of 2006.





A-7





*Sources
      of Power - Leased*


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.





As
      discussed above, PNM leases portions of PVNGS. See Item 2. “Properties” and Note
      7 in the Notes to Consolidated Financial Statements.





*Sources
      of Power - PPAs*





In
      addition to generating its own power, PNM purchases power in the open market.
      PNM's purchases under its long-term PPAs, including the Delta lease and the
      contract described below, were 649 MW in 2005 and are expected to be 599 MW
      in
      2006, 532 MW in 2007, 532 MW in 2008, and 532 MW in 2009. This projected
      capacity assumes that contracts that end during the period are not renewed
      or
      extended. PNM also purchases power in the forward, day-ahead and real-time
      markets.




In
      2002,
      PNM entered into an agreement with FPL to develop a 200 MW wind generation
      facility in New Mexico. PNM began receiving commercial power from the project
      in
      June 2003. FPL owns and operates the New Mexico Wind Energy Center, which
      consists of 136 wind-powered turbines on a site in eastern New Mexico. PNM
      has a
      contract to purchase all the power generated by the New Mexico Wind Energy
      Center for 25 years. 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. Any wind-generated electricity
      in
      excess of these amounts is sold on the wholesale power market, either within
      New
      Mexico or outside the state.





TNMP


TNMP
        purchases all electricity for its New Mexico customers' needs and
        energy-scheduling services under a wholesale power contract with PNM that
        extends through December 2006. As discussed below, in “Rates and Regulation,” in
        accordance with the NMPRC stipulation approving PNMR’s acquisition of TNP, PNM
        will remain the power supplier for TNMP’s New Mexico needs through 2010. As
        discussed above, First Choice performs the energy supply activities for TNMP’s
        Texas customers.





**MARKET
      REACH**





As
      of the
      date of this report, PNM owns firm transmission capacity to the Mead market
      hub
      in the amount of 100 MW, which serves various wholesale power markets and loads
      in the greater Las Vegas, Nevada area, and serves as a delivery point for the
      Cal ISO. In addition, PNM owns transmission capacity to serve major load centers
      in the Phoenix, Arizona area in amounts varying from 100 MW to 150
      MW.





A-8





**FUEL
      AND WATER SUPPLY**





PNM





The
      percentages of PNM’s generation of electricity (on the basis of KWh) fueled by
      coal, nuclear fuel and gas and oil, and the average costs to PNM of those fuels
      (in cents per million BTU), during the past three years were as
      follows:





**Coal**
            
            **Nuclear**
            
            **Gas
                and Oil****Percent
                of**
            
            **Average**
            
            **Percent
                of**
            
            **Average**
            
            **Percent
                of**
            
            **Average****Generation**
            
            **Cost**
            
            **Generation**
            
            **Cost**
            
            **Generation**
            
            **Cost**2005
            71.3%
            
            163.9
            
            26.3%
            
            45.7
            
            2.4%
            
            687.62004
            70.1%
            
            154.4
            
            28.1%
            
            52.5
            
            1.8%
            
            693.92003
            68.0%
            
            163.8
            
            29.5%
            
            44.5
            
            2.5%
            
            625.2





The
      generation mix for 2006 is expected to be 67.4% coal, 27.7% nuclear and 4.9%
      gas
      and oil. Due to locally available natural gas and oil supplies, the utilization
      of locally available coal deposits and the generally abundant supply of nuclear
      fuel, PNM believes that adequate sources of fuel are available for its
      generating stations into the foreseeable future.





*Coal*





See
      Note
      16 in the Notes to Consolidated Financial Statements for information about
      PNM’s
      coal supply.





*Natural
      Gas*





The
      natural gas used as fuel for the electric generating plants located in
      Albuquerque (Reeves and the Delta operating lease) is procured on the open
      market and delivered by PNM Gas through its transportation services. PNM
      Wholesale procures its gas supply independently of PNM Gas but obtains gas
      transportation services from PNM Gas.





*Nuclear
      Fuel*




PNM
          is
          one of several participants in PVNGS. (See Note 14 in the Notes to Consolidated
          Financial Statements.) 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 have contracted for all of the PVNGS requirements for uranium
      concentrates and conversion services through 2008. The PVNGS participants have
      also contracted for all of the PVNGS enrichment services through 2010, 80%
      of
      enrichment services through 2013 and all of the fuel assembly fabrication
      services until at least 2015.





*Water
      Supply*





See
      Note
      16 in the Notes to Consolidated Financial Statements for information about
      PNM's
      water supply.





A-9





**RATES
      AND REGULATION**





PNM
      is
      subject to the jurisdiction of the NMPRC, with respect to its retail electric
      and gas rates, service, accounting, issuance of securities, construction of
      major new generation and transmission facilities and other matters regarding
      retail utility services provided in New Mexico. The FERC has jurisdiction over
      rates and other matters related to wholesale electric sales and cost recovery
      for a portion of PNM’s transmission network.





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. Within New Mexico, TNMP is subject to the jurisdiction of the
      NMPRC. TNMP is subject to traditional cost-of-service regulation in both Texas
      and New Mexico. TNMP is subject to the jurisdiction of the FERC for some of
      its
      activities, including the issuance of securities and the acquisition or
      disposition of properties in New Mexico. 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.





First
      Choice is a member of ERCOT, the ISO responsible for maintaining reliable
      operations of the bulk electric power supply system in the Texas electric
      market. The responsibilities of ERCOT include ensuring that information relating
      to a customer's choice of retail electric provider is conveyed in a timely
      manner to anyone needing the information. ERCOT is also responsible for ensuring
      that electricity production and delivery are accurately accounted for among
      the
      generation resources and wholesale buyers and sellers in the ERCOT region.
      The
      ERCOT ISO 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 agent for procuring ancillary
      services for those who elect not to secure their own ancillary services
      requirements.





Members
      of ERCOT include retail customers, investor and municipal owned electric
      utilities, rural electric cooperatives, river authorities, independent
      generators, power markets and retail electric providers. 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 Texas. Senate Bill 7 contains
      no
      provisions for the specific recovery of fuel and purchased power costs, although
      First Choice can request that the PUCT change the price-to-beat fuel factor
      twice a year to recognize changes in natural gas prices. The rates charged
      to
      new customers acquired by First Choice outside of TNMP’s service territory are
      not regulated by the PUCT, but are negotiated by First Choice with each
      customer. As a result, changes in fuel and purchased power costs will affect
      First Choice’s operating results.





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





PNMR





**Energy
      Policy Act**





In
      August
      2005, the Energy Policy Act of 2005 was enacted, effective February 2006.
      Implementation of various portions of the law requires the issuance of rules
      by
      the FERC. The FERC adopted final rules implementing various provisions of the
      Energy Policy Act including rules pertaining to repeal of PUHCA of 1935 and
      implementation of PUHCA of 2005, the FERC’s expanded mergers and acquisitions
      approval authority and prohibition of energy market manipulation. The FERC
      has
      also issued a number of other proposed rules that are pending, including rules
      pertaining to preventing undue discrimination in transmission services and
      electric reliability standards. The Company will continue to monitor, and
      participate in, as appropriate, proceedings involving implementation of the
      Energy Policy Act.





A-10





PNM





**Regional
      Transmission Issues**





In
      July
      2005, the FERC issued an order terminating its proceeding on standard market
      design, stating that since issuance of the standard market design notice of
      proposed rulemaking, the electric industry has made significant progress in
      the
      development of voluntary RTOs and ISOs. 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.





In
      November 2005, the FERC issued a Notice of Proposed Rulemaking Promoting
      Transmission Investment through Pricing Reform. In the proposed rulemaking,
      the
      FERC notes declining investment in the national transmission grid and proposes
      certain incentive actions it is considering to increase transmission investment
      to improve the reliability of national transmission grid. In addition to the
      incentive proposals, the FERC would implement additional reporting requirements
      for public utilities that operate transmission systems. The Company intends
      to
      monitor and participate in these FERC notices and rulemakings.





**Generation
      Market Power Filings**





In
      its
      triennial market power screen filing in 2004, PNM reported that it continued
      to
      face transmission constraints in northern New Mexico and would continue to
      abide
      by the cost-based rate limitation on transmission service during times of
      transmission congestion for the northern New Mexico market. PNM also reported
      that for the EPE control area, PNM’s revised wholesale market share screen was
      below 20% for all seasons. In its order in PNM’s market-based rate filing, the
      FERC initiated a proceeding to determine if PNM’s mitigation measure in northern
      New Mexico is sufficiently adequate to prevent the exercise of market power
      and
      also required additional explanation of PNM’s revised wholesale market share
      calculation. The FERC established that rates reviewed under this proceeding
      for
      transactions completed in these two markets would be subject to refund effective
      March 6, 2005.




In
      April
      2005, the FERC issued an order denying PNM’s petition for rehearing regarding
      the FERC’s finding that the existing mitigation measure for the northern New
      Mexico control area was insufficient, rejecting PNM’s February 2005 compliance
      filing as to both the northern and southern New Mexico control areas and
      requiring PNM to submit a compliance filing containing one of the alternatives
      listed in the order. The FERC’s order also clarified that market-based sales
      made at SJGS are sales made within PNM’s northern control area and are subject
      to these proceedings. In July 2005, PNM made its compliance filing at the FERC.
      The filing indicated that, as a result of the completion of its analysis
      pursuant to the FERC’s order, PNM did show failures in its own control area, but
      did not show failures in the EPE control area, with the exception of one
      measure. PNM maintained its position that when the historical data is
      considered, it is clear that PNM does not possess generation market power in
      either the PNM or EPE control area destination markets and PNM should maintain
      its market-based sales authority in those markets. In the event the FERC does
      not so find, PNM also proposed mitigation measures in both the PNM and EPE
      control area destination markets that will be applicable during the limited
      time
      periods when the failures occurred.





PNM
      cannot predict the outcome of the additional FERC proceedings on PNM’s financial
      position or results of operations; however, should the FERC determine that
      PNM
      has generation market power in these two markets, PNM could continue to make
      sales at cost-based or otherwise mitigated rates and thus not have future
      revenues subject to refund in this matter.





**FERC
      Office of Market Oversight and Investigations Audit**





In
      November 2005, PNM received notice that the FERC Division of Operational Audits
      of the Office of Market Oversight and Investigations would perform a compliance
      audit of PNM. The audit covers the period from January 2004 to the present
      and
      will examine PNM’s compliance with the FERC standards of conduct and OASIS
      requirements, compliance of PNM’s transmission practices with the FERC
      regulations and applicable OATT, and compliance of PNM’s wholesale electricity
      marketing operation with its market-based rate tariff. This audit is part of
      a
      series of routine, mandatory audits of all of the utilities under FERC
      oversight, focused on compliance with the FERC’s rules and regulations. Similar
      audits have been conducted of other regional utilities. The FERC will issue
      its
      findings upon conclusion of the audit, which could take from six months to
      a
      year, or more to complete.




A-11





In
      preparing for an on-site visit by OMOI as part of its audit, and during the
      visit itself, the Company discovered computer system paths that could have
      permitted unauthorized Company personnel to access certain real-time
      transmission information concerning the PNM and TNMP transmission systems.
      The
      Company immediately reported to OMOI its discovery and disabled the paths.
      The
      Company’s preliminary examination has not revealed any evidence that
      unauthorized access to transmission information was, in fact, obtained by use
      of
      these paths.




PNM
      has
      been cooperating, and will continue to cooperate, fully with the FERC to
      complete the audit. The Company cannot predict the outcome of the audit or
      whether the FERC will make any adverse findings related to PNM’s compliance with
      the FERC’s rules and regulations.





**Global
      Electric Agreement**





In
      2003,
      PNM signed the Global Electric Agreement, which provided for the repeal of
      a
      majority of the New Mexico Restructuring Act, a fixed rate path, procedures
      for
      PNM’s participation in unregulated generating plant activities and other
      regulatory issues. In accordance with this rate path, PNM reduced its retail
      rates by 2.5% in September 2005. The rate path is effective through December
      31,
      2007, at which time rates are subject to review by the NMPRC.





**Renewable
      Portfolio Standard**





The
      NMPRC
      issued a renewable resources rule in 2002 to encourage the development of
      renewable energy in New Mexico. The rule includes a provision requiring the
      use
      of a minimum of 5% renewable energy by January 1, 2006, with the minimum amount
      to increase 1% per year for each year until a renewable portfolio standard
      of
      10% is reached in the year 2011. The Renewable Energy Act passed by the New
      Mexico Legislature establishes a mandatory renewable energy portfolio standard
      similar to the structure established by the NMPRC. The Renewable Energy Act
      provides for streamlined proceedings for utilities to obtain approval of
      procurement plans, provided certainty to utilities and protection for customers
      and required the NMPRC to establish a reasonable cost threshold for the
      procurement of renewable energy to prevent excessive costs being added to rates.
      Under the Renewable Energy Act, if renewable energy cannot be acquired under
      the
      threshold, the mandate would be suspended.





In
      September 2005, PNM made its 2006 annual portfolio summary filing and renewable
      energy procurement plan filing. PNM proposed to continue to procure renewable
      energy and certificates from wind resources, to pursue renewable energy projects
      and to implement a program to purchase renewable energy certificates from
      net-metered customers with small solar systems. The NMPRC approved this plan;
      however, with respect to cost recovery, costs incurred pursuant to the plan,
      with the exception of those for the small solar program, are subject to a
      rebuttable presumption of prudence.





TNMP





**FERC
      Office of Market Oversight and Investigations Audit**


In
        November 2005, the Company received notice that the FERC Division of Operational
        Audits of the Office of Market Oversight and Investigations would begin a
        compliance audit of the FERC jurisdiction transmission system of TNMP. The
        audit
        covers the period from the effective date of PNMR’s acquisition of TNP in June
        2005 to the present. The audit is substantially the same as the PNM audit
        discussed above.





**Acquisition
      Agreements**





In
      2005,
      the PUCT approved a settlement agreement finding the acquisition of TNP to
      be in
      the public interest. Among other things, the settlement agreement called for:





·
            a
                two-year electric rate freeze that includes a $13.0 million annual
                rate
                reduction in TNMP's retail delivery rates effective May 1,
                2005;


·
            an
                authorized return on equity of 10.25% on an implied capital structure
                of
                60% debt and 40% equity for certain reporting
                purposes;


·
            the
                use of a 60/40% debt/equity capital structure in TNMP's next base
                rate
                case if filed before January 1, 2009;
                and






A-12


·
            a
                $6.0 million synergy savings credit amortized over 24 months effective
                after the close of the transaction.


Also
        in
        2005, the NMPRC approved a stipulation in connection with the acquisition
        of
        TNP. Among other things, the stipulation called for:





·
            a
                three-phase rate reduction totaling 15%, to TNMP’s electric customers in
                southern New Mexico, beginning January 2006 and ending December 2010;
                the
                rate reduction will lower TNMP electric rates by approximately $9.6
                million in the first year;


·
            an
                imputed 55/45% debt/equity structure with an assumed rate of return
                on
                equity of 10.5% for TNMP;


·
            PNM
                to remain the power supplier for TNMP’s New Mexico needs through 2010;
                and


·
            integration
                of TNMP’s New Mexico assets into PNM effective January 1, 2007, the
                companies, however, will maintain separate rates, at minimum, through
                2010.





**ENVIRONMENTAL
      MATTERS**





PNM
      and
      TNMP, in common with other 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 Part II, Item 7. “Management’s Discussion
      and Analysis of Financial Condition and Results of Operation - Critical
      Accounting Policies” for a discussion of applicable accounting policies. In
      addition, see Note 16 and Note 18 in the Notes to Consolidated Financial
      Statements for information related to the following matters, incorporated in
      this item by reference.





·
            Person
                Station


·
            Retired
                Fossil-Fueled Plant Decommissioning
                Costs


·
            Nuclear
                Spent Fuel and Waste Disposal


·
            Navajo
                Nation Environmental Issues


·
            New
                Source Review Rules


·
            The
                Clean Air Act


·
            Citizen
                Suit Under the Clean Air Act


·
            Four
                Corners Air Emissions


·
            Excess
                Emissions Reports


·
            Santa
                Fe Generating Station


·
            SESCO
                Matter (for both PNM and TNMP)


·
            Coal
                Combustion Waste Disposal


·
            Environmental
                Issues





**COMPETITION**





PNM
      Wholesale 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 typically do not own or operate generating assets.
      The Company believes that it is well positioned to compete in this market due
      to
      its long history in the marketplace, its product offerings, and stringent risk
      management practices. The Company’s energy marketers are operationally trained
      and maintain effective marketing relationships with competitors and
      counterparties. The Company has maintained an investment-grade rating for its
      long-term debt despite turbulent wholesale markets, which enables the Company
      to
      fully participate in the marketplace.





The
      Texas
      electricity market has been open to retail competition since January 2002.
      Prior
      to 2002, TNMP operated as an integrated utility in Texas. In accordance with
      Senate Bill 7 and in compliance with a plan approved by the PUCT, TNMP separated
      its Texas utility operations into three components: (1) an unregulated retail
      sales




A-13




business
      operated by First Choice; (2) a regulated power transmission and distribution
      business operated by TNMP and (3) power generation, a business which TNMP is
      no
      longer engaged in. In accordance with Senate Bill 7, TNMP provides transmission
      and distribution services at regulated rates to various retail electric
      providers that, in turn, provide retail electric service within TNMP’s Texas
      service area.





The
      Company is exposed to competition in the unregulated Texas retail electricity
      market through First Choice. First Choice serves customers at competitive rates
      and customers at price-to-beat rates approved by the PUCT. 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, Texas’ electric consumers have been encouraged to switch from their
      traditional affiliated retail energy provider, such as TNMP, to a competitive
      retail energy provider, such as First Choice. Currently under TECA, Texas’
consumers whose chosen retail energy provider has exited the Texas market are
      provided electric service by a “provider of last resort.” The rates of a
      provider of last resort are regulated by the PUCT and are fixed for the two-year
      period that each provider of last resort serves. The current contracts for
      default service offered by providers of last resort under TECA will expire
      on
      December 31, 2006. On January 1, 2007 new providers of last resort will be
      identified and those providers as well as the rates offered will be effective
      until December 31, 2008.





On
      December 31, 2006, the price-to-beat rate mechanism will cease to exist and
      First Choice and other retail energy providers subject to providing
      price-to-beat rates will only market retail electricity at competitive rates.
      There is currently an open rulemaking at the PUCT evaluating the potential
      need
      for a replacement rate for the price-to-beat rate mechanism. Other services
      being evaluated in this rulemaking are provider of last resort functions and
      pricing and the possible creation of a default provider. The Company cannot
      currently predict what, if any, changes will occur to either mechanism and
      what,
      if any, impact such changes may have on its results of operations and financial
      position.





**EMPLOYEES**





The
      following table sets forth the number of employees of PNMR, PNM and TNMP and
      for
      each business segment as of December 31, 2005:





**PNMR**
            
            **PNM**
            
            **TNMP**Corporate
                *
            751
            
            -
            
            -PNM
                Electric
            1,165
            
            1,165
            
            -TNMP
                Electric
            469
            
            -
            
            469PNM
                Gas
            736
            
            736
            
            -PNM
                Wholesale
            70
            
            70
            
            -First
                Choice
            174
            
            -
            
            -Other
            17
            
            -
            
            -Total
            3,382
            
            1,971
            
            469





*
      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, who are
      represented by unions as of December 31, 2005:





**PNMR**
            
            **PNM**PNM
                Electric
            496
            
            496PNM
                Gas
            82
            
            82PNM
                Wholesale
            45
            
            45Total
            623
            
            623





Not
      all
      of the Company’s business segments are separate legal entities. The employees
      disclosed in the tables above for PNM Electric, PNM Gas and PNM Wholesale are
      allocated, in part, in a manner consistent with the allocation of labor costs
      to
      those segments.





A-14


**ITEM
      1A.**  **RISK
      FACTORS**





The
      business and financial results of PNMR, PNM and TNMP are subject to a number
      of
      risks and uncertainties, including those set forth below and in Part II. Item
      7.
“Management’s Discussion and Analysis of Financial Condition and Results of
      Operation.”





**PNMR
      may fail to successfully integrate acquisitions, including the TNP acquisition
      and the proposed acquisition of Twin Oaks, into its other businesses or
      otherwise fail to achieve the anticipated benefits of pending and future
      acquisitions.**





As
      part
      of PNMR’s growth strategy, PNMR is pursuing, and intends to continue to pursue,
      a disciplined acquisition strategy. While PNMR expects to identify potential
      synergies, cost savings, and growth opportunities prior to the acquisition
      and
      integration of acquired companies or assets, PNMR may not be able to achieve
      these anticipated benefits due to, among other things:




·
            delays
                or difficulties in completing the integration of acquired companies
                or
                assets,




·
            higher
                than expected costs or a need to allocate resources to manage unexpected
                operating difficulties,




·
            diversion
                of the attention and resources of its
                management,




·
            reliance
                on inaccurate assumptions in evaluating the expected benefits of
                a given
                acquisition,




·
            inability
                to retain key employees or key customers of acquired companies,
                and




·
            assumption
                of liabilities unrecognized in the due diligence
                process.





**Acquisition
      of TNP in 2005**





PNMR
      cannot assure that it will successfully integrate TNP with PNMR‘s current
      businesses. The integration of TNP with PNMR‘s other businesses presents
      significant challenges and, as a result, PNMR may not be able to operate the
      combined company as effectively as expected. PNMR may also fail to achieve
      the
      anticipated benefits of the acquisition as quickly or as anticipated or may
      not
      be able to achieve those benefits at all. Even if PNMR manages to realize
      greater than anticipated benefits from the integration of TNP into its business,
      PNMR’s regulated subsidiaries may be required by their regulators to return
      these benefits to ratepayers.





While
      the
      acquisition of TNP was accretive to earnings and cash flow in 2005, the 2005
      results were based on a number of factors, which may not continue in the future.
      At FCP, the gross margin increased, which was driven mainly by natural gas
      hedging, lower transmission costs and gains from capacity auction participation.
      However, at TNMP, gross margin decreased in 2005 compared to the prior year.
      The
      decrease was primarily due to a decrease in revenues due to a rate reduction
      effective May 1, 2005 that was part of the PUCT’s approval of the TNP
      acquisition.





The
      ultimate success of the acquisition is also dependent upon PNMR’s ability to
      achieve operational benefits from operating the companies as a unified operation
      and the management of customer retention at First Choice and TNMP.





**Proposed
      Acquisition of Twin Oaks in 2006**


On
        January 14, 2006, Altura, a newly formed indirect wholly owned subsidiary
        of
        PNMR, entered into an agreement with Sempra to purchase Twin Oaks in an
        acquisition of assets for $480.0 million in cash. The Twin Oaks facility
        is a
        305 MW coal-fired power plant located 150 miles south of Dallas, Texas. The
        transaction is expected to close no earlier than April 17, 2006. The Twin
        Oaks
        purchase agreement also includes the development rights for a possible 600
        MW
        expansion of the plant. The necessary permits are expected to be granted
        in
        2007. An additional $2.5 million payment will be made to Sempra upon the
        issuance of an air permit for the expansion and an additional $2.5 million
        will
        be paid when Altura begins construction of the expansion.
 
 A-15
 The
        proposed acquisition of Twin Oaks is the latest step in implementing PNMR’s
        strategy of expanding its merchant generation fleet to serve a growing wholesale
        market in the Southwest, including the ERCOT market in Texas. The Twin Oaks
        plant provides PNMR with the opportunity for lower-cost coal generation in
        an
        ERCOT market that is driven by natural gas.
 
 PNMR
        and
        Sempra are also parties to the purchase agreement and have agreed to guarantee
        certain obligations of their respective subsidiaries relating to the
        acquisition. Consequently, PNMR is at risk that Altura will not be able to
        meet
        its obligations that are guaranteed by PNMR.
 
 Under
        the
        purchase agreement, substantially all of the assets and contractual commitments
        relating to Twin Oaks are to be transferred to Altura upon closing, including
        fuel supply and power purchase and sale agreements. For the next five years
        the
        majority of the plant’s output will be sold via two existing contracts. All
        of
        the plant’s capacity is committed through September 2007. After expiration, the
        first contract is expected to be replaced with another contract for
        approximately 75% of the plant’s capacity through 2010. Although PNMR plans to
        market the excess energy and capacity within ERCOT, PNMR is at risk that
        its
        marketing efforts may not be successful due to a number of factors, including
        competition, market prices and demand for electricity and economic conditions.
 
 PNMR
        has
        arranged for bridge financing to close the transaction. It is expected that
        the
        permanent financing will come from the issuance of debt and equity structured
        to
        maintain PNMR’s investment grade rating. However, PNMR is at risk that it will
        be unable to obtain financing for the acquisition at a reasonable cost or
        terms
        that will permit PNMR to maintain its investment grade rating, due to conditions
        in the capital markets or PNMR’s financial condition.
 
 While
        the
        acquisition of the Twin Oaks facility is expected to be neutral to slightly
        accretive to earnings in the first 18 months of ownership, approximately
        15% to
        20% of earnings during this period will include the amortization of certain
        contracts, which will be recorded at fair market value under purchase accounting
        and amortized into income. Although the acquisition of Twin Oaks is expected
        to
        be fully accretive to earnings after the first 18 months and to be neutral
        to
        cash flow in 2006 and accretive thereafter, PNMR cannot assure that it will
        be
        able to achieve the expected earnings and cash flow results from the Twin
        Oaks
        plant.


**PNMR,
      PNM and TNMP are subject to complex government regulation, which may have a
      negative impact on their business, financial position and results of
      operations.**





PNMR,
      PNM
      and TNMP are subject to comprehensive regulation by several federal, state
      and
      local regulatory agencies, which significantly influences their operating
      environment and may affect their ability to recover costs from utility
      customers. In particular, the NMPRC, the PUCT, the FERC, the NRC, the EPA,
      ERCOT, the NMED and the TCEQ regulate many aspects of their utility operations,
      including siting and construction of facilities, conditions of service, the
      issuance of securities, and the rates that the regulated entities can charge
      customers. PNMR, PNM and TNMP are required to have numerous permits, approvals
      and certificates from these agencies to operate their business. The rates that
      PNM and TNMP are allowed to charge for their retail services significantly
      influence PNMR’s and those subsidiaries’ business, financial position, results
      of operations and liquidity. Due to pending federal regulatory reforms, the
      public utility industry continues to undergo change.





The
      Energy Policy Act of 2005 was enacted into law in August 2005, effective in
      February 2006. The legislation covers many areas, including the items set forth
      in Note 17 in the Notes to the Consolidated Financial Statements and elsewhere
      in this report. Implementation of various portions of the law requires the
      issuance of rules by the FERC. The FERC has adopted final rules implementing
      various provisions of the Energy Policy Act including rules pertaining to repeal
      of PUHCA of 1935 and implementation of PUHCA of 2005, the FERC’s expanded
      mergers and acquisitions approval authority and prohibition of energy market
      manipulation. FERC has also issued a number of other proposed rules that are
      pending, including rules pertaining to preventing undue discrimination in
      transmission services and electric reliability standards. PNMR will continue
      to
      monitor, and participate in as appropriate, the FERC and other proceedings
      involving implementation of the Energy Policy Act, in order to assess the
      implications of the new law and rules on its operations.





PNMR
      and
      its subsidiaries are unable to predict the impact on their business and
      operating results from the future regulatory activities of any agency that
      regulates them or from the implementation of the Energy Policy Act of 2005.
      Changes in regulations or the imposition of additional regulations may require
      PNMR and its regulated subsidiaries to incur additional expenses or change
      business operations, and therefore may have an adverse impact on PNMR’s and
      those subsidiaries’ results of operations.





A-16


**PNM's
      retail electric rate reduction and retail electric rate freeze, and the New
      Mexico settlement relating to the TNP acquisition, could adversely affect its
      profit margin if it does not control costs.**





Pursuant
      to an electric retail rate freeze stipulation, PNM decreased its retail electric
      rates by 6.5% as follows:




·
            a
                4% reduction effective September 1,
                2003,


·
            an
                additional 2.5% reduction effective September 1, 2005,
                and


·
            maintain
                these reduced retail electric rates through December 31,
                2007.




The
        TNP
        acquisition settlement in New Mexico established how synergy savings would
        be
        allocated among PNM’s gas and electric customers. The settlement provides that:





·
            PNM’s
                413,000 electric customers will receive rate credits totaling $4.6
                million
                or nearly $1.84 million annually over a 30-month period beginning
                January
                2008.


·
            PNM’s
                471,000 gas customers will receive $4.3 million in rate credits over
                five
                years, or $860,000 annually, beginning June 6, 2005.





PNM's
      costs, however, are not frozen. Thus, PNM's ability to maintain its profit
      margins depends upon increased demand for electricity and PNM's efforts to
      control costs incurred in supplying that electricity, including, in particular,
      its coal costs.





PNM
      does
      not have the benefit of a fuel adjustment clause for its retail electric
      operations that would allow it to recover increased fuel and purchased power
      costs from customers. Therefore, to the extent that fuel and power prices
      increase, it is exposed to changes in fuel and power prices to the extent fuel
      for its electric generating facilities and power must be purchased on the open
      market in order for it to serve its retail electric customers. If PNM cannot
      control other operating expenses, the retail electric rate freeze may decrease
      PNM's profit margin.  The retail electric rate freeze will also affect
      PNM's ability to earn a return or recover from its customers costs associated
      with investments in generation, transmission and distribution facilities since
      it will not be able to increase retail electric rates to recover those costs
      until at least after the end of the rate freeze.





PNMR
      and
      PNM are not able to predict what rate treatment PNM will receive following
      the
      expiration of the retail electric rate freeze in New Mexico. Some of the factors
      that influence rates are largely outside their control. In response to
      competitive, economic, political, legislative and/or regulatory pressures,
      PNM
      may have to agree to further rate freezes, rate refunds or rate reductions,
      any
      or all of which could have a significant adverse effect on PNMR’s and PNM’s
      business, financial position, results of operations and liquidity.





**The
      impact from the TNP acquisition settlements could adversely affect TNMP’s profit
      margin if TNMP does not control costs.**





The
      TNP
      acquisition settlements for TNMP in Texas and New Mexico provide for the
      following:




·
            a
                two-year electric rate freeze that includes a $13.0 million annual
                rate
                reduction in TNMP's retail delivery rates effective May 1,
                2005,




·
            a
                $6.0 million synergy savings credit (whether or not these savings
                are
                actually achieved) amortized over 24 months effective after the closing
                of
                the transaction,




·
            a
                three-phase rate reduction totaling 15%, beginning January 2006 and
                ending
                December 2010, to TNMP’s electric customers in southern New Mexico; the
                rate reduction, which includes TNMP’s annual synergy-savings allocation,
                will lower TNMP electric rates by $9.6 million in the first year,
                and




·
            maintain
                PNM as the power supplier for TNMP’s New Mexico needs through
                2010.




A-17


In
      addition, as part of the New Mexico settlement relating to the TNP acquisition,
      TNMP's current fuel and purchased power adjustment clauses will be eliminated
      no
      later than March 31, 2006. Also, the New Mexico settlement requires the
      integration of TNMP’s New Mexico assets into PNM effective January 1, 2007. The
      companies, however, will maintain separate rates, at a minimum,  through
      2010. ****





PNMR
      and
      TNMP are not able to predict what rate treatment TNMP will receive following
      the
      expiration of the retail electric rate provisions in New Mexico. Some of the
      factors that influence rates are largely outside their control. In response
      to
      competitive, economic, political, legislative and/or regulatory pressures,
      TNMP
      may have to agree to further rate freezes, rate refunds or rate reductions,
      any
      or all of which could have a significant adverse effect on PNMR’s and TNMP’s
      business, financial position, results of operations and liquidity.





**The
      ability of First Choice to attract and retain customers and its ability to
      mitigate the fluctuation in costs of energy supply could have a significant
      adverse effect on PNMR’s business, financial position, results of operations and
      liquidity.**





As
      a
      result of the acquisition of TNP, PNMR is exposed to competition in the
      unregulated Texas retail electricity market through First Choice, which serves
      customers at price-to-beat rates and 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. The ability of First Choice to compete
      successfully in the Texas market could have a significant effect on PNMR’s
      business, financial position, results of operations and liquidity.





**There
      are inherent risks in the operation of nuclear facilities, such as
      environmental, health and financial risks and the risk of terrorist
      attack.**


PNM
        has a
        10.2% undivided interest in PVNGS, with portions of its interests in Units
        1 and
        2 held under leases. PVNGS is subject to environmental, health and financial
        risks such as the ability to dispose of spent nuclear fuel, the ability to
        maintain adequate reserves for decommissioning, potential liabilities arising
        out of the operation of these facilities and the costs of securing the
        facilities against possible terrorist attacks and unscheduled outages due
        to
        equipment and other problems.  PNM maintains nuclear decommissioning trust
        funds and external insurance coverage to minimize its financial exposure
        to some
        of these risks; however, it is possible that damages could exceed the amount
        of
        insurance coverage. Although the decommissioning trust funds are designed
        to
        provide adequate funds for decommissioning at the end of the expected life
        of
        the PVNGS units, there is the risk of insufficient decommissioning trust
        funds
        in the event of early decommissioning of the units.
  The
        NRC
        has broad authority under federal law to impose licensing and safety-related
        requirements for the operation of nuclear generation facilities. In the event
        of
        non-compliance, the NRC has the authority to impose fines or shut down a
        unit,
        or both, depending upon its assessment of the severity of the situation,
        until
        compliance is achieved. In addition, if a serious nuclear incident were to
        occur
        at PVNGS, it could materially and adversely affect PNM’s and PNMR’s business,
        financial position, results of operations and liquidity. A major incident
        at a
        nuclear facility anywhere in the world could cause the NRC to limit or prohibit
        the operation or licensing of any domestic nuclear unit.





**PNMR’s
      and its electric subsidiaries’ financial performance may be adversely affected
      if their power plants and transmission and distribution system are not
      successfully operated.**


*General*
  PNMR’s
        and its electric subsidiaries’ financial performance depends on the successful
        operation of their generation, transmission and distribution assets. Unscheduled
        or longer than expected maintenance outages, other performance problems with
        the
        electric generation assets, severe weather conditions, accidents and other
        catastrophic events, disruptions in the delivery of fuel and other factors
        could
        reduce its excess generation capacity and therefore limit the electric
        subsidiaries’ ability to opportunistically sell excess power in the wholesale
        market. Diminished generation capacity could also result in the aggregate
        net
        open forward electric sales position being larger than forecasted generation
        capacity. If this were to occur, purchases of electricity in the wholesale
        market would be required under contracts priced at the time of execution
        or, if
        in the spot market, at the then-current market price. There can be no assurance
        that sufficient electricity would be available at reasonable prices, or at
        all,
        if such a




A-18


situation
      were to occur. Failures of transmission or distribution facilities may also
      cause interruptions in the services the electric subsidiaries provide. 
These potential generation, distribution and transmission problems, and any
      potentially related service interruptions, could result in lost revenues and
      additional costs.





*PVNGS*





During
      2005, PVNGS had the lowest capacity factor (measured against maximum dependable
      capacity) that the plant has had since 1994. The equivalent availability for
      PVNGS was 76.0% for 2005. This reflects bottom quartile performance relative
      to
      the 103 operating reactors in the United States. There were nine unscheduled
      outages during 2005 that had a variety of causes. In 2004, the NRC determined
      that there had been a safety concern at PVNGS related to the safety injection
      systems for the three PVNGS units. This led to a "yellow" finding and a $50,000
      civil penalty under the NRC’s reactor oversight process. A "yellow" finding
      places a unit in the "degraded safety cornerstone" column of the NRC’s
      performance matrix, which results in an enhanced NRC inspection regimen. During
      2005, the NRC completed its enhanced inspection. The "yellow" finding remains
      unresolved.





APS
      has
      encountered tube cracking in the steam generators and has taken, and will
      continue to take, remedial actions that it believes have slowed the rate of
      tube
      degradation. The PVNGS Unit 2 steam generators were replaced in 2003, and the
      replacement of PVNGS Unit 1 steam generators was completed in December 2005.
      Installation of the PVNGS Unit 3 steam generators should be completed by
      December 2007.





APS
      has
      been operating PVNGS Unit 1 at reduced power levels since December 25, 2005
      due
      to a vibration in the PVNGS Unit 1 shutdown cooling lines. As a result, PNM
      is
      receiving approximately 24 MW of power from PVNGS Unit 1 based on its 10.2%
      undivided interest in PVNGS.





Implementation
      of a potential solution preliminarily scheduled by APS for February 2006 was
      canceled after comprehensive analysis concluded that the desired improvement
      likely would not have been achieved. APS had informed PNM that it was in the
      process of formulating other potential remedies to address the issue and that
      it
      was scheduling another attempt to remedy this issue sometime in April 2006.
      APS
      has more recently informed PNM that the preferred solution will require
      Unit 1 to undergo an outage of approximately five weeks in order to effect
      the
      necessary modifications to Unit 1 and that it plans to begin this outage in
      the
      June 2006 timeframe. In addition, an outage of approximately one week for
      preparatory work will begin in mid-March 2006. This preferred solution was
      initially planned for installation in the spring of 2007.





The
      operation of PVNGS not only affects PNM’s ability to make off-system sales, but
      can also cause PNM to purchase power to serve its retail electric customers.
      Based on current forward market energy prices, PNM estimates that operation
      of
      PVNGS Unit 1 at the reduced power level could result in a reduction in
      consolidated gross margin, or operating revenues minus cost of energy sold,
      of
      $3.0 million to $4.0 million per month before income taxes. However, PNM is
      taking steps to mitigate the impact on consolidated gross margin while PVNGS
      Unit 1 operates at the reduced power level.





The
      financial performance of PNMR and PNM may be adversely affected if PVNGS Unit
      1
      cannot be operated at a satisfactory level or if the NRC imposes restrictions
      on
      operation of the plant or any of the three units at PVNGS.





**The
      operations of PNMR and its operating subsidiaries are subject to risks beyond
      their control that may reduce their revenues.**





The
      revenues of PNMR and its operating subsidiaries are affected by the demand
      for
      electricity and natural gas.  That demand can vary greatly based
      upon:




·
            weather
                conditions, including hurricanes, seasonality and temperature
                extremes,




·
            fluctuations
                in economic activity and growth in PNMR’s service area and the western
                region of the United States,




·
            the
                extent of additional energy available from current or new competitors,
                and




·
            the
                ability of First Choice to attract and retain
                customers.





A-19


Weather
      conditions will impact the revenues that PNMR and its operating subsidiaries
      obtain from electric retail and wholesale sales.  Temperature extremes,
      especially for prolonged periods, can dramatically increase the demand for
      electricity, as opposed to the effect of more moderate temperatures. 
Temperature extremes inside the subsidiary’s service territory reduce the amount
      of power available to sell on the wholesale market.





Drought
      conditions in New Mexico generally, and especially in the Four Corners region,
      in which SJGS and the Four Corners Generating Station are located, may affect
      the water supply for PNM’s generating plants.  If adequate precipitation is
      not received in the watershed that supplies the Four Corners region, PNM may
      have to decrease generation at these plants, which would reduce PNM’s ability to
      sell excess power on the wholesale market and reduce its revenues. If the
      drought conditions continue or regulators or legislators take action to limit
      PNM’s supply of water, PNM’s and PNMR’s business may be adversely impacted.
      Although PNM has been able to maintain adequate access to water through
      supplemental contracts and voluntary shortage sharing agreements with tribes
      and
      other water users in the San Juan Basin, PNM cannot be certain that it will
      be
      able to do so in the future.





**The
      inability to raise capital could limit PNMR’s ability to execute its growth
      strategy and finance its capital requirements, which could adversely affect
      PNMR’s business, financial position, results of operations and
      liquidity.**





PNMR
      and
      its operating subsidiaries rely on access to both short-term money markets
      and
      longer-term capital markets as a source of liquidity for any capital
      requirements not satisfied by the cash flow from operations, which could include
      capital requirements for energy infrastructure investments and funding new
      projects. If PNMR and its operating subsidiaries are not able to access capital
      at competitive rates or at all, PNMR’s ability to implement its growth strategy
      and its ability to finance capital requirements, if needed, will be limited.
      Market disruptions or any downgrade of PNMR’s or its operating subsidiaries’
credit rating may increase the cost of borrowing or adversely affect their
      ability to raise capital through the issuance of securities or other borrowing
      arrangements, which could have a material adverse effect on their business,
      financial position, results of operations and liquidity. These disruptions
      could
      include:




·
            an
                economic downturn,




·
            changes
                in capital market conditions
                generally,




·
            the
                bankruptcy of an unrelated energy
                company,




·
            increased
                market prices for electricity and
                gas,




·
            terrorist
                attacks or threatened attacks on facilities of PNMR’s operating
                subsidiaries or those of unrelated energy companies,
                and




·
            deterioration
                in the overall health of the utility
                industry.





A
      significant reduction in the credit ratings of PNMR or its operating
      subsidiaries could materially and adversely affect their business, financial
      position, results of operations and liquidity.





PNMR,
      PNM
      and TNMP cannot be sure that any of their current ratings will remain in effect
      for any given period of time or that a rating will not be lowered or withdrawn
      entirely by a rating agency. Any downgrade:




·
            could
                increase borrowing costs, which would diminish financial
                results,




·
            could
                require payment of a higher interest rate in future financings and
                the
                potential pool of investors and funding sources could
                decrease,




·
            could
                increase borrowing costs under certain of existing credit
                facilities,




·
            could
                also require the provision of additional support in the form of letters
                of
                credit or cash or other collateral to various counterparties,




·
            could
                limit access to or increase the cost of access to the commercial
                paper
                market, and




·
            below
                investment grade credit ratings would also require approvals from
                the
                NMPRC for new wholesale plant projects and for continuing to participate
                in wholesale plant projects of more than a certain dollar value and
                under
                certain conditions.




A-20


On
      January 20, 2006, S&P revised PNMR’s outlook from stable to negative and
      downgraded the commercial paper of PNMR and PNM from A-2 to A-3, citing concerns
      about reduced plant availability at PVNGS, the higher cost of replacement power
      due to high natural gas prices and the lack of a fuel adjustment clause that
      would permit PNM to pass these costs to customers. The ratings action by S&P
      has increased short-term borrowing costs for PNMR and PNM and could increase
      long-term borrowing costs for PNMR and PNM.





The
      ratings from rating agencies reflect only the views of such rating agencies
      and
      are not recommendations to buy, to sell or to hold our securities. Each rating
      should be evaluated independently of any other rating. Any downgrade or
      withdrawal of PNMR’s, PNM’s or TNMP’s current ratings may have an adverse effect
      on the market price of their outstanding debt.





**Costs
      of environmental compliance, liabilities and litigation could exceed estimates
      by PNMR’s and its operating subsidiaries, which could adversely affect their
      business, financial position, results of operations and liquidity.**





Compliance
      with federal, state and local environmental laws and regulations may result
      in
      increased capital, operating and other costs, including remediation and
      containment expenses and monitoring obligations. PNMR, PNM and TNMP cannot
      predict how they would be affected if existing environmental laws and
      regulations were revised, or if new environmental laws and regulations seeking
      to protect the environment were adopted, but any such changes could increase
      their financing requirements or otherwise adversely affect their business,
      financial position, results of operations and liquidity, unless increased
      environmental costs are recovered in customer rates. Revised or additional
      laws
      and regulations could also result in additional operating restrictions on their
      facilities or increased compliance costs that may not be fully recoverable
      in
      rates, thereby reducing net income. For example, any future changes in the
      interpretation of the Clean Air Act’s new source review provisions could
      potentially increase operating and maintenance costs substantially. Similarly,
      in March 2005, the EPA adopted the Clear Air Act Mercury Rule, which is intended
      to reduce mercury emissions from coal-fired generation plants. PNMR and PNM
      cannot be certain how this rule will affect them.





In
      addition, PNM or TNMP may be designated as a responsible party for environmental
      clean up at a site identified by a regulatory body. PNMR, PNM and TNMP cannot
      predict with certainty the amount and timing of all future expenditures related
      to environmental matters because of the difficulty of estimating clean-up and
      compliance costs, and the possibility that changes will be made to the current
      environmental laws and regulations. There is also uncertainty in quantifying
      liabilities under environmental laws that impose joint and several liability
      on
      all potentially responsible parties. Failure to comply with environmental laws
      and regulations, even if caused by factors beyond PNM’s or TNMP’s control, may
      result in the assessment of civil or criminal penalties and fines.





**PNMR’s
      business, results of operations and financial position may be adversely affected
      if PNMR and its operating subsidiaries do not successfully compete for wholesale
      customers and generation plant acquisition opportunities. Wholesale plants
      will
      be exposed to price risk to the extent they must compete for the sale of energy
      and capacity.**





As
      a
      result of the changing regulatory environment and the relatively low barriers
      to
      entry (which include, in addition to open access transmission service,
      relatively low construction costs for new generating facilities), PNMR expects
      competition to steadily increase. This increased competition could affect load
      forecasts, acquisition opportunities and wholesale energy sales and related
      revenues. Since PNM’s sales in the wholesale electric market accounted for
      approximately 58% of total MWh sales in 2005, the impact of these changes on
      PNMR’s and PNM’s financial results could be material. The effect on results of
      operations and financial position could vary depending on the extent to
      which:




·
            PNMR
                and its operating subsidiaries are able to acquire additional generation
                to compete in the wholesale market,




·
            new
                opportunities are created for the expansion of wholesale load,
                and




·
            current
                wholesale customers elect to purchase from other suppliers after
                existing
                contracts expire.





A-21


As
      of
      December 31, 2005, PNM’s long-term contracts to supply power ranged from 1 to
      14.5 year terms with an average term of 5.3 years. PNM’s ability to renew these
      contracts at terms comparable to those currently in place is dependent upon
      prevailing market conditions at the time of negotiations.




To
      the
      extent electric capacity generated by wholesale plants is not under contract
      to
      be sold, the business, results of operations and financial position of PNMR
      and
      PNM will generally depend on the prices that can be obtained for energy and
      capacity in New Mexico, in Texas (if the proposed acquisition of Twin Oaks
      is
      completed) and in adjacent markets.





**PNMR
      and its operating subsidiaries may not be able to mitigate fuel and wholesale
      electricity pricing risks, which could result in unanticipated liabilities
      or
      increased volatility in earnings.**





The
      business and operations of PNMR and its operating subsidiaries are subject
      to
      changes in purchased power prices and fuel costs that may cause increases in
      the
      amounts that must be paid for power supplies on the wholesale market and the
      cost of producing power in owned generation plants. Prices for electricity,
      fuel
      and natural gas may fluctuate substantially over relatively short periods of
      time and expose PNMR and its operating subsidiaries to significant commodity
      price risks.





Among
      the
      factors that could affect market prices for electricity and fuel
      are:




·
            prevailing
                market prices for coal, oil, natural gas and other fuels used in
                the
                generation plants of PNMR and its operating subsidiaries, including
                associated transportation costs, and supplies of such
                commodities,




·
            prevailing
                market conditions in the general wholesale electricity
                market,




·
            liquidity
                in the commodity markets,




·
            the
                rate of growth in electricity as a result of population changes,
                regional
                economic conditions and the implementation of conservation
                programs,




·
            weather
                conditions impacting demand for electricity or availability of
                hydroelectric power or fuel
                supplies,




·
            changes
                in the regulatory framework for the commodities markets that PNMR
                and its
                operating subsidiaries rely on for purchased power and
                fuel,




·
            the
                actions of external parties, such as the FERC or independent system
                operators, that may impose price limitations and other mechanisms
                to
                address some of the volatility in the United States’ western energy
                markets,




·
            changes
                in federal and state energy and environmental laws and
                regulations,




·
            union
                and labor relations, and




·
            natural
                disasters, wars, embargoes and other catastrophic events.





PNMR
      and
      its operating subsidiaries rely on derivatives such as forward contracts,
      futures contracts, options and swaps to manage these risks. They attempt to
      manage their exposure from these activities through enforcement of established
      risk limits and risk management procedures. PNMR and its operating subsidiaries
      cannot be certain that these strategies will be successful in managing pricing
      risk, or that they will not result in net liabilities as a result of future
      volatility in these markets.





**Impairments
      of tangible long-lived assets of PNMR, PNM and TNMP could adversely affect
      their
      business, financial position, liquidity and results of operations.**





PNMR,
      PNM
      and TNMP evaluate their tangible long-lived assets for impairment whenever
      indicators of impairment exist pursuant to SFAS No. 144 “ *Accounting
      for the Impairment or Disposal of Long-Lived Assets* ”
(“SFAS
      144”). These potential impairment triggers could include changing customer
      purchase commitments and market share; fluctuating market prices resulting
      from
      weather patterns; changing fuel costs; industry deregulation and other economic
      and market conditions and trends. Except as described below, PNMR, PNM and
      TNMP
      determined that no triggering events occurred during the period for their
      tangible long-lived assets.





A-22


PNM
      determined that as of December 31, 2005, its D-11 steam turbine, which is in
      a
      temporary storage facility in southern New Mexico, was impaired in the amount
      of
      approximately $15.0 million. The D-11 steam turbine was impaired since it is
      no
      longer being utilized in the Afton generation facility and has been designated
      as available for sale.





PNM
      will
      continue to analyze all tangible long-lived assets for impairment on an on-going
      basis in accordance with SFAS 144.





**Impairments
      of goodwill and intangible assets of PNMR and its subsidiaries could adversely
      affect their business, financial position, liquidity and results of operations.**





As
      a
      result of the acquisition of TNP in 2005, PNMR recorded $499.2  million
      of goodwill composed of $456.1 million of goodwill at TNMP and $43.1 million
      of
      goodwill at FCP. As required by SFAS 142, “ *Goodwill
      and Other Intangible Assets* ”
(“SFAS
      142”), PNMR and TNMP will evaluate goodwill for impairment annually and between
      annual tests whenever indicators of impairment exist. Impairment of goodwill
      exists when the carrying amount of goodwill exceeds its implied fair value.




PNMR
      also
      recorded $79.3 million of other intangible assets as a result of its acquisition
      of TNP. Of the $79.3 million of acquired intangible assets, $68.8 million was
      assigned to the trade name “First Choice.” The trade name has an indefinite
      useful life and therefore, no amortization will be recognized until its useful
      life is determined to be no longer indefinite. As required by SFAS 142, PNMR
      evaluates the First Choice trade name for impairment annually and between annual
      tests whenever indicators of impairment exist. PNMR evaluates the useful life
      of
      the First Choice trade name each reporting period as required by SFAS 142 to
      determine whether events or circumstances continue to support an indefinite
      useful life.





The
      remaining $10.5 million of acquired intangible assets was assigned to the First
      Choice customer list. The useful life of the customer list is estimated to
      be
      eight years and is being amortized on a straight-line basis over eight years.
      As
      required by SFAS 144, PNMR evaluates the First Choice customer list for
      impairment whenever indicators of impairment exist. PNMR evaluates the remaining
      useful life of the First Choice customer list each reporting period as required
      by SFAS 144 to determine whether events or circumstances continue to support
      the
      remaining amortization period.





Due
      to
      the significant amounts of goodwill and intangible assets recorded by PNMR
      and
      its subsidiaries, the impairment of goodwill or intangible assets could
      adversely affect their business, financial position, liquidity and results
      of
      operations.





**Actual
      results could differ from estimates used to prepare PNMR’s, PNM’s and TNMP’s
      financial statements.**





In
      preparing the financial statements in accordance with GAAP, management must
      often make estimates and assumptions that affect the reported amounts of assets,
      liabilities, revenues, expenses and related disclosures at the date of the
      financial statements and during the reporting period. Some of those judgments
      can be subjective and complex, and actual results could differ from those
      estimates. For more information about these estimates and assumptions, see
      Item
      7. “Management's Discussion and Analysis of Financial Condition and Results of
      Operation - Critical Accounting Policies” and Footnote 1 in the Notes to
      Consolidated Financial Statements.





**Provisions
      of PNMR’s organizational documents, as well as several other statutory and
      regulatory factors, will limit another party’s ability to acquire PNMR and could
      deprive PNMR’s shareholders of the opportunity to gain a takeover premium for
      shares of PNMR’s common stock.**





PNMR’s
      restated articles of incorporation and by-laws include a number of provisions
      that may have the effect of discouraging persons from acquiring large blocks
      of
      PNMR’s common stock or delaying or preventing a change in control of PNMR. The
      material provisions that may have such an effect include:




·
            authorization
                for the PNMR Board to issue PNMR’s preferred stock in series and to fix
                rights and preferences of the series (including, among other things,
                whether, and to what extent, the shares of any series will have voting
                rights, subject to certain limitations, and the extent of the preferences
                of the shares of any series with respect to dividends and other
                matters),




A-23


·
            advance
                notice procedures with respect to any proposal other than those adopted
                or
                recommended by PNMR’s Board, and




·
            provisions
                specifying that only a majority of the Board, the chairman of the
                Board,
                the president or holders of not less than one-tenth of all of PNMR's
                shares entitled to vote may call a special meeting of
                stockholders.




Under
      the
      New Mexico Public Utility Act, NMPRC approval is required for certain
      transactions that may result in PNMR’s change in control or exercise of control.
      Certain acquisitions of PNMR’s outstanding voting securities would also require
      FERC approval under the FERC's authority resulting from the Energy Policy Act
      and the repeal of PUHCA. See Note 17 in the Notes to Consolidated Financial
      Statements for further discussion.





**ITEM
      1B.**  **UNRESOLVED
      STAFF COMMENTS**




None.








A-24




**ITEM
      2.**  **PROPERTIES**





PNMR





The
      significant properties owned by PNMR include those owned by PNM and TNMP and
      are
      disclosed below.





PNM





**Electric**





PNM’s
      ownership and capacity in electric generating stations in commercial service
      as
      of December 31, 2005 follow:




**Total
                  Net****Generation****Capacity****Type**
              
              **Name**
              
              **Location**
              
              **(MW)**
 
 Coal
              
              SJGS
                  (a)
              
              Waterflow,
                  New Mexico
              
              765Coal
              
              Four
                  Corners (b)
              
              Fruitland,
                  New Mexico
              
              192Gas/Oil
              
              Reeves
                  Station
              
              Albuquerque,
                  New Mexico
              
              154Gas/Oil
              
              Las
                  Vegas (c)
              
              Las
                  Vegas, New Mexico
              
              18Gas/Oil
              
              Afton
                  (d)
              
              La
                  Mesa, New Mexico
              
              141Gas
              
              Lordsburg
                  (e)
              
              Lordsburg,
                  New Mexico
              
              72Nuclear
              
              PVNGS
                  (f)
              
              Wintersburg,
                  Arizona
              
              402
              (g)1,744
 (a)
              SJGS
                  Units 1, 2 and 3 are 50% owned by PNM; SJGS Unit 4 is 38.5% owned
                  by
                  PNM. (b)
              Four
                  Corners Units 4 and 5 are 13% owned by
                  PNM. (c)
              PNM
                  has filed with the NMPRC for approval to close the Las Vegas Generating
                  Station in 2006. (d)
              Subject
                  to NMPRC approval, PNM plans to convert Afton to a combined cycle
                  plant
                  and bring Afton into retail rates, with 50% of Afton's capacity
                  designated
                  to serve PNM's customers and the other 50% designated to serve
                  TNMP's New
                  Mexico customers. (e)
              PNM’s
                  Lordsburg plant was built to serve wholesale customers and other
                  sales
                  rather than New Mexico retail customers and, therefore, is not
                  currently
                  included in the retail rates. However, it is possible that this
                  plant may
                  be needed in the future to serve the growing retail
                  load. (f)
              PNM
                  is entitled to 10.2% of the power and energy generated by PVNGS.
                  PNM has a
                  10.2% ownership interest in Unit 3 and has leasehold interests
                  in
                  approximately 7.9% of Units 1 and 2 and an ownership interest in
                  approximately 2.3% of Units 1 and 2. (g)
              For
                  load and resource purposes, PNM has notified the NMPRC that the
                  maximum
                  dependable capacity rating for PVNGS is 395
                  MW. **Fossil-Fueled
          Plants**





SJGS
      is
      located in northwestern New Mexico, and consists of four units operated by
      PNM.
      Units 1, 2, 3 and 4 at SJGS have net rated capacities of 327 MW, 316 MW, 497
      MW
      and 507 MW, respectively. SJGS Units 1 and 2 are owned on a 50% shared basis
      with Tucson. SJGS Unit 3 is owned 50% by PNM, 41.8% by SCPPA and 8.2% by
      Tri-State. SJGS Unit 4 is owned 38.457% by PNM, 28.8% by M - S - R
      Public
      Power Agency, 10.04% by Anaheim, 8.475% by Farmington, 7.2% by Los Alamos and
      7.028% by UAMPS.





PNM
      also
      owns 192 MW of net rated capacity derived from its 13% interest in Units 4
      and 5
      of Four Corners located in northwestern New Mexico on land leased from the
      Navajo Nation and adjacent to available coal deposits. Units 4 and 5 at Four
      Corners are jointly owned with SCE, APS, Salt River Project, Tucson and EPE
      and
      are operated by APS.





A-25


Four
      Corners and a portion of the facilities adjacent to SJGS are located on land
      held under easements from the United States and also under leases from the
      Navajo Nation. The enforcement of these leases could require Congressional
      consent. PNM does not deem the risk that is associated with the enforcement
      of
      these easements and leases to be material. However, PNM is dependent in some
      measure upon the willingness and ability of the Navajo Nation to protect these
      leased properties.





PNM
      owns
      154 MW of generation capacity at Reeves Station in Albuquerque and 18 MW of
      generation capacity at Las Vegas Station in Las Vegas, New Mexico. PNM also
      owns
      Afton, a 141 MW gas or oil fired combustion turbine plant in La Mesa, New
      Mexico, and Lordsburg, a 72 MW gas fired combustion turbine generator in
      Lordsburg, New Mexico. In addition, PNM has 132 MW of generation capacity in
      Albuquerque under an operating lease. These power sources are used primarily
      for
      peaking and transmission support. During times of excess capacity, these
      resources have been used to augment PNM’s wholesale power trading activities.
      PNM owns a one-third interest in a partially constructed, combined-cycle power
      plant near Deming, New Mexico, called Luna. The facility is expected to be
      completed no later than the second quarter of 2006 and is designed to be
      capable of producing 570 MW, of which PNM will be entitled to 190 MW. PNM plans
      to convert Afton to a combined cycle plant and bring Afton into retail rates,
      with 50% of Afton's capacity designated to serve PNM's customers and 50%
      designated to serve TNMP's New Mexico customers. (See “Sources of Power” in Item
      1. “Business.”)





**Nuclear
      Plant**





*PNM’s
      Interest in PVNGS*





PNM
      is
      participating in the three units of PVNGS, also known as the Arizona Nuclear
      Power Project, with APS (the operating agent), Salt River Project, EPE, SCE,
      SCPPA and the Department of Water and Power of the City of Los Angeles. PNM
      has
      a 10.2% undivided interest in PVNGS, with portions of its interests in Units
      1
      and 2 held under leases.





*Other
      PVNGS Matters*





See
      Note
      16 in the Notes to Consolidated Financial Statements for information on other
      PVNGS matters.





**Transmission
      and Distribution**





As
      of
      December 31, 2005, PNM owned, jointly owned or leased, 2,897 circuit miles
      of
      electric transmission lines, 4,077 miles of distribution overhead lines, 4,504
      cable miles of underground distribution lines (excluding street lighting) and
      237 substations.





**Gas**





As
      of
      December 31, 2005, the natural gas properties consisted primarily of natural
      gas
      storage, transmission and distribution systems. Provisions for storage made
      by
      PNM include ownership and operation of an underground storage facility located
      near Albuquerque. The transmission systems consisted of 1,578 miles of pipe
      and
      compression facilities. The distribution systems consisted of 12,205 miles
      of
      pipe.





**Other
      Information**





PNM’s
      electric and gas transmission and distribution lines are generally located
      within easements and rights-of-way on public, private and Native American lands.
      PNM leases interests in PVNGS Units 1 and 2 and related property, EIP and
      associated equipment, data processing, communication, office and other
      equipment, office space, joint use utility poles, vehicles and real estate.
      PNM
      also owns and leases service and office facilities in Albuquerque and in other
      areas throughout its service territory.





TNMP





TNMP’s
      facilities are located within its Texas and New Mexico service areas. TNMP’s
      Texas transmission and distribution facilities are located in three
      non-contiguous areas. One area 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 area includes counties along the Texas Gulf Coast between
      Houston and Galveston, and the third area includes portions of far west Texas
      between Midland




A-26


and
      El
      Paso. TNMP’s New Mexico transmission and distribution facilities are located in
      southwest and south central New Mexico, including the cities of Alamogordo,
      Ruidoso, Sliver City, Lordsburg and surrounding communities. TNMP also owns
      and
      leases service and office facilities in other areas throughout its service
      territory.





**ITEM
      3.**  **LEGAL
      PROCEEDINGS**





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





·
            Tax
                Refund Litigation


·
            PVNGS
                Water Supply Litigation


·
            San
                Juan River Adjudication


·
            Navajo
                Nation Environmental Issues


·
            Citizen
                Suit Under the Clean Air Act


·
            Excess
                Emissions Reports


·
            Santa
                Fe Generating Station


·
            Natural
                Gas Royalties Qui Tam Litigation


·
            Asbestos
                Cases


·
            SESCO
                Matter (for both PNM and TNMP)


·
            Archaeological
                Site Disturbance ·
            Legal
              Proceedings discussed under the caption "Western United States Wholesale
              Power Market" ·
            Wholesale
              Power Marketing Antitrust Suit ·
            TNMP
              True-Up Proceeding ·
            Power
              Resource Group Litigation







A-27





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





None.





**SUPPLEMENTAL
      ITEM - EXECUTIVE OFFICERS OF PNM RESOURCES, INC.**





All
      officers are elected annually by the Board of the PNMR. Executive officers,
      their ages as of February 26, 2006 and offices held with PNMR for the past
      five
      years, or other companies if less than five years with PNMR, are as
      follows:





**Name**
            **Age**
            **Office**
            **Initial
                Effective Date**J.
                E. Sterba
            50
            Chairman,
                President and Chief Executive Officer
            December
                2001Chairman,
                President and Chief Executive Officer, PNM
            October
                2000President
                and Chief Executive Officer, PNM
            June
                2000President,
                PNM
            March
                2000C.
                N. Eldred1
            52
            Senior
                Vice President and ChiefFinancial
                Officer
            January
                2006Vice
                President and Chief Financial Officer,Omaha
                Public Power District
            November
                1999A.
                A. Cobb
            58
            Senior
                Vice President and Chief Administrative Officer
            June
                2005Senior
                Vice President, Peoples Services andDevelopment
            December
                2001Senior
                Vice President, Peoples Services andDevelopment,
                PNM
            September
                2001Global
                Human Resources Officer, Clientlogic
            November
                1999P.
                T. Ortiz
            56
            Senior
                Vice President and General Counsel
            June
                2005Senior
                Vice President, General Counsel and Secretary
            December
                2001Senior
                Vice President, General Counsel andSecretary,
                PNM
            August
                1999W.J.
                Real
            57
            Senior
                Vice President, Public Policy (PNMR and PNM)
            July
                2002Executive
                Vice President, Power Productionand
                Marketing
            December
                2001Executive
                Vice President, Power Productionand
                Marketing, PNM
            January
                1999H.
                W. Smith2
            48
            Senior
                Vice President, Energy Resources (PNMR and PNM)
            March
                2004Vice
                President, Energy Supply, Trading andServices,
                TECO Energy, Inc.
            January
                2001W.D
                Hobbs3
            62
            Senior
                Vice President, Customer and Delivery Services
            June
                2005Senior
                Vice President and Chief OperationsOfficer,
                TNMP
            August
                2002Vice
                President, Transmission andDistribution
                Operations, TNMP
            June
                2002Vice
                President, Texas Transmission andDistribution
                Operations, TNMP
            October
                2000J.
                D. Shorter4
            40
            Senior
                Vice President
            April
                2005Managing
                Partner, Wolfrox Partners LLP
            August
                2004Senior
                Vice President, North AmericaCommercial
                Operations, TXU Corp.
            June
                2003Vice
                President and Director of Trading, TXU Corp.
            March
                1999T.
                G. Sategna
            52
            Vice
                President and Corporate Controller (PNMR and PNM)
            October
                2003Controller,
                Utility Operations (PNMR and PNM)
            August
                2002Controller,
                Electric and Gas
            December
                2001Controller,
                Electric and Gas Services, PNM
            May
                2000





A-28





1 C. N.
      Eldred was Chief Financial Officer at Omaha Public Power District prior to
      joining PNMR. Prior to that he was head of financing and capital markets for
      Southern Company. At Southern Company Mr. Eldred executed debt and equity
      financing strategies and managed rating agency and investment banking
      relationships associated with capital markets.





2 H.W.
      Smith had 25-years of experience in the utility industry prior to joining PNMR,
      which included executive-level experience in marketing and customer service,
      economic development, generation development and engineering.





3 W.D.
      Hobbs had more than 24 years of experience in engineering, power production,
      business development and utility operations prior to joining PNMR. He most
      recently served as Senior Vice President and Chief Operations Officer for
      TNMP.





4 J.
      D.
      Shorter had more than 16 years of experience in strategic planning, pricing
      and
      wholesale power marketing prior to joining PNMR, including extensive knowledge
      of the deregulated market in Texas.








A-29





**PART
      II**





**ITEM
      5.**  **MARKET
      FOR THE COMPANY’S COMMON EQUITY, RELATED**


**STOCKHOLDER MATTERS
      AND ISSUER PURCHASES OF EQUITY SECURITIES**




PNMR’s
        common stock is traded on the New York Stock Exchange. On May 18, 2004, PNMR’s
        Board approved a 3-for-2 stock split effective on June 11, 2004 for shareholders
        of record on June 1, 2004. All references to numbers of shares outstanding
        and
        per share amounts have been restated to reflect the stock
        split.





Ranges
      of
      sales prices of PNMR’s common stock, reported as composite transactions (Symbol:
      PNM), and dividends declared on the common stock for 2005 and 2004, by quarters,
      are as follows:





**Quarter
                Ended**
            
            
            **Range
                of**
              **Sales
                Prices**
            
            **Dividends****High**
            
            **Low**
            
            **Per
                Share****2005**December
                31
            $29.22
            
            $24.03
            
            $0.200September
                30
            $30.45
            
            $27.62
            
            $0.400June
                30
            $30.38
            
            $26.12
            
            $*-*March
                31
            $28.20
            
            $23.83
            
            $0.185Fiscal
                Year
            $30.45
            
            $23.83
            
            $0.785**2004**December
                31
            $26.11
            
            $22.57
            
            $0.185September
                30
            $22.75
            
            $20.09
            
            $0.160June
                30
            $20.87
            
            $18.70
            
            $0.160March
                31
            $21.20
            
            $18.77
            
            $0.160Fiscal
                Year
            $26.11
            
            $18.70
            
            $0.665





Dividends
      declared during the quarter ended September 30, 2005 include a $0.20 per share
      dividend declared on July 19, 2005 for the quarter ended June 30, 2005 and
      a
      $0.20 per share dividend declared on September 27, 2005 for the quarter ended
      September 30, 2005.





On
      July
      19, 2005, PNMR’s Board approved an 8.0% increase in the common stock dividend.
      The increase raised the quarterly dividend to $0.20 per share, for an indicated
      annual dividend of $0.80 per share. On February 14, 2006, the Board approved
      a
      10.0% increase in the Company's common stock dividend for an indicated annual
      rate of $0.88 per share. PNMR targets a payout ratio of 50% to 60% of
      consolidated earnings.





On
      February 28, 2006, there were 14,350 holders of record of the Company’s common
      stock.





See
      Part
      II. Item 7. “Management’s Discussion and Analysis of Results of Operation and
      Financial Condition - Liquidity and Capital Resources - Dividends,” for a
      discussion on the payment of future dividends.




See
      Part
      III. Item 12. “Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters.”








A-30




**Cumulative
      Preferred Stock**





PNMR





PNMR
      does
      not have any cumulative preferred stock outstanding.





PNM





PNM
      is
      not aware of any active trading market for its cumulative preferred stock.
      Quarterly cash dividends were paid on PNM’s outstanding cumulative preferred
      stock at the stated rates during 2005 and 2004.





**Sales
      of Unregistered Securities**




None
      not
      previously reported on a Quarterly Report on Form 10-Q or a Current Report
      on
      Form 8-K.




















A-31




**ITEM
      6.**  **SELECTED
      FINANCIAL DATA**





The
      selected financial data and comparative operating statistics should be read
      in
      conjunction with the Consolidated Financial Statements and Notes thereto and
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operation. All references to numbers of shares outstanding and per share amounts
      have been restated to reflect the 3-for-2 stock split that occurred on June
      11,
      2004. PNMR results include TNP results are included from the date of
      acquisition, June 6, 2005, in the table below.





**PNM
      RESOURCES, INC. AND SUBSIDIARIES**





**2005**
            
            **2004**
            
            **2003**
            
            **2002**
            
            **2001**(In
                thousands except per share amounts and ratios)**Total
                Operating Revenues**
            
            $
            2,076,810
            
            $
            1,604,792
            
            $
            1,455,653
            
            $
            1,118,694
            
            $
            2,254,178**Net
                Earnings Before Cumulative Effect of Changes****in
                Accounting Principles**
            
            $
            68,153
            
            $
            87,686
            
            $
            58,552
            
            $
            63,686
            
            $
            149,847**Net
                Earnings**
            
            $
            67,227
            
            $
            87,686
            
            $
            95,173
            
            $
            63,686
            
            $
            149,847**Net
                Earnings per Common Share**Basic
            
            $
            1.02
            
            $
            1.45
            
            $
            1.60
            
            $
            1.09
            
            $
            2.55Diluted
            
            $
            1.00
            
            $
            1.43
            
            $
            1.58
            
            $
            1.07
            
            $
            2.51**Cash
                Flow Data**Net
                cash flows provided from operating activities
            
            $
            210,451
            
            $
            235,142
            
            $
            225,915
            
            $
            97,359
            
            $
            327,346Net
                cash flows used in investing activities
            
            $
            (154,643
            )
            $
            (143,838
            )
            $
            (98,790
            )
            $
            (200,427
            )
            $
            (407,014
            )Net
                cash flows generated (used) by financing activities
            
            $
            (4,804
            )
            $
            (86,803
            )
            $
            (118,133
            )
            $
            78,362
            
            $
            385**Total
                Assets**
            
            $
            5,124,709
            
            $
            3,487,635
            
            $
            3,378,629
            
            $
            3,247,227
            
            $
            3,127,602**Long-Term
                Debt**
            
            $
            1,746,395
            
            $
            987,823
            
            $
            987,210
            
            $
            980,092
            
            $
            953,884**Common
                Stock Data**Market
                price per common share at year end
            
            $
            24.49
            
            $
            25.29
            
            $
            18.73
            
            $
            15.88
            
            $
            18.63Book
                value per common share at year end
            
            $
            19.51
            
            $
            18.20
            
            $
            18.07
            
            $
            16.60
            
            $
            17.25Average
                number of common shares outstanding
            
            
            65,928
            
            
            60,414
            
            
            59,620
            
            
            58,677
            
            
            58,677Dividends
                declared per common share
            
            $
            0.785
            
            $
            0.665
            
            $
            0.600
            
            $
            0.587
            
            $
            0.533Return
                on average common equity
            
            
            5.6
            %
            
            8.1
            %
            
            9.3
            %
            
            6.4
            %
            
            15.5
            %**Capitalization**Common
                stockholders’ equity
            
            
            42.3
            %
            
            52.4
            %
            
            51.9
            %
            
            49.5
            %
            
            50.8
            %Preferred
                stock without mandatory redemptionrequirements
            
            
            0.4
            
            
            0.6
            
            
            0.6
            
            
            0.7
            
            
            0.6Long-term
                debt
            
            
            57.3
            
            
            47.0
            
            
            47.5
            
            
            49.8
            
            
            48.6100.0
            %
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %










A-32





**PNM
                RESOURCES, INC. AND SUBSIDIARIES****COMPARATIVE
                OPERATING STATISTICS****2005**
            
            **2004**
            
            **2003**
            
            **2002**
            
            **2001****Regulated
                Operations****PNM
                Electric MWh Sales**Residential
            2,652,475
            
            2,509,449
            
            2,405,488
            
            2,298,542
            
            2,197,889Commercial
            3,526,133
            
            3,450,503
            
            3,379,147
            
            3,254,576
            
            3,213,208Industrial
            1,277,156
            
            1,283,769
            
            1,292,711
            
            1,612,723
            
            1,603,266Other
            256,202
            
            253,393
            
            247,255
            
            267,070
            
            240,934Total
                PNM Electric MWh Sales
            7,711,966
            
            7,497,114
            
            7,324,601
            
            7,432,911
            
            7,255,297**TNMP
                Electric MWh Sales ***Residential
            1,859,020
            
            -
            
            -
            
            -
            
            -General
                Services
            144,203
            
            -
            
            -
            
            -
            
            -Primary/Economy/Transmission
            1,311,208
            
            -
            
            -
            
            -
            
            -Secondary
            1,174,587
            
            -
            
            -
            
            -
            
            -Municipal/Lighting
            86,307
            
            -
            
            -
            
            -
            
            -Total
                TNMP MWh Sales
            4,575,325
            
            -
            
            -
            
            -
            
            -**PNM
                Gas Throughput - Decatherms**(In
                thousands):Residential
            28,119
            
            30,618
            
            27,416
            
            29,627
            
            27,848Commercial
            10,554
            
            11,639
            
            10,810
            
            12,009
            
            10,421Industrial
            369
            
            413
            
            485
            
            749
            
            3,920Transportation
            37,013
            
            43,208
            
            50,756
            
            44,889
            
            51,395Other
            9,780
            
            13,871
            
            5,510
            
            4,807
            
            4,355Total
                PNM Gas Throughput
            85,835
            
            99,749
            
            94,977
            
            92,081
            
            97,939**Unregulated
                Operations****PNM
                Wholesale MWh Sales**Long-term
                contracts
            2,516,907
            
            2,943,372
            
            2,469,707
            
            844,169
            
            1,463,031Short-term
                sales
            8,069,751
            
            9,057,172
            
            9,432,297
            
            8,605,985
            
            11,133,669Total
                PNM Wholesale MWh Sales
            10,586,658
            
            12,000,544
            
            11,902,004
            
            9,450,154
            
            12,596,700**First
                Choice MWh Sales ***Residential
            1,591,005
            
            -
            
            -
            
            -
            
            -Mass-market
            400,839
            
            -
            
            -
            
            -
            
            -Mid-market
            478,531
            
            -
            
            -
            
            -
            
            -Other
            29,780
            
            -
            
            -
            
            -
            
            -Total
                First Choice MWh Sales
            2,500,155
            
            -
            
            -
            
            -
            
            -





*
      TNMP
      and First Choice are reported from the date of acquisition, June 6,
      2005.




Under
      TECA, customers of TNMP Electric in Texas can choose First Choice or any other
      REP to provide energy. However, TNMP Electric delivers energy to customers
      within its service area regardless of the REP chosen. Therefore, TNMP Electric
      earns revenue for energy delivery and First Choice earns revenue on the usage
      of
      that energy by its customers. The MWh reported above for TNMP Electric and
      First
      Choice include approximately 1,644,675 MWh used by customers of TNMP Electric
      who have chosen First Choice as their REP.











A-33





**PNM
                RESOURCES, INC. AND SUBSIDIARIES****COMPARATIVE
                OPERATING STATISTICS****2005**
            
            **2004**
            
            **2003**
            
            **2002**
            
            **2001**(In
                thousands)**Regulated
                Operations****PNM
                Electric Revenues**Residential
            $
                216,890
            
            $
                206,950
            
            $
                203,710
            
            $
                197,174
            
            $ 
                187,600Commercial
            254,480
            
            251,092
            
            252,876
            
            247,800
            
            242,372Industrial
            61,146
            
            61,905
            
            64,549
            
            82,009
            
            82,752Transmission
            21,509
            
            18,327
            
            19,453
            
            23,857
            
            26,553Other
            19,951
            
            20,138
            
            19,876
            
            19,956
            
            19,949Total
                PNM Electric Revenues
            $
                573,976
            
            $
                558,412
            
            $
                560,464
            
            $
                570,796
            
            $
                 559,226**TNMP
                Electric Revenues ***Residential
            $ 
                 57,732
            
            $-
            
            $-
            
            $-
            
            $-General
                Services
            18,864
            
            -
            
            -
            
            -
            
            -Primary/Economy/Transmission
            25,815
            
            -
            
            -
            
            -
            
            -Secondary
            29,925
            
            -
            
            -
            
            -
            
            -Municipal/Lighting
            5,311
            
            -
            
            -
            
            -
            
            -Other
            16,703
            
            -
            
            -
            
            -
            
            -Total
                TNMP Revenues
            $
                154,350
            
            $-
            
            $-
            
            $-
            
            $-**PNM
                Gas Revenues**Residential
            $
                311,043
            
            $
                292,163
            
            $
                226,799
            
            $
                176,284
            
            $ 
                 221,409Commercial
            98,929
            
            92,128
            
            72,269
            
            53,734
            
            65,654Industrial
            3,375
            
            2,889
            
            2,820
            
            2,872
            
            27,519Transportation
            13,813
            
            15,274
            
            18,906
            
            17,735
            
            20,188Other
            84,282
            
            88,467
            
            37,473
            
            26,781
            
            36,495Total
                PNM Gas Revenues
            $
                511,442
            
            $
                490,921
            
            $
                358,267
            
            $
                277,406
            
            $  
                371,265**Unregulated
                Operations****PNM
                Wholesale Revenues**Long-term
                contracts
            $
                154,692
            
            $
                158,085
            
            $
                135,674
            
            $ 
                 58,546
            
            $   
                 77,250Short-term
                sales
            473,336
            
            430,158
            
            417,486
            (a)
            285,234
            
            1,244,899Total
                PNM Wholesale Revenues
            $
                628,028
            
            $
                588,243
            
            $
                553,160
            
            $
                343,780
            
            $1,322,149**First
                Choice Revenues ***Residential
            $
                198,218
            
            $-
            
            $-
            
            $-
            
            $-Mass-market
            53,111
            
            -
            
            -
            
            -
            
            -Mid-market
            46,584
            
            -
            
            -
            
            -
            
            -Other
            18,417
            
            -
            
            -
            
            -
            
            -Total
                First Choice Revenues
            $
                316,330
            
            $-
            
            $-
            
            $-
            
            $-





*
      TNMP
      and First Choice are reported from the date of acquisition, June 6,
      2005.





(a)
      Includes intersegment sales of $1,535 in 2003.











A-34





**PNM
                RESOURCES, INC. AND SUBSIDIARIES****COMPARATIVE
                OPERATING STATISTICS****2005**
            
            **2004**
            
            **2003**
            
            **2002**
            
            **2001****Regulated
                Operations****PNM
                Electric Customers**Residential
            378,116
            
            367,491
            
            358,099
            
            345,588
            
            340,656Commercial
            44,721
            
            43,425
            
            42,391
            
            41,092
            
            40,065Industrial
            281
            
            290
            
            296
            
            311
            
            377Other
            838
            
            818
            
            822
            
            796
            
            924Total
                PNM Electric Customers
            423,956
            
            412,024
            
            401,608
            
            387,787
            
            382,022**TNMP
                Electric Customers ***Residential
            222,688
            
            -
            
            -
            
            -
            
            -General
                Services
            6,147
            
            -
            
            -
            
            -
            
            -Primary/Economy/Transmission
            208
            
            -
            
            -
            
            -
            
            -Secondary
            29,038
            
            -
            
            -
            
            -
            
            -Municipal/Lighting
            2,188
            
            -
            
            -
            
            -
            
            -Total
                TNMP Customers
            260,269
            
            -
            
            -
            
            -
            
            -**PNM
                Gas Customers**Residential
            440,624
            
            430,578
            
            421,104
            
            411,642
            
            404,753Commercial
            35,136
            
            34,993
            
            34,645
            
            35,194
            
            32,894Industrial
            42
            
            47
            
            46
            
            58
            
            50Transportation
            26
            
            23
            
            40
            
            27
            
            34Other
            2,654
            
            2,931
            
            2,983
            
            3,664
            
            3,528Total
                PNM Gas Customers
            478,482
            
            468,572
            
            458,818
            
            450,585
            
            441,259**Unregulated
                Operations****PNM
                Wholesale Customers**Long-term
                and short-term
            76
            
            68
            
            72
            
            76
            
            79Total
                PNM Wholesale Customers
            76
            
            68
            
            72
            
            76
            
            79**First
                Choice Customers ***Residential
            178,128
            
            -
            
            -
            
            -
            
            -Mass-market
            23,914
            
            -
            
            -
            
            -
            
            -Mid-market
            6,649
            
            -
            
            -
            
            -
            
            -Other
            1,760
            
            -
            
            -
            
            -
            
            -Total
                First Choice Customers
            210,451
            
            -
            
            -
            
            -
            
            -**PNM
                Generation Statistics**Reliable
                Net Capability - MW
            1,744
            
            1,729
            
            1,742
            
            1,734
            
            1,521Coincidental
                Peak Demand - MW
            1,779
            
            1,655
            
            1,661
            
            1,478
            
            1,431Average
                Fuel Cost per Million BTU
            $
                1.4711
            
            $
                1.3751
            
            $
                1.4120
            
            $
                1.3910
            
            $
                1.6007BTU
                per KWh of Net Generation
            10,706
            
            10,442
            
            10,854
            
            10,568
            
            10,549





*
      TNMP
      and First Choice are reported from the date of acquisition, June 6,
      2005.




The
      customers reported above for TNMP Electric and First Choice include 150,787
      customers of TNMP who have chosen First Choice as their REP. These TNMP Electric
      customers are also included in the First Choice segment.




A-35




**ITEM
      7.**  **MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATION**





The
      following Management’s Discussion and Analysis of Financial Condition and
      Results of Operation for PNMR, PNM and TNMP is presented both on a combined
      basis as applicable, and on a separate basis. For discussion purposes, this
      report will use the term “Company” when discussing matters of common
      applicability to PNMR, PNM and TNMP. Discussions regarding specific contractual
      obligations generally reference the entity that is legally obligated. In the
      case of contractual obligations of PNM and TNMP, these obligations are
      consolidated with PNMR and its subsidiaries under GAAP. A reference to a “Note”
in this Item 7 refers to the accompanying Notes to Consolidated Financial
      Statements.





**RESULTS
      OF OPERATION - EXECUTIVE SUMMARY**





During
        2005, the Company's results were impacted by unexpected plant outages and
        the
        extension of planned outages, particularly at PVNGS, higher purchased power
        costs and charges for refinancing and TNP acquisition integration costs.
        As
        experienced in its 2005 results, the Company expects that the TNP acquisition
        will be accretive to earnings in 2006, the first full year of operation after
        the transaction was completed. This expectation is based on certain assumptions,
        including assumptions related to interest rates and market prices for power,
        among other things. In 2005, the market price of natural gas across the United
        States increased significantly, due to a hot 2005 summer, which led to more
        demand from natural gas-fired power plants, as well as due to the hurricanes
        in
        the Gulf Coast region of the United States. The Company cannot predict what
        impact the increase in market prices for natural gas will have on its future
        results of operations.
  PNM
        is a
        participant in PVNGS, of which APS is the operating agent. During 2005, PVNGS
        had the lowest capacity factor (measured against maximum dependable capacity)
        that the plant has had since 1994. The equivalent availability for PVNGS
        was
        76.0% for 2005. This reflects bottom quartile performance relative to the
        103
        operating reactors in the United States. There were nine unscheduled outages
        during 2005 that had a variety of causes. In 2004, the NRC determined that
        there
        had been a safety concern at PVNGS related to the safety injection systems
        for
        the three PVNGS units. This led to a "yellow" finding and a $50,000 civil
        penalty under the NRC’s reactor oversight process. A "yellow" finding places a
        unit in the "degraded safety cornerstone" column of the NRC’s performance
        matrix, which results in an enhanced NRC inspection regimen. During 2005,
        the
        NRC completed its enhanced inspection. The "yellow" finding remains
        unresolved.
  PVNGS
        has
        encountered tube cracking in the steam generators. The PVNGS Units 2 steam
        generators were replaced in 2003 and the replacement of PVNGS Unit 1 steam
        generators was completed in December 2005. Completion of installation of
        the
        PVNGS Unit 3 steam generators is expected by December 2007.
  APS
        has
        been operating PVNGS Unit 1 at reduced power levels since December 25, 2005
        due
        to a vibration in the PVNGS Unit 1 shutdown cooling lines. As a result, PNM
        is
        receiving approximately 24 MW of power from PVNGS Unit 1 based on its 10.2%
        undivided interest in PVNGS.
  Implementation
        of a potential solution preliminarily scheduled by APS for February 2006
        was
        canceled after comprehensive analysis concluded that the desired improvement
        likely would not have been achieved. APS had informed PNM that it was in
        the
        process of formulating other potential remedies to address the issue and
        that it
        was scheduling another attempt to remedy this issue sometime in April 2006.
        APS
        has more recently informed PNM that the preferred solution will require
        Unit 1 to undergo an outage of approximately five weeks in order to effect
        the
        necessary modifications to Unit 1 and that it plans to begin this outage
        in the
        June 2006 timeframe. In addition, an outage of approximately one week for
        preparatory work will begin in mid-March 2006. This preferred solution was
        initially planned for installation in the spring of 2007.
  The
        operation of PVNGS not only affects PNM’s ability to make off-system sales, but
        can also cause PNM to purchase power to serve its retail electric customers.
        Based on current forward market energy prices, PNM estimates that operation
        of
        PVNGS Unit 1 at the reduced power level could result in a reduction in
        consolidated gross margin, or operating revenues minus cost of energy sold,
        of
        $3.0 million to $4.0 million per month before income taxes. However, PNM
        is
        taking steps to mitigate the impact on consolidated gross margin while PVNGS
        Unit 1 operates at the reduced power level.




A-36


The
        Company is positioned as a merchant utility, primarily operating as a regulated
        energy service provider. The Company is engaged in the sale and marketing
        of
        electricity in the competitive wholesale energy marketplace. In addition,
        through First Choice, the Company is a retail electric provider in Texas
        under
        legislation that established retail competition. PNM is under the jurisdiction
        of the NMPRC while TNMP operates under the jurisdiction of the PUCT in Texas
        and
        the NMPRC in New Mexico.





***Regulated
      Operations***





The
      regulated operations strategy is directed at supplying reasonably priced and
      reliable energy to retail customers through customer-driven operational
      excellence, high quality customer service, cost efficient processes and improved
      overall organizational performance.





**PNM
      Electric**





PNM
      Electric is an integrated electric utility that consists of generation,
      transmission and distribution of electricity for retail electric customers
      in
      New Mexico and the sale of transmission to third parties as well as to PNM
      Wholesale and TNMP Electric. 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. Customer rates for retail
      electric service are set by the NMPRC based on the provisions of the Global
      Electric Agreement. (See Note 17.) PNM Electric owns or leases transmission
      lines, interconnected with other utilities in New Mexico, south and east into
      Texas, west into Arizona, and north into Colorado and Utah.





**PNM
      Gas**





PNM
      Gas
      distributes natural gas to most of the major communities in New Mexico,
      including two of New Mexico’s three largest metropolitan areas, Albuquerque and
      Santa Fe. The customer base for PNM Gas includes both sales-service customers
      and transportation-service customers. PNM Gas operates under a purchase gas
      adjustment clause that allows it to purchase natural gas in the open market
      and
      resell it at cost to its distribution customers. As a result, increases or
      decreases in gas revenues resulting from wholesale gas price fluctuations do
      not
      impact PNM’s consolidated gross margin or earnings.





**TNMP
      Electric**





TNMP
      Electric is a regulated utility operating in Texas and New Mexico. In Texas,
      TNMP provides regulated transmission and distribution services under TECA.
      In
      New Mexico, TNMP provides integrated electric services that include the
      transmission, distribution, purchase and sale of electricity to its New Mexico
      customers as well as transmission to third parties and to PNM. TNMP’s Texas and
      New Mexico operations are subject to traditional cost of service regulation.
      PNM
      Wholesale is TNMP’s sole supplier for its load in New Mexico. In accordance with
      the NMPRC stipulation approving PNMR’s acquisition of TNP, PNM Wholesale will
      remain the sole power supplier for TNMP’s New Mexico needs through 2010 (see
      Note 17).





***Unregulated
      Operations***





**PNM
      Wholesale**





PNM
      Wholesale is engaged in the generation and sale of electricity into the
      wholesale market based on two product lines, long-term contracts (including
      a
      contract with TNMP that expires December 31, 2006) and short-term sales. PNM
      wholesale sells the unused capacity of jurisdictional assets as well as the
      capacity of PNM’s wholesale plants excluded from retail rates. Both regulated
      and unregulated generation is jointly dispatched in order to improve
      reliability, provide the most economic power to retail customers and maximize
      profits on any wholesale transactions. Although PNM Wholesale is regulated
      in
      certain respects, including FERC jurisdiction over its rates, the Company
      includes PNM Wholesale in the unregulated segment of its business because PNM
      Wholesale is not subject to traditional rate of return regulation.





The
      PNM
      Wholesale strategy utilized by the Company calls for net asset-backed energy
      sales supported by long-term contracts sold into the wholesale market. PNM
      Wholesale’s aggregate net open forward electric sales position, including
      short-term sales and long-term contracts, is covered by its forecasted excess
      generation capacity. Management actively monitors the net asset-backed sales
      by
      the use of stringent risk management policies.





A-37


**First
      Choice**





First
      Choice is a certified retail electric provider operating in Texas that provides
      electricity to residential, small and large commercial, industrial and
      institutional customers. First Choice serves Texas retail customers by acquiring
      new retail customers, by 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 was organized in
      2000
      to act as TNMP’s affiliated retail electric provider, as required by TECA.
      Although First Choice is regulated in certain respects by the PUCT under ERCOT,
      the Company includes First Choice in the unregulated segment of its business
      because First Choice is not subject to traditional rate of return
      regulation.





***Corporate
      and Other***





PNMR
      was
      established as the holding company in 2001. On December 30, 2004, PNMR became
      a
      registered holding company under PUHCA and created PNMR Services Company, which
      began operating on January 1, 2005.





Comprehensive
      energy legislation enacted in August 2005 resulted in the repeal of PUHCA
      effective February 2006. PNMR is in the process of evaluating the effects of
      the
      repeal, along with the other provisions of the legislation.





PNMR
      performed substantially all of the corporate activities of PNM from 2001 to
      2004. These activities were billed to PNM on a cost basis to the extent they
      were for the corporate management of PNM and were allocated to the business
      units. The services functions previously performed by PNMR were assumed by
      PNMR
      Services Company effective January 1, 2005.





TNMP
      provided First Choice and TNP with corporate support services under a shared
      services agreement with First Choice and a similar agreement with TNP. These
      services were billed at TNMP’s cost and, in return, TNP and First Choice
      compensated TNMP for the use of the services. These agreements were in effect
      through June 6, 2005 when they were replaced by a new service
      arrangement.





Effective
      with the acquisition of TNP on June 6, 2005 (see Note 2) all TNMP employees
      who
      were providing corporate support to TNP and First Choice became employees of
      PNMR Services Company. PNMR Services Company provides corporate services to
      PNMR
      and its subsidiaries including PNM, Avistar, TNP, TNMP and First Choice based
      on
      shared services agreements. These services are billed at cost on a monthly
      basis
      and are allocated to PNMR and its subsidiaries.





The
      following discussion and analysis should be read in conjunction with the
      Consolidated Financial Statements and Notes thereto. Trends and contingencies
      of
      a material nature are discussed to the extent known. Refer also to Item 1A.
      "Risk Factors" and to “Disclosure Regarding Forward Looking Statements" in this
      Item 7.





***TNP
      Acquisition***




On
        June
        6, 2005, PNMR acquired all of the outstanding common shares of TNP, including
        its principal subsidiaries, TNMP and First Choice, in order to complement
        its
        existing New Mexico electric operations and to expand into the retail and
        wholesale markets in Texas. The results of TNP’s operations have been included
        in the Consolidated Financial Statements of PNMR from that date.





The
      aggregate purchase price was $1,221 million, including a net payment to the
      previous owner of $162.0 million consisting of $74.6 million of cash and common
      stock valued at $87.4 million. The value of the 4,326,337 common shares issued
      was determined based on $20.20 per common share as provided for in the Stock
      Purchase Agreement, dated as of July 24, 2004, by and between PNMR and SW
      Acquisition. In addition, the aggregate purchase price included $1,037 million
      of TNP debt and preferred stock and incurred transaction and other costs of
      $21.5 million. During the fourth quarter of 2005, PNMR completed the valuations
      of acquired property and intangible assets.




A-38


Pursuant
          to the Stock Purchase Agreement, PNMR provided SW Acquisition its proposed
          final
          purchase price, reflecting a reduction from the estimated purchase price
          of
          approximately $37.0 million. SW Acquisition filed a lawsuit that disputed
          PNMR’s
          proposed final purchase price. In November 2005, the parties reached a
          settlement of the lawsuit resulting in a reduction of approximately $13.0
          million to the original purchase price based on working capital adjustments
          from
          the closing of the second-quarter financial statements and stranded cost
          recovery payments. PNMR received the $13.0 million payment from SW Acquisition
          in the fourth quarter of 2005. The net cash paid and purchase price stated
          above
          reflect this reduction.
  In
          2005,
          the PUCT approved a settlement agreement finding the acquisition of TNP
          to be in
          the public interest. Among other things, the settlement agreement calls
          for:


·
            a
                two-year electric rate freeze that includes a $13.0 million annual
                rate
                reduction in TNMP's retail delivery rates effective May 1,
                2005;


·
            an
                authorized return on equity of 10.25% on an implied capital structure
                of
                60% debt and 40% equity for certain reporting
                purposes;


·
            the
                use of a 60/40% debt/equity capital structure in TNMP's next base
                rate
                case if filed before January 1, 2009;
                and


·
            a
                $6.0 million synergy savings credit (whether or not savings are achieved)
                amortized over 24 months effective after the close of the
                transaction.





Also
      in
      2005, the NMPRC approved a stipulation in connection with the acquisition of
      TNP. Among other things, the stipulation calls for:


·
            a
                three-phase rate reduction totaling 15%, to TNMP’s electric customers in
                southern New Mexico, beginning January 2006 and ending December 2010;
                the
                rate reduction will lower TNMP electric rates by approximately $9.6
                million in the first year;


·
            an
                imputed 55/45% debt/equity structure with an assumed rate of return
                on
                equity of 10.5% for TNMP;


·
            PNM
                to remain the power supplier for TNMP’s New Mexico needs through 2010;
                and


·
            integration
                of TNMP’s New Mexico assets into PNM effective January 1, 2007, the
                companies, however, will maintain separate rates through
                2010.





***Proposed
      Twin Oaks Acquisition***





In
      January 2006, Altura, an indirect wholly owned subsidiary of PNMR, entered
      into
      an agreement with subsidiaries of Sempra to purchase the Twin Oaks power
      facility in an acquisition of assets for $480 million in cash. PNMR and Sempra
      are also parties to the agreement and have agreed to provide parental guarantees
      for certain obligations of their respective subsidiaries relating to the
      acquisition.





The
      Twin
      Oaks power facility is a 305 MW coal-fired power plant located 150 miles south
      of Dallas, Texas. Under the agreement, substantially all of the assets and
      contractual commitments relating to Twin Oaks are to be transferred to Altura
      upon closing, including fuel supply and power purchase and sale agreements.
      The
      agreement also includes the development rights for a possible 600 MW expansion
      of the plant. The Sempra subsidiaries are pursuing necessary permits for the
      plant expansion, which permits are expected to be granted in 2007. An additional
      $2.5 million payment will be made to Sempra upon the issuance of an air permit
      for the expansion and an additional $2.5 million will be paid when Altura begins
      construction of the expansion.





The
      transaction is expected to close no earlier than April 17, 2006, subject to
      third-party consents and anti-trust clearance under the Hart-Scott-Rodino Act.
      PNMR has arranged for bridge financing to close the transaction. It is expected
      that the permanent financing will be provided from the issuance of debt and
      equity.





***Competitive
      Strategy***





The
      Company’s vision is to “Build America’s Best Merchant Utility.” To achieve this
      objective, management intends to:





A-39


*Expand Regulated and Unregulated Operations* .
      The
      Company intends to develop both its retail and wholesale business by expanding
      its current operations and by acquiring additional value-enhancing assets.
      As
      evidenced by the Luna and TNP acquisitions and the proposed Twin Oaks
      acquisition, the Company intends to continue to increase its revenues by
      expanding its geographic coverage in the southwest, a region which not only
      exhibits rapid customer and load growth, but which the Company knows well.
      The
      Company also intends to increase its presence in the southwest market by buying
      additional generating resources and selling power from those resources through
      long-term contracts. The Company’s future growth plans call for approximately
      75% of its new generation portfolio to be committed through long-term contracts
      as required by the Global Electric Agreement. In October 2005, PNM entered
      into
      a 150 MW long-term sale contract with APS that begins in June 2007. In addition,
      the Company expects that the acquisition of First Choice as part of the TNP
      acquisition will provide a solid foundation for entry into the competitive
      retail market in Texas. In addition, PNMR intends to continue to provide energy
      and technology related services through its wholly owned subsidiary,
      Avistar.





*Acquire
      Additional Generating Assets in the Southwest Region* .
      The
      Company intends to enhance and diversify its presence in the southwest region
      through the acquisition or development of quality generation assets, including
      renewable or clean technology resources, to serve the Company’s retail and
      wholesale load while maintaining diversity of fuel mix. The Company also plans
      to increase long-term sales contracts in tandem with increases in its generation
      capacity. In 2004, the Company purchased a one-third interest in Luna, a
      partially constructed, combined-cycle power plant near Deming, New Mexico.
      The
      Company will be entitled to 190 MW from the 570 MW facility, which is expected
      to be completed no later than the second quarter of 2006. The Company also
      believes that Luna strategically fits well into its portfolio of generation
      assets because of the facility’s location in southern New Mexico, its low
      capital costs, its efficient heat rate, its anticipated low dispatch costs
      and
      its use of clean burning gas technology. In addition, the proposed acquisition
      of the Twin Oaks facility, discussed above, would provide access to wholesale
      markets in Texas. As in the past, the Company intends to continue a disciplined
      approach to any acquisition, to match acquisitions to demand and to hedge
      capacity with long-term contracts.





*Maintain
      Prudent Cost Controls* .
      Management maintains cost control procedures for PNMR and its subsidiaries.




*Continue
        to Improve Credit Strength and Reduce Cost of Capital* .
        A high
        priority and long-term commitment is to maintain the Company's investment
        grade
        rating in any type of regulatory, natural gas or electricity price scenario.
        The
        Company believes TNP offers an opportunity to derive additional value through
        the stronger credit profile of the combined entity. In conjunction with the
        acquisition of TNP, on June 6, 2005, PNMR made an equity investment of
        approximately $110.5 million in TNP, which TNP used to repay in full amounts
        owing under TNP’s credit agreement. In addition, in July 2005, PNMR provided
        funds to TNP to enable TNP to redeem its preferred stock and senior notes.
        See
“Financing Activities - PNMR” below in “Liquidity and Capital Resources” for
        further details of this transaction. In addition, PNMR plans to obtain the
        permanent financing for the proposed acquisition of the Twin Oaks facility
        from
        the issuance of debt and equity, structured to maintain the Company's investment
        grade rating.





*Commitment
      to Corporate Citizenship* .
      The
      Company is committed to its guiding principle, “Do the Right Thing.” This
      commitment serves as the cornerstone of the Company's ethics and compliance
      efforts and underscores its effort to ensure that dealings with customers,
      employees, shareholders and business partners are above reproach. This is
      evidenced by the Company's environmental sustainability program with aggressive
      five-year goals for reducing water usage, improving air quality, reducing waste
      streams and becoming a leader in the development of renewable energy.










A-40





**RESULTS
      OF OPERATION - PNMR**





**YEAR
      ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31,
      2004**





PNMR’s
      net GAAP earnings for the year ended December 31, 2005 were $67.2 million,
      or
      $1.00 per diluted share of common stock, compared to $87.7 million or $1.43
      per
      diluted share of common stock in 2004. The decrease in earnings per share was
      driven primarily by acquisition related and other charges of $36.5 million,
      net
      of income taxes, which consisted of the following:


·
            TNP
                acquisition integration costs of $10.1
                million;


·
            turbine
                impairment of $9.0 million (see Note
                1);


·
            charge
                related to issuance of equity-linked units of $7.3 million (see Note
                6);


·
            TNP
                debt refinancing costs of $5.1
                million;


·
            software
                write-off of $2.7 million;


·
            charge
                associated with the NMPRC’s approval of the TNP acquisition of $1.4
                million; and


·
            cumulative
                effect of adoption of FIN 47 of $0.9 million (see Note
                1).





In
      addition, as discussed above, PNM experienced below normal levels of plant
      performance due to unexpected plant outages, particularly at PVNGS, which
      reduced the amount of electricity PNM sold in the wholesale market and forced
      PNM to purchase power to meet jurisdictional and contractual wholesale needs.
      In
      addition, the margin on fixed-price contracts decreased, as increases in
      purchased power prices that were driven by increasing fuel prices that could
      not
      be passed on to customers with fixed sales prices. These decreases to net
      earnings were partially offset by the addition of TNP operations from June
      6
      through December 31, 2005.





The
      following discussion is based on the methodology that management uses for making
      operating decisions and assessing performance of its various business
      activities. See Note 3 for additional information regarding these results and
      the Consolidated Financial Statements.





In
      addition, adjustments related to EITF Issue 03-11, *“Reporting
      Realized Gains and Losses on Derivative Instruments That Are Subject to FASB
      Statement No. 133 and Not Held for Trading Purposes,”* are
      excluded from the PNM Wholesale segment and are instead included in the
      Corporate and Other segment. This accounting pronouncement requires a net
      presentation of realized gains and losses for certain non-trading derivatives.
      Management evaluates PNM Wholesale on a gross presentation basis due to its
      primarily net-asset-backed marketing strategy and the importance it places
      on
      PNM’s ability to repurchase and remarket previously sold capacity. The other
      segments are not affected by this EITF.





Corporate
      costs, income taxes and non-operating items are discussed on a consolidated
      basis for PNMR and are in conformity with the presentation in PNMR’s
      Consolidated Financial Statements.











A-41





**Regulated
      Operations**





**PNM
      Electric**





The
      table
      below sets forth the operating results for PNM Electric:




**Year
                  Ended****December
                  31,****2005**
              
              **2004**
              
              **Variance**(In
                  thousands)**Operating
                  revenues**
              
              **$**
              **573,976**
              
              **$**
              **558,412**
              
              **$**
              **15,564**Less:
                  Cost of energy
              
              
              210,169
              
              
              186,517
              
              
              23,652Intersegment
                  energy transfer
              
              
              (35,829
              )
              
              (42,769
              )
              
              6,940**Gross
                  margin**
              
              
              **399,636**
              
              
              **414,664**
              
              
              **(15,028**
              **)**Energy
                  production costs
              
              
              118,633
              
              
              113,848
              
              
              4,785Transmission
                  and distribution O&M
              
              
              30,462
              
              
              31,360
              
              
              (898
              )Customer
                  related expense
              
              
              19,454
              
              
              18,190
              
              
              1,264Administrative
                  and general
              
              
              11,001
              
              
              4,640
              
              
              6,361**Total
                  non-fuel O&M**
              
              
              **179,550**
              
              
              **168,038**
              
              
              **11,512**Corporate
                  allocation
              
              
              64,170
              
              
              69,820
              
              
              (5,650
              )Depreciation
                  and amortization
              
              
              69,798
              
              
              63,050
              
              
              6,748Taxes
                  other than income taxes
              
              
              19,726
              
              
              20,324
              
              
              (598
              )Income
                  taxes
              
              
              13,065
              
              
              23,141
              
              
              (10,076
              )**Total
                  non-fuel operating expenses**
              
              
              **346,309**
              
              
              **344,373**
              
              
              **1,936****Operating
                  income**
              
              **$**
              **53,327**
              
              **$**
              **70,291**
              
              **$**
              **(16,964**
              **)**


The
      following table shows electric revenues by customer class and average
      customers:





**PNM
      Electric Revenues**


**Year
                  Ended****December
                  31,****2005**
              
              **2004**
              
              **Variance**(In
                  thousands, except customers)Residential
              
              $
              216,890
              
              $
              206,950
              
              $
              9,940Commercial
              
              
              254,480
              
              
              251,092
              
              
              3,388Industrial
              
              
              61,146
              
              
              61,905
              
              
              (759
              )Transmission
              
              
              21,509
              
              
              18,327
              
              
              3,182Other
              
              
              19,951
              
              
              20,138
              
              
              (187
              )$
              573,976
              
              $
              558,412
              
              $
              15,564Average
                  customers
              
              
              417,986
              
              
              406,968
              
              
              11,018





A-42





The
      following table shows electric sales by customer class:





**PNM
      Electric Sales**





**Year
                Ended****December
                31,****2005**
            
            **2004**
            
            **Variance**(Megawatt
                hours)Residential
            
            
            2,652,475
            
            
            2,509,449
            
            
            143,026Commercial
            
            
            3,526,133
            
            
            3,450,503
            
            
            75,630Industrial
            
            
            1,277,156
            
            
            1,283,769
            
            
            (6,613
            )Other
            
            
            256,202
            
            
            253,393
            
            
            2,8097,711,966
            
            
            7,497,114
            
            
            214,852





Operating
      revenues increased $15.6 million, or 2.8%, from the prior year. Retail
      electricity sales increased 2.9%, to 7.7 million MWh in 2005 compared to 7.5
      million MWh in 2004. Customer growth was 2.7% year over year and
      weather-normalized retail electric load growth was 2.5%. Average customer load
      growth, when normalized for the impact of weather and the leap year in 2004,
      increased revenues by $14.0 million. Cooling Degree Days for Albuquerque
      increased approximately 19.6% and Heating Degree Days decreased approximately
      4.7%, resulting in a net overall increase in revenues of $3.7 million. In
      addition, increased transmission revenues, primarily from point-to-point
      customers, increased revenues $3.2 million. These revenue increases were
      partially offset by a decrease of $1.3 million attributable to the 2004 leap
      year, with 2005 including one less day of revenues, and by a decrease of $3.8
      million due to the 2.5% electric rate reduction effective September 1, 2005.





The
      gross
      margin, or operating revenues minus cost of energy sold and intersegment energy
      transfer, decreased $15.0 million, or 3.6%, from the prior year due to a
      reduction in power plant availability resulting from plant outages and a related
      increase in purchased power requirements to serve load. In addition, an increase
      in purchased power contract prices on pre-existing contracts reduced the margin
      earned on fixed-price sales. These decreases were partially offset by the
      increased revenues associated with retail load growth.





Total
      non-fuel O&M expenses increased $11.5 million, or 6.9%, over the prior year.
      Energy production costs increased $4.8 million, or 4.2%, due to higher plant
      maintenance costs in 2005 compared to 2004. Plant outage costs at PVNGS and
      Reeves increased costs $2.8 million and $1.4 million, respectively, in 2005.
      In
      addition, there were higher general plant maintenance and other costs of $1.0
      million compared to 2004. These increases were partially offset by reduced
      outage costs at Four Corners and SJGS of $0.4 million and $0.3 million,
      respectively. Transmission and distribution O&M expense decreased $0.9
      million, or 2.9%, primarily due to a decrease in maintenance and labor expenses.
      Customer related expense increased $1.3 million, or 6.9%, primarily due to
      increased consulting fees related to FERC proceedings. Administrative and
      general expenses increased $6.4 million over the prior year primarily due to
      increased incentive compensation, labor and insurance costs of $5.3 million
      (compensation costs were recorded at the corporate level in 2004 but charged
      to
      the business segments in 2005) and increased legal and other outside services
      costs of $0.6 million for routine business matters.





Depreciation
      and amortization increased $6.7 million, or 10.7%, primarily due to asset and
      software additions placed in service in December 2004 and in 2005. PNMR expects
      depreciation to rise going forward as a result of increased investment in new
      information technology platforms and other capital spending.











A-43





**TNMP
      Electric**





PNMR
      acquired TNP, the parent of TNMP, on June 6, 2005, and results in this section
      are presented from the acquisition date forward only. Comparable results from
      2004 are not presented. For the year ended December 31, 2005, which includes
      results from June 6 through December 31, 2005, the TNMP Electric segment
      increased PNMR revenues by $154.4 million.





The
      table
      below sets forth the operating results for TNMP Electric:




**For
                  the Period****June
                  6 - December 31, 2005**(In
                  thousands)**Operating
                  revenues**
              
              **$**
              **154,350**Less:
                  Cost of energy
              
              
              58,014**Gross
                  margin**
              
              
              **96,336**Transmission
                  and distribution O&M
              
              
              12,403Customer
                  related expense
              
              
              3,111Administrative
                  and general
              
              
              415**Total
                  non-fuel O&M**
              
              
              **15,929**Corporate
                  allocation
              
              
              9,386Depreciation
                  and amortization
              
              
              17,596Taxes
                  other than income taxes
              
              
              14,261Income
                  taxes
              
              
              8,442**Total
                  non-fuel operating expenses**
              
              
              **65,614****Operating
                  income**
              
              **$**
              **30,722**


The
      following table shows electric revenues by customer class and average
      customers:





**TNMP
      Electric Revenues**


**For
                  the Period****June
                  6 - December 31, 2005**(In
                  thousands, except customers)Residential
              
              $
              57,732General
                  Services
              
              
              18,864Primary/Economy/Transmission
              
              
              25,815Secondary
              
              
              29,925Municipal/Lighting
              
              
              5,311Other
              
              
              16,703$
              154,350Average
                  customers *
              
              
              255,335


*
      Under
      TECA, customers of TNMP Electric in Texas have the ability to choose First
      Choice or any other REP to provide energy. However, TNMP Electric delivers
      energy to customers within its service area regardless of the REP chosen.
      Therefore, TNMP Electric earns revenue for the delivery of energy to First
      Choice and First Choice earns revenue on the usage of that energy by its
      customers. The average customers reported above include 154,252 customers of
      TNMP Electric who have chosen First Choice as their REP. These TNMP Electric
      customers are also included below in the First Choice segment. For PNMR
      consolidated reporting purposes, these customers are included only once in
      the
      consolidated customer count.





A-44





The
      following table shows electric sales by customer class:





**TNMP
      Electric Sales ***


**For
                  the Period****June
                  6 - December 31, 2005**(Megawatt
                  hours)Residential
              
              
              1,859,020General
                  Services
              
              
              144,203Primary/Economy/Transmission
              
              
              1,311,208Secondary
              
              
              1,174,587Municipal/Lighting
              
              
              86,3074,575,325


*
      The MWh
      reported above include 1,644,675 MWh used by customers of TNMP Electric who
      have
      chosen First Choice as their REP. These MWh are also included below in the
      First
      Choice segment.





TNMP
      Electric’s gross margin was $96.3 million for the period June 6 through December
      31, 2005. The significant factors that impacted gross margin include increases
      due to load growth because of warmer than normal weather, a decrease in revenues
      due to a 9.3% Texas rate reduction, synergy savings effective in May 2005,
      and
      lower revenues due to a reduction in operations of a major customer in New
      Mexico.








A-45





**PNM
      Gas**





The
      table
      below sets forth the operating results for PNM Gas:




**Year
                  Ended****December
                  31,****2005**
              
              **2004**
              
              **Variance**(In
                  thousands)**Operating
                  revenues**
              
              **$**
              **511,442**
              
              **$**
              **490,921**
              
              **$**
              **20,521**Less:
                  Cost of energy
              
              
              364,205
              
              
              343,219
              
              
              20,986**Gross
                  margin**
              
              
              **147,237**
              
              
              **147,702**
              
              
              **(465**
              **)**Energy
                  production costs
              
              
              2,444
              
              
              2,338
              
              
              106Transmission
                  and distribution O&M
              
              
              27,817
              
              
              28,006
              
              
              (189
              )Customer
                  related expense
              
              
              19,616
              
              
              19,283
              
              
              333Administrative
                  and general
              
              
              3,487
              
              
              1,648
              
              
              1,839**Total
                  non-fuel O&M**
              
              
              **53,364**
              
              
              **51,275**
              
              
              **2,089**Corporate
                  allocation
              
              
              37,028
              
              
              38,725
              
              
              (1,697
              )Depreciation
                  and amortization
              
              
              22,548
              
              
              18,894
              
              
              3,654Taxes
                  other than income taxes
              
              
              8,010
              
              
              7,412
              
              
              598Income
                  taxes
              
              
              5,853
              
              
              8,063
              
              
              (2,210
              )**Total
                  non-fuel operating expenses**
              
              
              **126,803**
              
              
              **124,369**
              
              
              **2,434****Operating
                  income**
              
              **$**
              **20,434**
              
              **$**
              **23,333**
              
              **$**
              **(2,899**
              **)**
  The
          following table shows gas revenues by customer and average
          customers:


**PNM
      Gas Revenues**




**Year
                  Ended****December
                  31,****2005**
              
              **2004**
              
              **Variance**(In
                  thousands, except customers)Residential
              
              $
              311,043
              
              $
              292,163
              
              $
              18,880Commercial
              
              
              98,929
              
              
              92,128
              
              
              6,801Industrial
              
              
              3,375
              
              
              2,889
              
              
              486Transportation*
              
              
              13,813
              
              
              15,274
              
              
              (1,461
              )Other
              
              
              84,282
              
              
              88,467
              
              
              (4,185
              )$
              511,442
              
              $
              490,921
              
              $
              20,521Average
                  customers
              
              
              471,321
              
              
              461,399
              
              
              9,922


*Customer-owned
      gas.





A-46


The
          following table shows gas throughput by customer class:





**PNM
      Gas Throughput**


**Year
                  Ended****December
                  31,****2005**
              
              **2004**
              
              **Variance**(Thousands
                  of decatherms)Residential
              
              
              28,119
              
              
              30,618
              
              
              (2,499
              )Commercial
              
              
              10,554
              
              
              11,639
              
              
              (1,085
              )Industrial
              
              
              369
              
              
              413
              
              
              (44
              )Transportation*
              
              
              37,013
              
              
              43,208
              
              
              (6,195
              )Other
              
              
              9,780
              
              
              13,871
              
              
              (4,091
              )85,835
              
              
              99,749
              
              
              (13,914
              )
  *Customer-owned
          gas.





Operating
      revenues increased $20.5 million, or 4.2% over the prior year, primarily due
      to
      higher natural gas prices in 2005 compared to 2004. PNM Gas purchases natural
      gas in the open market and resells it at the same price to its sales-service
      customers. As a result, increases or decreases in gas revenues driven by gas
      costs do not impact the consolidated gross margin or earnings of PNM Gas. Total
      gas sales volumes decreased 13.9%, due to a 4.7% decrease in Heating Degree-Days
      and additional customer conservation resulting from higher natural gas prices.
      These decreases were partially offset by average customer growth of 2.2%, which
      increased gas revenues $2.2 million, and an increase of $6.7 million due to
      a
      residential cost of service rate increase beginning in April 2004.





The
      gross
      margin, or operating revenues minus cost of energy sold, was largely unchanged,
      decreasing only $0.5 million, or 0.3%, from the prior year. Warmer weather
      resulted in a $7.9 million decrease to margin and additional customer
      conservation resulted in reduced usage of $1.4 million. These decreases were
      offset by the residential cost of service rate increase and the customer growth
      discussed above.





Total
      non-fuel O&M expenses increased $2.1 million, or 4.1%, over the prior year.
      Administrative and general expense increased $1.8 million primarily due to
      a
      $1.5 million increase in incentive based compensation, which was recorded at
      the
      corporate level in 2004 but charged to the business segments in 2005.
      Administrative and general expense also increased by $0.9 million due to reduced
      capitalization of expenses, which increased the costs allocated to
      administrative and general expense. The increase in administrative and general
      expense was offset in part by a $0.9 million decrease in workmen’s compensation
      and insurance.





Depreciation
      and amortization increased $3.7 million, or 19.3%, primarily due to the addition
      of $16.0 million in distribution assets, $14.2 million in transmission assets
      and $18.2 million in software assets. PNMR expects depreciation to continue
      to
      rise going forward as a result of increased investment in new information
      technology platforms and other capital spending.








A-47





**Unregulated
      Operations**





**PNM
      Wholesale**





The
      table
      below sets forth the operating results for PNM Wholesale:


**Year
                  Ended****December
                  31,****2005**
              
              **2004**
              
              **2005**(In
                  thousands)**Operating
                  revenues**
              
              **$**
              **628,028**
              
              **$**
              **588,243**
              
              **$**
              **39,785**Less:
                  Cost of energy
              
              
              506,935
              
              
              449,059
              
              
              57,876Intersegment
                  energy transfer
              
              
              35,829
              
              
              42,769
              
              
              (6,940
              )**Gross
                  margin**
              
              
              **85,264**
              
              
              **96,415**
              
              
              **(11,151**
              **)**Energy
                  production costs
              
              
              29,614
              
              
              29,967
              
              
              (353
              )Transmission
                  and distribution O&M
              
              
              54
              
              
              81
              
              
              (27
              )Customer
                  related expense
              
              
              879
              
              
              1,049
              
              
              (170
              )Administrative
                  and general
              
              
              6,446
              
              
              7,255
              
              
              (809
              )**Total
                  non-fuel O&M**
              
              
              **36,993**
              
              
              **38,352**
              
              
              **(1,359**
              **)**Corporate
                  allocation
              
              
              4,395
              
              
              4,557
              
              
              (162
              )Depreciation
                  and amortization
              
              
              15,669
              
              
              14,809
              
              
              860Taxes
                  other than income taxes
              
              
              3,439
              
              
              3,533
              
              
              (94
              )Income
                  taxes
              
              
              3,612
              
              
              8,537
              
              
              (4,925
              )**Total
                  non-fuel operating expenses**
              
              
              **64,108**
              
              
              **69,788**
              
              
              **(5,680**
              **)****Operating
                  income**
              
              **$**
              **21,156**
              
              **$**
              **26,627**
              
              **$**
              **(5,471**
              **)**


A-48


The
        following table shows revenues by customer class:





**PNM
      Wholesale Revenues**





**Year
                Ended****December
                31,****2005**
            
            **2004**
            
            **Variance**(In
                thousands)Long-term
                contracts
            
            $
            154,692
            
            $
            158,085
            
            $
            (3,393
            )Short-term
                sales
            
            
            473,336
            
            
            430,158
            
            
            43,178$
            628,028
            
            $
            588,243
            
            $
            39,785


The
        following table shows sales by customer class:





**PNM
      Wholesale Sales**





**Year
                Ended****December
                31,****2005**
            
            **2004**
            
            **Variance**(Megawatt
                hours)Long-term
                contracts
            
            
            2,516,907
            
            
            2,943,372
            
            
            (426,465
            )Short-term
                sales
            
            
            8,069,751
            
            
            9,057,172
            
            
            (987,421
            )10,586,658
            
            
            12,000,544
            
            
            (1,413,886
            )





Operating
      revenues increased $39.8 million, or 6.8%, from the prior year. This increase
      in
      wholesale electric sales was primarily due to increased short-term sales of
      $43.2 million, or 10.0%, resulting from a 23.5% increase in average short-term
      prices in 2005 compared to 2004. In addition, long-term sales increased due
      to
      higher prices associated with SO2 credit sales. These increases were partially
      offset by a decrease in revenues from long-term contracts in 2005 due primarily
      to the expiration of a customer contract and lower sales volumes resulting
      from
      below normal levels of plant performance. PNM Wholesale sold 10.6 million MWh
      of
      electricity in 2005 compared to 12.0 million MWh in 2004, a decrease of 11.8%.





The
      gross
      margin, or operating revenues minus cost of energy sold and intersegment energy
      transfer, decreased $11.2 million, or 11.6%, from the prior year. Decreased
      plant availability and increased retail load decreased the availability of
      less
      expensive excess energy for sale in the wholesale market. In addition, higher
      purchased power contracts prices decreased the margin on fixed-price sales
      contracts. The long-term sales margin was relatively unchanged from the prior
      year due to the impacts of customer load growth and higher prices associated
      with SO2 credit sales that were offset by a decrease in sales volume due to
      the
      expiration of a long-term contract and increased purchased power contract prices
      that could not be passed through to customers based on fixed-price sales
      contracts. The short-term margin decreased $11.5 million primarily resulting
      from lower plant availability and increased retail loads, which caused a
      decrease in energy available to sell on the wholesale market. PNM Wholesale's
      mark-to-market position fell to a $0.2 million loss in 2005 from a $1.6 million
      gain in 2004.





Total
      non-fuel O&M expense decreased $1.4 million, or 3.5%, from the prior year.
      Administrative and general expense decreased $0.8 million, or 11.2%, due
      primarily to the capitalization of expenses from administrative and general
      activities related to the construction of Luna.





Depreciation
      and amortization increased $0.9 million, or 5.8%, over the prior year due to
      the
      addition of new technology platforms that were placed in service in December
      2004 and in 2005. PNMR expects depreciation to rise going forward as a result
      of
      increased investment in new information technology platforms and other capital
      spending.








A-49





**First
      Choice**





PNMR
      acquired TNP on June 6, 2005, and results in this section are presented from
      the
      acquisition date forward only. For the year ended December 31, 2005, which
      includes results from June 6 through December 31, 2005, the First Choice segment
      increased PNMR revenues by $316.3 million.





The
      table
      below sets forth the operating results for First Choice:





**For
                the Period****June
                6 - December 31, 2005**(In
                thousands)**Operating
                revenues**
            
            **$**
            **316,330**Less:
                Cost of energy
            
            
            243,053**Gross
                margin**
            
            
            **73,277**Customer
                related expense
            
            
            2,539Administrative
                and general
            
            
            13,008**Total
                non-fuel O&M**
            
            
            **15,547**Corporate
                allocation
            
            
            8,434Depreciation
                and amortization
            
            
            1,094Taxes
                other than income taxes
            
            
            3,916Income
                taxes
            
            
            15,450**Total
                non-fuel operating expenses**
            
            
            **44,441****Operating
                income**
            
            **$**
            **28,836**





The
      following table shows electric revenues by customer class and average
      customers:





**First
      Choice Electric Revenues**





**For
                the Period****June
                6 - December 31, 2005**(In
                thousands, except customers)Residential
            
            $
            198,218Mass-market
            
            
            53,111Mid-market
            
            
            46,584Other
            
            
            18,417$
            316,330Average
                customers *
            
            
            209,464





The
      following table shows electric sales by customer class:





**First
      Choice Electric Sales ***





**For
                the Period****June
                6 - December 31, 2005**(Megawatt
                hours)Residential
            
            
            1,591,005Mass-market
            
            
            400,839Mid-market
            
            
            478,531Other
            
            
            29,7802,500,155





*
      See
      note above in the TNMP Electric segment discussion about the impact of
      TECA.





A-50


First
        Choice’s gross margin was $73.3 million for the period June 6 through December
        31, 2005. The significant factors that impacted gross margin include revenues
        of
        $9.4 million due to an increase in the price-to-beat fuel factor in October
        2005, higher purchased power costs, that were lessened by gas hedges, gains
        of
        $4.2 million from the amortization of purchase power and power sale contracts
        (see Note 2), and gains of $4.2 million from a capacity
        auction.


In
        Texas,
        capacity auctions were a semi-regular event mandated by the TECA to promote
        liquidity in the marketplace. In the most recent auctions, First Choice was
        the
        successful bidder for four 25 MW baseload blocks of capacity in October 2005
        and
        two 25 MW cyclic blocks of capacity in September 2005.





**Corporate
      and Other**





*Corporate
      Administrative and General Expenses*





Corporate
          administrative and general expenses, which represent costs that are driven
          primarily by corporate-level activities, are allocated to the business
          segments
          and are presented in the corporate allocation line item in the segment
          statements. These costs increased $10.5 million, or 9.3%, from the prior
          year to
          $123.6 million. The increase was primarily due to charges in 2005 related
          to the
          TNP acquisition of $19.3 million and increased audit and costs related
          to the
          cost of compliance with the Sarbanes-Oxley Act of $3.1 million. These increases
          were offset in part by a decrease of $14.2 million for incentive based
          compensation at the corporate level, which were recorded at the corporate
          level
          in 2004 but charged to the business segments in 2005.





**PNMR
      Consolidated**





*Other
      Income and Deductions*





Interest
        income increased $4.8 million, or 12.7%, due primarily to interest income
        of
        $2.5 million earned from the investment of TNP's cash balance, which PNMR
        did
        not have in the prior year, interest income of $1.9 million earned from the
        investment of cash received from PNMR’s issuance of equity-linked units, and
        $1.4 million of interest income earned from higher cash balances from the
        PGAC
        caused by increasing gas prices. The increase in interest income was partially
        offset by lower interest income of $2.0 million due to a lower level of
        investment in the Palo Verde capital trust.





Other
      income increased $7.6 million, or 75.3%, due to a realized gain of $4.1 million
      on the sale of certain PVNGS decommissioning trust assets, a $2.1 million
      increase in trust earnings in excess of the required amount and a $2.2 million
      increase in merchandising revenues, primarily from emergency assistance services
      to other utilities (offset by the related expenses in other deductions below).
      The increase in other income was offset in part by a $0.8 million decrease
      from
      the sale of water rights in 2004 that did not reoccur in 2005.





Carrying
      charges on regulatory assets were $4.4 million from June 6 through December
      31,
      2005. This represents interest income on TNMP regulatory assets from the date
      of
      acquisition.





Other
      deductions increased approximately $16.0 million due primarily to an $11.3
      million charge related to the issuance of equity-linked units (see Note 6).
      In
      addition, other deductions increased due to a $2.5 million contribution by
      PNMR
      to the PNM Resources Foundation and a $2.4 million increase in expenses related
      to emergency assistance services to other utilities (offset by the related
      revenues in other income above).





*Interest
      Charges*





Interest
      charges increased $42.3 million, or 82.3%, primarily due to $16.8 million of
      interest charges related to debt from the TNP operations, which PNMR did not
      have in the prior year, interest and refinancing costs of $10.8 million related
      to the hybrid income term securities issued in March and October of 2005 and
      $8.1 million of interest charges related to increased commercial paper
      borrowings.





A-51


*Cumulative
      Effect of a Change in Accounting Principle*





Effective
      January 1, 2005, PNMR adopted FASB
      Interpretation No. 47, *“Accounting
      for Conditional Asset Retirement Obligations”* (“FIN
      47”), and
      recognized a cumulative effect of a change in accounting principle that
      decreased 2005 earnings $0.9 million, net of the income tax benefit, or $0.01
      per diluted common share. The $0.9 million decrease to 2005 earnings is net
      of
      amounts expensed in prior years for cost of removal included in depreciation.
      FIN 47 requires the accrual of costs associated with conditional retirement
      obligations.





*Income
      Taxes*





PNMR’s
      consolidated income tax expense was $32.9 million for the year ended December
      31, 2005 before the cumulative effect of a change in accounting principle,
      compared to $49.2 million in 2004. The decrease in consolidated income tax
      expense was due to the impact of lower pre-tax earnings. PNMR’s effective
      operating income tax rates for the years ended December 31, 2005 and 2004 were
      30.80% and 36.95%, respectively. The decrease in the effective operating tax
      rate, year-over-year, was due to lower pre-tax earnings and changes in permanent
      tax differences. PNMR’s effective non-operating income tax rates for the years
      ended December 31, 2005 and 2004 were 32.92% and 33.03%, respectively.











A-52





**RESULTS
      OF OPERATION - PNM**





**YEAR
      ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31,
      2004**




PNM’s
        segments are PNM Electric, PNM Gas and PNM Wholesale and are identical to
        the
        segments presented above in “Results of Operation” for PNMR.





*Cumulative
      Effect of a Change in Accounting Principle*





In
      2005,
      PNM adopted FIN
      47 and
      recognized a cumulative effect of a change in accounting principle that
      decreased 2005 earnings $0.5 million, net of the income tax benefit. The $0.5
      million decrease to 2005 earnings is net of amounts expensed in prior years
      for
      cost of removal included in depreciation. FIN 47 requires the accrual of costs
      associated with conditional retirement obligations.








A-53





**RESULTS
      OF OPERATION - TNMP**





**YEAR
      ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31,
      2004**




TNMP
        operates in only one reportable segment, “TNMP Electric.” Results for the year
        ended December 31, 2005 include the effects of purchase accounting on June
        6,
        2005, which are not included in the year ended December 31, 2004. Amounts
        for
        the period June 6 through December 31, 2005 are post-acquisition and amounts
        for
        the period January 1 through June 6, 2005 and the year ended December 31,
        2004
        are pre-acquisition. (See Note 2.)
  Operating
        revenues decreased $2.5 million, or 0.9%, from the prior year. Gross margin
        for
        the year ended December 31, 2005 decreased $3.0 million, or 1.8%, compared
        with
        the year ended December 31, 2004. The decrease was primarily due to a $10.5
        million decrease in revenues due to a rate reduction effective May 1, 2005
        that
        was part of the PUCT’s approval of the TNP acquisition and $0.9 million decrease
        in margin due to the reduced operations of a major customer. Partially
        offsetting the decrease in operating revenues were an increase in revenues
        of
        $6.1 million due to customer growth and an increase in revenues of $1.8 million
        resulting from warm weather.





Total
      non-fuel operating expenses increased $0.3 million, or 0.2%, due primarily
      to a
      decrease in non-fuel O&M of $0.6 million offset by an increase of $0.9
      million in depreciation and amortization expense.





Administrative
      and general expenses decreased $2.8 million primarily due to decreased legal,
      environmental and regulatory expenses of $4.4 million. The decrease in
      administrative and general expense was partially offset by increased expenses
      of
      $1.5 million related to synergy credits passed to customers.





Transmission
      and distribution O&M increased $2.2 million primarily due to $0.6 million in
      increased expenses for the preparation and restoration efforts related to
      hurricane Rita, $0.9 million related to the maintenance of overhead lines in
      2005, and increased payroll expenses of $0.6 million.





Depreciation
      expenses increased as a result of additions to fixed assets.





*Cumulative
      Effect of a Change in Accounting Principle*





In
      2005,
      TNMP adopted FIN 47 and recognized a cumulative effect of a change in accounting
      principle that decreased 2005 earnings $0.4 million, net of the income tax
      benefit. The $0.4 million decrease to 2005 earnings is net of amounts expensed
      in prior years for cost of removal included in depreciation. FIN 47 requires
      the
      accrual of costs associated with conditional retirement obligations.





A-54





**RESULTS
      OF OPERATION - PNMR**





**YEAR
      ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31,
      2003**




The
        Company’s net GAAP earnings for the year ended December 31, 2004 were $87.7
        million, or $1.43 per diluted share of common stock, a 7.8% decrease in net
        earnings compared to $95.2 million, or $1.58 per diluted share of common
        stock,
        in 2003. This decrease primarily resulted from items that occurred in 2003
        that
        did not recur in 2004. In 2003, the Company recognized $36.6 million, net
        of
        income taxes, as an addition to net income for the cumulative effect of changes
        in accounting principles for the adoption of SFAS No. 143, *”Accounting
        for Asset Retirement Obligations”* (”SFAS
        143”) and the change in the pension actuarial valuation measurement date ($0.61
        per diluted share of common stock). This increase to 2003 income was partially
        offset by the write-off of transition costs of $9.5 million, net of income
        taxes, or $0.16 per diluted share of common stock, that resulted from the
        repeal
        of electric deregulation in New Mexico in 2003, and a charge of $10.0 million,
        net of income taxes, or $0.17 per diluted share of common stock, for costs
        related to long-term debt refinancing.





The
      following discussion is based on the methodology that the Company’s management
      uses for making operating decisions and assessing performance of its various
      business activities. As such, these statements report operating results without
      regard to the effect of accounting or regulatory changes, and similar items
      not
      related to normal operations. See Note 3 for additional information regarding
      these results and the Consolidated Financial Statements.




In
      addition, adjustments related to EITF Issue 03-11 are excluded from the PNM
      Wholesale segment and are instead included in the Corporate and Other segment.
      This accounting pronouncement requires a net presentation of realized gains
      and
      losses for certain non-trading derivatives. Management evaluates PNM Wholesale
      on a gross presentation basis due to its primarily net-asset-backed marketing
      strategy and the importance it places on PNM’s ability to repurchase and
      remarket previously sold capacity. The other segments are not affected by this
      EITF.





Corporate
      costs, income taxes and non-operating items are discussed only on a consolidated
      basis and are in conformity with the presentation in the Consolidated Financial
      Statements.








A-55





**Regulated
      Operations**





**PNM
      Electric**





The
      table
      below sets forth the operating results for PNM Electric:


**Year
                  Ended****December
                  31,****2004**
              
              **2003**
              
              **Variance**(In
                  thousands)**Operating
                  revenues**
              
              **$**
              **558,412**
              
              **$**
              **560,464**
              
              **$**
              **(2,052**
              **)**Less:
                  Cost of energy
              
              
              186,517
              
              
              177,767
              
              
              8,750Intersegment
                  energy transfer
              
              
              (42,769
              )
              
              (34,760
              )
              
              (8,009
              )**Gross
                  margin**
              
              
              **414,664**
              
              
              **417,457**
              
              
              **(2,793**
              **)**Energy
                  production costs
              
              
              113,848
              
              
              108,734
              
              
              5,114Transmission
                  and distribution O&M
              
              
              31,360
              
              
              31,596
              
              
              (236
              )Customer
                  related expense
              
              
              18,190
              
              
              15,543
              
              
              2,647Administrative
                  and general
              
              
              4,640
              
              
              6,972
              
              
              (2,332
              )**Total
                  non-fuel O&M**
              
              
              **168,038**
              
              
              **162,845**
              
              
              **5,193**Corporate
                  allocation
              
              
              69,820
              
              
              69,269
              
              
              551Depreciation
                  and amortization
              
              
              63,050
              
              
              73,532
              
              
              (10,482
              )Taxes
                  other than income taxes
              
              
              20,324
              
              
              20,520
              
              
              (196
              )Income
                  taxes
              
              
              23,141
              
              
              23,750
              
              
              (609
              )**Total
                  non-fuel operating expenses**
              
              
              **344,373**
              
              
              **349,916**
              
              
              **(5,543**
              **)****Operating
                  income**
              
              **$**
              **70,291**
              
              **$**
              **67,541**
              
              **$**
              **2,750**


The
      following table shows electric revenues by customer class and average
      customers:





**PNM
      Electric Revenues**





**Year
                Ended****December
                31,****2004**
            
            **2003**
            
            **Variance**(In
                thousands, except customers)Residential
            
            $
            206,950
            
            $
            203,710
            
            $
            3,240Commercial
            
            
            251,092
            
            
            252,876
            
            
            (1,784
            )Industrial
            
            
            61,905
            
            
            64,549
            
            
            (2,644
            )Transmission
            
            
            18,327
            
            
            19,453
            
            
            (1,126
            )Other
            
            
            20,138
            
            
            19,876
            
            
            262$
            558,412
            
            $
            560,464
            
            $
            (2,052
            )Average
                customers
            
            
            406,968
            
            
            396,303
            
            
            10,665








A-56





The
      following table shows electric sales by customer class:





**PNM
      Electric Sales**





**Year
                Ended****December
                31,****2004**
            
            **2003**
            
            **Variance**(Megawatt
                hours)Residential
            
            
            2,509,449
            
            
            2,405,488
            
            
            103,961Commercial
            
            
            3,450,503
            
            
            3,379,147
            
            
            71,356Industrial
            
            
            1,283,769
            
            
            1,292,711
            
            
            (8,942
            )Other
            
            
            253,393
            
            
            247,255
            
            
            6,1387,497,114
            
            
            7,324,601
            
            
            172,513





Operating
      revenues decreased $2.1 million, or 0.4%, from the prior year. The decrease
      in
      revenues was primarily due to an electric rate reduction under the Global
      Electric Agreement. The rate reduction decreased 2004 revenues by $16.7 million.
      Under the agreement, rates will decrease again by 2.5% in September 2005 and
      remain at that level through 2007. PNM Electric sales grew 2.4%, to 7.5 million
      MWh in 2004 compared to 7.3 million MWh in 2003. Weather-normalized retail
      electric load growth was 3.3% in 2004. This volume increase was due to customer
      growth, which increased revenues by $21.2 million. This volume increase was
      offset slightly by warmer summer weather in 2003 compared to 2004. Cooling
      Degree Days for Albuquerque declined 22% to 1,304 during the year ended December
      31, 2004 compared to 1,671 during the year ended December 31, 2003.





The
      gross
      margin, or operating revenues minus cost of energy sold and intersegment energy
      transfer, decreased $2.8 million, or 0.7%, from the prior year. Generation
      costs
      decreased by $3.5 million driven by lower fuel costs at SJGS, while purchased
      power costs increased $5.4 million due to higher prices. In addition, costs
      of
      $5.9 million related to the amortization of certain coal mine reclamation costs
      as agreed to in the current electric rate agreement were incurred during 2004,
      an increase of $4.0 million compared to 2003. These costs are amortized over
      17
      years.





Total
      non-fuel O&M expenses increased $5.2 million, or 3.2%, over the prior year.
      Energy production costs increased $5.1 million, or 4.7%, primarily due to
      increased plant maintenance costs of $4.3 million for planned and unplanned
      outages in 2004. Transmission and distribution O&M expense decreased $0.2
      million, or 0.8%, primarily due to a decrease in operating lease costs of $1.1
      million for a transmission line, a portion of which was purchased in April
      2003
      and decreased maintenance costs of $0.3 million in 2004, which were mostly
      offset by increased labor and outside services costs. Customer-related expense
      increased $2.6 million, or 17.0%, as a result of favorable collection outcomes
      in 2003. Administrative and general expense decreased $2.3 million, or 33.5%,
      due to lower expenses for paid-time-off and insurance, regulatory commission
      expense and outside service costs.





Depreciation
      and amortization decreased $10.5 million, or 14.3%. This reduction was primarily
      attributable to a decrease in depreciation rates to align depreciation expenses
      with NMPRC approved rates based on a new five-year depreciation study, which
      decreased depreciation expense by $8.2 million year over year. Additionally,
      depreciation decreased $3.0 million due to the Company’s billing system being
      fully depreciated at the end of 2003. The Company expects to see depreciation
      rise going forward as a result of increased investment in new information
      technology platforms.





A-57





**PNM
      Gas**





The
      table
      below sets forth the operating results for PNM Gas:




**Year
                Ended****December
                31,****2004**
            
            **2003**
            
            **Variance**(In
                thousands)**Operating
                revenues**
            
            **$**
            **490,921**
            
            **$**
            **358,267**
            
            **$**
            **132,654**Less:
                Cost of energy
            
            
            343,219
            
            
            228,345
            
            
            114,874**Gross
                margin**
            
            
            **147,702**
            
            
            **129,922**
            
            
            **17,780**Energy
                production costs
            
            
            2,338
            
            
            1,930
            
            
            408Transmission
                and distribution O&M
            
            
            28,006
            
            
            29,515
            
            
            (1,509
            )Customer
                related expense
            
            
            19,283
            
            
            16,832
            
            
            2,451Administrative
                and general
            
            
            1,648
            
            
            2,040
            
            
            (392
            )**Total
                non-fuel O&M**
            
            
            **51,275**
            
            
            **50,317**
            
            
            **958**Corporate
                allocation
            
            
            38,725
            
            
            39,543
            
            
            (818
            )Depreciation
                and amortization
            
            
            18,894
            
            
            22,186
            
            
            (3,292
            )Taxes
                other than income taxes
            
            
            7,412
            
            
            6,886
            
            
            526Income
                taxes
            
            
            8,063
            
            
            (956
            )
            
            9,019**Total
                non-fuel operating expenses**
            
            
            **124,369**
            
            
            **117,976**
            
            
            **6,393****Operating
                income**
            
            **$**
            **23,333**
            
            **$**
            **11,946**
            
            **$**
            **11,387**


The
        following table shows gas revenues by customer and average
        customers:





**PNM
      Gas Revenues**





**Year
                Ended****December
                31,****2004**
            
            **2003**
            
            **Variance**(In
                thousands, except customers)Residential
            
            $
            292,163
            
            $
            226,799
            
            $
            65,364Commercial
            
            
            92,128
            
            
            72,269
            
            
            19,859Industrial
            
            
            2,889
            
            
            2,820
            
            
            69Transportation*
            
            
            15,274
            
            
            18,906
            
            
            (3,632
            )Other
            
            
            88,467
            
            
            37,473
            
            
            50,994$
            490,921
            
            $
            358,267
            
            $
            132,654Average
                customers
            
            
            461,399
            
            
            452,328
            
            
            9,071





*Customer-owned
      gas.





A-58


The
        following table shows gas throughput by customer class:





**PNM
      Gas Throughput**





**Year
                Ended****December
                31,****2004**
            
            **2003**
            
            **Variance**(Thousands
                of decatherms)Residential
            
            
            30,618
            
            
            27,416
            
            
            3,202Commercial
            
            
            11,639
            
            
            10,810
            
            
            829Industrial
            
            
            413
            
            
            485
            
            
            (72
            )Transportation*
            
            
            43,208
            
            
            50,756
            
            
            (7,548
            )Other
            
            
            13,871
            
            
            5,510
            
            
            8,36199,749
            
            
            94,977
            
            
            4,772




*Customer-owned
        gas.





Operating
      revenues increased $132.7 million, or 37.0%, over the prior year primarily
      because of higher natural gas prices in 2004 as compared to 2003 and the rate
      increase discussed below. The Company purchases natural gas in the open market
      and resells it at the same price to its sales-service customers. As a result,
      increases or decreases in gas revenues driven by gas costs do not impact the
      Company’s consolidated gross margin or earnings. In 2004, off-system sales
      revenues increased $47.7 million due to the revision of an interstate
      transportation contract and improved conditions in the gas market. Total gas
      sales volumes increased 5.0%, resulting from off-system sales and customer
      growth of 2.0%; customer growth increased revenues $2.7 million over the prior
      year. A normal early winter season compared to a warmer 2003 increased revenues
      $3.0 million. In addition, revenues grew $11.4 million due to a cost of service
      rate increase granted by the NMPRC in January 2004. The rate increase is
      expected to increase gas revenues by approximately $22.0 million annually;
      however, implementation of the residential increase was delayed until April
      2004. The increase in operating revenues was partially offset by a decrease
      in
      off-system transportation of $5.4 million due to lower price differences between
      the San Juan and Permian basins.





The
      gross
      margin, or operating revenues minus cost of energy sold, increased $17.8
      million, or 13.7%, over the prior year. This increase was due mainly to customer
      growth, a normal winter heating season during the first quarter 2004 compared
      to
      the first quarter of 2003, and the NMPRC-approved rate increase, partially
      offset by the decrease in off-system transportation sales described above.





Total
      non-fuel O&M expenses increased $1.0 million, or 1.9%, over the prior year.
      Customer-related expense increased $2.5 million, or 14.6%, primarily due to
      an
      improvement in collection rates in 2003 that was maintained in 2004.
      Transmission and distribution O&M expense decreased $1.5 million primarily
      due to a reduction in payroll costs from a Company reorganization.
      Administrative and general expense decreased $0.4 million due primarily to
      a
      $1.3 million decrease in paid-time-off expense, offset in part by increased
      insurance expense of $0.5 million and increased capital activity in
      2004.





Depreciation
      and amortization decreased $3.3 million, or 14.8%, primarily due to the
      Company’s customer billing system being fully depreciated at the end of 2003.
      The Company expects to see depreciation rise going forward as a result of
      increased investment in new information technology platforms and other capital
      spending.





A-59





**Unregulated
      Operations**





**PNM
      Wholesale**





The
      table
      below sets forth the operating results for PNM Wholesale:





**Year
                Ended****December
                31,****2004**
            
            **2003**
            
            **Variance**(In
                thousands)**Operating
                revenues**External
                sales
            
            $
            588,243
            
            $
            551,625
            
            $
            36,618Intersegment
                sales
            
            
            -
            
            
            1,535
            
            
            (1,535
            )**Total
                revenues**
            
            
            **588,243**
            
            
            **553,160**
            
            
            **35,083**Less:
                Cost of energy
            
            
            449,059
            
            
            413,089
            
            
            35,970Intersegment
                energy transfer
            
            
            42,769
            
            
            34,760
            
            
            8,009**Gross
                margin**
            
            
            **96,415**
            
            
            **105,311**
            
            
            **(8,896**
            **)**Energy
                production costs
            
            
            29,967
            
            
            29,919
            
            
            48Transmission
                and distribution O&M
            
            
            81
            
            
            59
            
            
            22Customer
                related expense
            
            
            1,049
            
            
            711
            
            
            338Administrative
                and general
            
            
            7,255
            
            
            8,390
            
            
            (1,135
            )**Total
                non-fuel O&M**
            
            
            **38,352**
            
            
            **39,079**
            
            
            **(727**
            **)**Corporate
                allocation
            
            
            4,557
            
            
            2,586
            
            
            1,971Depreciation
                and amortization
            
            
            14,809
            
            
            14,230
            
            
            579Taxes
                other than income taxes
            
            
            3,533
            
            
            3,263
            
            
            270Income
                taxes
            
            
            8,537
            
            
            12,111
            
            
            (3,574
            )**Total
                non-fuel operating expenses**
            
            
            **69,788**
            
            
            **71,269**
            
            
            **(1,481**
            **)****Operating
                income**
            
            **$**
            **26,627**
            
            **$**
            **34,042**
            
            **$**
            **(7,415**
            **)**








A-60





The
      following table shows revenues by customer class:





**PNM
      Wholesale Revenues**





**Year
                Ended****December
                31,****2004**
            
            **2003**
            
            **Variance**(In
                thousands)Long-term
                contracts
            
            $
            158,085
            
            $
            135,674
            
            $
            22,411Short-term
                sales
            
            
            430,158
            
            
            415,951
            
            
            14,207Intersegment
                sales
            
            
            -
            
            
            1,535
            
            
            (1,535
            )$
            588,243
            
            $
            553,160
            
            $
            35,083





The
      following table shows sales by customer class:





**PNM
      Wholesale Sales**





**Year
                Ended****December
                31,****2004**
            
            **2003**
            
            **Variance**(Megawatt
                hours)Long-term
                contracts
            
            
            2,943,372
            
            
            2,469,707
            
            
            473,665Short-term
                sales
            
            
            9,057,172
            
            
            9,432,297
            
            
            (375,125
            )12,000,544
            
            
            11,902,004
            
            
            98,540





Operating
      revenues increased $35.1 million or 6.3% over the prior year. This increase
      in
      wholesale electric sales primarily reflects additional long-term contract sales
      and wholesale electric price improvements in short-term prices. New long-term
      contracts added 437,446 MWhs, or $21.0 million in revenues, slightly offset
      by a
      decrease in certain existing contract sales prices of $3.3 million due largely
      to a price reduction for sales to Kirtland Air Force Base. These contracts
      support the Company’s long-term growth plans and net asset-backed strategy. In
      addition, the Company’s short-term sales increased $14.2 million, or 3.4%,
      compared to the prior year period, partially due to an increase in average
      short-term prices. Short-term sales volume decreased 4.0% due to less favorable
      energy purchase-to-sale market spreads between PVNGS and the Mead market
      hub.





The
      gross
      margin, or operating revenues minus cost of energy sold and intersegment energy
      transfer, decreased $8.9 million, or 8.4%, from the prior year. Short-term
      sales
      margin decreased $15.6 million primarily due to the effect of higher purchase
      costs and less available excess energy resulting from increased electric retail
      load growth and unplanned outages on certain of the Company’s generation
      facilities, partially offset by higher sales volumes and higher market prices.
      Average short-term market purchase prices increased 10.7% over the prior year
      while average short-term market sale prices increased 4.4% over the prior year.
      The Company had an unfavorable change in the unrealized mark-to-market position
      of $1.7 million from the prior year ($1.8 million gain in 2004 versus $3.5
      million gain in 2003), reflecting depressed pricing caused by cooler weather.
      Long-term contracts margin increased $6.8 million due to additional long-term
      sales under new and existing contracts. In addition, the long-term margin
      increase included $6.1 million from sales of pollution credits.





Total
      non-fuel O&M decreased $0.7 million, or 1.9%, from the prior year.
      Administrative and general decreased $1.1 million, or 13.5%, due to
      transportation costs of $1.0 million recognized in 2003 for turbines that were
      placed in storage, which did not recur in 2004.





**Corporate
      and Other**





*Corporate
      Administrative and General Expenses*




Corporate
        administrative and general expenses, which represent costs that are driven
        primarily by corporate-level activities, is allocated to the business segments
        and is presented in the corporate allocation line item in the segment
        statements. These costs increased $1.7 million, or 1.5%, from the prior year
        to
        $113.1 million, primarily due to a net increase in compensation and benefit
        costs.





A-61


Taxes
        other than income increased $2.7 million due to the 2003 favorable resolution
        of
        tax issues of $2.4 million and increased social security taxes due to overall
        higher payroll costs.





**PNMR
      Consolidated**





*Other
      Income and Deductions*





Other
      income decreased $4.6 million, or 8.8%, from the prior year due to decreased
      tax
      credits of $2.4 million, and a decrease in the equity component of allowance
      for
      funds used during construction of $1.3 million. Additionally, other income
      decreased due to favorable 2003 customer settlements of $0.8 million, which
      did
      not recur in 2004.




Other
      deductions decreased $38.0 million from the prior year primarily due to a charge
      of $16.7 million in 2003 for the write-off of transition costs due to the repeal
      of deregulation in New Mexico and a charge of $16.6 million in 2003 for costs
      related to long-term debt refinancing.





*Interest
      Expense*





Interest
      expense decreased $14.8 million, or 22.4%, over the prior year due to debt
      refinancing, including senior unsecured notes and pollution control bonds,
      and
      lower short-term debt balances, which decreased interest costs $10.1 million.
      Additionally, the Company had lower borrowing levels in 2004, which reduced
      interest expense by $2.6 million, and a favorable interest rate swap which
      further reduced interest expense by $2.1 million.





*Income
      Taxes*





PNMR’s
      consolidated income tax expense was $49.2 million for the year ended December
      31, 2004, compared to $27.9 million in 2003 before the cumulative effect of
      a
      change in accounting principles. The increase was due to the impact of higher
      pre-tax earnings. PNMR’s effective operating income tax rates for the years
      ended December 31, 2004 and 2003 were 36.95% and 34.88%, respectively. The
      increase in the effective operating tax rate was due to a decrease in permanent
      tax differences, resulting from tax credits in 2003. PNMR’s effective
      non-operating income tax rates for the years ended December 31, 2004 and 2003
      were 33.03% and (2.79)%, respectively. The increase in the effective tax rate
      was due to a decrease in permanent tax differences, resulting from allowance
      for
      funds used during construction and tax credits in 2003.





*Cumulative
      Effect of Changes in Accounting Principles*





In
      2003,
      the Company adopted SFAS 143. The effect of the initial application of the
      new
      standard is reported as a cumulative effect of a change in accounting principle.
      As a result, PNMR recorded income, net of income tax expense, of approximately
      $37.4 million, or $0.62 per diluted common share, representing amounts expensed
      in prior years for its asset retirement obligations in excess of the actual
      legal obligations as established under the new accounting standard.





In
      2003,
      the Company changed its valuation date for its pension and post retirement
      benefits plans from September 30 to December 31 to better reflect the actual
      plan balances as of the PNMR’s year end balance sheet date. The effect of the
      change in the plans’ valuation date is reported as a cumulative effect of a
      change in accounting principle. PNMR recorded additional expense, net of income
      tax benefit, of approximately $0.8 million, or $0.01 per diluted common share
      reflecting the effect of changing the valuation date.








A-62




**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 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. Company
      management has identified the following accounting policies that it deems
      critical to the portrayal of the financial condition and results of operations
      of PNMR, PNM and TNMP and that involve significant subjectivity. Company
      management believes that its selection and application of these policies best
      represent the operating results and financial position of PNMR, PNM and TNMP.
      The following discussion provides information on the processes utilized by
      Company management in making judgments and assumptions as they apply to its
      critical accounting policies.





*Revenue
      Recognition*





Operating
      revenues are recorded as services are rendered to customers. Revenues subject
      to
      refund are recorded with a reserve also established for the potential refund.
      The Company’s subsidiaries record unbilled revenues representing management's
      assessment of the estimated amount customers will be billed for services
      rendered between the meter-reading dates in a particular month and the end
      of
      that month. Company management estimates unbilled revenues based on sales
      recorded in the billing system, taking into account weather impacts. The method
      is consistent with the approach to normalization employed for rate case billing
      determinants and the load forecast. To the extent the estimated amount differs
      from the amount subsequently billed, revenues will be affected. Unbilled
      revenues are separately reported on the Consolidated Balance Sheets of PNMR,
      PNM
      and TNMP.





*Regulatory
      Assets and Liabilities*





The
      Company is subject to the provisions of SFAS No. 71, as amended, “ *Accounting
      for the Effects of Certain Types of Regulation* ”
(”SFAS
      71”). Accordingly, the Company’s utility subsidiaries, PNM and TNMP, have
      recorded assets and liabilities on the Consolidated Balance Sheets resulting
      from the effects of the ratemaking process, which would not be recorded under
      GAAP for non-regulated entities. Regulatory assets represent incurred costs
      that
      have been deferred because they are probable of future recovery in customer
      rates. Regulatory liabilities generally represent probable future reductions
      in
      revenue or refunds to customers. The Company’s continued ability to meet the
      criteria for application of SFAS 71 may be affected in the future by competitive
      forces and restructuring in the electric industry. In the event that SFAS 71
      no
      longer applied to all, or a separable portion, of Company’s operations, the
      related regulatory assets and liabilities would be written off unless an
      appropriate regulatory recovery mechanism is provided.


Until
        its
        next rate case, PNM’s electric rates are fixed; therefore, the opportunity to
        recover increased costs and the costs of new investment in facilities through
        rates is limited through 2007 due to the rate-freeze. As a result, PNM defers
        certain costs based on its expectation that it will recover these costs in
        future rate cases. If future recovery of these costs ceases to be probable,
        PNM
        would be required to record a charge in current period earnings for the portion
        of the costs that were not recoverable.





*Asset
      Impairment*


Tangible
        long-lived assets are evaluated in relation to the future undiscounted cash
        flows to assess recoverability in accordance with SFAS 144 when events and
        circumstances indicate that the assets might be impaired. These potential
        impairment indicators include Company management's assessment of fluctuating
        market conditions as a result of industry deregulation; planned and scheduled
        customer purchase commitments; future market penetration; fluctuating market
        prices resulting from factors including changing fuel costs and other economic
        conditions; weather patterns; and other market trends. The amount of impairment
        recognized is the difference between the fair value of the asset and the
        carrying value of the asset.





A-63


PNM
      has
      three turbines currently in storage, with a combined book value of approximately
      $64.7 million at December 31, 2005. PNM believes that it will be able to place
      two of the turbines in service and recover the costs of these two turbines
      in
      rates. As previously reported, PNM had planned to convert Afton from a
      combustion turbine to a combined-cycle unit using another turbine in storage.
      As
      part of negotiations that will allow PNM to convert Afton to a combined cycle
      plant and include it as a jurisdictional resource, Company management found
      that
      an alternative equipment configuration will be used and this turbine will not
      be
      used. In the fourth quarter of 2005, Company management determined that it
      would
      make the turbine available for sale. Based on its market survey, PNM recorded
      an
      impairment charge of $15.0 million for the year ended December 31, 2005. The
      impairment charge is recorded in the Corporate and Other segment.





*Goodwill
      and Other Intangible Assets*





In
      accordance with SFAS No. 141, as amended *,
      “Business Combinations”* (“SFAS
      141”), the Company has revalued the assets and liabilities acquired as part of
      the acquisition of TNP at their respective fair values. Under the provisions
      of
      SFAS 142, the Company does not amortize goodwill. Certain intangible assets
      are
      amortized over their estimated useful lives. Goodwill and unamortized intangible
      assets are evaluated for impairment at least annually, or more frequently if
      events and circumstances indicate that the goodwill and intangible assets might
      be impaired. Amortized other intangible assets are evaluated for impairment
      in
      accordance with SFAS 144 when events and circumstances indicate that the assets
      might be impaired.





*Purchase
      Accounting*





The
      acquisition of TNP was accounted for using the purchase method of accounting
      as
      prescribed in SFAS 141; accordingly, purchase accounting adjustments have been
      reflected in the financial statements of TNP for all periods subsequent to
      June
      6, 2005. The purchase accounting entries are reflected on PNMR’s financial
      statements as of the purchase date. PNMR “pushed down” the effects of purchase
      accounting to the financial statements of TNMP and First Choice. Accordingly,
      TNMP’s post-acquisition financial statements reflect a new basis of accounting.
      TNP’s largest subsidiary, TNMP, is a regulated utility; therefore, in accordance
      with SFAS 71, the fair value of the majority of the assets and liabilities
      did
      not change significantly. The business operations of TNP were not significantly
      changed as a result of the acquisition, and post-acquisition and pre-acquisition
      operating results, except as noted in the discussion, are comparable.





*Decommissioning
      Costs*





Accounting
      for decommissioning costs for nuclear and fossil-fuel generation involves
      significant estimates related to costs to be incurred many years in the future
      after plant closure. Changes in these estimates could significantly impact
      PNMR’s and PNM’s financial position, results of operations and cash flows. PNM
      owns and leases nuclear and fossil-fuel generation facilities that are within
      and outside of its retail service areas. In accordance with SFAS 143, PNM is
      only required to recognize and measure decommissioning liabilities for tangible
      long-lived assets for which a legal obligation exists (see Note 15). Adoption
      of
      SFAS 143 changed the method of accounting for both nuclear generation
      decommissioning and fossil-fuel generation decommissioning. Nuclear
      decommissioning costs are based on site-specific estimates of the costs for
      removing all radioactive and other structures at the site. PVNGS Unit 3 is
      excluded from PNM’s retail rates while PVNGS Units 1 and 2 are included. PNM
      collects a provision for ultimate decommissioning of PVNGS Units 1 and 2 in
      its
      rates and recognizes a corresponding expense and liability for these amounts.
      PNM believes that it will continue to be able to collect in rates for its legal
      asset retirement obligations for nuclear generation activities included in
      the
      ratemaking process.





*Financial
      Instruments*





The
      Company follows the provisions set forth under SFAS 133, as amended. SFAS 133
      establishes accounting and reporting standards requiring derivative instruments
      to be recorded in the balance sheet as either an asset or liability measured
      at
      their fair value. SFAS 133 also requires that changes in the derivatives’ fair
      value be recognized currently in earnings unless specific hedge accounting
      or
      normal purchase and sale criteria are met. Special accounting for qualifying
      hedges allows derivative gains and losses to offset related results on the
      hedged item in the statement of earnings, and requires that a company must
      formally document, designate, and assess the effectiveness of transactions
      that
      receive hedge accounting. SFAS 133 provides that the effective portion of the
      gain or loss on a derivative instrument designated and qualifying as a cash
      flow
      hedging instrument be reported as a




A-64


component
      of other comprehensive income and be reclassified into earnings in the period
      during which the hedged forecasted transaction affects earnings. The results
      of
      hedge ineffectiveness and the change in fair value of a derivative that an
      entity has chosen to exclude from hedge effectiveness are required to be
      presented in current earnings.





*Pension
      and Other Postretirement Benefits*





PNMR
      and
      its subsidiaries maintain a qualified defined benefit pension, a plan providing
      medical and dental benefits to eligible retirees, and an executive retirement
      program (“PNM Plans”). PNMR maintains the legal obligation for the benefits owed
      to participants under these plans. TNMP also maintains a qualified defined
      benefit pension plan covering substantially all of its employees, a plan
      providing medical and death benefits to eligible retirees and an executive
      retirement program (“TNMP Plans”). The actuarial estimates of retiree benefits
      and the associated significant weighted-average assumptions for these plans
      are
      discussed in Note 12.





One
      of
      the most significant assumptions is the return on assets assumption, which
      was
      9.0% for the PNM pension plan for the year ending December 31, 2005 and 7.8%
      for
      the TNMP pension plan from January 1 though June 6 and 9.0% from June 6 through
      December 31, 2005. This assumption will be 9.0% for both the PNM and TNMP
      pension plans for 2006. In developing the expected long-term rate of return
      assumption, the Company evaluated input from its actuaries and its investment
      consultant, including their review of asset class return expectations as well
      as
      long-term inflation assumptions. The 9.0% assumption was based on a passive
      return of 8.7% and a premium for active management of 0.3% reflecting the target
      asset allocation and current investment array. If all other factors were to
      remain unchanged, it is expected that a 1% decrease in the expected long-term
      rate of return would cause PNM’s 2006 net pension income to decrease
      approximately $4.5 million (analogous change would result from a 1% increase).
      If all other factors were to remain unchanged, it is expected that a 1% decrease
      in the expected long-term rate of return would cause TNMP’s 2006 net pension
      income to decrease approximately $0.8 million (analogous change would result
      from a 1% increase).





Under
      SFAS No. 87, *“Employers'
      Accounting for Pensions”* (“SFAS
      87”) and SFAS No. 106, “ *Employers'
      Accounting for Postretirement Benefits Other Than Pensions”* (“SFAS
      106”), the expected long-term rate of return on pension and postretirement plan
      assets is calculated on the market-related value of assets. SFAS 87 and SFAS
      106
      require that actual gains and losses on pension and postretirement plan assets
      be recognized in the market-related value of assets equally over a period of
      not
      more than five years, which reduces year-to-year volatility. For the PNM Plans
      and TNMP Plans, the market-related value of assets is equal to the prior years’
market related value of assets adjusted for contributions, benefit payments
      and
      investment gains and losses that lie within a corridor of plus or minus 4.0%
      around the expected return on market value. Gains and losses that lie outside
      the corridor are amortized over five years, i.e., if investment return is
      outside a range of 5.0% to 13.0% (expected long-term rate of return plus or
      minus 4.0%), this market-related value recognizes the portion of return that
      is
      outside the range over a five-year period from the year in which the return
      occurs. As such, the future value of assets will be impacted as previously
      deferred returns are recorded.





The
      discount rate that the Company utilizes for determining future pension and
      postretirement obligations is based on a review of long-term high-grade bonds
      and management’s expectations. As a result of this review, the Company adjusted
      the discount rate for the PNM pension plan to 5.75% at December 31, 2005 from
      6.0% at December 31, 2004. The rate for the TNMP pension plan was adjusted
      to
      5.75% at December 31, 2005 from 5.25% at June 6, 2005 and was 5.75% at December
      31, 2004. Lowering the discount rate by 0.5% would have decreased 2005 pension
      income for PNM by approximately $0.5 million and would have no impact on TNMP
      pension expense.





Based
      on
      an expected rate of return of 9.0%, a discount rate of 5.75% and various other
      assumptions, it is estimated that the PNM pension income for the qualified
      and
      non-qualified pension plans will be approximately $2.8 million in 2006 and
      $2.8
      million in 2007. It is estimated that TNMP pension income for the qualified
      and
      non-qualified pension plans will be approximately $2.6 million in 2006 and
      $2.7
      million in 2007. Future actual pension income or expense will depend on future
      investment performance, changes in future discount rates and various other
      factors related to the populations participating in the Company’s pension
      plans.





A-65


Note
      12
      contains further details about the effects of certain changes in assumptions
      related to medical trend rates on retiree health costs. The Company will
      continue to evaluate its actuarial assumptions at least annually, and will
      adjust as necessary.




See
      Item
      7A. “Quantitative and Qualitative Disclosure About Market Risk” for discussion
      regarding the Company’s accounting policies and sensitivity analysis for the
      Company’s financial instruments and derivative energy and other derivative
      contracts. See also “Financing Activities” below for additional discussion
      regarding the Company’s accounting policies for forward interest rate
      swaps.





**LIQUIDITY
      AND CAPITAL RESOURCES**





PNMR


At
        December 31, 2005, PNMR had cash and short-term investments of $68.2 million
        compared to $17.2 million in cash and short-term investments at December
        31,
        2004.





Cash
      provided by operating activities for the year ended December 31, 2005 was $210.5
      million compared to $235.1 million for the year ended December 31, 2004. PNMR's
      net earnings for the year ended December 31, 2005 decreased 23.4% to $67.2
      million from $87.7 million for the year ended December 31, 2004. The decrease
      in
      earnings, as well as higher natural gas prices in 2005, contributed to the
      decrease in cash provided by operating activities. The decrease in earnings
      was
      driven primarily by acquisition related costs, the write down of a turbine
      to
      fair market value and other charges. In addition, the Company experienced below
      normal levels of plant performance, which reduced the amount of electricity
      the
      Company sold on the wholesale market and forced the Company to purchase power
      to
      meet jurisdictional and contractual wholesale needs. In addition, the margin
      on
      fixed-price contracts decreased, as increases in purchased power contract prices
      driven by increasing fuel prices could not be passed on to customers with fixed
      sales prices. These decreases to net earnings were partially offset by the
      addition of the TNP operations for June 6 through December 31, 2005 and an
      increase in cost of service gas rates.





Cash
      used
      for investing activities was $154.6 million for the year ended December 31,
      2005
      compared to $143.8 million for the year ended December 31, 2004. The increase
      in
      cash used for investing activities in the current period was due primarily
      to
      increased cash payments for utility plant additions, offset in part by the
      cash
      balances acquired from TNP, net of the cash paid to acquire TNP.




Cash
      used
      for financing activities was $4.8 million for the year ended December 31, 2005
      compared to cash used for financing activities of $86.8 million for the year
      ended December 31, 2004. Cash used for financing activities in 2005 decreased
      due to the issuance of short-term debt of $237.5 million to fund a portion
      of
      the cost of redemption of TNP preferred stock and senior notes, the issuance
      of
      the equity-linked units for $339.8 million and the issuance of common stock
      for
      $101.2 million. The decrease in cash used for financing activities was partially
      offset by the redemption of TNP preferred stock of $224.6 million and the
      repayment of long-term debt of $399.6 million, including the repayment of $289.1
      million in TNP senior notes (excluding the final interest payment) and the
      repayment of $110.5 million under the TNP credit agreement. Financing activities
      in 2004 consisted primarily of common stock dividend payments and short-term
      debt repayments.





PNM




Cash
          provided by operating activities for the year ended December 31, 2005 was
          $171.5
          million compared to $261.0 million for the year ended December 31, 2004.
          This
          decrease in cash provided by operating activities was due primarily to
          lower
          earnings in 2005 and higher natural gas prices in 2005.





Cash
      used
      for investing activities was $151.3 million for the year ended December 31,
      2005
      compared to $131.8 million for the year ended December 31, 2004. The increase
      in
      cash used for investing activities was due primarily to increased utility plant
      additions in 2005, offset in part by a $12.2 million purchase of EIP bond
      investments in 2004 that did not recur in 2005.





A-66


Cash
        used
        by financing activities was $24.0 million for the year ended December 31,
        2005
        compared to cash used for financing activities of $124.4 million for the
        year
        ended December 31, 2004. The decrease in cash used for financing activities
        was
        due primarily to cash received from short-term borrowings in 2005 of $67.8
        million compared to the use of cash in 2004 of $64.5 million to repay short-term
        borrowings. The decrease in cash flows from financing activities was offset
        in
        part by the payment of $91.0 million in dividends to PNMR in 2005.





TNMP





TNMP's
      cash provided by operating activities for the year ended December 31, 2005
      was
      $66.9 million compared to $67.4 million for the year ended December 31, 2004.
      TNMP's net earnings for the year ended December 31, 2005 were $26.7 million
      compared to a net loss of $51.2 million in the year ended December 31, 2004.
      TNMP's net earnings increased $77.9 million in 2005 compared to 2004 due
      primarily to a charge of $97.8 million, net of tax, in 2004 for the disallowance
      of stranded costs, which did not recur in 2005. The charge for stranded costs
      was offset in part by the recording of $32.0 million of carrying charges related
      to deferred stranded costs in 2004.





Cash
      used
      for investing activities was $42.8 million for the year ended December 31,
      2005,
      relatively unchanged from $43.2 million for the year ended December 31, 2004.





Cash
      used
      for financing activities for the year ended December 31, 2005 was $73.7 million
      compared to cash used for financing activities for the year ended December
      31,
      2004 of $15.4 million. During 2005, TNMP, a wholly owned subsidiary of TNP,
      paid
      $62.0 million to redeem a portion of the TNMP stock held by TNP. TNMP also
      paid
      $12.0 million to redeem senior notes in 2005.  Cash used for financing
      activities in 2004 consisted primarily of long-term debt costs/repayments
      and dividends paid.





*Pension
      and Other Postretirement Benefits*





PNMR





PNMR
      and
      its subsidiaries maintain a qualified defined benefit pension, a plan providing
      medical and dental benefits to eligible retirees, and an executive retirement
      program (“PNM Plans”). PNMR maintains the legal obligation for the benefits owed
      to participants under these plans. TNMP also maintains a qualified defined
      benefit pension plan covering substantially all of its employees, a plan
      providing medical and death benefits to eligible retirees and an executive
      retirement program (“TNMP Plans”).





The
      total
      2005 contributions to the PNM Plans, in addition to contributions to the TNMP
      Plans from the date of PNMR’s acquisition of TNP, or June 6, 2005 through
      December 31, 2005, are included in PNMR’s Consolidated Statement of Cash Flows.
      TNMP Plan contributions of $0.5 million are included in PNMR’s Consolidated
      Statement of Cash Flows for the year ended December 31, 2005. See PNM and TNMP
      contribution detail below.





PNM


During
        2005, PNM did not make any contributions to its qualified pension plan and
        does
        not anticipate making any contributions to the qualified pension plan in
        2006.
        PNM made contributions totaling $6.2 million to its postretirement benefit
        plan
        for the plan year 2005 and expects to make contributions totaling $6.2 million
        to its postretirement benefit plan in 2006.





TNMP




During
          2005, TNMP did not make any contributions to its qualified pension plan
          and does
          not anticipate making any contributions to the qualified pension plan in
          2006.
          TNMP made contributions totaling $0.9 million to its postretirement benefit
          plan
          for the plan year 2005 and expects to make contributions totaling $0.3
          million
          to its postretirement benefit plan in 2006.





A-67





*Capital
      Requirements*





PNMR





Total
      capital requirements include construction expenditures as well as other major
      capital requirements and cash dividend requirements for both common and
      preferred stock. The main focus of the Company’s current construction program is
      upgrading generation resources, upgrading and expanding the electric and gas
      transmission and distribution systems and purchasing nuclear fuel. Projections
      for total capital requirements for 2006, including TNMP and First Choice, are
      $458.0 million with projections for construction expenditures for 2006
      constituting $418.0 million of that total. Total capital requirements, including
      TNMP and First Choice, are projected to be $1,833.8 million and construction
      expenditures are projected to be $1,602.8 million for 2006-2010. These estimates
      are under continuing review and subject to on-going adjustment. This projection
      includes $16.0 million for the construction of Luna and $147.0 million for
      expansion at Afton. In November 2005, PNM filed a joint stipulation with the
      NMPRC that would allow PNM to convert Afton to a combined cycle plant and bring
      Afton into retail rates effective January 1, 2008. The Afton book value for
      ratemaking in PNM’s 2007 rate case will be 50% of the lower of the actual cost
      to construct or $187.6 million. PNM cannot recover costs for Afton in excess
      of
      this amount in its retail rates. The stipulation is subject to approval by
      the
      NMPRC. This projection does not include any amounts for the proposed Twin Oaks
      acquisition.




The
      Company continues to look for appropriately priced generation acquisition and
      expansion opportunities to support retail electric load growth, for the
      continued expansion of its long-term contract business, and to supplement its
      natural transmission position in the southwest and west areas of the United
      States.




During
      the year ended December 31, 2005, the Company utilized cash generated from
      operations and cash on hand, as well as its liquidity arrangements, to cover
      its
      capital requirements and construction expenditures. Except for the proposed
      acquisition of the Twin Oaks facility, the Company anticipates that internal
      cash generation and current debt capacity will be sufficient to meet all of
      its
      capital requirements and construction expenditures for the years 2006 through
      2010. 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.





PNM





The
      main
      focus of PNM’s current construction program is to upgrade generation resources,
      to upgrade and expand the electric and gas transmission and distribution systems
      and to purchase nuclear fuel. Projections for total capital requirements for
      2006 are $386.2 million with projections for construction expenditures for
      2006
      constituting $346.2 million of that total. Total capital requirements are
      projected to be $1,520.0 million and construction expenditures are projected
      to
      be $1,289.0 million for the years 2006 through 2010. These estimates are under
      continuing review and subject to on-going adjustment.





Until
      November 2005, the Company's one-third interest in the 570 MW Luna facility,
      currently under construction, was held in a wholly owned subsidiary, PNMR
      Development and Management Corporation. In November 2005, the Company
      transferred its one-third interest in the Luna facility to PNM. PNM will
      complete construction of the Luna facility for use as merchant plant.





TNMP





The
      main
      focus of TNMP’s current construction program is to upgrade and expand its
      electric transmission and distribution systems. Projections for total capital
      requirements for 2006 are $44.3 million. Total capital requirements are
      projected to be $233.7 million for the years 2006 through 2010. These estimates
      are under continuing review and subject to on-going adjustment.





*Liquidity*





PNMR


As
        of
        February 28, 2006, PNMR had $615.0 million of liquidity arrangements. The
        liquidity arrangements consist of $600.0 million from an unsecured revolving
        credit facility, referred to as the PNMR Facility for purposes of this
        discussion, and $15.0 million in local lines of credit. As of February 28,
        2006,
        there were no amounts borrowed under the PNMR Facility and $9.8 million borrowed
        under the local lines of credit.


A-68


At
      February 28, 2006, First Choice had up to $300.0 million of borrowing capacity
      under the PNMR Facility. Any borrowings made by First Choice under this sublimit
      are guaranteed by PNMR. At February 28, 2006, First Choice had no borrowings
      outstanding under the PNMR Facility; however, First Choice had $16.9 million
      of
      letters of credit outstanding, which reduces the available capacity under the
      PNMR Facility. TNMP is also a borrower under the PNMR Facility, see “TNMP”
detail below.




In
      addition, in February 2006, the Board approved intercompany borrowing
      arrangements between PNMR and its subsidiaries that would authorize each
      subsidiary to borrow up to $50.0 million from PNMR.




PNMR
      has
      established a commercial paper program under which it may issue up to $400.0
      million in commercial paper for up to 270 days. The commercial paper is
      unsecured and the proceeds are used for short-term cash management needs. The
      PNMR Facility serves as a backstop for the outstanding commercial paper. As
      of
      February 28, 2006, there were $208.4 million of borrowings outstanding under
      this program.




PNMR’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
      and wholesale markets. Financing flexibility is enhanced by providing a high
      percentage of total capital requirements from internal sources and having the
      ability, if necessary, to issue long-term securities and to obtain short-term
      credit.




Moody’s
      considered PNMR's credit outlook stable as of the date of this report. In
      January 2006, S&P revised its outlook for PNMR to negative from stable. The
      Company is committed to maintaining or improving its investment grade ratings.
      S&P and Moody’s rated PNMR’s senior unsecured notes issued in March 2005
      (see “Financing Activities” below) as BBB- and Baa3, respectively. PNMR's
      commercial paper program discussed above has been rated P-3 by Moody's, but
      was
      lowered to A-3 from A-2 by S&P in January 2006.




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.





PNM





As
      of
      February 28, 2006, PNM had $493.5 million of liquidity arrangements. The
      liquidity arrangements consist of $400.0 million from an unsecured revolving
      credit facility, referred to as the PNM Facility for purposes of this
      discussion, $70.0 million from an accounts receivable securitization program
      and
      $23.5 million in local lines of credit. As of February 28, 2006, there were
      no
      amounts borrowed against the accounts receivable securitization, the local
      lines
      of credit, or the PNM Facility; however, $4.5 million of letters of
      credit were outstanding, which reduces the available capacity under the PNM
      Facility. The accounts receivable securitization program expires in April
      2006.




At
      February 28, 2006, PNM also had a $20.0 million borrowing arrangement with
      PNMR,
      which is not included in the $493.5 million of liquidity arrangements discussed
      above. As of February 28, 2006 there were no amounts outstanding under this
      arrangement.




PNM
      has a
      commercial paper program under which PNM may issue up to $300.0 million in
      commercial paper for up to 365 days. The commercial paper is unsecured and
      the
      proceeds are used for short-term cash management needs. The PNM Facility serves
      as a backstop for PNM's outstanding commercial paper. As of February 28, 2006,
      PNM had $133.9 million in commercial paper outstanding under this
      program.




PNM’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
      and wholesale markets. Financing flexibility is enhanced by providing a high
      percentage of total capital requirements from internal sources and having the
      ability, if necessary, to issue long-term securities and to obtain short-term
      credit.





A-69


Moody’s
        considered PNM's credit outlook stable as of the date of this report. In
        January
        2006, S&P revised its outlook for PNM to negative from stable. PNM is
        committed to maintaining or improving its investment grade ratings. As of
        December 31, 2005, S&P rated PNM’s business position as six, its senior
        unsecured notes as BBB with a stable outlook and its preferred stock as BB+.
        As
        of December 31, 2005, Moody’s rated PNM’s senior unsecured notes as Baa2 and its
        preferred stock as Ba1. PNM's commercial paper program is rated P-3 by Moody's,
        but was lowered to A-3 from A-2 by S&P in January 2006.





TNMP





In
      June
      2005, TNMP filed an application with the NMPRC to become a borrower and issue
      notes of up to $100.0 million under the PNMR Facility. In July 2005, the NMPRC
      issued an order approving the application, SEC approval was received in
      September 2005 and TNMP was added as a borrower under the PNMR Facility in
      September 2005. Any borrowings made by TNMP under this sublimit are not
      guaranteed by PNMR. At February 28, 2006, TNMP had no outstanding borrowings
      under the PNMR Facility, but did have $2.5 million letters of credit
      outstanding, which reduces available capacity under the PNMR
      Facility.





In
      September 2005, as part of the TNP acquisition financing, TNMP redeemed and
      cancelled 1,090 shares of its privately held stock held by TNP at the book
      value
      of $56,888.91 per share, for a total of $62.0 million. TNP subsequently paid
      a
      cash dividend of $62.0 million to PNMR.





In
      June
      2003, TNMP issued $250.0 million of 6.125% senior notes due in 2008. In May
      2003, TNMP executed a $250.0 million Treasury rate lock transaction designed
      to
      manage interest rate risk associated with the issuance of the senior notes.
      TNMP
      paid $4.2 million upon the issuance of senior notes in June 2003 to settle
      the
      rate lock. Through the date of the acquisition, the cost of the rate lock was
      recorded in accumulated other comprehensive income and was amortized to interest
      expense over the life of the senior notes. The book value of the rate lock
      acquired was $1.7 million. In conjunction with the acquisition of TNP by PNMR
      on
      June 6, 2005, the balance for the rate lock remaining in accumulated other
      comprehensive income was recorded at fair market value as of the date of
      acquisition, which was zero, in accordance with SFAS 141.




TNMP’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
      and wholesale markets. Financing flexibility is enhanced by providing a high
      percentage of total capital requirements from internal sources and having the
      ability, if necessary, to issue long-term securities and to obtain short-term
      credit.




Moody’s
      considered TNMP's credit outlook stable as of the date of this report. In
      January 2006, S&P revised its outlook for TNMP to negative from stable. The
      Company is committed to maintaining or improving its investment grade ratings.
      As of December 31, 2005, S&P rated TNMP’s senior unsecured notes at BBB. As
      of December 31, 2005, Moody’s rated TNMP’s senior unsecured notes at
      Baa3.





*Off-Balance
      Sheet Arrangements*




The
        Company’s off-balance sheet arrangements consist of PNM’s operating lease
        obligations for PVNGS Units 1 and 2, the EIP transmission line and the entire
        output of Delta, as gas-fired generating plant. These arrangements help ensure
        PNM the availability of lower-cost generation needed to serve
        customers.
  The
        total
        capitalization for these obligations was $170.9 million as of December 31,
        2005
        and $176.0 million as of December 31, 2004.





*Commitments
      and Contractual Obligations*





Tabular
      information for PNMR, PNM and TNMP is presented below. See also Note 7 for
      further details about the Company’s significant leases, including those for PNM
      and TNMP.





A-70





PNMR





The
      following table sets forth PNMR’s long-term contractual obligations as of
      December 31, 2005:





**Payments
                Due****Less
                than**
            
            
            
            
            
            **After****Contractual
                Obligations**
            
            **Total**
            
            **1
                year**
            
            **2-3
                years**
            
            **4-5
                years**
            
            **5
                years**(In
                thousands)Long-Term
                Debt (a)
            
            $
            1,749,745
            
            $
            -
            
            $
            548,935
            
            $
            514,940
            
            $
            685,870Interest
                on Long-Term Debt (b)
            
            
            810,713
            
            
            97,174
            
            
            186,725
            
            
            110,838
            
            
            415,976Equity-Linked
                Units ForwardContracts
            
            
            16,038
            
            
            5,983
            
            
            9,988
            
            
            67
            
            
            -Interest
                on Forward Contracts
            
            
            759
            
            
            465
            
            
            294
            
            
            -
            
            
            -Operating
                Leases
            
            
            380,593
            
            
            34,363
            
            
            69,005
            
            
            62,749
            
            
            214,476Purchased
                Power Agreements
            
            
            85,457
            
            
            32,027
            
            
            24,924
            
            
            24,119
            
            
            4,387Coal
                Contracts (c)
            
            
            694,307
            
            
            49,905
            
            
            103,635
            
            
            110,206
            
            
            430,561Other
                Purchase Obligations (d)
            
            
            1,609,268
            
            
            424,376
            
            
            752,061
            
            
            432,831
            
            
            -Total
            
            $
            5,346,880
            
            $
            644,293
            
            $
            1,695,567
            
            $
            1,255,750
            
            $
            1,751,270





(a)
            Represents
                total long-term debt excluding unamortized discount of $3.4
                million.


(b)
            Represents
                the annual interest expense on fixed and variable rate debt. Projections
                of interest expense on variable rate debt are based on current interest
                rates as of December 31, 2005.


(c)
            Represents
                only certain minimum payments that may be required under the coal
                contracts if no deliveries are
                made.


(d)
            Represents
                commitments for capital expenditures, pension and postretirement
                benefit
                obligations and other obligations.





The
      following table sets forth PNMR’s other commercial commitments as of December
      31, 2005:





**Amount
                of Commitment Expiration Per Period****Total****Other
                Commercial**
            
            **Amounts**
            
            
            
            
            
            
            
            **After****Commitments**
            
            **Committed**
            
            **1
                year**
            
            **2-3
                years**
            
            **4-5
                years**
            
            **5
                years**(In
                thousands)Short-Term
                Debt (a)
            
            $
            967,492
            
            $
            395,500
            
            $
            -
            
            $
            571,992
            
            $
            -Local
                Lines of Credit
            
            
            38,500
            
            
            38,500
            
            
            -
            
            
            -
            
            
            -Total
            
            $
            1,005,992
            
            $
            434,000
            
            $
            -
            
            $
            571,992
            
            $
            -





(a)
            Represents
                the unused borrowing capacity of the various credit facilities less
                outstanding letters of credit of $22.5 million and borrowings of
                $10.0
                million as of December 31, 2005.





A-71





PNM





The
      following table sets forth PNM’s long-term contractual obligations as of
      December 31, 2005:





**Payments
                Due****Contractual
                Obligations**
            
            **Total**
            
            **Less
                than**
              **1
                year**
            
            **2-3
                years**
            
            **4-5
                years**
            
            **After**
              **5
                years**(In
                thousands)Long-Term
                Debt (a)
            
            $
            985,870
            
            $
            -
            
            $
            300,000
            
            $
            -
            
            $
            685,870Interest
                on Long-Term Debt (b)
            
            
            637,861
            
            
            49,657
            
            
            99,314
            
            
            72,914
            
            
            415,976Operating
                Leases
            
            
            353,430
            
            
            29,322
            
            
            61,353
            
            
            57,990
            
            
            204,765Purchased
                Power Agreements
            
            
            71,239
            
            
            17,809
            
            
            24,924
            
            
            24,119
            
            
            4,387Coal
                Contracts (c)
            
            
            694,307
            
            
            49,905
            
            
            103,635
            
            
            110,206
            
            
            430,561Other
                Purchase Obligations (d)
            
            
            1,295,107
            
            
            352,316
            
            
            610,613
            
            
            332,178
            
            
            -Total
            
            $
            4,037,814
            
            $
            499,009
            
            $
            1,199,839
            
            $
            597,407
            
            $
            1,741,559





(a)
            Represents
                total long-term debt excluding unamortized premium of $1.2
                million.


(b)
            Represents
                the annual interest expense on fixed and variable rate debt. Projections
                of interest expense on variable rate debt are based on current interest
                rates as of December 31, 2005.


(c)
            Represents
                only certain minimum payments that may be required under the coal
                contracts if no deliveries are
                made.


(d)
            Represents
                commitments for capital expenditures, pension and postretirement
                benefit
                obligations and other obligations.





The
      following table sets forth PNM’s other commercial commitments as of December 31,
      2005:





**Amount
                of Commitment Expiration Per Period****Other
                Commercial**
              **Commitments**
            
            **Total**
              **Amounts**
              **Committed**
            
            **1
                year**
            
            **2-3
                years**
            
            **4-5
                years**
            
            **After**
              **5
                years**(In
                thousands)Short-Term
                Debt (a)
            
            $
            395,500
            
            $
            395,500
            
            $
            -
            
            $
            -
            
            $
            -Local
                Lines of Credit
            
            
            23,500
            
            
            23,500
            
            
            -
            
            
            -
            
            
            -Total
            
            $
            419,000
            
            $
            419,000
            
            $
            -
            
            $
            -
            
            $
            -





(a)
            Represents
                the unused borrowing capacity of the various credit facilities less
                outstanding letters of credit of $4.5 million as of December 31,
                2005.





A-72





TNMP





The
      following table sets forth TNMP’s long-term contractual obligations as of
      December 31, 2005:





**Payments
                Due****Contractual
                Obligations**
            
            **Total**
            
            **Less
                than**
              **1
                year**
            
            **2-3
                years**
            
            **4-5
                years**
            
            **After**
              **5
                years**(In
                thousands)Long-Term
                Debt (a)
            
            $
            416,625
            
            $
            -
            
            $
            248,935
            
            $
            167,690
            
            $
            -Interest
                on Long-Term Debt (b)
            
            
            74,800
            
            
            25,728
            
            
            43,832
            
            
            5,240
            
            
            -Operating
                Leases
            
            
            8,493
            
            
            3,159
            
            
            3,887
            
            
            993
            
            
            454Purchased
                Power Agreements
            
            
            14,218
            
            
            14,218
            
            
            -
            
            
            -
            
            
            -Other
                Purchase Obligations (c)
            
            
            233,979
            
            
            44,555
            
            
            110,809
            
            
            78,615
            
            
            -Total
            
            $
            748,115
            
            $
            87,660
            
            $
            407,463
            
            $
            252,538
            
            $
            454





(a)
            Represents
                total long-term debt excluding unamortized discount of $0.8
                million.


(b)
            Represents
                the annual interest expense on fixed and variable rate debt. Projections
                of interest expense on variable rate debt are based on current interest
                rates as of December 31, 2005.


(c)
            Represents
                commitments for capital expenditures, pension and postretirement
                benefit
                obligations and other obligations.





The
      following table sets forth TNMP’s other commercial commitments as of December
      31, 2005:





**Amount
                of Commitment Expiration Per Period****Other
                Commercial**
              **Commitments**
            
            **Total**
              **Amounts**
              **Committed**
            
            **1
                year**
            
            **2-3
                years**
            
            **4-5
                years**
            
            **After**
              **5
                years**(In
                thousands)Short-Term
                Debt (a)
            
            $
            97
                587
            
            $
            -
            
            $
            -
            
            $
            97,587
            
            $
            -Total
            
            $
            97,587
            
            $
            -
            
            $
            -
            
            $
            97,587
            
            $
            -





(a)
            Represents
                the unused borrowing capacity of TNMP on the PNMR credit facility
                less
                outstanding letters of credit of $2.4 million as of December 31,
                2005.





A-73





*Contingent
      Provisions of Certain Obligations*





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. PNMR, PNM or TNMP could be required to provide
      security, immediately pay outstanding obligations or be prevented from drawing
      on unused capacity under certain credit agreements if the contingent
      requirements were to be triggered. The most significant consequences resulting
      from these contingent requirements are detailed in the discussion
      below.





PNMR





The
      committed PNMR Facility contains a “ratings trigger,” for pricing purposes only.
      If PNMR is downgraded or upgraded by the ratings agencies, the result would
      be
      an increase or decrease in interest cost, respectively. In addition, the PNMR
      Facility contains a contingent requirement that requires PNMR to maintain a
      debt-to-capital ratio, inclusive of off-balance sheet debt, of less than 65%.
      If
      PNMR’s debt-to-capital ratio, inclusive of off-balance sheet debt, were to
      exceed 65%, it could be required to repay all borrowings under the PNMR
      Facility, be prevented from drawing on the unused capacity under the PNMR
      Facility, and be required to provide security for all outstanding letters of
      credit issued under the PNMR Facility.





PNM





PNM's
      standard purchase agreement for the procurement of gas for its retail customers
      contains a contingent requirement that could require PNM to provide security
      for
      its gas purchase obligations if the seller were to reasonably believe that
      PNM
      was unable to fulfill its payment obligations under the agreement.





The
      master agreement for the sale of electricity in the WSPP contains a contingent
      requirement that could require PNM to provide security if its debt were to
      fall
      below investment grade rating. The WSPP agreement also contains a contingent
      requirement, commonly called a material adverse change provision, which could
      require PNM to provide security if a material adverse change in its financial
      condition or operations were to occur.





The
      committed PNM Facility contains a “ratings trigger,” for pricing purposes only.
      If PNM is downgraded or upgraded by the ratings agencies, the result would
      be an
      increase or decrease in interest cost, respectively. In addition, the PNM
      Facility contains a contingent provision that requires PNM to maintain a
      debt-to-capital ratio, inclusive of off-balance sheet debt, of less than 65%.
      If
      PNM’s debt-to-capital ratio, inclusive of off-balance sheet debt, were to exceed
      65%, PNM could be required to repay all borrowings under the PNM Facility,
      be
      prevented from drawing on the unused capacity under the PNM Facility, and be
      required to provide security for all outstanding letters of credit issued under
      the PNM Facility.





If
      a
      contingent requirement were to be triggered under the PNM Facility resulting
      in
      an acceleration of the outstanding loans under the PNM Facility, a cross-default
      provision in the PVNGS leases could occur if the accelerated amount is not
      paid.
      If a cross-default provision is triggered, the lessors have the ability to
      accelerate their rights under the leases, including acceleration of all future
      lease payments.





TNMP





TNMP’s
      borrowing availability under the committed PNMR Facility contains a “ratings
      trigger,” for pricing purposes only. If TNMP is downgraded or upgraded by the
      ratings agencies, the result would be an increase or decrease in interest cost,
      respectively. In addition, the PNMR Facility contains a contingent requirement
      that requires TNMP to maintain a debt-to-capital ratio, inclusive of off-balance
      sheet debt, of less than 65%. If TNMP’s debt-to-capital ratio, inclusive of
      off-balance sheet debt, were to exceed 65%, TNMP could be required to repay
      all
      borrowings under the PNMR Facility, be prevented from drawing on the unused
      capacity under the PNMR Facility, and be required to provide security for all
      outstanding letters of credit issued under the PNMR Facility.





A-74





*Financing
      Activities*





PNMR





PNMR
      has
      a universal shelf registration statement filed with the SEC for the issuance
      of
      debt securities, equity securities, preferred stock, purchase contracts,
      purchase contract units and warrants. As of December 31, 2005, PNMR had
      approximately $400.9 million of remaining unissued securities under this
      registration statement.





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 initial
      floating rate was 1.91% and will be reset every six months. The floating rate
      was reset on September 15, 2005, to 4.60%. The swap is accounted for as a
      fair-value hedge with a negative fair-market value (liability position) of
      approximately $3.9 million as of December 31, 2005.





During
      October 2004, PNMR entered into two forward starting floating-to-fixed rate
      interest rate swaps with an aggregate notional principal amount of $100.0
      million. These swaps became effective August 1, 2005 and terminate November
      15,
      2009. Under these swaps, PNMR receives a floating rate equal to three month
      LIBOR on the notional principal amount and pays a fixed interest rate of 3.975%
      on the notional principal amount on a quarterly basis. The initial floating
      rate
      was set on August 1, 2005, at 3.693% and will be reset every three months.





From
      November 2004 through June 30, 2005, the swaps were accounted for as a cash
      flow
      hedge against borrowings under a five-year $400.0 million PNMR revolving credit
      agreement dated November 15, 2004. The PNMR Facility replaced the November
      2004
      credit agreement in August 2005. Effective June 30, 2005, the swaps were
      de-designated as cash flow hedges due to a change in the underlying borrowings
      being hedged from the November 2004 credit agreement at the inception of the
      hedge to commercial paper. The mark-to-market change in the fair value of these
      swaps was subsequently recognized on PNMR’s Consolidated Statement of Earnings.
      At December 31, 2005, the increase in fair value related to these swaps was
      $2.8
      million. Of this increase, $0.4 million was recorded in accumulated other
      comprehensive income on PNMR’s Consolidated Balance Sheet and $2.4 million was
      recognized in other income on PNMR’s Consolidated Statement of Earnings for the
      year ended December 31, 2005.





In
      March
      2005, PNMR issued 3,910,000 shares of its common stock at $26.76 per share.
      PNMR
      received net proceeds from this offering, after deducting underwriting discounts
      and commissions and estimated expenses, of approximately $101.0 million. In
      addition, in March 2005, PNMR also completed a public offering of 4,945,000
      equity-linked units at 6.75% yielding net proceeds after fees of $239.6 million.
      See Note 6 for further details about this transaction.





In
      October 2005, PNMR completed a private offering of 4,000,000 equity-linked
      units
      at 6.625%. PNMR received $100.0 million in proceeds from this transaction and
      there were no underwriting discounts or commissions. PNMR used the proceeds
      to
      repay short-term borrowings, a portion of which was incurred to finance the
      acquisition of TNP. See Note 6 for further details about this
      transaction.





In
      conjunction with the acquisition of TNP, on June 6, 2005, PNMR made an equity
      investment of approximately $110.5 million in TNP, which TNP used to repay
      in
      full amounts owing under TNP’s credit agreement. In addition, pursuant to PNMR’s
      acquisition of TNP, PNMR agreed to provide funds to TNP to enable TNP to redeem
      (a) TNP's 14.5% Senior Redeemable Preferred Stock, Series C, (b) TNP's 14.5%
      Senior Redeemable Preferred Stock, Series D (collectively, “Preferred Stock”),
      and (c) TNP’s 10.25% Senior Subordinated Notes due 2010, Series B (“Senior
      Notes”). On July 6, 2005, TNP redeemed the Preferred Stock by tendering $224.6
      million to the holders of the Preferred Stock and redeemed the Senior Notes
      by
      tendering $296.5 million to holders of the Senior Notes (tendered amounts
      include interest, as applicable). In
      order
      to fund a portion of the cost of redemption of TNP’s Preferred Stock and Senior
      Notes, PNMR issued $370.0 million of commercial paper short-term notes under
      the
      PNMR commercial paper program. The
      balance of the funds necessary for the redemption came from other cash available
      to PNMR and the total redemption amount was an equity investment by PNMR in
      TNP.





A-75


As
        discussed above under “Proposed Twin Oaks Acquisition,” in addition to Altura,
        PNMR is a party to the purchase agreement and has agreed to provide parental
        guarantees for certain obligations of Altura relating to the acquisition.
        PNMR
        has arranged for bridge financing to close the transaction. It is expected
        that
        the permanent financing will come from the issuance of debt and equity
        structured to maintain PNMR’s investment grade rating. However, PNMR is at risk
        that it will be unable to obtain financing for the acquisition at a reasonable
        cost or terms that will permit PNMR to maintain its investment grade rating,
        due
        to conditions in the capital markets or PNMR’s financial
        condition.





PNM





PNM
      has a
      universal shelf registration statement filed with the SEC for the issuance
      of
      debt securities, equity securities, preferred stock, purchase contracts,
      purchase contract units and warrants. As of December 31, 2005, PNM had
      approximately $200.0 million of remaining unissued securities registered under
      its shelf registration statement. The amount of senior unsecured notes that
      may
      be issued is not limited by the senior unsecured notes indenture. However,
      debt-to-capital requirements in certain of PNM’s financial instruments and
      regulatory agreements could ultimately limit the amount of additional debt
      PNM
      could issue.





TNMP





Depending
      on TNMP’s future business strategy, capital needs and market conditions, TNMP
      could enter into additional long-term financings for the purpose of
      strengthening TNMP’s balance sheet, funding growth and reducing its cost of
      capital. The Company continues to evaluate its investment and debt retirement
      options to optimize its financing strategy and earnings potential. The amount
      of
      senior unsecured notes that may be issued is not limited by the senior unsecured
      notes indenture. However, debt-to-capital requirements in certain of TNMP’s
      financial instruments and regulatory agreements would ultimately limit the
      amount of additional debt TNMP would issue.





*Dividends*




The
        declaration of common dividends by PNMR is dependent upon a number of factors
        including the ability of PNMR’ subsidiaries to pay dividends. PNMR’s primary
        sources of dividends are PNM and TNMP.
  PNM
        paid
        cash dividends of $91.0 million, $23.0 million and $49.6 million to PNMR
        for the
        years ended December 31, 2005, 2004 and 2003, respectively. In 2005, TNMP
        paid
        cash dividends of $12.0 million to its parent company, which were ultimately
        paid to PNMR.
  As
        part
        of the order approving the formation of PNMR, the NMPRC placed certain
        restrictions on the ability of PNM and TNMP to pay dividends. The NMPRC order
        imposed the following conditions regarding dividends paid by PNM and TNMP:
        PNM
        or TNMP cannot pay dividends which cause its debt rating to fall below
        investment grade; and neither PNM nor TNMP can pay dividends in any year,
        as
        determined on a rolling four quarter basis, in excess of net earnings without
        prior NMPRC approval. The Global Electric Agreement (see Note 17) modified
        the
        PNM dividend restriction to allow PNM to dividend earnings as well as equity
        contributions made by PNMR. Additionally, PNM has various financial covenants
        that limit the transfer of assets, through dividends or other
        means.
  In
        addition, the ability of PNMR to declare dividends is dependent upon the
        extent
        to which cash flows will support dividends, the availability of retained
        earnings, the financial circumstances and performance, the NMPRC’s and PUCT’s
        decisions in various regulatory cases currently pending and which may be
        docketed in the future, the effect of federal regulatory decisions,
        Congressional and legislative acts, and economic conditions in the United
        States. Conditions imposed by the NMPRC or PUCT, future growth plans and
        the
        related capital requirements and business considerations may also affect
        PNMR’s
        ability to pay dividends.
  In
        July
        2005, the Board of PNMR approved an 8.0% increase in the common stock dividend
        for an indicated annual dividend of $0.80 per share. In February 2006, the
        Board
        of PNMR approved a 10.0% increase in the common stock dividend for an indicated
        annual dividend of $0.88 per share. PNMR targets a payout ratio of 50% to
        60% of
        consolidated earnings.





A-76





*Capital
      Structure*





PNMR




PNMR’s
      capitalization, including current maturities of long-term debt, at December
      31,
      2005 and December 31, 2004 is shown below:





**December
                31,**
            
            **December
                31,****2005**
            
            **2004**Common
                Equity
            
            
            42.3
            %
            
            52.4
            %Preferred
                Stock
            
            
            0.4
            %
            
            0.6
            %Long-term
                Debt
            
            
            57.3
            %
            
            47.0
            %Total
                Capitalization
            
            
            100.0
            %
            
            100.0
            %




Total capitalization does not include as debt the present value of PNM’s
      operating lease obligations for PVNGS Units 1 and 2, EIP and the Delta operating
      lease, which was approximately $170.9 million as of December 31, 2005 and $176.0
      million as of December 31, 2004.




The
        change in PNMR’s capitalization is due to the issuance of common stock and
        equity-linked units in March 2005, the equity-linked units in October 2005
        (see
        Note 6) and the acquisition of TNP on June 6, 2005 (see Note
        2).





PNM




PNM’s
        capitalization, including current maturities of long-term debt, at December
        31,
        2005 and December 31, 2004 is shown below:





**December
                31,**
            
            **December
                31,****2005**
            
            **2004**Common
                Equity
            
            
            50.2
            %
            
            50.8
            %Preferred
                Stock
            
            
            0.6
            %
            
            0.6
            %Long-term
                Debt
            
            
            49.2
            %
            
            48.6
            %Total
                Capitalization
            
            
            100.0
            %
            
            100.0
            %





TNMP




TNMP’s
        capitalization, including current maturities of long-term debt, at December
        31,
        2005 and December 31, 2004 is shown below:





**December
                31,**
            
            **December
                31,****2005**
            
            **2004**Common
                Equity
            
            
            58.6
            %
            
            31.3
            %Long-term
                Debt
            
            
            41.4
            %
            
            68.7
            %Total
                Capitalization
            
            
            100.0
            %
            
            100.0
            %




The
        change in TNMP’s capitalization is due to the acquisition of TNP on June 6, 2005
        and the effects of purchase accounting.











A-77





**COMPETITION**





Under
      current law, the Company is not in any direct retail competition with any other
      regulated electric and gas utility, except for sales of natural gas.
      Nevertheless, 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. PNM Wholesale 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 Company believes that it is well positioned to compete
      in
      this market due to its long history in the marketplace, its niche product
      offerings, and stringent risk management practices. The Texas electricity market
      has been open to retail competition since January 2002. Prior to 2002, TNMP
      operated as an integrated utility in Texas. In accordance with Senate Bill
      7,
      TNMP separated its Texas utility operations into three components: (1) an
      unregulated retail sales business operated by First Choice; (2) a regulated
      power transmission and distribution business operated by TNMP and (3) power
      generation, a business which TNMP is no longer engaged in. The Company is
      exposed to competition in the unregulated Texas retail electricity market
      through First Choice, which serves customers at price-to-beat rates approved
      by
      the PUCT and 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 affiliated retail energy provider, such as TNMP, to a competitive
      retail energy provider, 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. The current contracts for default service
      offered by providers of last resort under TECA will expire on December 31,
      2006.
      On January 1, 2007 new providers of last resort will be identified and those
      providers as well as the rates offered will be effective until December 31,
      2008. Also on December 31, 2006, the price-to-beat rate mechanism will cease
      to
      exist and First Choice and other retail energy providers subject to providing
      price-to-beat rates will only market retail electricity at competitive rates.
      There is currently an open rulemaking at the PUCT evaluating the potential
      need
      for a replacement rate for the price-to-beat rate mechanism. Other services
      being evaluated in this rulemaking are provider of last resort functions and
      pricing and the possible creation of a default provider. The Company cannot
      currently predict what, if any, changes will occur to either mechanism and
      what,
      if any, impact such changes may have on its results of operations and financial
      position.





**OTHER
      ISSUES FACING THE COMPANY**





PNM
      is
      subject to the jurisdiction of the NMPRC, with respect to its retail electric
      and gas rates, service, accounting, issuance of securities, construction of
      major new generation and transmission facilities and other matters regarding
      retail utility services provided in New Mexico. The FERC has jurisdiction over
      rates and other matters related to wholesale electric sales and cost recovery
      for a portion of PNM’s transmission network.





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. Within New Mexico, TNMP is subject to the jurisdiction of the
      NMPRC. TNMP is subject to traditional cost-of-service regulation in both Texas
      and New Mexico. TNMP is subject in some of its activities, including the
      issuance of securities and the acquisition or disposition of properties in
      New
      Mexico, to the jurisdiction of the FERC. 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.





First
      Choice is a member of ERCOT, the ISO, responsible for maintaining reliable
      operations of the bulk electric power supply system in the electric market
      served in Texas by ERCOT. 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.





A-78


See
      Notes
      16, 17 and 18 for a discussion of commitments and contingencies, rate and
      regulatory matters and environmental issues facing the Company.





**NEW
      ACCOUNTING STANDARDS**




There
      have been no new accounting standards that materially affected PNMR, PNM or
      TNMP
      this period; however, see Note 1 for discussion of SFAS No. 123 (revised
      2004), *“Share
      Based Payment”* and
      Note
      15 for discussion of FASB Interpretation No. 47, *“Accounting
      for Conditional Asset Retirement Obligations.”*





**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:





·
            The
                potential unavailability of cash at TNP and its
                subsidiaries,


·
            The
                risk that TNP and its subsidiaries will not be integrated successfully
                into PNMR,


·
            The
                risk that the benefits of the TNP acquisition will not be fully realized
                or will take longer to realize than
                expected,


·
            Disruption
                from the TNP acquisition making it more difficult to maintain
                relationships with customers, employees, suppliers or other third
                parties,


·
            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
                (including impacts of the hurricanes in the Gulf Coast
                region),


·
            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,


·
            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
                performance of generating units, including PVNGS, and transmission
                systems,


·
            The
                market for electrical generating
                equipment,


·
            The
                ability to secure long-term power
                sales,


·
            The
                risks associated with completion of construction of Luna, including
                construction delays and unanticipated cost
                overruns,


·
            State
                and federal regulatory and legislative decisions and
                actions,


·
            The
                outcome of legal proceedings,


·
            Changes
                in applicable accounting
                principles,


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


·
            The
                other factors described in Item 1A. “Risk Factors” in this Form
                10-K.





A-79


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, 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-K does not
      constitute an offer to sell or the solicitation of an offer to buy any
      securities.





**ITEM
      7A.**  **QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**





The
      Company uses derivative financial instruments to manage risk as it relates
      to
      changes in natural gas and electric prices, changes in interest rates and,
      historically, adverse market changes for investments held by the Company’s
      various trusts. The Company also uses certain derivative instruments for
      wholesale power marketing and natural gas transactions in order to take
      advantage of favorable price movements and market timing activities in these
      power markets. The following additional information is provided.





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 PNMR
      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 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 a Risk Manager, 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 Finance Committee and the PNMR Board on these activities.





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





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.





*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




A-80


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
      wholesale 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. PNM is 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 PNM were required to cover all or a portion of
      its
      net open contract position as a result of the aforementioned unexpected
      situations, it would have to meet its commitments through market purchases.
      As
      such, PNM is exposed to risks related to fluctuations in the market price of
      energy that could impact the sales price or purchase price of energy. In
      addition, the wholesale operations utilize discrete market-based transactions
      to
      take advantage of opportunities that present themselves in the ordinary course
      of business. These positions are subject to market risk that is not mitigated
      by
      PNM’s generation capabilities.




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. First Choice operates within a competitive
      marketplace; however, to the extent that it serves former TNMP customers under
      the provisions of the price-to-beat service, it has the ability to file with
      the
      PUCT to change the price-to-beat fuel factor twice each year, in the event
      of
      significant changes in natural gas prices. The rates charged to new customers
      acquired by First Choice outside of TNMP’s service territory are not regulated
      by the PUCT, but are negotiated with each customer. As a result, changes in
      fuel
      and 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. In addition, First Choice utilizes discrete
      market-based transactions to take advantage of opportunities that present
      themselves in the ordinary course of business. These positions are subject
      to
      market risk that is not mitigated by First Choice's retail
      operations.




Additionally,
      in connection with the issuance of a final stranded cost true-up order for
      TNMP,
      the PUCT will adjust First Choice’s fuel factor portion of the price-to-beat
      downward if natural gas prices are below the prices embedded in the then-current
      rates. (See Note 17.)





*Accounting
      for Derivatives*





Under
      the
      derivative accounting rules and the related accounting rules for energy
      contracts, the Company accounts for its various financial derivative instruments
      for the purchase and sale of energy differently based on the contract terms.
      Energy contracts that meet the definition of a derivative under SFAS 133 and
      do
      not qualify for a normal purchase or sale designation are recorded on the
      balance sheet at fair market value at each period end. The changes in fair
      market value are recognized in earnings unless specific hedge accounting
      criteria are met. Should an energy transaction qualify as a hedge under SFAS
      133, fair market value changes from year to year are recognized on the balance
      sheet with a corresponding charge to other comprehensive income. Gains or losses
      are recognized when the hedged transaction settles. Derivatives that meet the
      normal sales and purchases exceptions within SFAS 133 are not marked to market
      but rather recorded in results of operations when the underlying transaction
      settles.








A-81





PNMR





The
      acquisition of TNP occurred on June 6, 2005; therefore First Choice activity
      is
      included in the PNMR activity from June 6, 2005 through December 31,
      2005.





The
      following table shows the net fair value of mark-to-market energy contracts
      for
      First Choice and PNM Wholesale included in PNMR’s Consolidated Balance
      Sheet:





**December
                31,**
            
            **December
                31,****2005**
            
            **2004**(In
                thousands)Mark-to-Market
                Energy Contracts:Current
                asset
            
            $
            14,555
            
            $
            6,890Long-term
                asset
            
            
            21,292
            
            
            316Total
                mark-to-market assets
            
            
            35,847
            
            
            7,206Current
                liability
            
            
            (11,198
            )
            
            (5,007
            )Long-term
                liability
            
            
            (20,903
            )
            
            (126
            )Total
                mark-to-market liabilities
            
            
            (32,101
            )
            
            (5,133
            )Net
                fair value of mark-to-market energy contracts
            
            $
            3,746
            
            $
            2,073





The
      mark-to-market energy transactions represent net assets at December 31, 2005
      and
      December 31, 2004 after netting all applicable open purchase and sale contracts.





The
      market prices used to value PNMR mark-to-market energy transactions are based
      on
      index prices and broker quotations.





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
      for
      the operations of First Choice and PNM Wholesale:





**Year
                Ended****December
                31,****2005**
            
            **2004**(In
                thousands)Sources
                of Fair Value Gain/(Loss):Fair
                value at beginning of year
            
            $
            2,073
            
            $
            433Change
                in valuation method1
            
            
            -
            
            
            (227
            )Amount
                realized on contracts deliveredduring
                period
            
            
            (1,535
            )
            
            (160
            )Changes
                in fair value
            
            
            3,208
            
            
            1,800Net
                fair value at end of period
            
            $
            3,746
            
            $
            1,846Net
                change recorded as mark-to-market
            
            $
            1,673
            
            $
            1,640




1 Change
        in valuation method based on illiquid market data utilized for initial valuation
        of long-term physical option contract and long-term gas swap
        contract.





A-82




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:





**Fair
      Value at December 31** **,
      2005**





**Maturities****Less
                than****1
                year**
            
            **1-3
                Years**
            
            **4+
                Years**
            
            **Total**(In
                thousands)$3,325
            
            $194
            
            $227
            
            $3,746




As
        of
        December 31, 2005, a decrease in market pricing of PNMR’s mark-to-market energy
        transactions by 10% would have resulted in a decrease in net earnings of
        less
        than 1%. Conversely, an increase in market pricing of these transactions
        by 10%
        would have resulted in an increase in net earnings of less than
        1%.





PNM





The
      following table shows the net fair value of mark-to-market energy contracts
      for
      PNM Wholesale included in the Consolidated Balance Sheet:





**December
                31,**
            
            **December
                31,****2005**
            
            **2004**(In
                thousands)Mark-to-Market
                Energy Contracts:Current
                asset
            
            $
            10,433
            
            $
            6,890Long-term
                asset
            
            
            21,292
            
            
            316Total
                mark-to-market assets
            
            
            31,725
            
            
            7,206Current
                liability
            
            
            (8,437
            )
            
            (5,007
            )Long-term
                liability
            
            
            (20,903
            )
            
            (126
            )Total
                mark-to-market liabilities
            
            
            (29,340
            )
            
            (5,133
            )Net
                fair value of mark-to-market energy contracts
            
            $
            2,385
            
            $
            2,073





The
      mark-to-market energy transactions represent net assets at December 31, 2005
      and
      December 31, 2004 after netting all applicable open purchase and sale contracts.





The
      market prices used to value PNM Wholesale’s mark-to-market energy transactions
      are based on index prices and broker quotations.





A-83





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
      for
      the operations of PNM Wholesale:





**Year
                Ended****December
                31,****2005**
            
            **2004**(In
                thousands)Sources
                of Fair Value Gain/(Loss):Fair
                value at beginning of year
            
            $
            2,073
            
            $
            433Change
                in valuation method1
            
            
            -
            
            
            (227
            )Amount
                realized on contracts deliveredduring
                period
            
            
            (2,319
            )
            
            (160
            )Changes
                in fair value
            
            
            2,631
            
            
            1,800Net
                fair value at end of period
            
            $
            2,385
            
            $
            1,846Net
                change recorded as mark-to-market
            
            $
            312
            
            $
            1,640


1 Change
        in valuation method based on illiquid market data utilized for initial valuation
        of long-term physical option contract and long-term gas swap
        contract.


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





**Fair
      Value at December 31** **,
      2005**





**Maturities****Less
                than****1
                year**
            
            **1-3
                Years**
            
            **4+
                Years**
            
            **Total**(In
                thousands)$1,964
            
            $194
            
            $227
            
            $2,385




As
        of
        December 31, 2005, a decrease in market pricing of PNM Wholesale’s
        mark-to-market energy transactions by 10% would have resulted in a decrease
        in
        net earnings of less than 1%. Conversely, an increase in market pricing of
        these
        transactions by 10% would have resulted in an increase in net earnings of
        less
        than 1%.





*Risk
      Management Activities*





PNM’s
      Wholesale Operations measure the market risk of its long-term contracts and
      wholesale activities using a VaR calculation to maintain the Company’s total
      exposure within management-prescribed limits. The Company’s 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. In 2005, the Company adopted 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
      Company continues to utilize the two-tailed confidence level at 99%. VaR models
      are relatively sophisticated. 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 Company’s VaR calculation
      considers the Company’s forward position for the next eighteen months. The
      Company 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




A-84


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 at
      a
      99% confidence level that if prices move against PNM’s positions, the Company’s
      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.





In
      2005,
      the Company revised its methodologies for calculating VaR in order to improve
      its ability to measure and manage risk. As a result, the Company also revised
      its VaR limits to be consistent with the new methodologies. As previously
      discussed, the Company adopted the Monte Carlo statistical simulation approach.
      In addition, the Company redefined the types of transactions on which it
      measures VaR. For PNM's wholesale operations, the Company measures VaR for
      all
      transactions that are not directly asset related and have economic risk. The
      VaR
      limit established for these transactions in February 2005 is $5.0 million.
      For
      the year ended December 31, 2005, the average VaR amount for these transactions
      was $1.7 million, with high and low VaR amounts for the period of $7.8 million
      and $0, respectively. The VaR amount for these transactions at December 31,
      2005
      was $3.5 million. In late 2005, the Company discontinued its use of VaR to
      manage risk from its asset-backed merchant operations; therefore, the Company
      no
      longer measures a total portfolio VaR. Management believes that the limitations
      inherent in the VaR calculation overstates the market risk related to its
      generation assets.





In
      2004,
      the Company utilized the variance/covariance model of VaR, which is a
      probabilistic model that measures the risk of loss to earnings in market
      sensitive instruments. The variance/covariance model relies on statistical
      relationships to analyze how changes in different markets can affect a portfolio
      of instruments with different characteristics and market exposure. For the
      year
      ended December 31, 2004 the Company’s average total VaR amount was $15.7
      million, with high and low VaR amounts for the period of $29.1 million and
      $5.1
      million, respectively. The total VaR amount at December 31, 2004 was $20.0
      million. In the prior year the Company also measured VaR for a subset of
      transactions that were marked-to-market in accordance with SFAS 133. The VaR
      limit established for these transactions was $2.0 million. For the year ended
      December 31, 2004, the average VaR amount for these transactions was $0.3
      million, with high and low VaR amounts for the period of $1.1 million and $0,
      respectively. The total VaR amount for these transactions as reported at
      December 31, 2004 was $0.6 million. Because of the nature of the Monte Carlo
      simulation method now utilized by the Company, reporting of the 2004 VaR amounts
      using the Company’s new approach is neither practical nor representational of
      the Company’s management of risk in 2004.





First
      Choice measures the market risk of its activities using an EaR calculation
      to
      maintain the Company’s total exposure within management-prescribed limits.
      Because of its obligation to serve, First Choice must take its obligations
      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’s EaR calculation reports the possible losses
      against forecasted earnings for its retail load and supply portfolio. This
      calculation is based on First Choice’s forecasted earnings on the reporting
      date. The Company utilizes a Delta/Gamma approximation model of EaR. The
      Delta/Gamma model calculates a price change within a given time frame,
      correlation and volatility parameters for each price curve utilized in valuing
      the mark-to-market of each position to develop a change in value for any
      position. This process is repeated multiple times to calculate a standard
      deviation, which is used to arrive at an EaR amount based on a certain
      confidence level. The model uses the Delta/Gamma approximation to model the
      optionality related to price-to-beat rate resets by both the Company and the
      PUCT as discussed above. First Choice utilizes the one-tailed confidence level
      at 95%. EaR models are relatively sophisticated. 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 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 at a 95%
      confidence level that if prices move against First Choice’s positions, the
      losses against the Company’s forecasted earnings over the next twelve months
      would not exceed $10.0 million.





For
      the
      period June 6 through December 31, 2005, the average total EaR amount was $19.5
      million, with high and low EaR amounts for the period of $26.4 million and
      $14.6
      million, respectively. The total EaR amount at December 31, 2005 was $14.6
      million.





A-85


In
      July
      2005, the Finance Committee approved new risk measures for First Choice. These
      measures were designed to give First Choice management flexibility to execute
      its strategies to reduce the risk inherent in the portfolio and to take
      advantage of market opportunities in a controlled and limited fashion. The
      Company adopted an EaR limit of $25.0 million. Upon successful execution of
      First Choice’s strategy to mitigate risk by locking in its floating supply costs
      at favorable prices, these limits are expected to be lowered to match the new
      risk profile. In addition, the Company adopted two new VaR measures to monitor
      the market based mitigation strategies of First Choice management. The first
      VaR
      limit is based on the same total retail load and supply portfolio 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. This VaR limit was established at $7.5 million. The second VaR limit
      was
      established at $1.5 million for transactions that are subject to mark-to-market
      accounting as defined by SFAS 133 and SFAS 149, *“Amendment
      of Statement 133 on Derivative Instruments and Hedging*  *Activities.”* 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
      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. 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 uses derivative financial instruments to manage risk as it relates
      to
      changes in natural gas and electric prices, changes in interest rates and,
      historically, adverse market changes for investments held by the Company’s
      various trusts. The Company also uses certain derivative instruments for
      wholesale power marketing transactions in order to take advantage of favorable
      price movements and market timing activities in the wholesale power markets.
      The
      Company’s use of derivatives and the resulting credit risk is regularly
      monitored by the RMC.





In
      addition, counterparties expose the Company to credit losses in the event of
      non-performance or non-payment. The Company manages credit 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 in place procedures to ensure that increases in credit risk
      measures that exceed the prescribed limits are reviewed and, if deemed
      necessary, acted upon to reduce exposures.





A-86





The
      following table provides information related to PNM Wholesale’s credit exposure
      as of December 31, 2005. The Company does not hold any credit collateral as
      of
      December 31, 2005. 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 PNM Wholesale may
      have. Also provided is an indication of the maturity of a Company’s credit risk
      by credit ratings of the counterparties.





**Schedule
      of PNM Wholesale Credit Risk Exposure**


**December
      31, 2005**





**Net****(b)**
            
            **Number**
            
            **Exposure****Net**
            
            **of**
            
            **of****Credit**
            
            **Counter**
            
            **Counter-****Risk**
            
            **-parties**
            
            **parties****Rating
                (a)**
            
            **Exposure**
            
            **>10%**
            
            **>10%**(Dollars
                in thousands)Investment
                grade
            
            $
            117,734
            
            
            2
            
            $
            38,887Non-investment
                grade
            
            
            985
            
            
            -
            
            
            -Internal
                ratingsInvestment
                grade
            
            
            51
            
            
            -
            
            
            -Non-investment
                grade
            
            
            3,663
            
            
            -
            
            
            -Total
            
            $
            122,433
            
            
            
            
            $
            38,887





(a)
            ***The
                Rating*******included
                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 to PNM from PNM Wholesale operations. This
                includes long-term contracts, forward sales and short-term sales.
                The
                exposure captures the net amounts due to PNM 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.





A-87





**PNM
      Wholesale**


**Maturity
      of Credit Risk Exposure**


**December
      31, 2005**





**Total****Less
                than**
            
            
            
            
            
            **Net****Rating**
            
            **2
                Years**
            
            **2-5
                Years**
            
            **>5
                Years**
            
            **Exposure**(In
                thousands)Investment
                grade
            
            $
            100,489
            
            $
            13,686
            
            $
            3,559
            
            $
            117,734Non-investment
                grade
            
            
            985
            
            
            -
            
            
            -
            
            
            985Internal
                ratingsInvestment
                grade
            
            
            51
            
            
            -
            
            
            -
            
            
            51Non-investment
                grade
            
            
            3,663
            
            
            -
            
            
            -
            
            
            3,663Total
            
            $
            105,188
            
            $
            13,686
            
            $
            3,559
            
            $
            122,433





The
      Company provides for losses due to market and credit risk. PNM Wholesale credit
      risk with its largest counterparty as of December 31, 2005 and December 31,
      2004
      was $20.5 million and $26.2 million, respectively.





*First
      Choice*





First
      Choice is subject to credit risk from non-performance by its supply
      counterparties to the extent these contracts have a mark-to-market value in
      the
      favor of First Choice. The Constellation power supply agreement established
      FCPSP, a bankruptcy remote special purpose entity, to hold all of First Choice's
      customer contracts and wholesale power and gas contracts. Constellation received
      a lien on accounts receivable, customer contracts, cash, and the equity of
      FCPSP
      as security for FCPSP’s performance under the power supply agreement. The
      provisions of this agreement severely limit FCPSP’s ability to secure power from
      alternate sources. Additionally, the terms of the security agreement do not
      require Constellation to post collateral for any mark-to-market balances in
      FCPSP’s favor. At December 31, 2005, the supply contracted with Constellation
      was in a favorable mark-to-market position for FCPSP. When netted against
      amounts owed to Constellation, this exposure was approximately $8.0 million.
      The
      Constellation power supply agreement collateral provisions will continue until
      the expiration of the agreement on December 31, 2007. First Choice's credit
      exposure to other counterparties at December 31, 2005 was $14.6 million and
      the
      tenor of these exposures was less than two years.





First
      Choice has continued to experience a reduction in bad debt expense from its
      retail customers due to reduced customer receivables resulting partially from
      effective disconnect policies, increased collection activity and refined
      consumer credit and securitization policies. Bad debt expense for the period
      June 6, 2005 through December 31, 2005, was $2.5 million. First Choice expects
      bad debt expense to increase in 2006 due primarily to the continued increase
      in
      the price of natural gas and impacts from the Gulf Coast hurricanes, including
      waiver of customer deposits for hurricane victims.





*PNM
      Gas Supply Hedging Activities*




PNM
        hedges certain portions of natural gas supply contracts in order to protect
        its
        retail customers from adverse price fluctuations in the natural gas market.
        The
        financial impact of all hedge gains and losses, including the related costs
        of
        the program, is recoverable through the PGAC. As a result, earnings are not
        affected by gains and losses generated by these instruments.





In
      order
      to protect its natural gas customers from the risk of rising prices during
      the
      2005-2006 heating season, in total, PNM spent approximately $6.8 million in
      2005
      to purchase gas options that essentially cap the amount PNM would pay for each
      volume of gas subject to the options during the winter heating season. PNM
      expects to recover its option premiums as a component of the PGAC during the
      months of October 2005 through February 2006.





A-88





*Interest
      Rate Risk*





PNMR





PNMR’s
      senior notes issued as part of the equity-linked units sold in March and October
      2005 will be remarketed in 2008. If the remarketing is successful, the interest
      rate on the senior notes may change to a rate selected by the remarketing agent,
      and the maturity of the senior notes may be extended to a date selected by
      PNMR.
      If the remarketing of the senior notes is not successful, the maturity and
      interest rate of the senior notes will not change and holders of the
      equity-linked units will have the option of putting their senior notes to PNMR
      to satisfy their obligations under the purchase contracts. PNMR expects that
      the
      remarketing of the senior notes will be successful.





PNM





PNM
      has
      long-term debt which subjects it to the risk of loss associated with movements
      in market interest rates. The majority of PNM’s long-term debt is fixed-rate
      debt, and therefore, does not expose PNM’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 4.6%, or $48.3
      million, if interest rates were to decline by 50 basis points from their levels
      at December 31, 2005. At December 31, 2005, the fair value of PNM's
      long-term debt was approximately $1.05 billion as compared to a book value
      of $1.02 billion. In general, an increase in fair value would impact earnings
      and cash flows to the extent not recoverable in rates if PNM were to re-acquire
      all or a portion of its debt instruments in the open market prior to their
      maturity.





PNM’s
      $146.0 million, 2.1% pollution control bonds due in 2033 are required to be
      remarketed in April 2006. Following a successful remarketing, the interest
      rate
      on the pollution control bonds may change to reflect current market conditions.
      If for some reason, the remarketing of the pollution control bonds were not
      successful, PNM would be required to repurchase the bonds.





During
      the year ended December 31, 2005, PNM contributed cash of approximately $9.7
      million to PVNGS decommissioning, pension and other postretirement benefits
      for
      plan year 2005. The securities held by the trusts had an estimated fair value
      of
      $631.8 million at December 31, 2005, of which approximately 26.5% 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 December 31, 2005, the decrease in the fair value of the
      securities would be 2.8% or $4.8 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.





TNMP





TNMP
      has
      long-term debt which subjects it to the risk of loss associated with movements
      in market interest rates. The majority of TNMP’s long-term debt is fixed-rate
      debt, and therefore, does not expose TNMP’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 1.2%, or $5.3
      million, if interest rates were to decline by 50 basis points from their levels
      at December 31, 2005. At December 31, 2005, the fair value of TNMP's long-term
      debt was approximately $432.8 million as compared to a book value of $425.0
      million. In general, an increase in fair value would impact earnings and cash
      flows to the extent not recoverable in rates if TNMP were to re-acquire all
      or a
      portion of its debt instruments in the open market prior to their
      maturity.





During
      the year ended December 31, 2005, TNMP contributed cash of approximately $0.9
      million to other postretirement benefits for plan year 2005. The securities
      held
      by the trusts had an estimated fair value of $88.0 million at December 31,
      2005,
      of which approximately 28.0% were fixed-rate debt securities that subject TNMP
      to risk of loss of fair value with movements in market interest rates. 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.





A-89





*Equity
      Market Risk*





PNMR





Until
      October 2005, when the program was discontinued, PNMR had a cash management
      program that included a preferred stock dividend capture strategy and various
      absolute return strategies that had the objective of achieving returns higher
      than that associated with passive cash management plans and with bond-like
      volatility. The four investments under this program have been classified as
      trading securities in accordance with SFAS No. 115, *“Accounting
      for Certain Investments in Debt and Equity Securities”* (“SFAS
      115”). PNMR has requested and is in the process of requesting return of the cash
      held by investment managers under this program. At December 31, 2005, PNMR
      had
      received cash of $3.2 million held by one investment manager and cash of $6.7
      million from two others was received in January and February 2006. As of
      December 31, 2005 and December 31, 2004, the total balance in this investment
      program was $3.5 million and $10.6 million, respectively.





During
      2005, PNMR determined that one of its investments under this program, Wood
      River, had experienced a loss in market value. During the third quarter of
      2005,
      PNMR wrote down the value of its investment in Wood River to zero and incurred
      a
      loss of approximately $3.6 million. In the fourth quarter of 2005, the assets
      held in the Wood River fund were transferred into receivership as part of a
      civil complaint filed by the SEC against Wood River. As noted above, prior
      to
      this, the investments in Wood River were classified and accounted for as trading
      securities. At December 31, 2005, due to the change in circumstances surrounding
      Wood River, PNMR’s investment was reclassified from trading to
      available-for-sale in accordance with SFAS 115. The fair value of PNMR’s
      investment in Wood River was determined to be zero at December 31, 2005. PNMR
      cannot predict when or if it will receive a return of the cash value of its
      investment in Wood River.





PNM





PNM
      contributes to trusts established to fund its share of the decommissioning
      costs
      of PVNGS and pension and other postretirement benefits. The trusts hold certain
      equity securities at December 31, 2005. These equity securities also expose
      the
      Company to losses in fair value. Approximately 60.4% of the securities held
      by
      the various trusts were equity securities as of December 31, 2005. 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.





TNMP





TNMP
      contributes to trusts established to fund the pension and other postretirement
      benefits. The trusts hold certain equity securities
      at December 31, 2005 .
      These
      equity securities also expose the Company to losses in fair value. Approximately
      62.7% of the securities held by the various trusts were equity securities as
      of
      December 31, 2005. TNMP does not recover or earn a return through rates on
      any
      losses or gains on these equity securities.





A-90





**ITEM
        8.**  **FINANCIAL
        STATEMENTS AND SUPPLEMENTARY DATA**
 
 **PNM
        RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
        SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
        MEXICO POWER COMPANY AND SUBSIDIARIES**
 
 **GLOSSARY**
 
 Afton
              Afton
                  Generating StationALJ
              Administrative
                  Law JudgeAltura
              Altura
                  Power L.P.APB
              Accounting
                  Principles BoardAPS
              Arizona
                  Public Service CompanyARO
              Asset
                  Retirement ObligationAvistar
              Avistar,
                  Inc.BLM
              U.S.
                  Department of the Interior Bureau of Land ManagementBNCC
              BHP
                  Navajo Coal CompanyBoard
              Board
                  of DirectorsBTU
              British
                  Thermal UnitCal
                  PX
              California
                  Power ExchangeCal
                  ISO
              California
                  Independent System OperatorCCN
              Certificate
                  of Public Convenience and NecessityCompany
              PNM
                  Resources, Inc. and SubsidiariesCongress
              United
                  States CongressConstellation
              Constellation
                  Energy Commodities Group, Inc.Decatherm
              1,000,000
                  BTUsDelta
              Delta-Person
                  Limited PartnershipDOJ
              United
                  States Department of JusticeDuke
              Duke
                  Energy CorporationEaR
              Earnings
                  at RiskEIP
              Eastern
                  Interconnection ProjectEITF
              Emerging
                  Issues Task ForceEPE
              El
                  Paso Electric CompanyEPA
              United
                  States Environmental Protection AgencyERCOT
              Electric
                  Reliability Council of TexasESPP
              Employee
                  Stock Purchase PlanFASB
              Financial
                  Accounting Standards BoardFarmington
              City
                  of Farmington, New MexicoFCPSP
              First
                  Choice Power Special Purpose, L.P.FERC
              Federal
                  Energy Regulatory CommissionFirst
                  Choice
              First
                  Choice Power, L. P. and SubsidiariesFIP
              Federal
                  Implementation PlanFour
                  Corners
              Four
                  Corners Power PlantFPL
              FPL
                  Energy New Mexico Wind, LLCGAAP
              Generally
                  Accepted Accounting Principles in the UnitedStates
                  of AmericaGCT
              Grand
                  Canyon Trust
 
 
 B-1
 
 Global
                  Electric Agreement
              Signed
                  by PNMR and other parties in 2003; provides for a five-year rate
                  path for
                  New Mexico jurisdictional customers that began in September
                  2003Great
                  Southwestern
              Great
                  Southwestern Construction, Inc.IBLA
              Interior
                  Board of Land AppealsIRS
              United
                  States Internal Revenue ServiceISO
              Independent
                  System OperatorLIBOR
              London
                  Interbank Offered RateLordsburg
              Lordsburg
                  Generating StationLuna
              Luna
                  Energy FacilityMMBTUs
              Million
                  British Thermal UnitsMoody's
              Moody’s
                  Investor Services, Inc.MW
              MegawattMWh
              Megawatt
                  HourNavajo
                  Acts
              Navajo
                  Nation Air Pollution Prevention and Control Act, theNavajo
                  Nation Safe Drinking Water Act, and the NavajoNation
                  Pesticide ActNinth
                  Circuit
              United
                  States Court of Appeals for the Ninth CircuitNMED
              New
                  Mexico Environment DepartmentNMPRC
              New
                  Mexico Public Regulation CommissionNNHPD
              Navajo
                  Nation Historic Preservation DepartmentNRC
              United
                  States Nuclear Regulatory CommissionNSPS
              New
                  Source Performance StandardsNSR
              New
                  Source ReviewOASIS
              Open
                  Access Same Time Information SystemOATT
              Open
                  Access Transmission TariffO&M
              Operations
                  and MaintenancePGAC
              Purchased
                  Gas Adjustment ClausePG&E
              Pacific
                  Gas and Electric Co.PNM
              Public
                  Service Company of New Mexico and SubsidiaryPNMR
              PNM
                  Resources, Inc. and SubsidiariesPPA
              Power
                  Purchase AgreementPRG
              Power
                  Resource Group, Inc.PSA
              Power
                  Supply AgreementPSD
              Prevention
                  of Significant DeteriorationPUCT
              Public
                  Utility Commission of TexasPUHCA
              The
                  Public Utility Holding Company ActPURPA
              Public
                  Utility Regulatory Policy Act of 1978PVNGS
              Palo
                  Verde Nuclear Generating StationReeves
              Reeves
                  Generating StationREP
              Retail
                  Electricity ProviderRestructuring
                  Act
              New
                  Mexico Electric Utility Industry Restructuring Act of1999,
                  as amendedRMC
              Risk
                  Management CommitteeRMRR
              Routine
                  Maintenance, Repair or ReplacementRTO
              Regional
                  Transmission Organization
 
 
 B-2
 
 SCE
              Southern
                  California Edison CompanySCPPA
              Southern
                  California Public Power AuthoritySDG&E
              San
                  Diego Gas and Electric CompanySEC
              United
                  States Securities and Exchange CommissionSempra
              Sempra
                  EnergySenate
                  Bill 7
              Legislation
                  that established retail competition in TexasSESCO
              San
                  Angelo Electric Service CompanySFAS
              Statement
                  of Financial Accounting StandardsSJCC
              San
                  Juan Coal CompanySJGS
              San
                  Juan Generating StationSO2
              Sulfur
                  DioxideS&P
              Standard
                  and Poors Ratings ServicesSPS
              Southwestern
                  Public Service CompanySW
                  Acquisition
              SW
                  Acquisition, L.P.TCEQ
              Texas
                  Commission on Environmental QualityTECA
              Texas
                  Electric Choice Act (also known as Senate Bill 7)TNMP
              Texas-New
                  Mexico Power Company and SubsidiariesTNP
              TNP
                  Enterprises, Inc. and SubsidiariesThroughput
              Volumes
                  of gas delivered, whether or not owned by the CompanyTri-State
              Tri-State
                  Generation and Transmission Association, Inc.Tucson
              Tucson
                  Electric Power CompanyTwin
                  Oaks
              Assets
                  of Twin Oaks Power, LP and Twin Oaks Power III, LPUAMPS
              Utah
                  Associated Municipal Power SystemsUSBR
              United
                  States Bureau of ReclamationUSFS
              United
                  States Forest ServiceVaR
              Value
                  at RiskWood
                  River
              Wood
                  River Partners, L.P.WSPP
              Western
                  Systems Power Pool
 
 
 B-3
 
 **PNM
        RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
        SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
        MEXICO POWER COMPANY AND SUBSIDIARIES**
 
 **INDEX**
 **Page**Glossary
                B-1Management’s
                    Annual Report on Internal Control Over Financial Reporting
                B-5Report
                    of Independent Registered Public Accounting Firm
                B-7Financial
                    Statements:PNM
                    Resources, Inc. and SubsidiariesConsolidated
                    Statements of Earnings
                B-13Consolidated
                    Statements of Retained Earnings
                B-14Consolidated
                    Balance Sheets
                B-15Consolidated
                    Statements of Cash Flows
                B-17Consolidated
                    Statements of Capitalization
                B-19Consolidated
                    Statements of Comprehensive Income (Loss)
                B-20Public
                    Service Company of New Mexico and SubsidiaryConsolidated
                    Statements of Earnings
                B-21Consolidated
                    Statements of Retained Earnings
                B-22Consolidated
                    Balance Sheets
                B-23Consolidated
                    Statements of Cash Flows
                B-25Consolidated
                    Statements of Capitalization
                B-27Consolidated
                    Statements of Comprehensive Income (Loss)
                B-28Texas-New
                    Mexico Power Company and SubsidiariesConsolidated
                    Statements of Earnings
                B-29Consolidated
                    Statements of Retained Earnings
                B-30Consolidated
                    Balance Sheets
                B-31Consolidated
                    Statements of Cash Flows
                B-33Consolidated
                    Statements of Capitalization
                B-35Consolidated
                    Statements of Comprehensive Income (Loss)
                B-36Notes
                    to Consolidated Financial Statements
                B-37Supplementary
                    Data:Report
                    of Independent Registered Public Accounting Firm on
                    Schedules
                B-133Schedule
                    I Condensed Financial Information of Parent Company
                B-135Schedule
                    II Valuation and Qualifying Accounts
                B-138
 
 B-4
 
 **Management’s
        Annual Report on Internal Control Over Financial Reporting**
 
 Management
        of PNM Resources, Inc. and subsidiaries (“the Company”) is responsible for
        establishing and maintaining adequate internal control over financial reporting
        as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as
        amended.
 
 Management
        assessed the effectiveness of the Company’s internal control over financial
        reporting based on the *Internal
        Control - Integrated Framework* set
        forth by the Committee of Sponsoring Organizations of the Treadway Commission.
        Based on the assessment performed, management concludes that the Company’s
        internal control over financial reporting was effective as of December 31,
        2005.
 
 Management
        has excluded TNP Enterprises, Inc. and its subsidiaries Texas-New Mexico
        Power
        Company and First Choice Power from their report on internal control over
        financial reporting. The financial statements of TNP Enterprises, Inc. and
        its
        subsidiaries reflect total assets and revenues constituting 29 and 20 percent,
        respectively, of the related consolidated financial statement amounts as
        of and
        for the year ended December 31, 2005. The Company has disclosed the material
        change in the Company’s internal control over financial reporting due to the
        acquisition, which occurred June 6, 2005.
 
 Deloitte
        & Touche LLP, an independent registered public accounting firm, has issued
        an attestation report on management’s assessment of internal control over
        financial reporting which is included herein.
 
 
 
 /s/
        Jeffry E. Sterba
 Jeffry
        E.
        Sterba,
 Chairman,
        President and
 Chief
        Executive Officer
 
 
 
 /s/
        Charles Eldred
 Charles
        Eldred
 Senior
        Vice President and
 Chief
        Financial Officer
 
 B-5
 
 **Management’s
        Annual Report on Internal Control Over Financial Reporting**
 
 Management
        of Public Service Company of New Mexico and subsidiaries is responsible for
        establishing and maintaining adequate internal control over financial reporting
        as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as
        amended.
 
 Management
        assessed the effectiveness of the Company’s internal control over financial
        reporting based on the *Internal
        Control - Integrated Framework* set
        forth by the Committee of Sponsoring Organizations of the Treadway Commission.
        Based on the assessment performed, management concludes that the Company’s
        internal control over financial reporting was effective as of December 31,
        2005.
 
 Deloitte
        & Touche LLP, an independent registered public accounting firm, has issued
        an attestation report on management’s assessment of internal control over
        financial reporting which is included herein.
 
 
 
 /s/
        Jeffry E. Sterba
 Jeffry
        E.
        Sterba,
 Chairman,
        President and
 Chief
        Executive Officer
 
 
 
 /s/
        Charles Eldred
 Charles
        Eldred
 Senior
        Vice President and
 Chief
        Financial Officer
 
 B-6
 
 REPORT
        OF
        INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To
        the
        Board of Directors and Stockholders of
 PNM
        Resources, Inc.
 Albuquerque,
        New Mexico
 
 We
        have
        audited management's assessment, included in the accompanying Management’s
        Annual Report on Internal Control Over Financial Reporting, that PNM Resources,
        Inc. and subsidiaries (the “Company”) maintained effective internal control over
        financial reporting as of December 31, 2005, based on criteria established
        in *Internal
        Control—Integrated Framework* issued
        by the Committee of Sponsoring Organizations of the Treadway Commission.
        As
        described in Management’s Annual Report on Internal Control Over Financial
        Reporting, management excluded from their assessment the internal control
        over
        financial reporting at TNP Enterprises, Inc., and its subsidiaries Texas-New
        Mexico Power Company and First Choice Power which were acquired on June 6,
        2005
        and whose financial statements reflect total assets and revenues constituting
        29
        and 20 percent, respectively, of the related consolidated financial statement
        amounts as of and for the year ended December 31, 2005. Accordingly, our
        audit
        did not include the internal control over financial reporting at TNP
        Enterprises, Inc. and its subsidiaries. The Company's management is responsible
        for maintaining effective internal control over financial reporting and for
        its
        assessment of the effectiveness of internal control over financial reporting.
        Our responsibility is to express an opinion on management's assessment and
        an
        opinion on the effectiveness of the Company’s internal control over financial
        reporting based on our audit.
 
 We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether effective
        internal control over financial reporting was maintained in all material
        respects. Our audit included obtaining an understanding of internal control
        over
        financial reporting, evaluating management's assessment, testing, and evaluating
        the design and operating effectiveness of internal control, and performing
        such
        other procedures as we considered necessary in the circumstances. We believe
        that our audit provides a reasonable basis for our opinions.
 
 A
        company's internal control over financial reporting is a process designed
        by, or
        under the supervision of, the company's principal executive and principal
        financial officers, or persons performing similar functions, and effected
        by the
        company's board of directors, management, and other personnel 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. A company's internal control over
        financial reporting includes those policies and procedures that (1) pertain
        to
        the maintenance of records that, in reasonable detail, accurately and fairly
        reflect the transactions and dispositions of the assets of the company; (2)
        provide reasonable assurance that transactions are recorded as necessary
        to
        permit preparation of financial statements in accordance with generally accepted
        accounting principles, and that receipts and expenditures of the company
        are
        being made only in accordance with authorizations of management and directors
        of
        the company; and (3) provide reasonable assurance regarding prevention or
        timely
        detection of unauthorized acquisition, use, or disposition of the company's
        assets that could have a material effect on the financial
        statements.
 
 Because
        of the inherent limitations of internal control over financial reporting,
        including the possibility of collusion or improper management override of
        controls, material misstatements due to error or fraud may not be prevented
        or
        detected on a timely basis. Also, projections of any evaluation of the
        effectiveness of the internal control over financial reporting to future
        periods
        are subject to the risk that the controls may become inadequate because of
        changes in conditions, or that the degree of compliance with the policies
        or
        procedures may deteriorate.
 
 In
        our
        opinion, management's assessment that the Company maintained effective internal
        control over financial reporting as of December 31, 2005 is fairly stated,
        in
        all material respects, based on the criteria established in *Internal
        Control—Integrated Framework* issued
        by the Committee of Sponsoring Organizations of the Treadway Commission.
        Also,
        in our opinion, the Company maintained, in all material respects, effective
        internal control over financial reporting as of December 31, 2005, based
        on the
        criteria established in *Internal
        Control—Integrated Framework* issued
        by the Committee of Sponsoring Organizations of the Treadway Commission.
 
 We
        have
        also audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the consolidated financial statements as
        of and
        for the year ended December 31, 2005 of the Company and our report dated
        March
        8, 2006 expressed an unqualified opinion on those consolidated financial
        statements and included an explanatory paragraph relating to the adoption
        of
        Financial Accounting Standards Board Financial
  B-7
 Interpretation
        No. 47, *Accounting
        for Conditional Asset Retirement Obligations* and PNM
        Resources, Inc.’s acquisition of TNP Enterprises, Inc. in 2005.
 
 
 /s/
        DELOITTE & TOUCHE LLP
 
 
 Philadelphia,
        Pennsylvania
 March
        8,
        2006
 
 
 B-8
 
 REPORT
        OF
        INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To
        the
        Board of Directors and Stockholders of
 Public
        Service Company of New Mexico
 Albuquerque,
        New Mexico
 
 We
        have
        audited management's assessment, included in the accompanying Management’s
        Annual Report on Internal Control Over Financial Reporting, that Public Service
        Company of New Mexico and subsidiary (the “Company”) maintained effective
        internal control over financial reporting as of December 31, 2005, based
        on
        criteria established in *Internal
        Control—Integrated Framework* issued
        by the Committee of Sponsoring Organizations of the Treadway Commission.
        The
        Company's management is responsible for maintaining effective internal control
        over financial reporting and for its assessment of the effectiveness of internal
        control over financial reporting. Our responsibility is to express an opinion
        on
        management's assessment and an opinion on the effectiveness of the Company’s
        internal control over financial reporting based on our audit.
 
 We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether effective
        internal control over financial reporting was maintained in all material
        respects. Our audit included obtaining an understanding of internal control
        over
        financial reporting, evaluating management's assessment, testing, and evaluating
        the design and operating effectiveness of internal control, and performing
        such
        other procedures as we considered necessary in the circumstances. We believe
        that our audit provides a reasonable basis for our opinions.
 
 A
        company's internal control over financial reporting is a process designed
        by, or
        under the supervision of, the company's principal executive and principal
        financial officers, or persons performing similar functions, and effected
        by the
        company's board of directors, management, and other personnel 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. A company's internal control over
        financial reporting includes those policies and procedures that (1) pertain
        to
        the maintenance of records that, in reasonable detail, accurately and fairly
        reflect the transactions and dispositions of the assets of the company; (2)
        provide reasonable assurance that transactions are recorded as necessary
        to
        permit preparation of financial statements in accordance with generally accepted
        accounting principles, and that receipts and expenditures of the company
        are
        being made only in accordance with authorizations of management and directors
        of
        the company; and (3) provide reasonable assurance regarding prevention or
        timely
        detection of unauthorized acquisition, use, or disposition of the company's
        assets that could have a material effect on the financial
        statements.
 
 Because
        of the inherent limitations of internal control over financial reporting,
        including the possibility of collusion or improper management override of
        controls, material misstatements due to error or fraud may not be prevented
        or
        detected on a timely basis. Also, projections of any evaluation of the
        effectiveness of the internal control over financial reporting to future
        periods
        are subject to the risk that the controls may become inadequate because of
        changes in conditions, or that the degree of compliance with the policies
        or
        procedures may deteriorate.
 
 In
        our
        opinion, management's assessment that the Company maintained effective internal
        control over financial reporting as of December 31, 2005 is fairly stated,
        in
        all material respects, based on the criteria established in *Internal
        Control—Integrated Framework* issued
        by the Committee of Sponsoring Organizations of the Treadway Commission.
        Also,
        in our opinion, the Company maintained, in all material respects, effective
        internal control over financial reporting as of December 31, 2005, based
        on the
        criteria established in *Internal
        Control—Integrated Framework* issued
        by the Committee of Sponsoring Organizations of the Treadway Commission.
 
 We
        have
        also audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the consolidated financial statements as
        of and
        for the year ended December 31, 2005 of the Company and our report dated
        March
        8, 2006 expressed an unqualified opinion on those financial statements and
        included an explanatory paragraph relating to the adoption of Financial
        Accounting Standards Board Financial Interpretation No. 47, *Accounting
        for Conditional Asset Retirement Obligations* in
        2005.
 
 
 /s/
        DELOITTE & TOUCHE LLP
 
 Philadelphia,
        Pennsylvania
 March
        8,
        2006
 
 B-9
 
 REPORT
        OF
        INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To
        the
        Board of Directors and Stockholders of
 PNM
        Resources, Inc.
 Albuquerque,
        New Mexico
 
 We
        have
        audited the accompanying consolidated balance sheets and consolidated statements
        of capitalization of PNM Resources, Inc. and subsidiaries (the “Company”) as of
        December 31, 2005 and 2004, and the related consolidated statements of earnings,
        retained earnings, comprehensive income (loss), and cash flows for each of
        the
        three years in the period ended December 31, 2005. These financial statements
        are the responsibility of the Company's management. Our responsibility is
        to
        express an opinion on these financial statements based on our
        audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audits to obtain reasonable assurance about whether the
        financial statements are free of material misstatement. An audit includes
        examining, on a test basis, evidence supporting the amounts and disclosures
        in
        the financial statements. An audit also includes assessing the accounting
        principles used and significant estimates made by management, as well as
        evaluating the overall financial statement presentation. We believe that
        our
        audits provide a reasonable basis for our opinion.
  In
        our
        opinion, such consolidated financial statements present fairly, in all material
        respects, the financial position of PNM Resources, Inc. and subsidiaries
        as of
        December 31, 2005 and 2004, and the results of their operations and their
        cash
        flows for each of the three years in the period ended December 31, 2005,
        in
        conformity with accounting principles generally accepted in the United States
        of
        America.
 
 As
        discussed in Note 1 to the consolidated financial statements, the Company
        adopted Statement of Financial Accounting Standards No. 143, *Accounting
        for Asset Retirement Obligations* ,
        effective January 1, 2003 and Financial Accounting Standards Board Financial
        Interpretation No. 47, *Accounting
        for Conditional Asset Retirement Obligations* in
        2005.
        As discussed in Note 12 to the consolidated financial statements, during
        2003,
        the Company changed the actuarial valuation measurement date for the pension
        plan and other post-retirement benefit plans from September 30 to December
        31.
        As discussed in Note 2 to the consolidated financial statements, the Company
        acquired TNP Enterprises, Inc. in 2005.
 
 We
        have
        also audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the effectiveness of the Company's internal
        control over financial reporting as of December 31, 2005, based on the criteria
        established in *Internal
        Control—Integrated Framework* issued
        by the Committee of Sponsoring Organizations of the Treadway Commission and
        our
        report dated March 8, 2006 expressed an unqualified opinion on management's
        assessment of the effectiveness of the Company's internal control over financial
        reporting and an unqualified opinion on the effectiveness of the Company's
        internal control over financial reporting.
 
 
 /s/
        DELOITTE & TOUCHE LLP
 
 
 Philadelphia,
        Pennsylvania
 March
        8,
        2006
 
 
 B-10
 
 REPORT
        OF
        INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To
        the
        Board of Directors and Stockholders of
 Public
        Service Company of New Mexico
 Albuquerque,
        New Mexico
 
 We
        have
        audited the accompanying consolidated balance sheets and statements of
        capitalization of Public Service Company of New Mexico and subsidiary (the
        “Company”) as of December 31, 2005 and 2004, and the related consolidated
        statements of earnings, retained earnings, comprehensive income (loss), and
        cash
        flows for each of the three years in the period ended December 31, 2005.
        These
        financial statements are the responsibility of the Company's management.
        Our
        responsibility is to express an opinion on these financial statements based
        on
        our audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audits to obtain reasonable assurance about whether the
        financial statements are free of material misstatement. An audit includes
        examining, on a test basis, evidence supporting the amounts and disclosures
        in
        the financial statements. An audit also includes assessing the accounting
        principles used and significant estimates made by management, as well as
        evaluating the overall financial statement presentation. We believe that
        our
        audits provide a reasonable basis for our opinion.
  In
        our
        opinion, such consolidated financial statements present fairly, in all material
        respects, the financial position of Public Service Company of New Mexico
        and
        subsidiaries as of December 31, 2005 and 2004, and the results of their
        operations and their cash flows for each of the three years in the period
        ended
        December 31, 2005, in conformity with accounting principles generally accepted
        in the United States of America.
 
 As
        discussed in Note 1 to the consolidated financial statements, the Company
        adopted Statement of Financial Accounting Standards No. 143, *Accounting
        for Asset Retirement Obligations,* effective January 1, 2003 and Financial Accounting Standards Board Financial
        Interpretation No. 47, *Accounting
        for Conditional Asset Retirement Obligations* in 2005.
        As discussed in Note 12 to the consolidated financial statements, during
        2003,
        the Company changed the actuarial valuation measurement date for the pension
        plan and other post-retirement benefit plans from September 30 to December
        31.
 
 We
        have
        also audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the effectiveness of the Company's internal
        control over financial reporting as of December 31, 2005, based on the criteria
        established in *Internal
        Control—Integrated Framework* issued
        by the Committee of Sponsoring Organizations of the Treadway Commission and
        our
        report dated March 8, 2006 expressed an unqualified opinion on management's
        assessment of the effectiveness of the Company's internal control over financial
        reporting and an unqualified opinion on the effectiveness of the Company's
        internal control over financial reporting.
 
 
 /s/
        DELOITTE & TOUCHE LLP
 
 
 Philadelphia,
        Pennsylvania
 March
        8,
        2006
 
 
 B-11
 
 REPORT
        OF
        INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To
        the
        Board of Directors of
 Texas-New
        Mexico Power Company
 Fort
        Worth, Texas
 
 We
        have
        audited the accompanying consolidated balance sheets and statements of
        capitalization of Texas-New Mexico Power Company and subsidiaries (the
“Company”) as of December 31, 2005 and 2004, and the related consolidated
        statements of earnings, retained earnings, comprehensive income (loss), and
        cash
        flows for the periods June 6, 2005 to December 31, 2005, January 1, 2005
        to June
        6, 2005, and each of the years ended December 31, 2004 and 2003. These financial
        statements are the responsibility of the Company's management. Our
        responsibility is to express an opinion on these financial statements based
        on
        our audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audits to obtain reasonable assurance about whether the
        financial statements are free of material misstatement. The Company is not
        required to have, nor were we engaged to perform, an audit of its internal
        control over financial reporting.  Our audits included consideration of
        internal control over financial reporting as a basis for designing audit
        procedures that are appropriate in the circumstances, but not for the purpose
        of
        expressing an opinion on the effectiveness of the Company's internal control
        over financial reporting.  Accordingly, we express no such opinion. 
An audit includes examining, on a test basis, evidence supporting the amounts
        and disclosures in the financial statements. An audit also includes assessing
        the accounting principles used and significant estimates made by management,
        as
        well as evaluating the overall financial statement presentation. We believe
        that
        our audits provide a reasonable basis for our opinion.
 
 In
        our
        opinion, such consolidated financial statements present fairly, in all material
        respects, the financial position of Texas-New Mexico Power Company and
        subsidiaries as of December 31, 2005 and 2004, and the results of their
        operations and their cash flows for each of periods June 6, 2005 to December
        31,
        2005, January 1, 2005 to June 6, 2005, and each of the years ended December
        31,
        2004 and 2003, in conformity with accounting principles generally accepted
        in
        the United States of America.
 
 As
        discussed in Note 2 to the consolidated financial statements, PNM Resources,
        Inc. acquired Texas-New Mexico Power Company and its parent TNP Enterprises,
        Inc. in 2005. As discussed in Note 1 to the consolidated financial statements,
        the Company adopted Financial Accounting Standards Board Financial
        Interpretation No. 47, *Accounting
        for Conditional Asset Retirement Obligations* in
        2005.
 
 
 /s/
        DELOITTE & TOUCHE LLP
 
 
 Philadelphia,
        Pennsylvania
 March
        8,
        2006
 
  
 B-12
 **PNM
                    RESOURCES, INC. AND SUBSIDIARIES****CONSOLIDATED
                    STATEMENTS OF EARNINGS****Year
                    Ended December 31,****2005**
                
                **2004**
                
                **2003**(In
                    thousands, except per share amounts)**Operating
                    Revenues:**Electric
                
                $
                1,564,077
                
                $
                1,113,046
                
                $
                1,097,075Gas
                
                
                510,801
                
                
                490,921
                
                
                358,267Other
                
                
                1,932
                
                
                825
                
                
                311Total
                    operating revenues
                
                
                2,076,810
                
                
                1,604,792
                
                
                1,455,653**Operating
                    Expenses:**Cost
                    of energy sold
                
                
                1,274,647
                
                
                945,309
                
                
                802,670Administrative
                    and general
                
                
                217,983
                
                
                168,095
                
                
                158,706Energy
                    production costs
                
                
                165,580
                
                
                146,153
                
                
                140,584Depreciation
                    and amortization
                
                
                138,722
                
                
                102,221
                
                
                115,649Transmission
                    and distribution costs
                
                
                70,465
                
                
                59,447
                
                
                60,070Taxes,
                    other than income taxes
                
                
                52,594
                
                
                34,607
                
                
                31,310Income
                    taxes
                
                
                19,450
                
                
                36,062
                
                
                28,072Total
                    operating expenses
                
                
                1,939,441
                
                
                1,491,894
                
                
                1,337,061Operating
                    income
                
                
                137,369
                
                
                112,898
                
                
                118,592**Other
                    Income and Deductions:**Interest
                    income
                
                
                42,829
                
                
                38,007
                
                
                41,826Other
                    income
                
                
                17,639
                
                
                10,063
                
                
                10,879Carrying
                    charges on regulatory assets
                
                
                4,376
                
                
                -
                
                
                -Other
                    deductions
                
                
                (24,104
                )
                
                (8,150
                )
                
                (46,153
                )Other
                    income taxes
                
                
                (13,411
                )
                
                (13,185
                )
                
                183Net
                    other income and deductions
                
                
                27,329
                
                
                26,735
                
                
                6,735Earnings
                    before interest charges
                
                
                164,698
                
                
                139,633
                
                
                125,327**Interest
                    Charges:**Interest
                    on long-term debt, net
                
                
                75,736
                
                
                46,702
                
                
                59,429Other
                    interest charges
                
                
                17,941
                
                
                4,673
                
                
                6,760Net
                    interest charges
                
                
                93,677
                
                
                51,375
                
                
                66,189**Preferred
                    Stock Dividend Requirements**
                
                
                2,868
                
                
                572
                
                
                586**Net
                    Earnings Before Cumulative Effect of Changes in Accounting
                    Principles**
                
                
                68,153
                
                
                87,686
                
                
                58,552**Cumulative
                    Effect of Changes in Accounting Principles****Net
                    of Tax (Expense) Benefit of $592, $0 and
                    $(23,999)**
                
                
                (926
                )
                
                -
                
                
                36,621**Net
                    Earnings**
                
                $
                67,227
                
                $
                87,686
                
                $
                95,173**Net
                    Earnings per Common Share (see Note 10):****Basic**
                
                $
                1.02
                
                $
                1.45
                
                $
                1.60**Diluted**
                
                $
                1.00
                
                $
                1.43
                
                $
                1.58**Dividends
                    Declared per Common Share**
                
                $
                0.785
                
                $
                0.665
                
                $
                0.600The
                    accompanying notes, as they relate to PNMR, are an integral part
                    of these
                    financial statements.
 
 B-13
 
 **PNM
                  RESOURCES, INC. AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF RETAINED EARNINGS****Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003**(In
                  thousands)**Balance
                  at Beginning of Year**
              
              $
              550,566
              
              $
              503,069
              
              $
              444,651Net
                  earnings
              
              
              67,227
              
              
              87,686
              
              
              95,173Dividends:Common
                  stock
              
              
              (53,170
              )
              
              (40,189
              )
              
              (36,755
              )**Balance
                  at End of Year**
              
              $
              564,623
              
              $
              550,566
              
              $
              503,069The
                  accompanying notes, as they relate to PNMR, are an integral part
                  of these
                  financial statements.
 
 
 
 B-14
 
 **PNM
                  RESOURCES, INC. AND SUBSIDIARIES****CONSOLIDATED
                  BALANCE SHEETS****December
                  31,****2005**
              
              **2004**(In
                  thousands)**ASSETS****Utility
                  Plant:**Electric
                  plant in service
              
              $
              3,315,642
              
              $
              2,488,961Gas
                  plant in service
              
              
              711,823
              
              
              680,487Common
                  plant in service and plant held for future use
              
              
              135,849
              
              
              140,8184,163,314
              
              
              3,310,266Less
                  accumulated depreciation and amortization
              
              
              1,374,599
              
              
              1,135,5102,788,715
              
              
              2,174,756Construction
                  work in progress
              
              
              168,195
              
              
              124,381Nuclear
                  fuel, net of accumulated amortization of $14,679 and
                  $16,448
              
              
              27,182
              
              
              25,449Net
                  utility plant
              
              
              2,984,092
              
              
              2,324,586**Other
                  Property and Investments:**Investment
                  in lessor notes
              
              
              286,678
              
              
              308,680Other
                  investments
              
              
              180,013
              
              
              139,848Non-utility
                  property, net of accumulated depreciation of $22 and
                  $1,773
              
              
              4,214
              
              
              1,437Total
                  other property and investments
              
              
              470,905
              
              
              449,965**Current
                  Assets:**Cash
                  and cash equivalents
              
              
              68,199
              
              
              17,195Special
                  deposits
              
              
              534
              
              
              -Accounts
                  receivable, net of allowance for uncollectible accounts of $3,653
                  and
                  $1,329
              
              
              128,834
              
              
              96,600Unbilled
                  revenues
              
              
              151,773
              
              
              104,708Other
                  receivables
              
              
              64,285
              
              
              48,393Inventories
              
              
              52,037
              
              
              41,352Regulatory
                  assets
              
              
              28,058
              
              
              3,339Other
                  current assets
              
              
              102,577
              
              
              51,967Total
                  current assets
              
              
              596,297
              
              
              363,554**Deferred
                  charges:**Regulatory
                  assets
              
              
              347,279
              
              
              217,196Prepaid
                  pension cost
              
              
              91,444
              
              
              87,336Goodwill
              
              
              499,155
              
              
              -Other
                  intangible assets
              
              
              78,512
              
              
              -Other
                  deferred charges
              
              
              57,025
              
              
              44,998Total
                  deferred charges
              
              
              1,073,415
              
              
              349,530$
              5,124,709
              
              $
              3,487,635The
                  accompanying notes, as they relate to PNMR, are an integral part
                  of these
                  financial statements.
 
 
 B-15
 
 **PNM
                  RESOURCES, INC. AND SUBSIDIARIES****CONSOLIDATED
                  BALANCE SHEETS****December
                  31,****2005**
              
              **2004**(In
                  thousands)**CAPITALIZATION
                  AND LIABILITIES****Capitalization:**Common
                  stockholders’ equity:Common
                  stock outstanding (no par value, 120,000,000 shares
                  authorized:issued
                  68,786,286 and 60,464,595 at December 31, 2005 and 2004,
                  respectively)
              
              $
              813,425
              
              $
              638,826Accumulated
                  other comprehensive loss, net of tax
              
              
              (91,589
              )
              
              (89,813
              )Retained
                  earnings
              
              
              564,623
              
              
              550,566Total
                  common stockholders’ equity
              
              
              1,286,459
              
              
              1,099,579Cumulative
                  preferred stock of subsidiary without mandatory redemption($100 stated
                  value, 10,000,000 shares authorized: issued 115,293 atDecember
                  31, 2005 and 2004)
              
              
              11,529
              
              
              11,529Long-term
                  debt
              
              
              1,746,395
              
              
              987,823Total
                  capitalization
              
              
              3,044,383
              
              
              2,098,931**Current
                  Liabilities:**Short-term
                  debt
              
              
              332,200
              
              
              94,700Accounts
                  payable
              
              
              206,648
              
              
              117,645Accrued
                  interest and taxes
              
              
              27,815
              
              
              15,796Other
                  current liabilities
              
              
              156,833
              
              
              128,476Total
                  current liabilities
              
              
              723,496
              
              
              356,617**Long-Term
                  Liabilities:**Accumulated
                  deferred income taxes
              
              
              451,263
              
              
              284,528Accumulated
                  deferred investment tax credits
              
              
              33,806
              
              
              35,360Regulatory
                  liabilities
              
              
              402,253
              
              
              327,419Asset
                  retirement obligations
              
              
              55,646
              
              
              50,361Accrued
                  pension liability and postretirement benefit cost
              
              
              227,202
              
              
              180,903Other
                  deferred credits
              
              
              186,660
              
              
              153,516Total
                  long-term liabilities
              
              
              1,356,830
              
              
              1,032,087Commitments
                  and Contingencies (see Note 16)
              
              
              -
              
              
              -$
              5,124,709
              
              $
              3,487,635The
                  accompanying notes, as they relate to PNMR, are an integral part
                  of these
                  financial statements.
 
 
 B-16
 
 **PNM
                  RESOURCES, INC. AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003**(In
                  thousands)**Cash
                  Flows From Operating Activities:**Net
                  earnings
              
              $
              67,227
              
              $
              87,686
              
              $
              95,173Adjustments
                  to reconcile net earnings to net cash flows from operating
                  activities:Depreciation
                  and amortization
              
              
              160,591
              
              
              131,625
              
              
              144,854Allowance
                  for equity funds used during construction
              
              
              (1,892
              )
              
              (1,294
              )
              
              (2,589
              )Accumulated
                  deferred income tax
              
              
              28,318
              
              
              39,966
              
              
              90,175Transition
                  costs write-off
              
              
              -
              
              
              -
              
              
              16,720Loss
                  on reacquired debt
              
              
              -
              
              
              -
              
              
              16,576Cumulative
                  effect of a changes in accounting principles
              
              
              1,518
              
              
              -
              
              
              (60,620
              )Net
                  unrealized (gains)/losses on trading and investment
                  securities
              
              
              3,753
              
              
              (1,640
              )
              
              (1,360
              )Realized
                  gains on investment securities
              
              
              (8,562
              )
              
              (2,584
              )
              
              (1,251
              )Carrying
                  charges on deferred stranded costs
              
              
              (4,376
              )
              
              -
              
              
              -Equity-linked
                  units charge
              
              
              11,348
              
              
              -
              
              
              -Turbine
                  impairment
              
              
              14,958
              
              
              -
              
              
              -Other,
                  net
              
              
              (1,384
              )
              
              -
              
              
              (2,433
              )Changes
                  in certain assets and liabilities, net of amounts
                  acquired:Accounts
                  receivable
              
              
              (14,375
              )
              
              (28,342
              )
              
              (21,344
              )Unbilled
                  revenues
              
              
              (13,291
              )
              
              (21,809
              )
              
              5,539Accrued
                  postretirement benefit costs
              
              
              13,586
              
              
              (6,089
              )
              
              (14,962
              )Other
                  assets
              
              
              (85,388
              )
              
              (2,085
              )
              
              (5,972
              )Accounts
                    payable
              
              
              45,839
              
              
              30,429
              
              
              (7,317
              )Accrued
                  interest and taxes
              
              
              20,474
              
              
              (7,680
              )
              
              (22,712
              )Other
                  liabilities
              
              
              (27,893
              )
              
              16,959
              
              
              (2,562
              )Net
                  cash flows from operating activities
              
              
              210,451
              
              
              235,142
              
              
              225,915**Cash
                  Flows From Investing Activities:**Utility
                  plant additions
              
              
              (211,160
              )
              
              (135,795
              )
              
              (167,701
              )Nuclear
                  fuel additions
              
              
              (10,654
              )
              
              (9,915
              )
              
              (9,503
              )Redemption
                  of available-for-sale investments
              
              
              -
              
              
              -
              
              
              80,291Proceeds
                  from sales of securities
              
              
              104,623
              
              
              81,218
              
              
              79,624Purchases
                  of securities
              
              
              (109,795
              )
              
              (87,823
              )
              
              (84,068
              )Cash
                  acquired from purchase of TNP, net of cash paid
              
              
              45,965
              
              
              -
              
              
              -Combustion
                  turbine payments
              
              
              -
              
              
              -
              
              
              (11,136
              )Bond
                  purchase
              
              
              -
              
              
              -
              
              
              (6,675
              )Return
                  of principal PVNGS lessor notes
              
              
              21,432
              
              
              20,292
              
              
              18,360Luna
                  investment
              
              
              -
              
              
              (13,379
              )
              
              -Other,
                  net
              
              
              4,946
              
              
              1,564
              
              
              2,018Net
                  cash flows from investing activities
              
              
              (154,643
              )
              
              (143,838
              )
              
              (98,790
              )The
                  accompanying notes, as they relate to PNMR, are an integral part
                  of these
                  financial statements.
 
 
 B-17
 
 **PNM
                  RESOURCES, INC. AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003**(In
                  thousands)**Cash
                  Flows From Financing Activities:**Short-term
                  borrowings (repayments), net
              
              
              237,500
              
              
              (31,218
              )
              
              (24,082
              )Long-term
                  debt borrowings
              
              
              339,832
              
              
              -
              
              
              483,882Long-term
                  debt repayments
              
              
              (399,626
              )
              
              -
              
              
              (476,572
              )Premium
                  on long-term debt refinancing
              
              
              -
              
              
              -
              
              
              (23,905
              )Refund
                  costs of pollution control bonds
              
              
              -
              
              
              -
              
              
              (31,427
              )Issuance
                  of common stock
              
              
              101,231
              
              
              -
              
              
              -Redemption
                  of TNP preferred stock
              
              
              (224,564
              )
              
              -
              
              
              -Retirement
                  of preferred stock
              
              
              -
              
              
              (1,118
              )
              
              -Exercise
                  of employee stock options
              
              
              (9,735
              )
              
              (16,430
              )
              
              (9,639
              )Dividends
                  paid
              
              
              (51,128
              )
              
              (38,848
              )
              
              (36,702
              )Other,
                  net
              
              
              1,686
              
              
              811
              
              
              312Net
                  cash flows from financing activities
              
              
              (4,804
              )
              
              (86,803
              )
              
              (118,133
              )Increase
                  in Cash and Cash Equivalents
              
              
              51,004
              
              
              4,501
              
              
              8,992Beginning
                  of Year
              
              
              17,195
              
              
              12,694
              
              
              3,702End
                  of Year
              
              $
              68,199
              
              $
              17,195
              
              $
              12,694**Supplemental
                  Cash Flow Disclosures:**Interest
                  paid, net of capitalized interest
              
              $
              77,066
              
              $
              46,469
              
              $
              69,046Income
                  taxes paid (refunded), net
              
              $
              (4,174
              )
              $
              14,459
              
              $
              (23,154
              )**Supplemental
                  schedule of noncash transactions:**Pension
                  contribution of PNMR common shares
              
              $
              -
              
              $
              -
              
              $
              28,950**Supplemental
                  schedule of noncash investing and financing
                  activities**:During
                  2005, PNMR purchased all of the outstanding common shares of TNP
                  for $74.6
                  million in cashand
                  $87.4 million in PNMR common stock. In conjunction with the acquisition,
                  liabilities wereassumed
                  as follows:Fair value of assets acquired
              
              $
              1,501,114Cash paid for transaction costs
              
              
              (21,520
              )Cash paid for TNP common shares
              
              
              (74,648
              )PNMR common stock exchanged for TNP common stock
              
              
              (87,392
              )Liabilities
                  assumed
              
              $
              1,317,554The
                  accompanying notes, as they relate to PNMR, are an integral part
                  of these
                  financial statements.
 
 
 B-18
  **PNM
                    RESOURCES, INC. AND SUBSIDIARIES****CONSOLIDATED
                    STATEMENTS OF
                    CAPITALIZATION**
 
 **December
                    31,****2005**
                
                **2004**(In
                    thousands)**Common
                    Stockholders’ Equity:**Common
                    Stock, no par value
                
                $
                813,425
                
                $
                638,826Accumulated
                    other comprehensive income, net of tax
                
                
                (91,589
                )
                
                (89,813
                )Retained
                    earnings
                
                
                564,623
                
                
                550,566Total
                    common stockholders’ equity
                
                
                1,286,459
                
                
                1,099,579**Cumulative
                    Preferred Stock:**Without
                    mandatory redemption requirements:1965
                    Series, 4.58% with a stated value of $100.00 and acurrent
                    redemption price of $102.00; outstanding sharesat
                    December 31, 2005 and 2004 were 115,293
                
                
                11,529
                
                
                11,529**Long-Term
                    Debt:****Issue
                    and Final Maturity**First
                    Mortgage Bonds, Pollution Control Revenue Bonds:5.7%
                    due 2016
                
                
                65,000
                
                
                65,000Senior
                    Unsecured Notes, Pollution Control Revenue Bonds:6.30%
                    due 2016
                
                
                77,045
                
                
                77,0455.75%
                    due 2022
                
                
                37,300
                
                
                37,3005.80%
                    due 2022
                
                
                100,000
                
                
                100,0006.375%
                    due 2022
                
                
                90,000
                
                
                90,0006.30%
                    due 2026
                
                
                23,000
                
                
                23,0006.60%
                    due 2029
                
                
                11,500
                
                
                11,5002.10%
                    due 2033
                
                
                46,000
                
                
                46,0002.10%
                    due 2033
                
                
                100,000
                
                
                100,0004.00%
                    due 2038
                
                
                36,000
                
                
                36,000Total
                    Senior Unsecured Notes, Pollution Control Revenue Bonds
                
                
                520,845
                
                
                520,845Senior
                    Unsecured Notes:4.40%
                    due 2008
                
                
                300,000
                
                
                300,0007.50%
                    due 2018
                
                
                100,025
                
                
                100,0256.125%
                    due 2008
                
                
                248,935
                
                
                -6.25%
                    due 2009
                
                
                167,690
                
                
                -Other,
                    including unamortized discounts
                
                
                (3,350
                )
                
                1,953Total
                    Senior Unsecured Notes
                
                
                813,300
                
                
                401,978Equity-Linked
                    Units:6.75%
                    due 2010
                
                
                247,250
                
                
                -6.625%
                    due 2010
                
                
                100,000
                
                
                -Total
                    Equity-Linked Units
                
                
                347,250
                
                
                -Total
                    long-term debt
                
                
                1,746,395
                
                
                987,823Total
                    Capitalization
                
                $
                3,044,383
                
                $
                2,098,931The
                    accompanying notes, as they relate to PNMR, are an integral part
                    of these
                    financial statements.
 
 B-19
 **PNM
                  RESOURCES, INC. AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF COMPREHENSIVE INCOME (LOSS****)****Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003**(In
                  thousands)**Net
                  Earnings**
              
              $
              67,227
              
              $
              87,686
              
              $
              95,173Other
                  Comprehensive Income (Loss):**Unrealized
                  gain (loss) on securities**:Unrealized
                  holding gains arising during the period,net
                  of tax expense of $2,948, $1,212 and $1,256
              
              
              4,498
              
              
              1,849
              
              
              1,916Reclassification
                  adjustment for gains included in net income,net
                  of tax expense of $2,925, $745 and $440
              
              
              (4,464
              )
              
              (1,137
              )
              
              (672
              )**Additional
                  minimum pension liability adjustment, net of tax****(expense)
                  benefit of $8,322, $14,415 and $(6,284)**
              
              
              (12,701
              )
              
              (21,996
              )
              
              9,589**Mark-to-market
                  adjustment for certain derivative transactions:**Change
                  in fair market value of designated cash flow hedges,net
                  of tax expense of $7,913, $3,567 and $6,816
              
              
              11,844
              
              
              5,443
              
              
              10,401Reclassification
                  adjustment for gains included in net income,net
                  of tax expense of $624, $318 and $0
              
              
              (953
              )
              
              (485
              )
              
              -**Total
                  Other Comprehensive Income (Loss)**
              
              
              (1,776
              )
              
              (16,326
              )
              
              21,234**Total
                  Comprehensive Income**
              
              $
              65,451
              
              $
              71,360
              
              $
              116,407The
                  accompanying notes, as they relate to PNMR, are an integral part
                  of these
                  financial statements.
 
 
 B-20
 
 **PUBLIC
                  SERVICE COMPANY OF NEW MEXICO AND****SUBSIDIARY****A
                  WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.****CONSOLIDATED
                  STATEMENTS OF EARNINGS****Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003**(In
                  thousands)**Operating
                  Revenues:**Electric
              
              $
              1,164,656
              
              $
              1,113,046
              
              $
              1,097,075Gas
              
              
              510,801
              
              
              490,921
              
              
              358,267Total
                  operating revenues
              
              
              1,675,457
              
              
              1,603,967
              
              
              1,455,342**Operating
                  Expenses:**Cost
                  of energy sold
              
              
              1,043,490
              
              
              945,186
              
              
              802,650Administrative
                  and general
              
              
              176,641
              
              
              165,942
              
              
              160,200Energy
                  production costs
              
              
              165,580
              
              
              146,153
              
              
              140,584Depreciation
                  and amortization
              
              
              115,791
              
              
              99,633
              
              
              113,921Transmission
                  and distribution costs
              
              
              58,231
              
              
              59,447
              
              
              61,169Taxes,
                  other than income taxes
              
              
              31,175
              
              
              31,270
              
              
              29,670Income
                  taxes
              
              
              8,217
              
              
              37,964
              
              
              28,262Total
                  operating expenses
              
              
              1,599,125
              
              
              1,485,595
              
              
              1,336,456Operating
                  income
              
              
              76,332
              
              
              118,372
              
              
              118,886**Other
                  Income and Deductions:**Interest
                  income
              
              
              37,919
              
              
              37,721
              
              
              38,918Other
                  income
              
              
              17,211
              
              
              10,006
              
              
              9,837Other
                  deductions
              
              
              (7,141
              )
              
              (5,497
              )
              
              (39,625
              )Other
                  income taxes
              
              
              (17,077
              )
              
              (14,733
              )
              
              (2,328
              )Net
                  other income and deductions
              
              
              30,912
              
              
              27,497
              
              
              6,802Earnings
                  before interest charges
              
              
              107,244
              
              
              145,869
              
              
              125,688**Interest
                  Charges:**Interest
                  on long-term debt, net
              
              
              49,102
              
              
              49,015
              
              
              59,013Other
                  interest charges
              
              
              5,022
              
              
              4,416
              
              
              6,697Net
                  interest charges
              
              
              54,124
              
              
              53,431
              
              
              65,710**Net
                  Earnings Before Cumulative Effect of Changes in Accounting
                  Principles**
              
              
              53,120
              
              
              92,438
              
              
              59,978**Cumulative
                  Effect of Changes in Accounting Principles,****Net
                  of Tax (Expense) Benefit of $331, $0 and
                  $(23,999)**
              
              
              (506
              )
              
              -
              
              
              36,621**Net
                  Earnings**
              
              
              52,614
              
              
              92,438
              
              
              96,599Preferred
                  Stock Dividend Requirements
              
              
              528
              
              
              572
              
              
              586**Net
                  Earnings Available for Common Stock**
              
              $
              52,086
              
              $
              91,866
              
              $
              96,013The
                  accompanying notes, as they relate to PNM, are an integral part
                  of these
                  financial statements.
 
 
 B-21
 
 **PUBLIC
                  SERVICE COMPANY OF NEW MEXICO AND****SUBSIDIARY****A
                  WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.****CONSOLIDATED
                  STATEMENTS OF RETAINED EARNINGS****Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003**(In
                  thousands)**Balance
                  at Beginning of Year**
              
              $
              371,455
              
              $
              302,589
              
              $
              256,157Net
                  earnings
              
              
              52,614
              
              
              92,438
              
              
              96,599Dividends:Cumulative
                  preferred stock
              
              
              (528
              )
              
              (572
              )
              
              (586
              )Common
                  stock dividends paid to parent company
              
              
              (90,999
              )
              
              (23,000
              )
              
              (49,581
              )**Balance
                  at End of Year**
              
              $
              332,542
              
              $
              371,455
              
              $
              302,589The
                  accompanying notes, as they relate to PNM, are an integral part
                  of these
                  financial statements.
 
 
 B-22
 
 **PUBLIC
                  SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY****A
                  WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.****CONSOLIDATED
                  BALANCE SHEETS****December
                  31,****2005**
              
              **2004**(In
                  thousands)**ASSETS****Utility
                  Plant:**Electric
                  plant in service
              
              $
              2,576,182
              
              $
              2,488,961Gas
                  plant in service
              
              
              711,823
              
              
              680,487Common
                  plant in service and plant held for future use
              
              
              74,857
              
              
              97,3693,362,862
              
              
              3,266,817Less
                  accumulated depreciation and amortization
              
              
              1,205,386
              
              
              1,125,4442,157,476
              
              
              2,141,373Construction
                  work in progress
              
              
              137,663
              
              
              110,406Nuclear
                  fuel, net of accumulated amortization of $14,679 and
                  $16,448
              
              
              27,182
              
              
              25,449Net
                  utility plant
              
              
              2,322,321
              
              
              2,277,228**Other
                  Property and Investments:**Investment
                  in lessor notes
              
              
              286,678
              
              
              308,680Other
                  investments
              
              
              170,422
              
              
              116,134Non-utility
                  property
              
              
              966
              
              
              966Total
                  other property and investments
              
              
              458,066
              
              
              425,780**Current
                  Assets:**Cash
                  and cash equivalents
              
              
              12,690
              
              
              16,448Special
                  deposits
              
              
              263
              
              
              -Accounts
                  receivable, net of allowance for uncollectible accounts of $1,435
                  and
                  $1,329
              
              
              108,569
              
              
              96,600Unbilled
                  revenues
              
              
              121,453
              
              
              104,708Other
                  receivables
              
              
              53,546
              
              
              45,717Inventories
              
              
              50,411
              
              
              41,246Regulatory
                  assets
              
              
              28,058
              
              
              3,339Other
                  current assets
              
              
              75,885
              
              
              39,933Total
                  current assets
              
              
              450,875
              
              
              347,991**Deferred
                  charges:**Regulatory
                  assets
              
              
              223,325
              
              
              217,196Prepaid
                  pension cost
              
              
              91,444
              
              
              87,336Other
                  deferred charges
              
              
              41,720
              
              
              38,199Total
                  deferred charges
              
              
              356,489
              
              
              342,731$
              3,587,751
              
              $
              3,393,730The
                  accompanying notes, as they relate to PNM, are an integral part
                  of these
                  financial statements.
 
 
 
 B-23
 
 **PUBLIC
                  SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY****A
                  WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.****CONSOLIDATED
                  BALANCE SHEETS****December
                  31,****2005**
              
              **2004**(In
                  thousands)**CAPITALIZATION
                  AND LIABILITIES****Capitalization:**Common
                  stockholder’s equity:Common
                  stock outstanding (no par value, 40,000,000 shares authorized:issued
                  39,117,799 at December 31, 2005 and 2004)
              
              $
              765,500
              
              $
              752,350Accumulated
                  other comprehensive loss, net of tax
              
              
              (90,515
              )
              
              (89,813
              )Retained
                  earnings
              
              
              332,542
              
              
              371,455Total
                  common stockholder’s equity
              
              
              1,007,527
              
              
              1,033,992Cumulative
                  preferred stock of subsidiary without mandatory redemption($100
                  stated value, 10,000,000 shares authorized: issued 115,293 atDecember
                  31, 2005 and 2004)
              
              
              11,529
              
              
              11,529Long-term
                  debt
              
              
              987,068
              
              
              987,676Total
                  capitalization
              
              
              2,006,124
              
              
              2,033,197**Current
                  Liabilities:**Short-term
                  debt
              
              
              128,200
              
              
              60,400Accounts
                  payable
              
              
              170,517
              
              
              116,763Intercompany
                  accounts payable
              
              
              50,070
              
              
              38,700Accrued
                  interest and taxes
              
              
              15,951
              
              
              28,783Other
                  current liabilities
              
              
              98,753
              
              
              91,765Total
                  current liabilities
              
              
              463,491
              
              
              336,411**Long-Term
                  Liabilities:**Accumulated
                  deferred income taxes
              
              
              300,752
              
              
              278,907Accumulated
                  deferred investment tax credits
              
              
              32,266
              
              
              35,360Regulatory
                  liabilities
              
              
              346,007
              
              
              327,419Asset
                  retirement obligations
              
              
              54,940
              
              
              50,361Accrued
                  pension liability and postretirement benefit cost
              
              
              217,092
              
              
              180,903Other
                  deferred credits
              
              
              167,079
              
              
              151,172Total
                  long-term liabilities
              
              
              1,118,136
              
              
              1,024,122Commitments
                  and Contingencies (see Note 16)
              
              
              -
              
              
              -$
              3,587,751
              
              $
              3,393,730The
                  accompanying notes, as they relate to PNM, are an integral part
                  of these
                  financial statements.
 
 
 B-24
 
 **PUBLIC
                  SERVICE COMPANY OF NEW MEXICO AND****SUBSIDIARY****A
                  WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003**(In
                  thousands)**Cash
                  Flows From Operating Activities:**Net
                  earnings
              
              $
              52,614
              
              $
              92,438
              
              $
              96,599Adjustments
                  to reconcile net earnings to net cash flows from operating
                  activities:Depreciation
                  and amortization
              
              
              135,813
              
              
              129,018
              
              
              143,940Allowance
                  for equity funds used during construction
              
              
              (1,757
              )
              
              (1,228
              )
              
              (2,551
              )Accumulated
                  deferred income tax
              
              
              20,039
              
              
              38,162
              
              
              82,799Transition
                  costs write-off
              
              
              -
              
              
              -
              
              
              16,720Loss
                  on reacquired debt
              
              
              -
              
              
              -
              
              
              16,576Cumulative
                  effect of changes in accounting principles
              
              
              837
              
              
              -
              
              
              (60,620
              )Net
                  unrealized gains on trading and investment securities
              
              
              (5,749
              )
              
              (1,640
              )
              
              (1,360
              )Realized
                  gains on investment securities
              
              
              (8,562
              )
              
              (2,584
              )
              
              (1,251
              )Wholesale
                  credit reserve
              
              
              -
              
              
              -
              
              
              (2,433
              )Turbine
                  impairment
              
              
              14,958
              
              
              -
              
              
              -Changes
                  in certain assets and liabilities:Accounts
                  receivable
              
              
              (11,969
              )
              
              (28,342
              )
              
              (21,344
              )Unbilled
                  revenues
              
              
              (16,745
              )
              
              (21,809
              )
              
              5,539Accrued
                  postretirement benefit costs
              
              
              11,556
              
              
              (6,090
              )
              
              (14,962
              )Other
                  assets
              
              
              (84,104
              )
              
              7,104
              
              
              (3,716
              )Accounts
                  payable
              
              
              53,754
              
              
              37,388
              
              
              (12,905
              )Accrued
                  interest and taxes
              
              
              (12,833
              )
              
              19,905
              
              
              (27,572
              )Other
                  liabilities
              
              
              23,691
              
              
              (1,309
              )
              
              (19,285
              )Net
                  cash flows from operating activities
              
              
              171,543
              
              
              261,013
              
              
              194,174**Cash
                  Flows From Investing Activities:**Utility
                  plant additions
              
              
              (157,092
              )
              
              (128,236
              )
              
              (159,322
              )Nuclear
                  fuel additions
              
              
              (10,654
              )
              
              (9,915
              )
              
              (9,503
              )Proceeds
                  from sales of securities
              
              
              104,623
              
              
              81,218
              
              
              79,624Purchases
                  of securities
              
              
              (109,795
              )
              
              (87,823
              )
              
              (84,068
              )Combustion
                  turbine payments
              
              
              -
              
              
              -
              
              
              (11,136
              )EIP
                  buyout
              
              
              -
              
              
              -
              
              
              (36,925
              )Return
                  of principal PVNGS lessor notes
              
              
              21,432
              
              
              20,292
              
              
              18,360Purchase
                  of EIP investment
              
              
              -
              
              
              (12,247
              )
              
              -Other,
                  net
              
              
              213
              
              
              4,942
              
              
              472Net
                  cash flows from investing activities
              
              
              (151,273
              )
              
              (131,769
              )
              
              (202,498
              )The
                  accompanying notes, as they relate to PNM, are an integral part
                  of these
                  financial statements.
 
 
 B-25
 
 **PUBLIC
                      SERVICE COMPANY OF NEW MEXICO AND****SUBSIDIARY****A
                      WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.****CONSOLIDATED
                      STATEMENTS OF CASH FLOWS****Year
                      Ended December 31,****2005**
                  
                  **2004**
                  
                  **2003**(In
                      thousands)**Cash
                      Flows From Financing Activities:**Short-term
                      borrowings (repayments), net
                  
                  
                  67,800
                  
                  
                  (64,500
                  )
                  
                  (25,100
                  )Long-term
                      debt borrowings
                  
                  
                  -
                  
                  
                  -
                  
                  
                  483,780Long-term
                      debt repayments
                  
                  
                  (611
                  )
                  
                  -
                  
                  
                  (450,420
                  )Premium
                      on long-term debt refinancing
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (23,905
                  )Refund
                      costs of pollution control bonds
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (31,427
                  )Equity
                      contribution from parent
                  
                  
                  -
                  
                  
                  -
                  
                  
                  126,053Retirement
                      of preferred stock
                  
                  
                  -
                  
                  
                  (1,118
                  )
                  
                  -Dividends
                      paid
                  
                  
                  (91,527
                  )
                  
                  (23,586
                  )
                  
                  (49,581
                  )Change
                      in intercompany borrowings
                  
                  
                  255
                  
                  
                  (34,871
                  )
                  
                  (12,340
                  )Other,
                      net
                  
                  
                  55
                  
                  
                  (328
                  )
                  
                  (223
                  )Net
                      cash flows from financing activities
                  
                  
                  (24,028
                  )
                  
                  (124,403
                  )
                  
                  16,837Increase
                      (Decrease) in Cash and Cash Equivalents
                  
                  
                  (3,758
                  )
                  
                  4,841
                  
                  
                  8,513Beginning
                      of Year
                  
                  
                  16,448
                  
                  
                  11,607
                  
                  
                  3,094End
                      of Year
                  
                  $
                  12,690
                  
                  $
                  16,448
                  
                  $
                  11,607**Supplemental
                      Cash Flow Disclosures:**Interest
                      paid, net of capitalized interest
                  
                  $
                  51,593
                  
                  $
                  49,937
                  
                  $
                  67,500Income
                      taxes paid (refunded), net
                  
                  $
                  5
                  
                  $
                  18,002
                  
                  $
                  (5,084
                  )The
                      accompanying notes, as they relate to PNM, are an integral
                      part of these
                      financial
                      statements.
 
 B-26
 
 **PUBLIC
                  SERVICE COMPANY OF NEW MEXICO AND****SUBSIDIARY****A
                  WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.****CONSOLIDATED
                  STATEMENTS OF CAPITALIZATION****December
                  31,****2005**
              
              **2004**(In
                  thousands)**Common
                  Stockholder’s Equity:**Common
                  stock outstanding, no par value
              
              $
              765,500
              
              $
              752,350Accumulated
                  other comprehensive income, net of tax
              
              
              (90,515
              )
              
              (89,813
              )Retained
                  earnings
              
              
              332,542
              
              
              371,455Total
                  common stockholder’s equity
              
              
              1,007,527
              
              
              1,033,992**Cumulative
                  Preferred Stock:**Without
                  mandatory redemption requirements:1965
                  Series, 4.58% with a stated value of $100.00 and a current redemption
                  price of$102.00;
                  outstanding shares at December 31, 2005 and 2004 of
                  115,293
              
              
              11,529
              
              
              11,529**Long-Term
                  Debt:****Issue
                  and Final Maturity**First
                  Mortgage Bonds, Pollution Control Revenue Bonds:5.7%
                  due 2016
              
              
              65,000
              
              
              65,000Senior
                  Unsecured Notes, Pollution Control Revenue Bonds:6.30%
                  due 2016
              
              
              77,045
              
              
              77,0455.75%
                  due 2022
              
              
              37,300
              
              
              37,3005.80%
                  due 2022
              
              
              100,000
              
              
              100,0006.375%
                  due 2022
              
              
              90,000
              
              
              90,0006.30%
                  due 2026
              
              
              23,000
              
              
              23,0006.60%
                  due 2029
              
              
              11,500
              
              
              11,5002.10%
                  due 2033
              
              
              46,000
              
              
              46,0002.10%
                  due 2033
              
              
              100,000
              
              
              100,0004.00%
                  due 2038
              
              
              36,000
              
              
              36,000Total
                  Senior Unsecured Notes, Pollution Control Revenue Bonds
              
              
              520,845
              
              
              520,845Senior
                  Unsecured Notes:4.40%
                  due 2008
              
              
              300,000
              
              
              300,0007.50%
                  due 2018
              
              
              100,025
              
              
              100,025Other,
                  including unamortized discounts
              
              
              1,198
              
              
              1,806Total
                  Senior Unsecured Notes
              
              
              401,223
              
              
              401,831Total
                  long-term debt
              
              
              987,068
              
              
              987,676Total
                  Capitalization
              
              $
              2,006,124
              
              $
              2,033,197The
                  accompanying notes, as they relate to PNM, are an integral part
                  of these
                  financial statements.
 
 
 B-27
  **PUBLIC
                    SERVICE COMPANY OF NEW MEXICO AND****SUBSIDIARY****A
                    WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.****CONSOLIDATED
                    STATEMENTS OF COMPREHENSIVE INCOME****(LOSS)****Year
                    Ended December 31,****2005**
                
                **2004**
                
                **2003**(In
                    thousands)**Net
                    Earnings Available for Common Stock**
                
                $
                52,086
                
                $
                91,866
                
                $
                96,013Other
                    Comprehensive Income (Loss):**Unrealized
                    gain (loss) on securities**:Unrealized
                    holding gains arising from the period,net
                    of tax expense of $2,948, $1,212 and $1,545
                
                
                4,498
                
                
                1,849
                
                
                2,357Reclassification
                    adjustment for gains included in net income,net
                    of tax expense of $2,925, $745 and $440
                
                
                (4,464
                )
                
                (1,137
                )
                
                (672
                )**Additional
                    minimum pension liability adjustment, net of tax****(expense)
                    benefit of $8,304, $14,415 and $(6,284)**
                
                
                (12,672
                )
                
                (21,996
                )
                
                9,589**Mark-to-market
                    adjustment for certain derivative transactions:**Change
                    in fair market value of designated cash flow hedges,net
                    of tax expense of $8,447, $3,567 and $6,140
                
                
                12,889
                
                
                5,443
                
                
                9,369Reclassification
                    adjustment for gains included in net income,net
                    of tax expense of $624, $318 and $0
                
                
                (953
                )
                
                (485
                )
                
                -**Total
                    Other Comprehensive Income (Loss)**
                
                
                (702
                )
                
                (16,326
                )
                
                20,643**Total
                    Comprehensive Income**
                
                $
                51,384
                
                $
                75,540
                
                $
                116,656The
                    accompanying notes, as they relate to PNM, are an integral part
                    of these
                    financial statements.
 
 B-28
 
 **TEXAS-NEW
                    MEXICO POWER COMPANY AND SUBSIDIARIES****A
                    WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.****CONSOLIDATED
                    STATEMENTS OF EARNINGS****Post-Acquisition**
                
                
                **Pre-Acquisition**
                
                **Pre-Acquisition**
                
                **Pre-Acquisition****For
                    the Period**
                
                
                **For
                    the Period**
                
                **Year
                    Ended**
                
                **Year
                    Ended****June
                    6-**
                
                
                **January
                    1-**
                
                **December
                    31,**
                
                **December
                    31,****December
                    31, 2005**
                
                
                **June
                    6, 2005**
                
                **2004**
                
                **2003**(In thousands)**Operating
                    Revenues:**Electric
                
                $
                154,350
                
                
                $
                112,820
                
                $
                269,665
                
                $
                249,488Total
                    operating revenues
                
                
                154,350
                
                
                
                112,820
                
                
                269,665
                
                
                249,488**Operating
                    Expenses:**Cost
                    of energy sold
                
                
                58,014
                
                
                
                43,885
                
                
                101,361
                
                
                89,818Administrative
                    and general
                
                
                14,165
                
                
                
                11,048
                
                
                27,963
                
                
                23,715Depreciation
                    and amortization
                
                
                17,596
                
                
                
                12,954
                
                
                29,691
                
                
                28,631Transmission
                    and distribution costs
                
                
                12,403
                
                
                
                9,111
                
                
                19,314
                
                
                20,289Taxes,
                    other than income taxes
                
                
                14,261
                
                
                
                9,228
                
                
                22,884
                
                
                21,227Income
                    taxes
                
                
                7,965
                
                
                
                5,055
                
                
                13,680
                
                
                13,044Total
                    operating expenses
                
                
                124,404
                
                
                
                91,281
                
                
                214,893
                
                
                196,724Operating
                    income
                
                
                29,946
                
                
                
                21,539
                
                
                54,772
                
                
                52,764**Other
                    Income and Deductions:**Interest
                    income
                
                
                1,001
                
                
                
                650
                
                
                677
                
                
                364Other
                    income
                
                
                528
                
                
                
                523
                
                
                844
                
                
                1,750Carrying
                    charges on regulatory assets
                
                
                4,376
                
                
                
                (1,407
                )
                
                32,006
                
                
                -Other
                    deductions
                
                
                (74
                )
                
                
                (79
                )
                
                (254
                )
                
                (35
                )Other
                    income taxes
                
                
                (2,071
                )
                
                
                154
                
                
                (12,711
                )
                
                (661
                )Net
                    other income and deductions
                
                
                3,760
                
                
                
                (159
                )
                
                20,562
                
                
                1,418**Interest
                    Charges:**Interest
                    on long-term debt, net
                
                
                14,650
                
                
                
                11,077
                
                
                25,855
                
                
                25,279Other
                    interest charges
                
                
                1,225
                
                
                
                1,043
                
                
                2,836
                
                
                3,621Net
                    interest charges
                
                
                15,875
                
                
                
                12,120
                
                
                28,691
                
                
                28,900**Net
                    Earnings Before Extraordinary Item****and
                    Cumulative Effect of Change in****Accounting
                    Principle**
                
                
                17,831
                
                
                
                9,260
                
                
                46,643
                
                
                25,282**Extraordinary
                    Item - Disallowance of****Stranded
                    Costs, Net of Tax Benefit****of
                    $57,317**
                
                
                -
                
                
                
                -
                
                
                (97,836
                )
                
                -**Cumulative
                    Effect of Change in Accounting****Principle,
                    Net of Tax Benefit of $234**
                
                
                (381
                )
                
                
                -
                
                
                -
                
                
                -**Net
                    Earnings (Loss)**
                
                $
                17,450
                
                
                $
                9,260
                
                $
                (51,193
                )
                $
                25,282The
                    accompanying notes, as they relate to TNMP, are an integral part
                    of these
                    financial statements.
 
 B-29
 
 **TEXAS-NEW
                  MEXICO POWER COMPANY AND SUBSIDIARIES****A
                  WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.****CONSOLIDATED
                  STATEMENTS OF RETAINED EARNINGS****Post-Acquisition**
              
              
              **Pre-Acquisition**
              
              **Pre-Acquisition**
              
              **Pre-Acquisition****For
                  the Period**
              
              
              **For
                  the Period**
              
              **Year
                  Ended**
              
              **Year
                  Ended****June
                  6-**
              
              
              **January
                  1-**
              
              **December
                  31,**
              
              **December
                  31,****December
                  31, 2005**
              
              
              **June
                  6, 2005**
              
              **2004**
              
              **2003**(In thousands)**Balance
                  at Beginning of Period**
              
              $
              -
              
              
              $
              (6,795
              )
              $
              50,398
              
              $
              54,516Net
                  earnings
              
              
              17,450
              
              
              
              9,260
              
              
              (51,193
              )
              
              25,282Dividends:Common
                  stock dividends paid to parentcompany
              
              
              (12,000
              )
              
              
              -
              
              
              (6,000
              )
              
              (29,400
              )**Balance
                  at End of Period**
              
              $
              5,450
              
              
              $
              2,465
              
              $
              (6,795
              )
              $
              50,398The
                  accompanying notes, as they relate to TNMP, are an integral part
                  of these
                  financial statements.
 
 
 B-30
 
 **TEXAS-NEW
                  MEXICO POWER COMPANY AND SUBSIDIARIES****A
                  WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.****CONSOLIDATED
                  BALANCE SHEETS****December
                  31,****2005**
              
              
              **2004**(In
                  thousands)**ASSETS****Utility
                  Plant:**Electric
                  plant in service
              
              $
              877,893
              
              
              $
              845,900Construction
                  work in progress
              
              
              7,138
              
              
              
              4,261Common
                  plant in service and plant held for future use
              
              
              589
              
              
              
              589885,620
              
              
              
              850,750Less
                  accumulated depreciation and amortization
              
              
              296,611
              
              
              
              276,081Net
                  utility plant
              
              
              589,009
              
              
              
              574,669**Other
                  Property and Investments:**Other
                  investments
              
              
              548
              
              
              
              530Non-utility
                  property, net of accumulated depreciation of $3 and $3
              
              
              2,120
              
              
              
              343Total
                  other property and investments
              
              
              2,668
              
              
              
              873**Current
                  Assets:**Cash
                  and cash equivalents
              
              
              16,228
              
              
              
              65,759Special
                  deposits
              
              
              -
              
              
              
              3,086Accounts
                  receivable, net of allowance for uncollectible accounts of $100
                  and
                  $191
              
              
              13,191
              
              
              
              12,739Federal
                  income tax refund
              
              
              36,392
              
              
              
              22,912Unbilled
                  revenues
              
              
              6,679
              
              
              
              7,576Other
                  receivables
              
              
              6,087
              
              
              
              10,083Inventories
              
              
              1,478
              
              
              
              1,505Other
                  current assets
              
              
              1,211
              
              
              
              7,526Total
                  current assets
              
              
              81,266
              
              
              
              131,186**Deferred
                  charges:**Stranded
                  costs
              
              
              87,316
              
              
              
              87,316Carrying
                  charges on stranded costs
              
              
              33,918
              
              
              
              48,130Other
                  regulatory assets
              
              
              2,720
              
              
              
              8,105Goodwill
              
              
              456,088
              
              
              
              -Other
                  deferred charges
              
              
              4,948
              
              
              
              22,227Total
                  deferred charges
              
              
              584,990
              
              
              
              165,778$
              1,257,933
              
              
              $
              872,506The
                  accompanying notes, as they relate to TNMP, are an integral part
                  of these
                  financial statements.
 
 
 B-31
 
 **TEXAS-NEW
                  MEXICO POWER COMPANY AND SUBSIDIARIES****A
                  WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.****CONSOLIDATED
                  BALANCE SHEETS****December
                  31,****2005**
              
              
              **2004**(In
                  thousands)**CAPITALIZATION
                  AND LIABILITIES****Capitalization:**Common
                  stockholder’s equity:Common
                  stock outstanding ($10 par value, 12,000,000 shares authorized:issued
                  9,615 and 10,705 at December 31, 2005 and 2004,
                  respectively)
              
              $
              96
              
              
              $
              107Paid-in-capital
              
              
              583,130
              
              
              
              197,751Accumulated
                  other comprehensive loss, net of tax
              
              
              (29
              )
              
              
              (1,761
              )Retained
                  earnings
              
              
              5,450
              
              
              
              (6,795
              )Total
                  common stockholder’s equity
              
              
              588,647
              
              
              
              189,302Long-term
                  debt
              
              
              415,864
              
              
              
              415,569Total
                  capitalization
              
              
              1,004,511
              
              
              
              604,871**Current
                  Liabilities:**Accounts
                  payable
              
              
              11,913
              
              
              
              15,649Accrued
                  interest and taxes
              
              
              24,250
              
              
              
              22,647Accrued
                  payroll and benefits
              
              
              3,268
              
              
              
              1,583Other
                  current liabilities
              
              
              5,516
              
              
              
              5,155Total
                  current liabilities
              
              
              44,947
              
              
              
              45,034**Long-Term
                  Liabilities:**Accumulated
                  deferred income taxes
              
              
              139,405
              
              
              
              138,249Accumulated
                  deferred investment tax credits
              
              
              1,540
              
              
              
              2,326Regulatory
                  liabilities
              
              
              56,246
              
              
              
              40,729Accrued
                  pension liability
              
              
              3,585
              
              
              
              4,844Accrued
                  postretirement benefit cost
              
              
              6,525
              
              
              
              2,693Other
                  deferred credits
              
              
              1,174
              
              
              
              33,760Total
                  long-term liabilities
              
              
              208,475
              
              
              
              222,601Commitments
                  and Contingencies (see Note 16)
              
              
              -
              
              
              
              -$
              1,257,933
              
              
              $
              872,506The
                  accompanying notes, as they relate to TNMP, are an integral part
                  of these
                  financial statements.
 
 
 B-32
 
 **TEXAS-NEW
                  MEXICO POWER COMPANY AND SUBSIDIARIES****A
                  WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****Post-Acquisition**
              
              
              **Pre-Acquisition**
              
              **Pre-Acquisition**
              
              **Pre-Acquisition****For
                  the Period**
              
              
              **For
                  the Period**
              
              **Year
                  Ended**
              
              **Year
                  Ended****June
                  6-**
              
              
              **January
                  1-**
              
              **December
                  31,**
              
              **December
                  31,****December
                  31, 2005**
              
              
              **June
                  6, 2005**
              
              **2004**
              
              **2003**(In
                  thousands)**Cash
                  Flows From Operating Activities:**Net
                  earnings (loss)
              
              $
              17,450
              
              
              $
              9,260
              
              $
              (51,193
              )
              $
              25,282Adjustments
                  to reconcile netearnings
                  to net cash flowsfrom
                  operating activities:Depreciation
                  and amortization
              
              
              18,619
              
              
              
              14,042
              
              
              32,279
              
              
              31,472Allowance
                  for equity funds usedduring
                  construction
              
              
              (112
              )
              
              
              (60
              )
              
              (384
              )
              
              (584
              )Accumulated
                  deferred income tax
              
              
              9,870
              
              
              
              (1,267
              )
              
              43,135
              
              
              2,179Carrying
                  charges on regulatory assets
              
              
              (4,376
              )
              
              
              1,407
              
              
              (32,006
              )
              
              -Cumulative
                  effect of change inaccounting
                  principle
              
              
              615
              
              
              
              -
              
              
              -
              
              
              -Disallowance
                  of stranded costs,net
                  of tax benefit
              
              
              -
              
              
              
              -
              
              
              97,836
              
              
              -Deferred
                  purchased power and fuel costs
              
              
              -
              
              
              
              -
              
              
              (511
              )
              
              18,373Changes
                  in certain assets and liabilities:Accounts
                  receivable
              
              
              (481
              )
              
              
              29
              
              
              820
              
              
              3,131Unbilled
                  revenues
              
              
              1,003
              
              
              
              (106
              )
              
              1,225
              
              
              (1,896
              )Accounts
                  payable
              
              
              86
              
              
              
              (5,379
              )
              
              2,347
              
              
              3,758Accrued
                  interest and taxes
              
              
              8,799
              
              
              
              (7,314
              )
              
              (16,621
              )
              
              1,088Interest
                  rate lock on issuance of seniornotes
              
              
              -
              
              
              
              -
              
              
              -
              
              
              (4,162
              )Acquisition
                  related benefit programs
              
              
              (2,604
              )
              
              
              -
              
              
              -
              
              
              -Payments
                  for stranded/fuel costs
              
              
              (4,284
              )
              
              
              -
              
              
              -
              
              
              -Receipt
                  for retail competitiontransition
                  obligation
              
              
              16,336
              
              
              
              -
              
              
              -
              
              
              -Other
                  assets and liabilities
              
              
              (9,347
              )
              
              
              4,741
              
              
              (9,520
              )
              
              (6,927
              )Net
                  cash flows fromoperating
                  activities
              
              
              51,574
              
              
              
              15,353
              
              
              67,407
              
              
              71,714**Cash
                  Flows From Investing Activities:**Utility
                  plant additions
              
              
              (27,801
              )
              
              
              (17,822
              )
              
              (42,817
              )
              
              (44,548
              )Other,
                  net
              
              
              3,111
              
              
              
              (242
              )
              
              (356
              )
              
              (2,909
              )Net
                  cash flows frominvesting
                  activities
              
              
              (24,690
              )
              
              
              (18,064
              )
              
              (43,173
              )
              
              (47,457
              )The
                  accompanying notes, as they relate to TNMP, are an integral part
                  of these
                  financial statements.
 
 
 B-33
 
 **TEXAS-NEW
                  MEXICO POWER COMPANY AND SUBSIDIARIES****A
                  WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****Post-Acquisition**
              
              
              **Pre-Acquisition**
              
              **Pre-Acquisition**
              
              **Pre-Acquisition****For
                  the Period**
              
              
              **For
                  the Period**
              
              **Year
                  Ended**
              
              **Year
                  Ended****June
                  6-**
              
              
              **January
                  1-**
              
              **December
                  31,**
              
              **December
                  31,****December
                  31, 2005**
              
              
              **June
                  6, 2005**
              
              **2004**
              
              **2003**(In
                  thousands)**Cash
                  Flows From Financing Activities:**Long-term
                  debt costs and repayments
              
              
              -
              
              
              
              -
              
              
              (9,382
              )
              
              (172,600
              )Redemption
                  of common stock
              
              
              (62,000
              )
              
              
              -
              
              
              -
              
              
              -Repayments
                  to affiliate
              
              
              -
              
              
              
              -
              
              
              -
              
              
              (14,557
              )Issuance
                  of senior notes, net of discount
              
              
              -
              
              
              
              -
              
              
              -
              
              
              248,923Dividends
                  paid
              
              
              (12,000
              )
              
              
              -
              
              
              (6,000
              )
              
              (29,400
              )Other
              
              
              169
              
              
              
              127
              
              
              -
              
              
              -Net
                  cash flows fromfinancing
                  activities
              
              
              (73,831
              )
              
              
              127
              
              
              (15,382
              )
              
              32,366Increase
                  (Decrease) in Cash and CashEquivalents
              
              
              (46,947
              )
              
              
              (2,584
              )
              
              8,852
              
              
              56,623Beginning
                  of Period
              
              
              63,175
              
              
              
              65,759
              
              
              56,907
              
              
              284End
                  of Period
              
              $
              16,228
              
              
              $
              63,175
              
              $
              65,759
              
              $
              56,907**Supplemental
                  Cash Flow Disclosures:**Interest
                  paid, net of capitalized interest
              
              $
              (609
              )
              
              $
              12,868
              
              $
              26,145
              
              $
              27,424Income
                  taxes paid, net
              
              $
              (20,014
              )
              
              $
              2,456
              
              $
              8,434
              
              $
              14,000The
                  accompanying notes, as they relate to TNMP, are an integral part
                  of these
                  financial statements.
 
 
 B-34
 **TEXAS-NEW
                      MEXICO POWER COMPANY AND SUBSIDIARIES****A
                      WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.****CONSOLIDATED
                      STATEMENTS OF
                      CAPITALIZATION**
 **December
                    31,****2005**
                
                
                **2004**(In
                    thousands)**Common
                    Stockholder’s Equity:**Common
                    stock outstanding, par value $10 per share
                
                $
                96
                
                
                $
                107Paid-in-capital
                
                
                583,130
                
                
                
                197,751Accumulated
                    other comprehensive loss, net of tax
                
                
                (29
                )
                
                
                (1,761
                )Retained
                    earnings
                
                
                5,450
                
                
                
                (6,795
                )Total
                    common stockholder’s equity
                
                
                588,647
                
                
                
                189,302**Long-Term
                    Debt:****Issue
                    and Final Maturity**Senior
                    Notes:6.125%
                    due 2008
                
                
                248,935
                
                
                
                248,9356.25%
                    due 2009
                
                
                167,690
                
                
                
                167,690Other,
                    including unamortized discounts
                
                
                (761
                )
                
                
                (1,056
                )Total
                    long-term debt
                
                
                415,864
                
                
                
                415,569Total
                    Capitalization
                
                $
                1,004,511
                
                
                $
                604,871The
                    accompanying notes, as they relate to TNMP, are an integral part
                    of these
                    financial statements.
 
 B-35
  **TEXAS-NEW
                  MEXICO POWER COMPANY AND SUBSIDIARIES****A
                  WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.****CONSOLIDATED
                  STATEMENTS OF COMPREHENSIVE INCOME (LOSS)****Post-Acquisition**
              
              
              **Pre-Acquisition**
              
              **Pre-Acquisition**
              
              **Pre-Acquisition****For
                  the Period**
              
              
              **For
                  the Period**
              
              **Year
                  Ended**
              
              **Year
                  Ended****June
                  6-**
              
              
              **January
                  1-**
              
              **December
                  31,**
              
              **December
                  31,****December
                  31, 2005**
              
              
              **June
                  6, 2005**
              
              **2004**
              
              **2003**(In
                  thousands)**Net
                  Earnings (Loss)**
              
              $
              17,450
              
              
              $
              9,260
              
              $
              (51,193
              )
              $
              25,282Other
                  Comprehensive Income (Loss):Interest
                  rate hedge net of reclassificationadjustment,
                  net of income tax benefit(expense)
                  of $0, $1,084, $317and $(685)
              
              
              -
              
              
              
              1,761
              
              
              516
              
              
              (1,111
              )Additional
                  minimum pension liabilityadjustment,
                  net of tax (expense)benefit
                  of $18, $0, $0 and $(132)
              
              
              (29
              )
              
              
              -
              
              
              -
              
              
              214**Total
                  Comprehensive Income (Loss)**
              
              $
              17,421
              
              
              $
              11,021
              
              $
              (50,677
              )
              $
              24,385In
                  conjunction with the acquisition of TNP by PNMR, the interest rate
                  hedge
                  was fair valued at zero. The acquired book valuewas
                  $1.7 million.The
                  accompanying notes, as they relate to TNMP, are an integral part
                  of these
                  financial statements.
 
 
 B-36
 **PNM
                RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
                SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
                MEXICO POWER COMPANY**  **AND
                SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
                31, 2005, 2004 and 2003**
  **(1)** **Summary
        of the Business and Significant Accounting Policies**
 
 *Nature
        of Business*
 
 PNMR
        or
        the “Company” is an investor-owned holding company of energy and energy-related
        businesses. The Company’s three primary subsidiaries are PNM, TNMP and First
        Choice. PNM is an integrated public utility with regulated operations primarily
        engaged in the generation, transmission and distribution of electricity,
        transmission, distribution and sale of natural gas within New Mexico, and
        unregulated operations primarily focused on the sale and marketing of
        electricity in the western United States. TNMP is a regulated utility operating
        in Texas and New Mexico. In Texas, TNMP provides regulated transmission and
        distribution services. In New Mexico, TNMP provides integrated electric services
        that include the transmission, distribution, purchase and sale of electricity
        to
        its New Mexico customers. First Choice is a competitive retail electric provider
        operating in Texas. In addition, PNMR provides energy and technology related
        services through its wholly owned subsidiary, Avistar. The Company’s common
        stock trades on the New York Stock Exchange under the symbol PNM.
 
 *TNP
        Acquisition*
 
 As
        discussed in Note 2, on June 6, 2005, PNMR completed the previously announced
        acquisition of TNP effective at 8:00 AM Central Daylight Time. Prior to the
        consummation of the acquisition, TNP was a privately owned holding company
        based
        in Fort Worth, Texas. TNP’s principal subsidiaries are TNMP and First
        Choice.
 
 The
        acquisition was accounted for using the purchase method of accounting. Under
        this method, the purchase price was allocated and fair market value adjustments
        were made to the assets acquired and the liabilities assumed. The excess
        of the
        purchase price over net assets acquired was allocated to goodwill in the
        amount
        of $499.2 million. Other intangible assets of $79.3 million were also recorded.
        Adjustments to goodwill and intangible assets were recorded in the third
        and
        fourth quarters of 2005 (see *“Goodwill
        and Intangible Assets”* below in
        this Note 1 and see also Note 2).
 
 The
        purchase accounting entries are reflected on PNMR’s financial statements as of
        the purchase date. PNMR “pushed down” the effects of purchase accounting to the
        financial statements of TNMP and First Choice. Accordingly, TNMP’s
        post-acquisition financial statements reflect a new basis of accounting,
        and
        separate financial statements and footnote amounts in tabular format are
        presented for pre-acquisition and post-acquisition periods, separated by
        a heavy
        black line.
 
 *Presentation*
 
 The
        Notes
        to 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 clearly indicated as such.
 
 PNMR
        was
        established as a holding company in 2001. On December 30, 2004, PNMR became
        a
        registered holding company under PUHCA. As a result of the requirement to
        register as a holding company, PNMR created PNMR Services Company, a wholly
        owned services company, which began operation on January 1, 2005.
 
 
 B-37
 **PNM
                RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
                SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
                MEXICO POWER COMPANY**  **AND
                SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
                31, 2005, 2004 and 2003**
  PNMR
        performed substantially all of the corporate activities of PNM from 2001
        to
        2004. These activities were billed to PNM on a cost basis and were allocated
        to
        the business units. The service functions previously performed by PNMR were
        assumed by PNMR Services Company effective January 1, 2005.
 
 Until
        June 6, 2005, TNMP provided First Choice and TNP with corporate support
        services, including accounting, finance, information services, legal and
        human
        resources, under a shared services agreement with First Choice and a similar
        agreement with TNP. These services were billed at TNMP’s cost and, in return,
        TNP and First Choice compensated TNMP for the services provided. These
        agreements were in effect through June 6, 2005 when they were replaced by
        a new
        shared services arrangement with PNMR Services Company.
 
 Effective
        with the close of the acquisition of TNP on June 6, 2005, all TNMP employees
        who
        were providing corporate support to TNP and First Choice became employees
        of
        PNMR Services Company. PNMR Services Company provides corporate services
        to all
        of PNMR's business units, including PNM, Avistar, TNP, TNMP and First Choice
        based on shared services agreements. These services are billed at cost on
        a
        monthly basis and allocated to the business units.
 
 The
        Company maintains its accounting records in accordance with the uniform system
        of accounts prescribed by the FERC and the National Association of Regulatory
        Utility Commissioners, and adopted by the NMPRC.
 
 The
        Company’s accounting policies conform to the provisions of SFAS No. 71, as
        amended, *“Accounting
        for the Effects of Certain Types of Regulation,”* (“SFAS
        71”), as applicable. In accordance with SFAS 71, the Company has deferred
        certain costs and recorded certain liabilities pursuant to the rate actions
        of
        the FERC, the NMPRC and the PUCT. These “regulatory assets” and “regulatory
        liabilities” are enumerated and discussed in Note 4.
 
 PNM
        discontinued the application of SFAS 71 as of December 31, 1999, for the
        generation portion of its business effective with the passage of the
        Restructuring Act in accordance with SFAS No. 101, *“Accounting
        for the Discontinuation of Application of FASB Statement No.
        71.”* As a
        result of repeal of the Restructuring Act, the Company re-applied SFAS 71
        to its
        generation portion of its business during the first quarter of 2003 as a
        result
        of NMPRC approval of the Global Electric Agreement (see Note 17) in January
        2003.
 
 *Principles
        of Consolidation*
 
 The
        Consolidated Financial Statements include the accounts of the Company and
        subsidiaries in which it owns a majority voting interest. Corporate
        administrative and general expenses, which represent costs that are driven
        primarily by corporate level activities, are allocated to the business segments.
        Other significant intercompany transactions between PNMR, PNM, TNP and TNMP
        in
        2005 or 2004 include energy purchases and sales, dividends paid on common
        stock,
        the redemption of common stock by TNMP from its parent company, TNP, and
        consolidation of PVNGS capital trust. All significant intercompany transactions
        and balances have been eliminated. See Note 20.
 
 PNM
        adopted SFAS No. 150 “ *Accounting
        for Certain Financial Instruments with Characteristics of both Liabilities
        and
        Equity* ”
(“SFAS
        150”) effective in May 2003. **** SFAS
        150
        established standards for classifying and measuring certain financial
        instruments with characteristics of both liabilities and equity. Under SFAS
        150,
        issuers are required to classify as liabilities a financial instrument that
        is
        within its scope as a liability because that financial instrument embodies
        an
        obligation of the issuer. SFAS 150 is effective for financial instruments
        entered into or modified after May 31, 2003. Upon adoption, the Company
        reclassified approximately $10.0 million from minority interest to other
        deferred credits on its Consolidated Balance Sheets.
 
 *Financial
        Statement Preparation*
 
 The
        preparation of financial statements in conformity with accounting principles
        generally accepted 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 recorded amounts could differ from those
        estimated.
 
 B-38
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 *Cash
        and Cash Equivalents*
 Investments
          in highly liquid investments with maturities of three months or less at
          the date
          of purchase are considered cash equivalents.
 
 *Utility
        Plant*
 
 Utility
        plant is stated at cost, which includes capitalized payroll-related costs
        such
        as taxes, pension and other fringe benefits, administrative costs and allowance
        for funds used during construction as deemed appropriate.
 
 It
        is
        Company policy to charge repairs and minor replacements of property to
        maintenance expense and to charge major replacements to utility plant as
        incurred. Gains or losses resulting from retirements or other dispositions
        of
        regulated property in the normal course of business are credited or charged
        to
        the accumulated provision for depreciation.
 
 *Allowance
        For Funds Used During Construction*
 
 As
        provided by the FERC uniform systems of accounts, allowance for funds used
        during construction is charged to utility plant. This allowance is a non-cash
        item designed to enable a utility to capitalize financing costs during periods
        of construction of property subject to rate regulation. It represents the
        cost
        of borrowed funds (allowance for borrowed funds used during construction)
        and a
        return on other funds (allowance for equity funds used during
        construction).
 
 The
        calculation of allowance for funds used during construction should be performed
        if its subsequent inclusion in allowable costs for rate-making purposes is
        probable. In 2005, 2004 and 2003, PNM recorded $4.3 million, $3.0 million
        and
        $3.9 million, respectively, of allowance for funds used during construction
        on
        certain projects. In 2005, 2004 and 2003, TNMP recorded $0.4 million, $0.8
        million and $1.0 million, respectively, of allowance for funds used during
        construction.
 
 *Capitalized
        Interest*
 
 In
        accordance with SFAS No. 34, *“Capitalization
        of Interest Costs”* (“SFAS
        34”), PNM capitalizes interest on its construction projects not included in
        rate
        base because there were no specific charges and software costs. Interest
        was
        capitalized at the overall weighted average borrowing rate of 5.0%, 5.2%
        and
        6.4% for 2005, 2004 and 2003, respectively. PNM’s capitalized interest was $1.4
        million, $1.0 million and $1.2 million in 2005, 2004 and 2003, respectively.
 
 *Carrying
        Charges on Stranded Costs*
 
 TNMP’s
        estimate of allowable carrying charges on stranded costs that it may recover
        from its transmission and distribution customers is based on a United States
        Supreme Court ruling, and the PUCT’s application of that ruling. As of December
        31, 2005, the accrual for carrying costs was $33.9 million (see Note 16).
 
 *Inventories*
 
 Inventory
        consists principally of materials and supplies, natural gas held in storage
        for
        eventual resale, and coal held for use in electric generation.
  B-39
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
  Generally,
        materials and supplies include the costs of transmission, distribution and
        generating plant materials. Materials and supplies are charged to inventory
        when
        purchased and are expensed or capitalized as appropriate when issued. Materials
        and supplies are valued using an average costing method. Obsolete materials
        and
        supplies are immediately expensed when identified.
 
 Gas
        in
        underground storage is valued using a weighted average inventory method.
        Withdrawals are charged to sales service customers through the
        PGAC.
 
 Coal
        is
        valued using a rolling weighted average costing method that is updated based
        on
        the current period cost per ton. Periodic aerial surveys are performed and
        any
        material adjustments would be recorded as identified.
 
 Inventories
        consisted of the following at December 31:
 
 **PNMR**
              
              **PNM**
              
              **TNMP****2005**
              
              **2004**
              
              **2005**
              
              **2004**
              
              **2005**
              
              
              **2004**(In
                  thousands)Coal
              
              $
              11,410
              
              $
              9,802
              
              $
              11,410
              
              $
              9,802
              
              $
              -
              
              
              $
              -Gas
                  in underground storage
              
              
              12,487
              
              
              5,324
              
              
              12,487
              
              
              5,324
              
              
              -
              
              
              
              -Materials
                  and supplies
              
              
              28,140
              
              
              26,226
              
              
              26,514
              
              
              26,120
              
              
              1,478
              
              
              
              1,505$
              52,037
              
              $
              41,352
              
              $
              50,411
              
              $
              41,246
              
              $
              1,478
              
              
              $
              1,505
 
 *Investments*
 
 The
        Company’s investments are comprised of United States, state, and municipal
        government obligations and corporate securities. Investments with maturities
        of
        less than one year are considered short-term and are carried at fair value.
        All
        investments are held in the Company’s name and are in the custody of major
        financial institutions. The specific identification method is used to determine
        the cost of securities disposed of, with realized gains and losses reflected
        in
        other income and deductions. At December 31, 2005 and 2004, substantially
        all of
        the Company’s investments were classified as available for sale. Unrealized
        gains and losses on these investments are included in other comprehensive
        income, net of any related tax effect.
  PNMR
        also
        has investments in equity securities that are primarily classified as trading.
        The investment balance is included in other current assets and unrealized
        gains
        and losses on these investments are recorded in other income and deductions
        (see
        Note 8).
  B-40
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 *Goodwill
        and Other Intangible Assets*
 
 The
        excess purchase price over the fair value of the assets acquired and the
        liabilities assumed by PNMR for its June 6, 2005 acquisition of TNP was recorded
        as goodwill. Under the provisions of SFAS No. 142, “ *Goodwill
        and Other Intangible Assets* ”
(“SFAS
        142”), the Company does not amortize goodwill. Certain intangible assets are
        amortized over their estimated useful lives. Goodwill and unamortized intangible
        assets are evaluated for impairment at least annually, or more frequently
        if
        events and circumstances indicate that the goodwill and intangible assets
        might
        be impaired. Amortized other intangible assets are evaluated for impairment
        in
        accordance with SFAS No. 144 “ *Accounting
        for the Impairment or Disposal of Long-Lived Assets* ”
(“SFAS
        144”) when events and circumstances indicate that the assets might be impaired.
 
 The
        changes in the carrying amount of goodwill by reportable segment (see Note
        3)
        for the year ended December 31, 2005 were as follows:
 
 **TNMP
                  Electric**
              
              **First
                  Choice**
              
              **Total**
                **PNMR**(In
                  thousands)Balance
                  as of January 1, 2005
              
              $
              -
              
              $
              -
              
              $
              -Purchase
                  of TNP during 2005
              
              
              456,088
              
              
              43,067
              
              
              499,155Balance
                  as of December 31, 2005
              
              $
              456,088
              
              $
              43,067
              
              $
              499,155
 
 Of
        the
        $79.3 million of acquired intangible assets, $68.8 million relates to the
        trade
        name “First Choice.” The trade name has an indefinite useful life; therefore, no
        amortization will be recognized, but the asset will be evaluated for impairment
        each reporting period. The other $10.5 million intangible asset relates to
        the
        First Choice customer list. The useful life of the customer list is estimated
        to
        be approximately eight years; therefore the asset will be amortized on a
        straight-line basis over an eight-year period.
 
 The
        components of PNMR’s identifiable intangible assets at December 31, 2005 are as
        follows:
 
 **Gross
                  Carrying Amount**
              
              **Accumulated
                  Amortization**(In
                  thousands)Amortized
                  intangible asset:First
                  Choice customer list
              
              $
              10,480
              
              $
              742Unamortized
                  intangible asset:First
                  Choice trade name
              
              $
              68,774
              
              $
              -
 
 Expected
        future amortization expense for this intangible asset is $1.3 million annually
        through 2010.
 
 *Asset
        Impairment*
 
 Tangible
        long-lived assets are evaluated in relation to the future undiscounted cash
        flows to assess recoverability in accordance with SFAS 144 when events and
        circumstances indicate that the assets might be impaired. Impairment testing
        of
        power generation assets excluded from jurisdictional rates is performed
        periodically in response to changes in market conditions. TNMP did not have
        any
        impairment on its long-lived assets for the years 2003 through 2005.
 
 PNM
        had
        planned to convert its Afton plant from a combustion turbine to a combined-cycle
        unit using a turbine in storage. As part of a stipulation that will allow
        PNM to
        convert Afton to a combined cycle plant and include it as a jurisdictional
        resource, with 50% of Afton's capacity designated to serve PNM's customers
        and
        50% designated to serve TNMP's New Mexico customers, an alternative equipment
        configuration will be used for Afton instead of the turbine in storage. In
        the
        fourth quarter of 2005, PNM management determined that it would make the
  B-41
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
  turbine
        available for sale. Based on its market survey, PNM recorded an impairment
        charge of approximately $15.0 million, included in energy production costs
        on
        the Consolidated Statement of Earnings for the year ended December 31, 2005.
        The
        impairment charge is recorded in the Corporate and Other segment (see Note
        3).
 
 *Revenue
        Recognition*
 
 First
        Choice, PNM and TNMP record electric and gas operating revenues, as applicable,
        in the period of delivery, which includes estimated amounts for service rendered
        but unbilled at the end of each accounting period.
 
 The
        determination of the energy sales by PNM, TNMP and First Choice to individual
        customers is based on the reading of their meters, which occurs on a systematic
        basis throughout the month. At the end of each month, amounts of energy
        delivered to customers since the date of the last meter reading are estimated
        and the corresponding unbilled revenue is estimated. Unbilled electric revenue
        is estimated based on the daily generation volumes, estimated customer usage
        by
        class, weather factors, line losses and applicable customer rates based on
        regression analyses reflecting historical trends and experience.
 
 PNM
        purchases gas on behalf of sales-service customers while other marketers
        or
        producers purchase gas on behalf of transportation-service customers. PNM
        collects a cost of service revenue for the transportation, delivery, and
        customer service provided to these customers. Sales-service tariffs are subject
        to the terms of the PGAC and billed under a cycle-bill basis. Transportation
        service customers are metered and billed on the last day of the month.
        Therefore, PNM estimates unbilled decatherms and records cost of service
        and
        PGAC revenues for sales-service customers only.
 
 PNM
        wholesale revenues are recognized in the month the energy is delivered to
        the
        customer and are based on the actual amounts supplied to the customer. However,
        in accordance with the WSPP contract, these revenues are billed in the month
        subsequent to their delivery. Consequently, wholesale revenues for the last
        month in any reporting period are unbilled when reported.
 
 PNM’s
        wholesale electricity sales are recorded as operating revenues and the wholesale
        electricity purchases are recorded as costs of energy sold. In accordance
        with
        EITF Issue 03-11, “ *Reporting
        Gains and Losses on Derivative Instruments That Are Subject to FASB Statement
        No. 133, Accounting for Derivative Instruments and Hedging Activities, and
        Not
        Held for Trading Purposes* ”
(“EITF
        03-11”), non-normal derivative contracts that are net settled or “booked-out”
are recorded net in earnings. A book-out is the planned or unplanned netting
        of
        off-setting purchase and sale transactions. A book-out is a transmission
        mechanism to reduce congestion on the transmission system or administrative
        burden (see further discussion below in “Financial Instruments” in this Note 1).
        For accounting purposes, a book-out, as referred to above, is the recording
        of
        net revenues upon the settlement of a non-normal derivative
        contract.
  PNM
        enters into merchant energy contracts to take advantage of market opportunities
        associated with the purchase and sale of electricity. Unrealized gains and
        losses resulting from the impact of price movements on PNM’s derivative energy
        contracts that are not designated normal purchases and sales or hedges are
        recognized as adjustments to operating revenues. The market prices used to
        value
        these transactions reflect Company management’s best estimate considering
        various factors including closing exchange and over-the-counter quotations,
        time
        value and volatility factors underlying the commitments.
 
 B-42
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 *Depreciation
        and Amortization*
 
 PNM’s
        provision for depreciation and amortization of utility plant is made based
        upon
        rates approved by the NMPRC. PNM’s average rates used are as follows:
 
 **2005**
              
              **2004**
              
              **2003**Electric
                  plant
              3.10%
              
              3.07%
              
              3.33%Gas
                  plant
              2.93%
              
              2.87%
              
              2.96%Common
                  plant
              8.65%
              
              8.08%
              
              8.38%
 
 TNMP’s
        provision for depreciation and amortization of utility plant is made based
        upon
        rates approved by the NMPRC and the PUCT. TNMP’s electric and common plant
        assets rates are both regulated rates and are depreciated on a straight-line
        basis. TNMP’s average rates used are as follows:
 
 **2005**
              
              **2004**
              
              **2003**Electric
                  plant and common plant
              3.34%
              
              3.62%
              
              3.66%
 
 The
        provision for depreciation of certain equipment is charged to depreciation
        expense and allocated to construction projects based on the use of the
        equipment. Depreciation of non-utility property is computed based on the
        straight-line method. Amortization of nuclear fuel for PNM is computed based
        on
        the units of production method.
 
 *Amortization
        of Debt Acquisition Costs*
 
 Discount,
        premium and expense related to the issuance of long-term debt are amortized
        over
        the lives of the respective issues. In connection with the early retirement
        of
        long-term debt, such amounts associated with resources subject to NMPRC
        regulation are amortized over the lives of the respective issues. Amounts
        associated with PNM's firm-requirements wholesale customers and its resources
        excluded from NMPRC retail rates are recognized immediately as expense or
        income
        as they are incurred.
 
 *Financial
        Instruments*
 
 The
        Company follows the provisions set forth under SFAS No. 133, *“Accounting
        for Derivative Instruments and Hedging Activities”* (“SFAS
        133”), as amended. SFAS 133 establishes accounting and reporting standards
        requiring derivative instruments to be recorded in the balance sheet as either
        an asset or liability measured at their fair value. SFAS 133 also requires
        that
        changes in the derivatives’ fair value be recognized currently in earnings
        unless specific hedge accounting or normal purchase and sale criteria are
        met.
        Special accounting for qualifying hedges allows derivative gains and losses
        to
        offset related results on the hedged item in the statement of earnings, and
        requires that a company must formally document, designate, and assess the
        effectiveness of transactions that receive hedge accounting. SFAS 133 provides
        that the effective portion of the gain or loss on a derivative instrument
        designated and qualifying as a cash flow hedging instrument be reported as
        a
        component of other comprehensive income and be reclassified into earnings
        in the
        period during which the hedged forecasted transaction affects earnings. The
        results of hedge ineffectiveness and the change in fair value of a derivative
        that an entity has chosen to exclude from hedge effectiveness are required
        to be
        presented in current earnings.
 
 SFAS
        No.
        149, “ *Amendment
        of Statement 133 on Derivative Instruments and Hedging
        Activities* ”
(“SFAS
        149”) was effective for all derivative contracts entered into by the Company
        or
        modified after June 30, 2003. Under SFAS 149, the Company treats all forward
        electric purchases and sales contracts subject to unplanned netting or book-out
        by the transmission provider as derivative instruments subject to mark-to-market
        accounting, unless the contract qualifies for the normal exception by meeting
        the definition in SFAS 149 of a capacity contract. Under this definition,
        the
        contract cannot permit net settlement, the seller must have the resources
        to
        serve the contract and the buyer must be a load serving entity. Upon adoption,
        SFAS 149 did not have a material impact on the Company’s financial condition or
        results of operations.
 
 B-43
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
  In
          addition, the Company follows the provisions of EITF 02-3, “ *Issues
          Related to Accounting for Contracts Involved in Energy Trading and Risk
          Management Activities.”* Under
          EITF 02-3 ** all
          energy contracts held for trading purposes are presented on a net margin
          basis
          in the statement of earnings. Energy contracts that do not meet the definition
          of a derivative under SFAS 133 are recognized in current earnings and are
          not
          marked to market.
 
 EITF
        03-11 was effective for PNM on October 1, 2003. EITF 03-11 gives guidance
        on
        whether realized gains and losses on derivative contracts not held for trading
        purposes should be reported on a net or gross basis and concludes such
        classification is a matter of judgment that depends on the relevant facts
        and
        circumstances. PNM nets all realized gains and losses on non-normal derivative
        transactions that do not physically deliver and that are offset by similar
        transactions during settlement. For the years ended December 31, 2005, 2004
        and
        2003, wholesale purchases of $30.9 million, $33.6 million and $15.0 million,
        respectively, were netted with electric revenues in the Consolidated Statements
        of Earnings (see Note 3).
 
 *Decommissioning
        Costs*
 
 Accounting
        for decommissioning costs for nuclear and fossil-fuel generation involves
        significant estimates related to costs to be incurred many years in the future
        after plant closure. Changes in these estimates could significantly impact
        PNMR’s and PNM’s financial position, results of operations and cash flows. PNM
        owns and leases nuclear and fossil-fuel facilities that are within and outside
        of its retail service areas. In accordance with SFAS No. 143, *"Accounting
        for Asset Retirement Obligations”* (“SFAS
        143”), PNM is only required to recognize and measure decommissioning liabilities
        for tangible long-lived assets for which a legal obligation exists (see Note
        15). Adoption of the statement changed the method of accounting for both
        nuclear
        generation decommissioning and fossil-fuel generation decommissioning. Nuclear
        decommissioning costs are based on site-specific estimates of the costs for
        removing all radioactive and other structures at the site. PVNGS Unit 3 is
        excluded from PNM’s retail rates while PVNGS Units 1 and 2 are included. PNM
        collects a provision for ultimate decommissioning of PVNGS Units 1 and 2
        in its
        rates and recognizes a corresponding expense and liability for these amounts.
        PNM believes that it will continue to be able to collect in rates for its
        legal
        asset retirement obligations for nuclear generation activities included in
        the
        ratemaking process.
 
 In
        addition, PNM has a contractual obligation with the PVNGS participants to
        fund
        separately the nuclear decommissioning cost at a level in excess of what
        PNM has
        identified as its legal asset retirement obligation under SFAS 143. The
        contractual funding obligation is based on a site-specific estimate prepared
        by
        a third party. PNM’s most recent site-specific estimates for nuclear
        decommissioning costs were developed in 2004, using 2004 cost factors, and
        are
        based on prompt dismantlement decommissioning, reflecting the costs of removal
        discussed above, with such removal occurring shortly after operating license
        expiration. PNM’s share of the contractual funding obligation through the end of
        the licensing terms is approximately $216.7 million (measured in 2004 dollars).
        The estimates are subject to change based on a variety of factors, including
        cost escalation, changes in technology applicable to nuclear decommissioning
        and
        changes in federal, state or local regulations. The operating licenses for
        PVNGS
        Units 1, 2 and 3 will expire in 2025, 2026, and 2027, respectively. PNM does
        not
        have a similar contractual funding obligation related to its fossil-fuel
        plants.
 
 *Pension
        and Other Postretirement Benefits*
 
 See
        Note
        12 for a comprehensive discussion of pension and postretirement benefits
        expense, including a discussion of the actuarial assumptions.
 
 *Stock
        Based Compensation*
 
 PNMR
        accounts for stock-based compensation using the intrinsic value method
        prescribed in Accounting Principles Board Opinion No. 25, " *Accounting
        for Stock Issued to Employee* "
        ("APB
        25"). Compensation cost for
  B-44
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
  stock
        options, if any, is measured as the excess of the quoted market price of
        PNMR’s
        stock at the date of grant over the exercise price of the granted stock option.
        Compensation cost for restricted stock awards are recorded over the requisite
        vesting period based on the market value on the date of grant. Compensation
        cost
        for performance shares are recorded on the measurement date. All stock-based
        compensation is granted through stock-based employee compensation plans
        maintained by PNMR. Although certain PNM and TNMP employees participate in
        the
        PNMR plans, PNM and TNMP do not have separate employee stock-based compensation
        plans.
 
 At
        December 31, 2005, PNMR had three stock-based employee compensation plans.
        Stock
        options continue to be granted under only one of the plans. Had compensation
        expense for PNMR’s stock options been recognized based on the fair value on the
        grant date under the methodology prescribed by SFAS No. 123, *“Accounting
        for Stock-Based Compensation”* (“SFAS
        123”), the effect on PNMR’s pro forma net earnings and pro forma diluted
        earnings per share would be as follows:
 
 **Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003**(In
                  thousands, except per share data)PNMR
                  net earnings:
              
              $
              67,227
              
              $
              87,686
              
              $
              95,173Add:
                  Stock compensation expense includedin
                  reported net income, net of related tax effects
              
              
              761
              
              
              1,362
              
              
              -Deduct:
                  Total stock-based employeecompensation
                  expense determined underfair
                  value based method for all awards,net
                  of related tax effects
              
              
              (3,072
              )
              
              (4,177
              )
              
              (2,200
              )PNMR
                  pro forma net earnings
              
              $
              64,916
              
              $
              84,871
              
              $
              92,973PNMR
                  earnings per share:Basic
                  - as reported
              
              $
              1.02
              
              $
              1.45
              
              $
              1.60Basic
                  - pro forma
              
              $
              0.98
              
              $
              1.40
              
              $
              1.56Diluted
                  - as reported
              
              $
              1.00
              
              $
              1.43
              
              $
              1.58Diluted
                  - pro forma
              
              $
              0.97
              
              $
              1.38
              
              $
              1.54
 
 SFAS
        No.
        123 (revised 2004), *“Share
        Based Payment”* (“SFAS
        123R”), supersedes APB 25. SFAS 123R requires the recognition of compensation
        expense, over the requisite service period, in an amount equal to the fair
        value
        of share-based payments granted to employees. The fair value of the share-based
        payments, excluding liability awards, is computed at the date of grant and
        will
        not be remeasured. The fair value of liability awards will be remeasured
        at each
        reporting date through the settlement date with the change in fair value
        recognized as compensation expense over that period. SFAS No. 123R also requires
        the benefits of tax deductions in excess of recognized compensation costs
        to be
        reported as financing cash flow, rather than as an operating cash flow as
        required under current literature. This requirement will reduce net operating
        cash flows and increase net financing cash flows in periods after adoption.
        PNMR
        does not believe this reclassification will have a material impact on its
        Consolidated Statements of Cash Flows.
 
 SFAS
        123R
        was effective for PNMR beginning January 1, 2006. PNMR adopted SFAS 123R
        using
        the modified prospective application transition method. PNMR estimates that
        2006
        compensation expense related to employee stock options is expected to be
        in the
        range of $4.0 million to $6.0 million. PNMR estimates that total 2006 expense
        for all of its stock-based compensation is expected to be in the range of
        $6.0
        million to $9.0 million.
 B-45
 **PNM
                RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
                SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
                MEXICO POWER COMPANY**  **AND
                SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
                31, 2005, 2004 and 2003**
 
 Income
        Taxes
  Income
        taxes are accounted for in accordance with the provisions of SFAS No. 109,
        “ *Accounting
        for Income Taxes* ”
(“SFAS
        109”), which uses the asset and liability method for accounting for income
        taxes. Under SFAS 109, deferred tax assets and liabilities are recognized
        for
        the estimated future tax consequences attributable to differences between
        the
        financial statement carrying value of existing assets and liabilities and
        their
        respective tax basis. Current NMPRC and PUCT approved rates include the tax
        effects of the majority of these differences. SFAS 109 requires that
        rate-regulated enterprises record deferred income taxes for temporary
        differences accorded flow-through treatment at the direction of a regulatory
        commission. The resulting deferred tax assets and liabilities are recorded
        at
        the expected cash flow to be reflected in future rates. Because the NMPRC
        and
        the PUCT have consistently permitted the recovery of tax effects previously
        flowed-through earnings, the Company has established regulatory liabilities
        and
        assets offsetting such deferred tax assets and liabilities. Items accorded
        flow-through treatment under rate orders, deferred income taxes and the future
        ratemaking effects of such taxes, as well as corresponding regulatory assets
        and
        liabilities, are recorded in the financial statements.
 
 *Excise
        Taxes*
 
 The
        Company pays certain fees or taxes which are either considered to be an excise
        tax or similar to an excise tax. These excise and excise-type taxes are recorded
        on both a net basis and a gross basis.
 *Cumulative
          Effect of Changes in Accounting Principles*
 
 In
          2005,
          PNMR, PNM and TNMP adopted FASB
          Interpretation No. 47, *“Accounting
          for Conditional Asset Retirement Obligations”* (“FIN
          47”), and
          recognized a cumulative effect of a change in accounting principle that
          decreased 2005 earnings. The amount is net of amounts expensed in prior
          years
          for cost of removal included in depreciation. FIN 47 requires the accrual
          of
          costs associated with conditional retirement obligations. PNMR, PNM and
          TNMP
          2005 earnings were decreased $0.9 million, $0.5 million and $0.4 million,
          respectively, net of income tax benefits. PNMR’s 2005 net earnings per diluted
          common share was decreased $0.01.
 In
        2003,
        the Company changed the actuarial valuation measurement date for its pension
        plan and other postretirement benefits plan from September 30 to December
        31 to
        better reflect the actual plan balances as of the year end balance sheet
        date.
        PNMR and PNM recognized a cumulative effect of a change in accounting principle
        that decreased 2003 earnings by $0.8 million, net of income tax benefit,
        or, for
        PNMR, $0.01 per diluted common share.
  Also,
          in
          2003, PNM adopted SFAS 143 and PNMR and PNM recognized a cumulative effect
          of a
          change in accounting principle that increased 2003 earnings by $37.4 million,
          net of income tax expense, or, for PNMR, $0.62 per diluted common share,
          representing amounts expensed in prior years for PNM’s asset retirement
          obligations in excess of the actual legal obligations as established under
          the
          new accounting standard.
 
 *Extraordinary
        Item*
 During
          2004, TNMP recorded a loss of $97.8 million related to the PUCT true-up
          proceeding regarding TNMP’s stranded costs. 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. The PUCT
          decision
          established $128.4 million as TNMP’s stranded costs and allowed TNMP to recover
          $87.3 million of the $266.5 million that TNMP requested for its true-up
          balance.
          This decision resulted in a loss of $155.2 million before tax ($97.8 million
          after tax). TNMP recorded the $97.8 million after tax loss as an extraordinary
          item in accordance with the requirements of SFAS No. 101, *“Regulated
          Enterprises - Accounting for the Discontinuance of the Application of FASB
          Statement No. 71.”*
 
 B-46
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 *Change
        in Presentation*
 
 Certain
        amounts in the 2004 and 2003 Consolidated Financial Statements and Notes
        thereto
        for PNMR, PNM and TNMP have been reclassified to conform to the 2005 financial
        statement presentation. Specifically, certain amounts in the 2004 and 2003
        Consolidated Financial Statements and Notes thereto of TNMP have been
        reclassified to conform to PNMR’s presentation for comparability.
 
 **(2)** **TNP
        Acquisition**
 
 On
        June
        6, 2005, PNMR acquired all of the outstanding common shares of TNP, including
        its principal subsidiaries, TNMP and First Choice. The results of TNP’s
        operations have been included in the Consolidated Financial Statements of
        PNMR
        from that date. PNMR acquired TNP in order to complement its existing New
        Mexico
        electric operations and to expand into the retail and wholesale markets in
        Texas.
 
 The
        aggregate purchase price was $1,221 million, including a net payment to the
        previous owner of $162.0 million consisting of $74.6 million of cash and
        common
        stock valued at $87.4 million. The value of the 4,326,337 common shares issued
        was determined based on $20.20 per common share as provided for in the Stock
        Purchase Agreement, dated as of July 24, 2004, by and between PNMR and SW
        Acquisition. In addition, the aggregate purchase price included $1,037 million
        of TNP debt and preferred stock and incurred transaction and other costs
        of
        $21.5 million. During the fourth quarter of 2005, PNMR completed the valuations
        of acquired property and intangible assets.
 
 Pursuant
        to the Stock Purchase Agreement, PNMR provided SW Acquisition its proposed
        final
        purchase price, reflecting a reduction from the estimated purchase price
        of
        approximately $37.0 million. SW Acquisition filed a lawsuit that disputed
        PNMR’s
        proposed final purchase price. In November 2005, the parties reached a
        settlement of the lawsuit resulting in a reduction of approximately $13.0
        million to the original purchase price based on working capital adjustments
        from
        the closing of the second-quarter financial statements and stranded cost
        recovery payments. PNMR received the $13.0 million payment from SW Acquisition
        in the fourth quarter of 2005. The net cash paid and purchase price stated
        above
        reflect this reduction.
 
 B-47
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 The
        following table presents the estimated fair values of the assets acquired
        and
        liabilities assumed at June 6, 2005, updated for subsequent adjustments to
        the
        purchase price.
 
 (In
                  thousands)Net
                  utility plant
              
              $
              580,427Other
                  property and investments
              
              
              3,785Current
                  assets
              
              
              213,229Goodwill
              
              
              499,155Other
                  intangible assets
              
              
              79,254Deferred
                  assets
              
              
              125,264Total
                  assets acquired
              
              $
              1,501,114Current
                  liabilities
              
              $
              70,815Long-term
                  debt
              
              
              814,725Preferred
                  stock
              
              
              222,224Deferred
                  liabilities
              
              
              209,790Total
                  liabilities assumed
              
              $
              1,317,554Net
                  assets acquired
              
              $
              183,560
 
 As
        part
        of the acquisition of TNP, PNMR determined the fair value of a First Choice
        contractual obligation to purchase power. In comparing the pricing terms
        of the
        contractual obligation against the forward price of electricity in the relevant
        market, First Choice concluded that the contract was above market. In accordance
        with SFAS No. 141, as amended, *“Business
        Combinations”* (“SFAS
        141”), the contract was recorded at fair value and a deferred liability of $3.8
        million was recorded that will be amortized as a reduction in cost of energy
        over the contract life, or approximately three years. The amortization matches
        the difference between the forward price curve and the contractual obligation
        for each month in accordance with the contract as of the acquisition
        date.
 
 PNMR
        also
        determined the fair value of a First Choice contractual obligation to sell
        power
        to certain commercial and industrial customers. The valuation was based on
        the
        difference between the current market rates charged by First Choice for these
        customers compared to the contractual rate embedded in the customer agreement.
        As a result of the analysis, First Choice determined that its rates for these
        contractual customers are below market rates and recorded a deferred liability
        of $3.5 million that will be amortized into revenues over the contract life,
        or
        approximately three years. The amortization matches the difference between
        the
        retail market rate and the contractual obligation for each month as of the
        date
        of acquisition.
 
 TNP’s
        largest subsidiary, TNMP, is a regulated utility; therefore, in accordance
        with
        SFAS 71, the valuations of the majority of the assets and liabilities did
        not
        change significantly.
  The
        $499.2 million of goodwill was allocated to the TNMP and First Choice segments
        in the amounts of $456.1 million and $43.1 million, respectively. Of that
        total
        goodwill amount, none is expected to be deductible under Section 197 of the
        Internal Revenue Code.
 
 B-48
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 The
        following unaudited pro forma financial information presents a summary of
        PNMR’s
        consolidated results of operations for the years ended December 31, 2005
        and
        2004, assuming the acquisition of TNP had been completed as of January 1,
        2004.
        The pro forma financial information does not include other items or synergy
        savings that may result from the business combination and is not necessarily
        indicative of the results of operations if the acquisition had been effective
        as
        January 1, 2004. Specifically, it does not include a charge of $11.3 million
        ($7.3 million net of tax) that was recorded during 2005 in conjunction with
        the
        issuance of equity-linked units in connection with the acquisition (see Note
        6).
 
 **For
                  the Year Ended December 31,****2005**
              
              **2004**(In
                  thousands, except per share amounts)Operating
                  revenues
              
              $
              2,301,333
              
              $
              2,286,680Operating
                  expenses
              
              $
              2,141,382
              
              $
              2,094,219Earnings
                  before extraordinary item and cumulativeeffect
                  of change in accounting principle
              
              $
              81,077
              
              $
              147,565Net
                  earnings
              
              $
              80,151
              
              $
              49,729Net
                  earnings per common share before extraordinaryitem
                  and cumulative effect of change inaccounting
                  principle:Basic
              
              $
              1.18
              
              $
              2.15Diluted
              
              $
              1.16
              
              $
              2.12Net
                  earnings per common share:Basic
              
              $
              1.17
              
              $
              0.72Diluted
              
              $
              1.15
              
              $
              0.71
 
 **(3)** **Segment
        Information**
 
 The
        following segment presentation is based on the methodology that the Company’s
        management uses for making operating decisions and assessing performance
        of its
        various business activities. The following presentation reports operating
        results without regard to the effect of accounting or regulatory changes
        and
        similar other items not related to normal operations. A reconciliation from
        the
        segment presentation to the GAAP financial statements is provided.
 
 **REGULATED
        OPERATIONS**
 
 **PNM
        Electric**
 
 PNM
        Electric is an integrated electric utility that consists of the generation,
        transmission and distribution of electricity for retail electric customers
        in
        New Mexico and the sale of transmission to third parties as well as to PNM
        Wholesale and TNMP Electric. 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. Customer rates for retail
        electric service are set by the NMPRC based on the provisions of the Global
        Electric Agreement (see Note 17). PNM Electric owns or leases transmission
        lines, interconnected with other utilities in New Mexico, and south and east
        into Texas, west into Arizona, and north into Colorado and Utah.
 
 **TNMP
        Electric**
 
 TNMP
        Electric consists of the operations of TNMP. TNMP is a regulated utility
        operating in Texas and New Mexico. In Texas, TNMP provides regulated
        transmission and distribution services under the provisions of TECA. In New
        Mexico, TNMP provides integrated electricity services
        that include the transmission, distribution, purchase and sale of electricity
        to
        its New Mexico customers as well as transmission to third parties and to
        PNM. TNMP’s
        Texas and New Mexico operations are subject to traditional cost-of-service
        regulation.
 
 B-49
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 **PNM
        Gas**
 
 PNM
        Gas
        distributes natural gas to most of the major communities in New Mexico,
        including two of New Mexico’s three largest metropolitan areas, Albuquerque and
        Santa Fe. 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 distribution customers. As a result,
        increases or decreases in gas revenues resulting from wholesale gas price
        fluctuations do not impact PNMR’s or PNM’s consolidated gross margin or
        earnings.
 
 **UNREGULATED
        OPERATIONS**
 
 **PNM
        Wholesale**
 
 PNM
        Wholesale consists of the generation and sale of electricity into the wholesale
        market. PNM Wholesale sells the unused capacity of PNM's jurisdictional assets
        as well as the capacity of PNM’s wholesale plants excluded from retail rates.
        Both regulated and unregulated generation is jointly dispatched in order
        to
        improve reliability, provide the most economic power to retail customers,
        and
        maximize profits on any wholesale transactions. Although the FERC has
        jurisdiction over the rates of PNM Wholesale, the Company includes PNM Wholesale
        in the unregulated portion of its business because PNM Wholesale is not subject
        to traditional rate of return regulation.
 
 Long-term
        contracts include sales to firm-requirements and other wholesale customers
        with
        multi-year arrangements. Short-term sales generally include transactions
        entered
        into for up to two years. They also include spot market, hour ahead, day
        ahead,
        week ahead and forward market opportunities in which PNM Wholesale utilizes
        its
        asset backed strategy. Also included in short-term sales are sales of any
        excess
        generation not required to fulfill PNM Electric’s retail load and contractual
        commitments.
 
 Adjustments
        related to EITF Issue 03-11, “ *Reporting
        Realized Gains and Losses on Derivative Instruments that are subject to FASB
        statement No. 133 and Not Held for Trading Purposes* ,”
are
        included in Corporate and Other. This requires a net presentation of trading
        gains and losses and realized gains and losses for certain non-trading
        derivatives. Management evaluates PNM Wholesale operations on a gross
        presentation basis due to its primarily net asset-backed marketing strategy
        and
        the importance it places on the Company’s ability to repurchase and remarket
        previously sold capacity.
 
 **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. First Choice performs all activities for its
        Texas
        retail customers, including acquiring new 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 was organized in 2000 to act as TNMP’s affiliated retail electric
        provider, as required by TECA. Although First Choice is regulated in certain
        respects by the PUCT under ERCOT, the Company includes First Choice in the
        unregulated portion of its business because First Choice is not subject to
        traditional rate of return regulation.
 
 **CORPORATE
        AND OTHER**
 
 On
        December 30, 2004, PNMR became a registered holding company under PUHCA.
        As a
        result of the requirement to register as a holding company, PNMR created
        PNMR
        Services Company, a services company, which began operation on January 1,
        2005.
        The comprehensive energy legislation enacted in August 2005 resulted in the
        repeal of PUHCA effective February 2006. PNMR is in the process of evaluating
        the effects of that repeal, along with the other provisions of the legislation
        (see Note 17).
 
 B-50
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 PNMR
        provides energy and technology related services through its wholly owned
        subsidiary, Avistar and those results are included in the Corporate and Other
        segment.
 
 
 
 
 B-51
 **PNM
                RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
                SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
                MEXICO POWER COMPANY**  **AND
                SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
                31, 2005, 2004 and 2003**
  PNMR
        Segment Information
 
 Summarized
        financial information for PNMR by business segment for the year ended December
        31, 2005 is as follows (in thousands):
  **Regulated**
                
                **Unregulated**Segments
                    of Business
                
                **PNM**
                
                **TNMP**
                
                **PNM**
                
                **PNM**
                
                **First**
                
                **Corporate****Electric**
                
                **Electric
                    ***
                
                **Gas**
                
                **Wholesale**
                
                **Choice
                    ***
                
                **&
                    Other**
                
                
                
                **Consolidated****2005:**Operating
                    revenues
                
                $
                567,270
                
                $
                108,475
                
                $
                510,801
                
                $
                602,939
                
                $
                316,330
                
                $
                (29,005
                )
                
                (a)
                
                $
                2,076,810Intersegment
                    revenues
                
                
                6,706
                
                
                45,875
                
                
                641
                
                
                25,089
                
                
                -
                
                
                (78,311
                )
                
                
                
                
                -**Total
                    revenues**
                
                
                573,976
                
                
                154,350
                
                
                511,442
                
                
                628,028
                
                
                316,330
                
                
                (107,316
                )
                
                
                
                
                2,076,810Less:
                    Cost of energy
                
                
                210,169
                
                
                58,014
                
                
                364,205
                
                
                506,935
                
                
                243,053
                
                
                (107,729
                )
                
                (a)
                
                
                1,274,647Intersegment
                    energytransfer
                
                
                (35,829
                )
                
                -
                
                
                -
                
                
                35,829
                
                
                -
                
                
                -
                
                
                
                
                
                -**Gross
                    margin**
                
                
                399,636
                
                
                96,336
                
                
                147,237
                
                
                85,264
                
                
                73,277
                
                
                413
                
                
                
                
                
                802,163Operating
                    expenses
                
                
                263,446
                
                
                39,576
                
                
                98,402
                
                
                44,827
                
                
                27,897
                
                
                32,474
                
                
                (b)
                
                
                506,622Depreciation
                    andamortization
                
                
                69,798
                
                
                17,596
                
                
                22,548
                
                
                15,669
                
                
                1,094
                
                
                12,017
                
                
                (c)
                
                
                138,722Income
                    taxes
                
                
                13,065
                
                
                8,442
                
                
                5,853
                
                
                3,612
                
                
                15,450
                
                
                (26,972
                )
                
                (b,c,e)
                
                
                19,450**Operating
                    income**
                
                
                53,327
                
                
                30,722
                
                
                20,434
                
                
                21,156
                
                
                28,836
                
                
                (17,106
                )
                
                
                
                
                137,369Interest
                    Income
                
                
                27,459
                
                
                1,001
                
                
                3,769
                
                
                5,249
                
                
                1,545
                
                
                3,806
                
                
                
                
                
                42,829Other
                    income/(deductions)
                
                
                6,859
                
                
                4,829
                
                
                689
                
                
                2,856
                
                
                (79
                )
                
                (20,111
                )
                
                (d)
                
                
                (4,957
                )Other
                    income taxes
                
                
                (13,586
                )
                
                (2,071
                )
                
                (1,765
                )
                
                (3,209
                )
                
                (528
                )
                
                7,748
                
                
                (d)
                
                
                (13,411
                )Interest
                    charges
                
                
                (33,392
                )
                
                (15,875
                )
                
                (11,503
                )
                
                (15,644
                )
                
                (905
                )
                
                (16,358
                )
                
                (e)
                
                
                (93,677
                )**Segment
                    net income (loss)****
                
                $
                40,667
                
                $
                18,606
                
                $
                11,624
                
                $
                10,408
                
                $
                28,869
                
                $
                (42,021
                )
                
                
                
                $
                68,153**Total
                    assets at****December
                    31, 2005**
                
                $
                1,937,811
                
                $
                1,257,933
                
                $
                721,021
                
                $
                421,377
                
                $
                229,977
                
                $
                556,590
                
                
                
                
                $
                5,124,709**Goodwill**
                
                $
                -
                
                $
                456,088
                
                $
                -
                
                $
                -
                
                $
                43,067
                
                $
                -
                
                
                
                
                $
                499,155**Gross
                    property additions**
                
                $
                135,632
                
                $
                27,801
                
                $
                31,019
                
                $
                14,595
                
                $
                482
                
                $
                12,285
                
                
                
                
                $
                221,814
 (a)
              Reflects
                  EITF 03-11 impact, under which wholesale revenues and the associated
                  cost
                  of energy of $30.9 million are reclassified to a net margin basis
                  in
                  accordance with GAAP.
 (b)
              Includes
                  the impairment of a turbine of $15.0 million, TNP acquisition related
                  costs of $17.0 million and regulatory costs associated with the
                  NMPRC’s
                  approval of the acquisition of $2.3 million in operating expense
                  and an
                  income tax benefit of $13.5 million in income
                  taxes.
 (c)
              Includes
                  a write-off of software costs of $4.5 million in depreciation and
                  amortization and an income tax benefit of $1.8 million in income
                  taxes.
 (d)
              Includes
                  an $11.3 million charge related to the issuance of equity-linked
                  units in
                  October 2005, TNP debt refinancing costs of $1.0 million in other
                  income/(deductions) and an income tax benefit of $3.5 million in
                  other
                  income taxes.
 (e)
              Includes
                  TNP debt refinancing costs of $5.3 million in interest charges
                  and an
                  income tax benefit of $2.0 million in income
                  taxes.
 
 *  Includes
        results from June 6 through December 31, 2005.
 **
        Net
        earnings before cumulative effect of change in accounting
        principle.
  B-52
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 Summarized
        financial information for PNMR by business segment for the year ended December
        31, 2004 is as follows (in thousands):
  **Regulated**
                  
                  **Unregulated**Segments
                      of Business
                  **PNM**
                  
                  **TNMP**
                  
                  **PNM**
                  
                  **PNM**
                  
                  **First**
                  
                  **Corporate****Electric**
                  
                  **Electric**
                  
                  **Gas**
                  
                  **Wholesale**
                  
                  **Choice**
                  
                  **&
                      Other**
                  
                  **Consolidated****2004:**Operating
                      revenues
                  $ 
                      552,563
                  
                  $   
                      -
                  
                  $
                      489,767
                  
                  $  
                      588,243
                  
                  $   
                      -
                  
                  $ 
                      (32,784)
                  (a)
                  $1,597,789Intersegment
                      revenues
                  5,849
                  
                  -
                  
                  1,154
                  
                  -
                  
                  -
                  
                  -
                  
                  7,003**Total
                      revenues**
                  558,412
                  
                  -
                  
                  490,921
                  
                  588,243
                  
                  -
                  
                  (32,784)
                  
                  1,604,792Less:
                      Cost of energy
                  186,517
                  
                  -
                  
                  343,219
                  
                  449,059
                  
                  -
                  
                  (33,486)
                  (a)
                  945,309Intersegment
                      energy
                  
                  
                  
                  
                  
                  
                  
                  
                  -transfer
                  (42,769)
                  
                  -
                  
                  -
                  
                  42,769
                  
                  -
                  
                  -
                  
                  -**Gross
                      margin**
                  414,664
                  
                  -
                  
                  147,702
                  
                  96,415
                  
                  -
                  
                  702
                  
                  659,483Operating
                      expenses
                  258,182
                  
                  -
                  
                  97,412
                  
                  46,442
                  
                  -
                  
                  6,266
                  
                  408,302Depreciation
                      andamortization
                  63,050
                  
                  -
                  
                  18,894
                  
                  14,809
                  
                  -
                  
                  5,468
                  
                  102,221Income
                      taxes
                  23,141
                  
                  -
                  
                  8,063
                  
                  8,537
                  
                  -
                  
                  (3,679)
                  
                  36,062**Operating
                      income**
                  70,291
                  
                  -
                  
                  23,333
                  
                  26,627
                  
                  -
                  
                  (7,353)
                  
                  112,898Interest
                      Income
                  28,445
                  
                  -
                  
                  2,253
                  
                  5,468
                  
                  -
                  
                  1,841
                  
                  38,007Other
                      income/(deductions)
                  2,045
                  
                  -
                  
                  190
                  
                  1,640
                  
                  -
                  
                  (2,534)
                  
                  1,341Other
                      income taxes
                  (12,072)
                  
                  -
                  
                  (967)
                  
                  (2,814)
                  
                  -
                  
                  2,668
                  
                  (13,185)Interest
                      charges
                  (34,981)
                  
                  -
                  
                  (11,029)
                  
                  (13,601)
                  
                  -
                  
                  8,236
                  
                  (51,375)**Segment
                      net income (loss)**
                  $   
                       53,728
                  
                  $   
                      -
                  
                  $
                      13,780
                  
                  $  
                      17,320
                  
                  $  
                       -
                  
                  $    
                      2,858
                  
                  $   
                       87,686**Total
                      assets at****December
                      31, 2004**
                  $1,764,032
                  
                  $  
                       -
                  
                  $
                      512,538
                  
                  $
                      430,493
                  
                  $  
                       -
                  
                  $
                      780,572
                  
                  $3,487,635**Gross
                      property additions**
                  $    
                      89,124
                  
                  $  
                       -
                  
                  $   35,547
                  
                  $     8,023
                  
                  $  
                       -
                  
                  $  
                      13,016
                  
                  $  
                      145,710
 (a)
              Reflects
                  EITF 03-11 impact, under which wholesale revenues and the associated
                  cost
                  of energy of $33.6 million are reclassified to a net margin basis
                  in
                  accordance with GAAP.
 
 
 B-53
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 Summarized
        financial information for PNMR by business segment for the year ended December
        31, 2003 is as follows (in thousands):
 
 **Regulated**
              
              **Unregulated**Segments
                  of Business
              **PNM**
              
              **TNMP**
              
              **PNM**
              
              **PNM**
              
              **First**
              
              **Corporate****Electric**
              
              **Electric**
              
              **Gas**
              
              **Wholesale**
              
              **Choice**
              
              **&
                  Other**
              
              **Consolidated****2003:**Operating
                  revenues
              $
                  553,979
              
              $   
                  -
              
              $
                  356,872
              
              $
                  551,625
              
              $   
                   -
              
              $
                  (14,703)
              (a)
              $1,447,773Intersegment
                  revenues
              6,485
              
              -
              
              1,395
              
              1,535
              
              -
              
              (1,535)
              
              7,880**Total
                  revenues**
              560,464
              
              -
              
              358,267
              
              553,160
              
              -
              
              (16,238)
              
              1,455,653Less:
                  Cost of energy
              177,767
              
              -
              
              228,345
              
              413,089
              
              -
              
              (16,531)
              (a)
              802,670Intersegment
                  energy
              
              
              
              
              
              
              
              
              -transfer
              (34,760)
              
              -
              
              -
              
              34,760
              
              -
              
              -
              
              -**Gross
                  margin**
              417,457
              
              -
              
              129,922
              
              105,311
              
              -
              
              293
              
              652,983Operating
                  expenses
              252,634
              
              -
              
              96,746
              
              44,928
              
              -
              
              (3,638)
              
              390,670Depreciation
                  andamortization
              73,532
              
              -
              
              22,186
              
              14,230
              
              -
              
              5,701
              
              115,649Income
                  taxes
              23,750
              
              -
              
              (956)
              
              12,111
              
              -
              
              (6,833)
              
              28,072**Operating
                  income**
              67,541
              
              -
              
              11,946
              
              34,042
              
              -
              
              5,063
              
              118,592Interest
                  Income
              28,669
              
              -
              
              2,437
              
              5,493
              
              -
              
              5,227
              
              41,826Other
                  income/(deductions)
              4,828
              
              -
              
              587
              
              1,097
              
              -
              
              (42,372)
              
              (35,860)Other
                  income taxes
              (13,830)
              
              -
              
              (1,197)
              
              (2,609)
              
              -
              
              17,819
              (b)
              183Interest
                  charges
              (31,303)
              
              -
              
              (13,406)
              
              (15,562)
              
              -
              
              (5,918)
              
              (66,189)**Segment
                  net income (loss)**
              $
                  55,905
              
              $   
                  -
              
              $
                  367
              
              $
                  22,461
              
              $   
                  -
              
              $
                  (20,181)
              (b)
              $
                  58,552**Total
                  assets at****December
                  31, 2003**
              $1,704,592
              
              $  
                   -
              
              $
                  509,111
              
              $
                  425,372
              
              $   
                  -
              
              $
                  739,554
              
              $3,378,629**Gross
                  property additions**
              $
                  108,823
              
              $   
                  -
              
              $
                  45,616
              
              $
                  14,620
              
              $   
                  -
              
              $
                  8,145
              
              $
                  177,204
 
 (a)
              Reflects
                  EITF 03-11 impact, under which certain wholesale revenues and the
                  associated cost of energy of $15.0 million are reclassified to
                  a net
                  margin basis in accordance with GAAP.
 (b)
              Includes
                  $9.5 million write-off of transition costs, net of tax benefit
                  of $7.2
                  million, due to the repeal of deregulation in New Mexico, and the
                  $10.0
                  million write-off related to refinancing of long-term debt, net
                  of tax
                  benefit of $6.6 million, that reduced consolidated net earnings.
 
 
 B-54
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 PNM
        Segment Information
 
 Summarized
        financial information for PNM by business segment for the year ended December
        31, 2005 is as follows (in thousands):
  Segments
                    of Business
                **PNM**
                
                **PNM**
                
                **PNM****Electric**
                
                **Gas**
                
                **Wholesale**
                
                **Other**
                
                **Consolidated****2005:**Operating
                    revenues
                $
                    567,270
                
                $
                    510,801
                
                $
                    602,939
                
                $
                    (34,228)
                (a)
                $1,646,782Intersegment
                    revenues
                6,706
                
                641
                
                25,089
                
                (3,761)
                
                28,675**Total
                    revenues**
                573,976
                
                511,442
                
                628,028
                
                (37,989)
                
                1,675,457Less:
                    Cost of energy
                210,169
                
                364,205
                
                506,935
                
                (37,819)
                (a)
                1,043,490Intersegment
                    energy transfer
                (35,829)
                
                -
                
                35,829
                
                -
                
                -**Gross
                    margin**
                399,636
                
                147,237
                
                85,264
                
                (170)
                
                631,967Operating
                    expenses
                263,446
                
                98,402
                
                44,827
                
                24,952
                (b)
                431,627Depreciation
                    and amortization
                69,798
                
                22,548
                
                15,669
                
                7,776
                (c)
                115,791Income
                    taxes
                13,065
                
                5,853
                
                3,612
                
                (14,313)
                (b,c)
                8,217**Operating
                    income**
                53,327
                
                20,434
                
                21,156
                
                (18,585)
                
                76,332Interest
                    Income
                27,459
                
                3,769
                
                5,249
                
                1,442
                
                37,919Other
                    income/(deductions)
                6,859
                
                689
                
                2,856
                
                (862)
                
                9,542Other
                    income taxes
                (13,586)
                
                (1,765)
                
                (3,209)
                
                1,483
                
                (17,077)Interest
                    charges
                (33,392)
                
                (11,503)
                
                (15,644)
                
                6,415
                
                (54,124)**Segment
                    net income (loss) ***
                $ 
                    40,667
                
                $
                    11,624
                
                $
                    10,408
                
                $
                    (10,107)
                
                $     52,592**Total
                    assets at****December
                    31, 2005**
                $1,937,811
                
                $
                    721,021
                
                $
                    421,377
                
                $ 
                    507,542
                
                $3,587,751**Gross
                        property additions**
                $  
                    135,632
                
                $ 
                     31,019
                
                $  
                    14,595
                
                $
                    (13,500)
                
                $  
                    167,746
 (a)
              Reflects
                  EITF 03-11 impact, under which wholesale revenues and the associated
                  cost
                  of energy of $30.9 million are reclassified to a net margin basis
                  in
                  accordance with GAAP.
 (b)
              Includes
                  the impairment of a turbine of $15.0 million, TNP acquisition related
                  costs of $8.7 million and regulatory costs associated with the
                  NMPRC's
                  approval of the acquisition of $2.3 million in operating expenses
                  and an
                  income tax benefit of $10.3 million in income
                  taxes.
 (c)
              Includes
                  a write-off of software costs of $4.5 million in depreciation and
                  amortization and an income tax benefit of $1.8 million in income
                  taxes.
 
 *
        Net
        earnings available for common stock before cumulative effect of change in
        accounting principle.
 
 B-55
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 Summarized
        financial information for PNM by business segment for the year ended December
        31, 2004 is as follows (in thousands):
  Segments
                    of Business
                **PNM**
                
                **PNM**
                
                **PNM****Electric**
                
                **Gas**
                
                **Wholesale**
                
                **Other**
                
                **Consolidated****2004:**Operating
                    revenues
                $
                    552,563
                
                $
                    489,767
                
                $
                    588,243
                
                $
                    (33,609)
                (a)
                $1,596,964Intersegment
                    revenues
                5,849
                
                1,154
                
                -
                
                -
                
                7,003**Total
                    revenues**
                558,412
                
                490,921
                
                588,243
                
                (33,609)
                
                1,603,967Less:
                    Cost of energy
                186,517
                
                343,219
                
                449,059
                
                (33,609)
                (a)
                945,186Intersegment
                    energytransfer
                (42,769)
                
                -
                
                42,769
                
                -
                
                -**Gross
                    margin**
                414,664
                
                147,702
                
                96,415
                
                -
                
                658,781Operating
                    expenses
                258,182
                
                97,412
                
                46,442
                
                776
                
                402,812Depreciation
                    andamortization
                63,050
                
                18,894
                
                14,809
                
                2,880
                
                99,633Income
                    taxes
                23,141
                
                8,063
                
                8,537
                
                (1,777)
                
                37,964**Operating
                    income**
                70,291
                
                23,333
                
                26,627
                
                (1,879)
                
                118,372Interest
                    Income
                28,445
                
                2,253
                
                5,468
                
                1,555
                
                37,721Other
                    income/(deductions)
                2,045
                
                190
                
                1,640
                
                62
                
                3,937Other
                    income taxes
                (12,072)
                
                (967)
                
                (2,814)
                
                1,120
                
                (14,733)Interest
                    charges
                (34,981)
                
                (11,029)
                
                (13,601)
                
                6,180
                
                (53,431)**Segment
                    net income (loss)**
                $  
                     53,728
                
                $  
                    13,780
                
                $ 
                     17,320
                
                $   
                    7,038
                
                $    
                    91,866**Total
                    assets at****December
                    31, 2004**
                $1,764,032
                
                $
                    512,538
                
                $
                    430,493
                
                $
                    686,667
                
                $3,393,730**Gross
                    property additions**
                $   
                     89,124
                
                $  
                    35,547
                
                $    
                    8,023
                
                $    
                    5,457
                
                $   138,151
 (a)
              Reflects
                  EITF 03-11 impact, under which wholesale revenues and the associated
                  cost
                  of energy of $33.6 million are reclassified to a net margin basis
                  in
                  accordance with GAAP.
 
 B-56
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 Summarized
        financial information for PNM by business segment for the year ended December
        31, 2003 is as follows (in thousands):
  Segments
                    of Business
                **PNM**
                
                **PNM**
                
                **PNM****Electric**
                
                **Gas**
                
                **Wholesale**
                
                **Other**
                
                **Consolidated****2003:**Operating
                    revenues
                $
                    553,979
                
                $
                    356,872
                
                $
                    551,625
                
                $
                    (15,014)
                (a)
                $1,447,462Intersegment
                    revenues
                6,485
                
                1,395
                
                1,535
                
                (1,535)
                
                7,880**Total
                    revenues**
                560,464
                
                358,267
                
                553,160
                
                (16,549)
                
                1,455,342Less:
                    Cost of energy
                177,767
                
                228,345
                
                413,089
                
                (16,551)
                (a)
                802,650Intersegment
                    energytransfer
                (34,760)
                
                -
                
                34,760
                
                -
                
                -**Gross
                    margin**
                417,457
                
                129,922
                
                105,311
                
                2
                
                652,692Operating
                    expenses
                252,634
                
                96,746
                
                44,928
                
                (2,685)
                
                391,623Depreciation
                    andamortization
                73,532
                
                22,186
                
                14,230
                
                3,973
                
                113,921Income
                    taxes
                23,750
                
                (956)
                
                12,111
                
                (6,643)
                
                28,262**Operating
                    income**
                67,541
                
                11,946
                
                34,042
                
                5,357
                
                118,886Interest
                    Income
                28,669
                
                2,437
                
                5,493
                
                2,319
                
                38,918Other
                    income/(deductions)
                4,828
                
                587
                
                1,097
                
                (36,886)
                
                (30,374)Other
                    income taxes
                (13,830)
                
                (1,197)
                
                (2,609)
                
                15,308
                (b)
                (2,328)Interest
                    charges
                (31,303)
                
                (13,406)
                
                (15,562)
                
                (5,439)
                
                (65,710)**Segment
                    net income (loss)**
                $   
                     55,905
                
                $      
                     367
                
                $
                    22,461
                
                $
                    (19,341)
                (b)
                $     
                    59,392**Total
                    assets at****December
                    31, 2003**
                $1,704,592
                
                $
                    509,111
                
                $
                    425,372
                
                $
                    660,229
                
                $3,299,304**Gross
                    property additions**
                $  
                    108,823
                
                $  
                    45,616
                
                $  
                    14,620
                
                $     
                     (234)
                
                $  
                    168,825
 (a)
              Reflects
                  EITF 03-11 impact, under which certain wholesale revenues and the
                  associated cost of energy of $15.0 million are reclassified to
                  a net
                  margin basis in accordance with GAAP.
 (b)
              Includes
                  $9.5 million write-off of transition costs, net of tax benefit
                  of $7.2
                  million, due to the repeal of deregulation in New Mexico, and the
                  $10.0
                  million write-off related to refinancing of long-term debt, net
                  of tax
                  benefit of $6.6 million, that reduced consolidated net earnings.
 
 TNMP
 
 TNMP
        operates in only one reportable segment; therefore tabular presentation of
        segment data is not required.
 
 **(4)**
              **Regulatory
                  Assets and Liabilities**
  The
        Company's operations are regulated by the NMPRC, PUCT and the FERC and the
        Company applies the provisions of SFAS 71 ** to
        its
        regulated operations as applicable. Regulatory assets represent probable
        future
        recovery of previously incurred costs, which will be collected from customers
        through the ratemaking process. Regulatory liabilities represent probable
        future
        reductions in revenues associated with amounts that are to be credited to
        customers through the ratemaking process. Regulatory assets and liabilities
        reflected in the Consolidated Balance Sheets are presented below.
 
 B-57
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 PNMR
 
 **December
                  31,****2005**
              
              **2004**(In
                  thousands)**Assets:**Current:PGAC
              
              $
              24,885
              
              $
              -Gas
                  Take-or-Pay Costs
              
              
              1,065
              
              
              3,339Underground
                  Rate
              
              
              790
              
              
              -Gas
                  Mark-to-Market - Off System Sales
              
              
              1,318
              
              
              -Subtotal
              
              
              28,058
              
              
              3,339Non-Current:Mine
                  Reclamation Costs
              
              
              94,758
              
              
              90,587Deferred
                  Income Taxes
              
              
              78,671
              
              
              71,471Financing
                  Costs
              
              
              25,362
              
              
              26,253Loss
                  on Reacquired Debt
              
              
              17,398
              
              
              19,044Renewable
                  Energy Certificates
              
              
              5,739
              
              
              3,448Stranded
                  Costs
              
              
              87,316
              
              
              -Carrying
                  Charges on Stranded Costs
              
              
              33,918
              
              
              -Other
              
              
              4,117
              
              
              6,393Subtotal
              
              
              347,279
              
              
              217,196Total
                  Regulatory Assets
              
              
              375,337
              
              
              220,535**Liabilities:**Current:PGAC
              
              
              -
              
              
              (657
              )Gas
                  Mark-to-Market - PGAC
              
              
              (7,085
              )
              
              -Subtotal
              
              
              (7,085
              )
              
              (657
              )Non-Current:Cost
                  of Removal
              
              
              (298,307
              )
              
              (247,350
              )Retail
                  competition transition obligation
              
              
              (16,621
              )
              
              -Deferred
                  Income Taxes
              
              
              (30,070
              )
              
              (33,020
              )Asset
                  Retirement Obligation
              
              
              (33,367
              )
              
              (30,702
              )Unrealized
                  Gain on PVNGS Decommissioning Trust
              
              
              (7,251
              )
              
              (8,153
              )PVNGS
                  Prudence Audit
              
              
              (3,555
              )
              
              (3,931
              )Settlement
                  Due Customers
              
              
              (1,075
              )
              
              (1,158
              )Gain
                  on Reacquired Debt
              
              
              (692
              )
              
              (1,012
              )Gas
                  Mark-to-Market - PGAC
              
              
              (5,564
              )
              
              -TNP
                  Acquisition - Settlement Due Customers
              
              
              (2,448
              )
              
              -Other
              
              
              (3,303
              )
              
              (2,093
              )Subtotal
              
              
              (402,253
              )
              
              (327,419
              )Total
                  Regulatory Liabilities
              
              
              (409,338
              )
              
              (328,076
              )
 
 
 B-58
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 PNM
 
 **December
                  31,****2005**
              
              **2004**(In
                  thousands)**Assets:**Current:PGAC
              
              $
              24,885
              
              $
              -Gas
                  Take-or-Pay Costs
              
              
              1,065
              
              
              3,339Underground
                  Rate
              
              
              790
              
              
              -Gas
                  Mark-to-Market - Off System Sales
              
              
              1,318
              
              
              -Subtotal
              
              
              28,058
              
              
              3,339Non-Current:Mine
                  Reclamation Costs
              
              
              94,758
              
              
              90,587Deferred
                  Income Taxes
              
              
              75,951
              
              
              71,471Financing
                  Costs
              
              
              25,362
              
              
              26,253Loss
                  on Reacquired Debt
              
              
              17,398
              
              
              19,044Renewable
                  Energy Certificates
              
              
              5,739
              
              
              3,448Other
              
              
              4,117
              
              
              6,393Subtotal
              
              
              223,325
              
              
              217,196Total
                  Regulatory Assets
              
              
              251,383
              
              
              220,535**Liabilities:**Current:PGAC
              
              
              -
              
              
              (657
              )Gas
                  Mark-to-Market - PGAC
              
              
              (7,085
              )
              
              -Subtotal
              
              
              (7,085
              )
              
              (657
              )Non-Current:Cost
                  of Removal
              
              
              (258,682
              )
              
              (247,350
              )Deferred
                  Income Taxes
              
              
              (30,070
              )
              
              (33,020
              )Asset
                  Retirement Obligation
              
              
              (33,367
              )
              
              (30,702
              )Unrealized
                  Gain on PVNGS Decommissioning Trust
              
              
              (7,251
              )
              
              (8,153
              )PVNGS
                  Prudence Audit
              
              
              (3,555
              )
              
              (3,931
              )Settlement
                  Due Customers
              
              
              (1,075
              )
              
              (1,158
              )Gain
                  on Reacquired Debt
              
              
              (692
              )
              
              (1,012
              )Gas
                  Mark-to-Market - PGAC
              
              
              (5,564
              )
              
              -TNP
                  Acquisition - Settlement Due Customers
              
              
              (2,448
              )
              
              -Other
              
              
              (3,303
              )
              
              (2,093
              )Subtotal
              
              
              (346,007
              )
              
              (327,419
              )Total
                  Regulatory Liabilities
              
              
              (353,092
              )
              
              (328,076
              )
 
 
 B-59
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 TNMP
 
 **December
                  31,****2005**
              
              
              **2004**(In
                  thousands)**Assets:**Non-Current:Stranded
                  Costs
              
              $
              87,316
              
              
              $
              87,316Carrying
                  Charges on Stranded Costs
              
              
              33,918
              
              
              
              48,130Deferred
                  Income Taxes
              
              
              2,720
              
              
              
              2,484Texas
                  System Benefit Fund
              
              
              -
              
              
              
              4,006Other
              
              
              -
              
              
              
              1,615Subtotal
              
              
              123,954
              
              
              
              143,551Total
                  Regulatory Assets
              
              
              123,954
              
              
              
              143,551**Liabilities:**Non-Current:Cost
                  of Removal
              
              
              (39,625
              )
              
              
              (40,729
              )Retail
                  competition transition obligation
              
              
              (16,621
              )
              
              
              -Total
                  Regulatory Liabilities
              
              
              (56,246
              )
              
              
              (40,729
              )
 
 Substantially
        all of the Company’s regulatory assets and regulatory liabilities are reflected
        in rates charged to customers or have been addressed in a regulatory proceeding.
        The Company receives or pays a rate of return on these regulatory assets
        and
        regulatory liabilities, except for mine reclamation costs and financing costs.
        Recovery of mine reclamation costs is provided for up to $100.0 million with
        a
        remaining recovery period of 15 years. Financing costs are amortized over
        the
        life of the debt, with the remaining amortization periods ranging from 3
        to 30
        years.
 
 The
        Company is permitted, under rate regulations, to accrue and record a regulatory
        liability for the estimated cost of removal and salvage associated with certain
        of its assets through depreciation expense.
 
 In
        2004,
        the PUCT issued its first order in TNMP’s stranded cost 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. See Note 17.
 
 PNM
        records a regulatory asset for renewable energy certificates at $0.005 per
        KWh.
        A renewable energy certificate represents one KWh of energy produced from
        a
        renewable energy source as defined by the New Mexico Renewable Energy Act.
        The
        source of the renewable energy certificates is PNM’s PPA to purchase renewable
        energy from the New Mexico Wind Energy Center.
 
 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. An order was issued by the NMPRC
        in
        2001 that 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.
  Five
        forward starting interest rate swaps were terminated in May 2003 for a cash
        settlement of $27.1 million. This amount has been capitalized by PNM as a
        financing cost and will be amortized over the life of the bonds.
 
 B-60
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 Based
        on
        a current evaluation of the various factors and conditions that are expected
        to
        impact future cost recovery, the Company believes that its regulatory assets
        are
        probable of future recovery.
 
 **(5)** **Stockholders’
        Equity**
 
 PNMR
 
 *Stock
        Split*
  In
        May
        2004, the Board of PNMR approved a 3-for-2 stock split for shareholders of
        record on June 1, 2004. All references in the accompanying Consolidated
        Financial Statements and Notes thereto to PNMR’s shares outstanding and per
        share amounts have been restated to reflect the stock split.
  Changes
        in common stock for PNMR are as follows:
 
 **Common
                  Stock****Number**
              
              **Aggregate****of
                  Shares**
              
              **Value**(Dollars
                  in thousands)**Balance
                  at December 31, 2003**
              
              
              60,388,496
              
              $
              647,722Exercise
                  of stock options
              
              
              -
              
              
              (16,430
              )Tax
                  benefit from exercise of stock options
              
              
              -
              
              
              6,246Stock
                  split costs
              
              
              -
              
              
              (142
              )Retirement
                  of preferred stock
              
              
              -
              
              
              153ESPP
                  purchase
              
              
              76,099
              
              
              1,277**Balance
                  at December 31, 2004**
              
              
              60,464,595
              
              $
              638,826Exercise
                  of stock options
              
              
              -
              
              
              (16,261
              )Tax
                  benefit from exercise of stock options
              
              
              -
              
              
              6,527Issuance
                  of equity-linked units
              
              
              -
              
              
              (18,769
              )Other
                  charge - equity-linked units
              
              
              -
              
              
              11,348Restricted
                  stock
              
              
              -
              
              
              1,259Sale
                  of common stock
              
              
              3,910,000
              
              
              101,231Common
                  stock issued for TNP acquisition
              
              
              4,326,337
              
              
              87,392ESPP
                  purchase
              
              
              85,354
              
              
              1,872**Balance
                  at December 31, 2005**
              
              
              68,786,286
              
              $
              813,425
 
 
 B-61
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 PNM
 
 Changes
        in common stock for PNM are as follows:
 
 **Common
                  Stock****Number**
              
              **Aggregate****of
                  Shares**
              
              **Value**(Dollars
                  in thousands)**Balance
                  at December 31, 2003**
              
              
              39,117,799
              
              $
              752,197Retirement
                  of preferred stock
              
              
              -
              
              
              153**Balance
                  at December 31, 2004**
              
              
              39,117,799
              
              $
              752,350Equity
                  from parent
              
              
              -
              
              
              13,150**Balance
                  at December 31, 2005**
              
              
              39,117,799
              
              $
              765,500
 
 TNMP
 
 Changes
        in common stock and additional paid-in capital for TNMP are as
        follows:
 
 **Common
                  Stock****Additional****Number**
              
              **Aggregate**
              
              **Paid-In****of
                  Shares**
              
              **Par
                  Value**
              
              **Capital**(Dollars
                  in thousands)**Pre-Acquisition:****Balance
                  at December 31, 2003**
              
              
              10,705
              
              $
              107
              
              $
              197,751**Balance
                  at December 31, 2004**
              
              
              10,705
              
              $
              107
              
              $
              197,751**Post-Acquisition:****Balance
                  at June 6, 2005**
              
              
              10,705
              
              $
              107
              
              $
              -Purchase
                  accounting adjustments
              
              
              -
              
              
              -
              
              
              645,130Stock
                  redemption
              
              
              (1,090
              )
              
              (11
              )
              
              (62,000
              )**Balance
                  at December 31, 2005**
              
              
              9,615
              
              $
              96
              
              $
              583,130
 
 *Dividends*
 The
          declaration of common dividends by PNMR is dependent upon a number of factors
          including the ability of PNMR’s subsidiaries to pay dividends. PNMR’s primary
          sources of dividends are PNM and TNMP.
  PNM
          paid
          cash dividends of $91.0 million, $23.0 million and $49.6 million to PNMR
          for the
          years ended December 31, 2005, 2004 and 2003, respectively. TNMP paid cash
          dividends of $12.0 million to PNMR for the year ended December 31,
          2005.
 
 B-62
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
  **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 As
          part
          of the order approving the formation of PNMR, the NMPRC placed certain
          restrictions on the ability of PNM and TNMP to pay dividends to PNMR. The
          NMPRC
          order imposed the following conditions regarding dividends paid by PNM
          and TNMP
          to PNMR: PNM or TNMP cannot pay dividends which cause its debt rating to
          fall
          below investment grade; and neither PNM nor TNMP can pay dividends in any
          year,
          as determined on a rolling four quarter basis, in excess of net earnings
          without
          prior NMPRC approval. The Global Electric Agreement (see Note 17) modified
          the
          PNM dividend restriction to allow PNM to pay dividends from earnings to
          PNMR as
          well as equity contributions made by PNMR. Additionally, PNM has various
          financial covenants that limit the transfer of assets, through dividends
          or
          other means.
  In
          addition, the ability of PNMR to declare dividends is dependent upon the
          extent
          to which cash flows will support dividends, the availability of retained
          earnings, the financial circumstances and performance, the NMPRC’s and PUCT’s
          decisions in various regulatory cases currently pending and which may be
          docketed in the future, the effect of federal regulatory decisions,
          Congressional and legislative acts and economic conditions in the United
          States.
          Conditions imposed by the NMPRC or PUCT, future growth plans and the related
          capital requirements and business considerations may also affect PNMR’s ability
          to pay dividends.
  In
          February 2004, the Board of PNMR approved a 4.3% increase in the common
          stock
          dividend for an indicated annual dividend of $0.64 per share. In December
          2004,
          the Board of PNMR approved a 15.6% increase in the common stock dividend
          for an
          indicated annual dividend of $0.74 per share. In July 2005, the Board of
          PNMR
          approved an 8.0% increase in the common stock dividend for an indicated
          annual
          dividend of $0.80 per share. In February 2006, the Board of PNMR approved
          a
          10.0% increase in the common stock dividend for an indicated annual dividend
          of
          $0.88 per share.
 
 *Cumulative
        Preferred Stock*
 
 PNMR
        has
        no preferred stock outstanding. PNMR’s restated articles of incorporation
        authorize 10 million shares of preferred stock, which may be issued without
        restriction.
 
 The
        number of authorized shares of PNM cumulative preferred stock is 10 million
        shares. During 2004, PNM retired 12,707 shares for $1.1 million. PNM preferred
        stock does not have a mandatory redemption requirement but may be redeemed
        at
        102% of the stated value with accrued dividends. The holders of the
        preferred stock are entitled to payment before the holders of common stock
        in
        the event of any liquidation or dissolution or distribution of assets of
        PNM. In
        addition, PNM’s preferred stock is not entitled to a sinking fund and cannot be
        converted into any other class of stock of PNM.
 
 TNMP
        has
        no preferred stock outstanding. The number of authorized shares of TNMP
        cumulative preferred stock is 1 million shares.
 
 *PNMR
        Equity-Linked Units and Common Stock*
 
 See
        Note
        6 below for details about PNMR’s issuance of equity-linked units and common
        stock and the other charge related to this transaction.
 
 *TNMP
        Common Stock*
 
 In
        September 2005, as part of the TNP acquisition financing, TNMP redeemed and
        cancelled 1,090 shares of its privately held stock held by TNP at the book
        value
        of $56,888.91 per share, for a total of $62.0 million. TNP subsequently paid
        a
        cash dividend of $62.0 million to PNMR.
 
 B-63
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 **(6)** **Financing**
 
 PNMR
 
 *Long-Term
        Debt*
 
 During
        2005, PNMR issued senior notes in conjunction with private and public offerings
        (see “Equity-Linked Units Offerings” below).
 
 *Revolving
        and Other Credit Facilities*
 
 In
        August
        2005, PNMR completed arrangements to expand the size, extend the maturity
        and
        modify certain terms and conditions of its previous unsecured revolving credit
        facility and executed an amended and restated credit agreement (the “PNMR
        Facility”). The PNMR Facility expands the size of its previous revolving credit
        facility from $400.0 million to $600.0 million. Under the PNMR Facility,
        the
        borrowing availability of First Choice was increased from $100.0 million
        to
        $300.0 million to support First Choice’s future business activities. The PNMR
        Facility has an expiration date of August 15, 2010 and includes two one-year
        extension options that are subject to approval by a majority of the lenders.
        At
        December 31, 2005, $10.0 million was outstanding under the PNMR Facility
        (see
        First Choice below).
 
 At
        December 31, 2005, PNMR also had $15.0 million in local lines of credit.
        There
        were no outstanding borrowings under the local lines of credit at December
        31,
        2005.
 
 In
        June
        2005, PNMR established a commercial paper program under which it may issue
        up to
        $400.0 million in commercial paper for up to 270 days. The commercial paper
        is
        unsecured and the proceeds are used for short-term cash management needs.
        The
        PNMR Facility serves as a backstop for the outstanding commercial paper.
        At
        December 31, 2005, PNMR had $190.1 million of commercial paper outstanding.
 
 At
        December 31, 2005, First Choice had up to $300.0 million of borrowing capacity
        under the PNMR Facility. Any borrowings made by First Choice under this sublimit
        are guaranteed by PNMR. At December 31, 2005, First Choice had $10.0 million
        outstanding under the PNMR Facility; however, First Choice had $15.6 million
        of
        letters of credit outstanding, which reduces the available capacity under
        the
        PNMR Facility. TNMP is also a borrower under the PNMR Facility (see “TNMP”
below).
 
 *Financing
        Activities*
 
 PNMR
        has
        a universal shelf registration statement filed with the SEC for the issuance
        of
        debt securities and equity securities, preferred stock, purchase contracts,
        purchase contract units and warrants. As of December 31, 2005, PNMR had
        approximately $400.9 million of remaining unissued securities under this
        registration statement.
 
 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 initial
        floating rate was 1.91% and will be reset every six months. The floating
        rate
        was reset on September 15, 2005, to 4.60%. The swap is accounted for as a
        fair-value hedge with a liability position of approximately $3.9 million
        as of
        December 31, 2005.
 
 During
        October 2004, PNMR entered into two forward starting floating-to-fixed rate
        interest rate swaps with an aggregate notional principal amount of $100.0
        million. These swaps became effective August 1, 2005 and terminate November
        15,
        2009. Under these swaps, PNMR receives a floating rate equal to the three
        month
        LIBOR rate on the notional principal amount and pays a fixed interest rate
        of
        3.975% on the notional principal amount on a quarterly basis. The initial
        floating rate was set on August 1, 2005, at 3.693% and will be reset every
        three
        months. From November 2004 through June 30, 2005, the swaps were accounted
        for
        as a cash flow hedge against
  B-64
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
  **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
  borrowings
        under a five-year $400.0 million PNMR revolving credit agreement dated November
        15, 2004. The PNMR Facility replaced the November 2004 credit agreement in
        August 2005. Effective June 30, 2005, the swaps were de-designated as cash
        flow
        hedges due to a change in the underlying borrowings being hedged from the
        November 2004 credit agreement at the inception of the hedge to commercial
        paper. The mark-to-market change in the fair value of theses swaps was
        subsequently recognized on PNMR’s Consolidated Statement of Earnings. At
        December 31, 2005, the increase in fair value related to these swaps was
        $2.8
        million. Of this increase, $0.4 million was recorded in accumulated other
        comprehensive income on PNMR’s Consolidated Balance Sheet and $2.4 million was
        recognized in other income on PNMR’s Consolidated Statement of Earnings for the
        year ended December 31, 2005.
 
 In
        conjunction with the acquisition of TNP, on June 6, 2005, PNMR made an equity
        investment of approximately $110.5 million in TNP, which TNP used to repay
        in
        full amounts owing under TNP’s credit agreement. In addition, pursuant to PNMR’s
        acquisition of TNP, PNMR agreed to provide funds to TNP to enable TNP to
        redeem
        (a) TNP's 14.5% Senior Redeemable Preferred Stock, Series C, (b) TNP's 14.5%
        Senior Redeemable Preferred Stock, Series D (collectively, “Preferred Stock”),
        and (c) TNP’s 10.25% Senior Subordinated Notes due 2010, Series B (“Senior
        Notes”). On July 6, 2005, TNP redeemed the Preferred Stock by tendering $224.6
        million to the holders of the Preferred Stock and redeemed the Senior Notes
        by
        tendering $296.5 million to holders of the Senior Notes (tendered amounts
        include interest, as applicable). In order to fund a portion of the cost
        of
        redemption of TNP’s Preferred Stock and Senior Notes, PNMR issued $370.0 million
        of commercial paper short-term notes under the PNMR commercial paper program.
        The balance of the funds necessary for the redemption came from other cash
        available to PNMR and the total redemption amount was an equity investment
        by
        PNMR in TNP.
 
 *Equity-Linked
        Units Offering - Private*
 
 In
        October 2005, PNMR completed a private offering of 4,000,000 equity-linked
        units
        at 6.625%. PNMR received $100.0 million in proceeds from this transaction
        and
        there were no underwriting discounts or commissions. PNMR used the proceeds
        to
        repay short-term borrowings, which included borrowings for the acquisition
        of
        TNP.
 
 Each
        equity-linked unit consists of a purchase contract and a 2.5% undivided
        beneficial ownership interest in one of PNMR’s senior notes with a stated amount
        of $1,000, which corresponds to a $25.00 stated amount of PNMR’s senior notes.
        The ownership interest in the senior notes is initially pledged to secure
        the
        purchaser’s obligation to purchase PNMR common stock under the related purchase
        contract. The senior notes are scheduled to mature in August 2010 (subject
        to
        the remarketing described below) and bear interest initially at the annual
        rate
        of 5.1%. The purchase contracts entitle the purchaser to quarterly contract
        adjustment payments of 1.525% per year on the stated amount of
        $25.00.
 
 Each
        purchase contract contains a mandatory obligation for the holder to purchase,
        and PNMR to sell, at a purchase price of $25.00 in cash, shares of PNMR’s common
        stock (or preferred stock under certain circumstances in a ratio of 1/10
        of a
        preferred share for each share of common stock) on or before November 16,
        2008.
        Generally, the number of shares the purchaser is obligated to purchase depends
        on the average closing price per share of PNMR’s common stock over a 20-day
        trading period ending on the third trading day immediately preceding November
        16, 2008, subject to anti-dilution adjustments. If the average closing price
        for
        the 20-day trading period is equal to or greater than approximately $25.116
        per
        share, the settlement rate will be 0.9954 shares of common stock. If the
        average
        closing price for the trading period is less than approximately $25.116 per
        share but greater than $20.93 per share, the settlement rate is equal to
        $25.00
        divided by the average closing price of PNMR’s common stock for the trading
        period. If the average closing price for the trading period is less than
        or
        equal to $20.93 per share, the settlement rate will be 1.1945 shares of common
        stock. The purchaser has the option to settle its obligations under the purchase
        contracts at any time on or prior to the fifth business day immediately
        preceding November 16, 2008. Prior to November 16, 2008, the senior notes
        will
        be remarketed. If the remarketing is successful, the interest rate on the
        senior
        notes may change to a rate selected by the remarketing agent, and the maturity
        of the senior notes may be extended to a date selected by PNMR, but no later
        than November 2011. If the remarketing of the senior notes is not successful,
        the maturity and interest rate of the senior notes will not change and holders
        of the equity-linked units will have the option of putting their senior notes
        to
        PNMR to satisfy their obligations under the purchase contracts. PNMR expects
        that the remarketing of the senior notes will be successful.
 
 B-65
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
  **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 The
        purchase contracts are forward transactions in PNMR’s common stock. Upon
        issuance in October 2005, a liability for the present value of the purchase
        contract adjustment payments of $4.6 million was recorded as a reduction
        to
        stockholders’ equity, with an offsetting increase to other long-term
        liabilities. Subsequent contract adjustment payments will reduce this liability.
        In addition, other charges of $11.3 million was recorded based on the increase
        in PNMR's stock price from August 2004, when the agreement was signed, to
        October 2005, when the equity-linked units were issued. Upon settlement of
        each
        purchase contract, PNMR will receive the stated amount of $25.00 on the purchase
        contract and will issue the requisite number of shares of common stock (or
        preferred stock under certain circumstances in a ratio of 1/10 of a preferred
        share for each share of common stock). The stated amount received will be
        recorded as an increase to stockholders’ equity.
 
 Before
        the issuance of common stock (or preferred stock under certain circumstances
        in
        a ratio of 1/10 of a preferred share for each share of common stock) upon
        settlement of the purchase contracts, the equity-linked units will be reflected
        in diluted earnings per share calculations using the treasury stock method
        as
        defined by SFAS No. 128, *“Earnings
        per Share”* (“SFAS
        128”). Under this method, the number of shares of common stock used in
        calculating diluted earnings per share (based on the settlement formula applied
        at the end of the reporting period) is deemed to be increased by the excess,
        if
        any, of the number of shares that would be issued upon settlement of the
        purchase contracts less the number of shares that could be purchased by PNMR
        in
        the market at the average market price during the period, using the proceeds
        to
        be received upon settlement. Therefore, dilution will occur for periods when
        the
        average market price of PNMR’s common stock for the reporting period is above
        approximately $25.116, and will potentially occur when the average price
        of
        PNMR’s common stock for the 20-day trading period preceding the end of the
        reporting period is lower than the average price of PNMR’s common stock for the
        full reporting period. The dilution effect for the year ended December 31,
        2005
        was approximately 317,600 shares.
 
 *Common
        Stock Offering*
 
 In
        March
        2005, PNMR issued 3,910,000 shares of its common stock at $26.76 per share.
        PNMR
        received net proceeds from this offering, after deducting underwriting discounts
        and commissions and estimated expenses, of approximately $101.0 million.
        PNMR
        used the net proceeds to retire high cost TNP debt and preferred stock and
        to
        complete the construction of Luna, a partially constructed, combined-cycle
        power
        plant near Deming, New Mexico and for other general corporate purposes.
 
 *Equity-Linked
        Units Offering - Public*
 
 In
        March
        2005, PNMR completed a public offering of 4,945,000 6.75% equity-linked units,
        yielding net proceeds after fees of $239.6 million. PNMR used the net proceeds
        to retire high cost TNP debt and preferred stock, to complete the construction
        of Luna and for other general corporate purposes.
 
 Each
        equity-linked unit consists of a purchase contract and a 5.0% undivided
        beneficial ownership interest in one of PNMR’s senior notes with a stated amount
        of $1,000, which corresponds to a $50.00 stated amount of PNMR’s senior notes.
        The ownership interest in the senior notes is initially pledged to secure
        the
        corporate unit holder’s obligation to purchase PNMR common stock under the
        related purchase contract. The senior notes are scheduled to mature in May
        2010
        (subject to the remarketing described below) and bear interest at a rate
        of 4.8%
        per year. The purchase contracts entitle their holders to contract adjustment
        payments of 1.95% per year on the stated amount of $50.00.
 
 Each
        purchase contract contains a mandatory obligation for the holder to purchase,
        and PNMR to sell, at a purchase price of $50.00 in cash, shares of PNMR’s common
        stock on or before May 16, 2008. Generally, the number of shares each
        holder of the equity-linked units is obligated to purchase depends on the
        average closing price per share of PNMR’s common stock over a 20-day trading
        period ending on the third trading day immediately preceding May 16, 2008,
        subject to anti-dilution adjustments. If the average closing price for the
        20-day trading
  B-66
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
  **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 period
        is
        equal to or greater than approximately $32.65 per share, the settlement rate
        will be 1.5315 shares of common stock. If the average closing price for the
        trading period is less than approximately $32.65 per share but greater than
        $26.76 per share, the settlement rate is equal to $50.00 divided by the average
        closing price of the Company’s common stock for the trading period. If the
        average closing price for the trading period is less than or equal to $26.76
        per
        share, the settlement rate will be 1.8685 shares of common stock. The holders
        of
        equity-linked units have the option to settle their obligations under the
        purchase contracts at any time on or prior to the seventh business day
        immediately preceding May 16, 2008. Prior to May 16, 2008, the senior
        notes will be remarketed. If the remarketing is successful, the interest
        rate on
        the senior notes may change to a rate selected by the remarketing agent,
        and the
        maturity of the senior notes may be extended to a date selected by PNMR,
        but no
        later than May 2038. If the remarketing of the senior notes is not successful,
        the maturity and interest rate of the senior notes will not change and holders
        of the equity-linked units will have the option of putting their senior notes
        to
        PNMR to satisfy their obligations under the purchase contracts. PNMR expects
        that the remarketing of the senior notes will be successful.
 
 The
        purchase contracts are forward transactions in PNMR’s common stock. Upon
        issuance, a liability for the present value of the purchase contract adjustment
        payments of $13.9 million was recorded as a reduction to stockholders’ equity,
        with an offsetting increase to other long-term liabilities. Subsequent contract
        adjustment payments will reduce this liability. Upon settlement of each purchase
        contract, PNMR will receive the stated amount of $50.00 on the purchase contract
        and will issue the requisite number of shares of common stock. The stated
        amount
        received will be recorded as an increase to stockholders’ equity. PNMR has
        reserved 10 million shares of its common stock for issuance pursuant to the
        purchase contracts.
 
 Before
        the issuance of common stock upon settlement of the purchase contracts, the
        equity-linked units will be reflected in diluted earnings per share calculations
        using the treasury stock method as defined by SFAS 128. Dilution will occur
        for
        periods when the average market price of PNMR’s common stock for the reporting
        period is above approximately $32.65, and will potentially occur when the
        average price of PNMR’s common stock for the 20-day trading period preceding the
        end of the reporting period is lower than the average price of PNMR’s common
        stock for the full reporting period. The dilution effect for the year ended
        December 31, 2005 was approximately 122,636 shares.
 
 PNM
 
 *Long-Term
        Debt*
 
 Under
        PNM’s modified 1947 Indenture of Mortgage and Deed of Trust, no future bonds
        can
        be issued under the mortgage. While first mortgage bonds continue to serve
        as
        collateral for pollution control bonds in the outstanding principal amount
        of
        $65.0 million, the lien of the mortgage covers only PNM’s ownership interest in
        PVNGS. Senior unsecured notes, which were issued under a senior unsecured
        note
        indenture, serve as collateral for the pollution control bonds in the
        outstanding principal amount of $520.8 million. With the exception of the
        $65.0
        million of pollution control bonds secured by first mortgage bonds, the senior
        unsecured notes are the senior debt of PNM.
 
 *Revolving
        and Other Credit Facilities*
 
 In
        August
        2005, PNM entered into a new $400.0 million unsecured credit agreement (the
“PNM
        Facility”) to replace its existing $300.0 million facility. The PNM Facility is
        for a one-year term and expires August 17, 2006. Upon receiving approval
        by the
        NMPRC, it is expected that the term will be extended through August 17, 2010.
        The PNM Facility also includes two one-year extension options, subject to
        regulatory approval and approval by a majority of the lenders. In connection
        with entering into the new PNM Facility, PNM simultaneously terminated the
        previously existing $300.0 million facility, which would otherwise have
        terminated on November 21, 2006. Many of the same lenders were parties to
        the
        prior agreement. The terms and conditions of the new PNM Facility are generally
        similar to, or improvements over, the terms and conditions in the terminated
        agreement. At the time the previous credit facility was terminated, there
        was no
        balance on the facility and there were no fees or penalties related to the
        termination.
 
 B-67
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
  **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 At
        December 31, 2005, PNM also had $23.5 million in local lines of credit and
        a
        $20.0 million borrowing arrangement with PNMR. There were no outstanding
        borrowings under the PNM Facility, the local lines of credit or the borrowing
        arrangement with PNMR at December 31, 2005; however, $4.5 million of letters
        of
        credit were outstanding, which reduces the available capacity under the PNM
        Facility.
 
 PNM
        has a
        commercial paper program under which PNM may issue up to $300.0 million in
        commercial paper for up to 365 days. The commercial paper is unsecured and
        the
        proceeds are used for short-term cash management needs. The PNM Facility
        serves
        as a backstop for the outstanding commercial paper. As of December 31, 2005,
        PNM
        had $127.9 million in commercial paper outstanding.
 
 *Financing
        Activities*
 
 PNM
        has a
        universal shelf registration statement filed with the SEC for the issuance
        of
        debt securities, equity securities, preferred stock, purchase contracts,
        purchase contract units and warrants. As of December 31, 2005, PNM had
        approximately $200.0 million of remaining unissued securities registered
        under
        its shelf registration statement.
 
 *Asset
        Securitization*
 
 PNM
        has
        an accounts receivable securitization program with a maximum borrowing capacity
        of $70.0 million. This program provides for the securitization of PNM’s retail
        electric service accounts receivable and retail gas service accounts receivable.
        Under the securitization program, PNM will periodically sell its accounts
        receivable, principally retail receivables, to a bankruptcy remote subsidiary,
        PNM Receivables Corporation, which in turn pledges an undivided interest
        in the
        receivables to an unaffiliated conduit commercial paper issuer. As of December
        31, 2005 and 2004, PNM had no outstanding borrowings under the accounts
        receivable securitization program, which was secured by $129.5 million and
        $143.7 million of accounts receivable, respectively. PNM Receivables Corporation
        is consolidated in PNM’s financial statements. The accounts receivable program
        expires in April 2006.
 
 TNMP
 
 *Long-Term
        Debt*
 
 In
        1999
        and 2003, respectively, TNMP issued $175.0 million, 6.25% senior unsecured
        notes
        that mature in 2009 and $250.0 million, 6.125% senior notes that mature in
        2008.
        On or after May 1, 2005, TNMP will be required to redeem the 6.125% senior
        notes
        to the extent that it receives proceeds from the securitization of stranded
        costs.
 
 *Revolving
        and Other Credit Facilities*
 
 In
        July
        2005, the NMPRC approved TNMP's application to become a borrower and issue
        notes
        of up to $100.0 million under the PNMR Facility. SEC approval was received
        in
        September 2005 and TNMP was added as a borrower under the PNMR Facility in
        September 2005. Any borrowings made by TNMP under this sublimit are not
        guaranteed by PNMR. At December 31, 2005, TNMP had no outstanding borrowings
        under the PNMR Facility. However, TNMP had $2.4 million letters of credit
        outstanding, which reduces the available capacity under the PNMR
        facility.
 
 B-68
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 *Financing
        Activities*
 
 In
        June
        2003, TNMP issued $250.0 million of 6.125% senior notes due in 2008. In May
        2003, TNMP executed a $250.0 million Treasury rate lock transaction designed
        to
        manage interest rate risk associated with the issuance of the senior notes.
        TNMP
        paid $4.2 million upon the issuance of senior notes in June 2003 to settle
        the
        rate lock. Through the date of the acquisition, the cost of the rate lock
        was
        recorded in accumulated other comprehensive income and was amortized to interest
        expense over the life of the senior notes. The book value of the rate lock
        acquired was $1.7 million. In conjunction with the acquisition of TNP by
        PNMR on
        June 6, 2005, the balance for the rate lock remaining in accumulated other
        comprehensive income was recorded at fair market value as of the date of
        acquisition, which was zero.
 
 **(7)**  **Lease
        Commitments**
 
 PNMR
  PNMR’s
          operating lease expense, including TNP lease expense from June 6, 2005
          through
          December 31, 2005, was approximately $36.7 million in 2005, $33.0 million
          in
          2004 and $33.4 million in 2003. Aggregate minimum payments to be received
          in
          future periods under non-cancelable subleases are approximately $1.2
          million.
 PNMR’s
          future minimum operating lease payments at December 31, 2005
          are:
 
 (In
                  thousands)2006
              
              $
              34,3632007
              
              
              34,6342008
              
              
              34,3712009
              
              
              31,4782010
              
              
              31,271Later
                  years
              
              
              214,476Total
                  minimum lease payments
              
              $
              380,593
 
 PNM
 
 PNM
        leases interests in Units 1 and 2 of PVNGS, certain transmission facilities,
        office buildings and other equipment under operating leases. Covenants in
        PNM’s
        PVNGS Units 1 and 2 lease agreements, expiring in 2015 and 2016, limit PNM’s
        ability, without consent of the owner participants in the lease transactions,
        (i) to enter into any merger or consolidation, or (ii) except in connection
        with
        normal dividend policy, to convey, transfer, lease or dividend more than
        5% of
        its assets in any single transaction or series of related transactions.
 
 PNM’s
        other significant operating lease obligations include a leased interest in
        the
        EIP transmission line with annual lease payments of $2.8 million and a PPA
        for
        the entire output of Delta, a gas-fired generating plant in Albuquerque,
        New
        Mexico, with imputed annual lease payments of $6.0 million. See Note 9 and
        Note
        16 for additional information about the Delta operating lease. PNM’s operating
        lease expense was approximately $28.5 million in 2005, $27.6 million in 2004
        and
        $28.0 million in 2003. Aggregate minimum payments to be received in future
        periods under non-cancelable subleases are approximately $1.2
        million.
 
 
 B-69
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 PNM
        has
        several capital leases for certain fleet vehicles. At December 31, 2005 and
        2004, $1.5 million and $2.2 million of these capital leases were recorded
        in
        long-term debt.
 
 PNM’s
        future minimum operating lease payments at December 31, 2005 are:
 
 (In
                  thousands)2006
              
              $
              29,3222007
              
              
              30,2062008
              
              
              31,1472009
              
              
              28,9952010
              
              
              28,995Later
                  years
              
              
              204,765Total
                  minimum lease payments
              
              $
              353,430
 
 TNMP
 TNMP’s
          operating lease expense was approximately $1.4 million in 2005, $1.1 million
          in
          2004 and $1.0 million in 2003.
  TNMP’s
          future minimum operating lease payments at December 31, 2005
          are:
 
 (In
                  thousands)2006
              
              $
              3,1592007
              
              
              2,5452008
              
              
              1,3422009
              
              
              6002010
              
              
              393Later
                  years
              
              
              454Total
                  minimum lease payments
              
              $
              8,493
 
 **(8)** **Fair
        Value of Financial Instruments**
 
 PNMR
        and PNM
 
 *Interest
        Rate Management*
 The
          Company may enter into agreements for derivative instruments, including
          options
          and swaps, to manage risks related to changes in interest rates. At the
          inception of any such transaction, the Company documents relationships
          between
          the hedging instruments and the items being hedged. This documentation
          includes
          the strategy that supports executing the specific transaction. See Note
          6 for
          details regarding interest rate swaps PNMR has entered into.
  GAAP
          defines the fair value of a financial instrument as the amount at which
          the
          instrument could be exchanged in a current transaction between willing
          parties,
          other than in a forced sale or liquidation. Although management uses its
          best
          judgment in estimating the fair value of these financial instruments, there
          are
          inherent limitations in any estimation technique. Therefore, the fair value
          estimates presented herein are not necessarily indicative of the amounts
          that
          the Company could realize in a current transaction. Fair value is based
          on
          market quotes provided by the Company’s investment bankers and trust advisors.
          The market prices used to value PNM’s mark-to-market energy portfolio are based
          on closing exchange prices and over-the-counter quotations.
 
 B-70
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 PNMR
 
 *Carrying
        Amount/Fair Value*
 
 The
        carrying amounts reflected on PNMR’s Consolidated Balance Sheets approximate
        fair value for cash, temporary investments, receivables, and payables due
        to the
        short period of maturity. The carrying amount and fair value of PNMR’s financial
        instruments (including current maturities) are:
 
 **December
                  31, 2005**
              
              **December
                  31, 2004****Carrying**
              
              
              
              **Carrying****Amount**
              
              **Fair
                  Value**
              
              **Amount**
              
              **Fair
                  Value**(In
                  thousands)Long-term
                  debt
              
              $
              1,746,395
              
              $
              1,828,990
              
              $
              987,823
              
              $
              1,026,131Investment
                  in PVNGS lessors' notes
              
              $
              286,678
              
              $
              331,961
              
              $
              308,680
              
              $
              390,244
 
 PNMR’s
        available-for-sale securities consist solely of PNM assets held in trust
        for its
        share of decommissioning costs of PVNGS and PNM’s executive retirement program.
        The trusts hold equity and fixed income securities. These amounts are included
        in other investments on the Consolidated Balance Sheets. The carrying value,
        gross unrealized gains and losses and estimated fair value of investments
        in
        available-for-sale securities are as follows:
 
 **At
                  and For the Year Ended December 31, 2005****Unrealized
                  Gains**
              
              **Unrealized
                  Losses**
              
              **Fair
                  Value**Available-for-sale:Equity
                  securities
              
              $
              19,155
              
              $
              (459
              )
              $
              73,562Municipal
                  bonds
              
              
              932
              
              
              (58
              )
              
              24,621U.S.
                  Government securities
              
              
              163
              
              
              (76
              )
              
              6,786Corporate
                  bonds
              
              
              10
              
              
              (72
              )
              
              2,569Other
                  investments
              
              
              30
              
              
              (5
              )
              
              3,569$
              20,290
              
              $
              (670
              )
              $
              111,107
 
 
 
 
 B-71
 **PNM
                RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
                SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
                MEXICO POWER COMPANY**  **AND
                SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
                31, 2005, 2004 and 2003**
  **At
                  and For the Year Ended December 31, 2004****Unrealized
                  Gains**
              
              **Unrealized
                  Losses**
              
              **Fair
                  Value**Available-for-sale:Equity
                  securities
              
              $
              20,089
              
              $
              (186
              )
              $
              62,873Municipal
                  bonds
              
              
              1,220
              
              
              (52
              )
              
              24,103U.S.
                  Government securities
              
              
              226
              
              
              (18
              )
              
              6,592Corporate
                  bonds
              
              
              31
              
              
              (18
              )
              
              2,508Other
                  investments
              
              
              6
              
              
              (2
              )
              
              4,410$
              21,572
              
              $
              (276
              )
              $
              100,486
 
 At
        December 31, 2005, the available-for-sale securities held by PNMR had the
        following maturities:
 
 **Fair
                  Value**(In
                  thousands)Within
                  1 year
              
              $
              2,923After
                  1 year through 5 years
              
              
              4,938After
                  5 years through 10 years
              
              
              5,285Over
                  10 years
              
              
              20,830Equity
                  securities
              
              
              73,562Other
                  investments
              
              
              3,569$
              111,107
 
 The
        proceeds and gross realized gains and losses on the disposition of
        available-for-sale investments for PNMR and PNM are shown in the following
        table. Realized gains and losses are determined by specific identification
        of
        costs of securities sold.
 
 **Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003**(In
                  thousands)Proceeds
                  from sales
              
              $
              106,624
              
              $
              51,213
              
              $
              123,030Gross
                  realized gains
              
              $
              11,825
              
              $
              6,737
              
              $
              7,685Gross
                  realized losses
              
              $
              (3,176
              )
              $
              (4,068
              )
              $
              (5,694
              )
 
 During
        2005, PNMR determined that one of its investments, Wood River, had experienced
        a
        loss in market value. During the third quarter of 2005, PNMR wrote down the
        value of its investment in Wood River to zero and incurred a loss of
        approximately $3.6 million. In the fourth quarter of 2005, the assets held
        in
        the Wood River fund were transferred into receivership as part of a civil
        complaint filed by the SEC against Wood River. As noted above, prior to this,
        the investments in Wood River were classified and accounted for as trading
        securities. At December 31, 2005, due to the change in circumstances surrounding
        Wood River, PNMR’s investment was reclassified from trading to
        available-for-sale in accordance with SFAS No. 115, *“Accounting
        for Certain Investments in Debt and Equity Securities”* (“SFAS
        115”). The fair value of PNMR’s investment in Wood River was determined to be
        zero at December 31, 2005. PNMR cannot predict when or if it will receive
        a
        return of the cash value of its investment in Wood River.
 
 B-72
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 *First
        Choice Natural Gas Contracts*
 
 During
        July 2005, First Choice began entering into various gas contracts. These
        contracts are marked to market in accordance with GAAP. The change in
        mark-to-market valuation is recognized in earnings each period and is recorded
        in operating revenues if a sales position, and cost of energy if a purchase
        position, as applicable. For the year ended December 31, 2005, First Choice
        had
        a net settled gain of $0.7 million related to natural gas contracts. As of
        December 31, 2005, First Choice had a net mark-to-market liability loss of
        $2.8
        million recorded in other current liabilities for these contracts.
 
 *First
        Choice Energy Contracts*
 
 During
        July 2005, First Choice also began entering into various forward physical
        contracts for the purchase and sale of electricity with the intent of optimizing
        market opportunities. These contracts, which are derivatives, do not qualify
        for
        normal purchase and sale designation pursuant to GAAP, and are marked to
        market.
        For the year ended December 31, 2005, First Choice had a net settled gain
        of
        $88,879 related to these forward energy contracts. As of December 31, 2005,
        First Choice had a net mark-to-market asset gain of $4.1 million recorded
        in
        other current assets for these contracts.
 
 *First
        Choice Natural Gas Hedges*
 
 First
        Choice also enters into natural gas transactions to hedge the variable component
        of certain heat-rate based power products used to serve customer load. These
        products are priced based on gas to power conversion rates using the spot
        price
        for natural gas. The hedges are effective in offsetting future cash flow
        volatility caused by increases in natural gas prices. The fair value of the
        natural gas hedges as of December 31, 2005, was a liability of $0.5 million,
        which is recorded on PNMR’s Consolidated Balance Sheet as a current liability.
        There was no hedge ineffectiveness on these transactions because the hedges
        and
        the underlying contracts are both indexed to New York Mercantile Exchange
        rates
        and movement in the hedge offsets movement in the contract. For the year
        ended
        December 31, 2005, (after June 6, 2005) First Choice’s cost of energy includes
        gains of $6.0 million related to the settlement of natural gas hedges.
 
 PNM
 
 *Carrying
        Amount/Fair Value*
  The
        carrying amounts reflected on PNM’s Consolidated Balance Sheets approximate fair
        value for cash, temporary investments, receivables, and payables due to the
        short period of maturity. The carrying amount and fair value of PNM’s financial
        instruments (including current maturities) are:
 
 **December
                  31, 2005**
              
              **December
                  31, 2004****Carrying**
              
              
              
              **Carrying****Amount**
              
              **Fair
                  Value**
              
              **Amount**
              
              **Fair
                  Value**(In
                  thousands)Long-term
                  debt
              
              $
              987,068
              
              $
              1,052,736
              
              $
              987,676
              
              $
              1,025,983Investment
                  in PVNGS lessors' notes
              
              $
              286,678
              
              $
              331,961
              
              $
              308,680
              
              $
              390,244
  PNM’s
          investment in the EIP transmission line and related facilities includes
          a 60%
          ownership and a 10.25% note investment maturing in 2012. It is carried
          at cost on the Consolidated Balance Sheet in other investments. The balance
          as
          of December 31, 2005 and 2004 was $12.0 million and $12.2 million, respectively.
  B-73
 **PNM
                RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
                SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
                MEXICO POWER COMPANY**  **AND
                SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
                31, 2005, 2004 and 2003**
  *Retail
        Natural Gas Contracts*
 
 The
        NMPRC
        has authorized PNM to hedge certain portions of natural gas supply contracts
        to
        protect PNM’s natural gas customers from the risk of adverse price fluctuations
        in the natural gas market. Hedge gains and losses are recoverable through
        PNM’s
        PGAC if deemed prudently incurred by the NMPRC. As a result, earnings are
        not
        affected by gains or losses generated by these instruments.
 
 PNM
        purchased $6.8 million and $7.8 million of natural gas options during the
        year
        ended December 31, 2005 and 2004, respectively, to protect its natural gas
        customers from the risk of rising prices during the 2005-2006 and 2004-2005
        heating seasons. These gas options cap the amount PNM would pay for each
        volume
        of gas subject to the options during the winter heating season. At December
        31,
        2005 and 2004, PNM had $3.4 million and $3.1 million of unrecovered premium
        costs included in other current assets on its Consolidated Balance Sheet.
        Expense of $3.4 million and $4.7 million is included on PNM’s Consolidated
        Statement of Earnings for the year ended December 31, 2005 and 2004,
        respectively. PNM recovered $3.1 million of its option premiums as a component
        of the PGAC during January 2005 through February 2005.
 
 PNM
        entered into fixed-for-float financial transactions to hedge a portion of
        its
        winter gas purchase portfolio and has applied hedge accounting to these
        transactions. PNM has hedged 10.9 million MMBTUs utilizing the fixed-for-float
        strategy for 2005-2006 and the 2006-2007 winter heating seasons.
 
 *Wholesale
        Electricity Contracts*
 
 PNM
        Wholesale has entered into various forward physical contracts for the purchase
        and sale of electricity with the intent to optimize its net generation position.
        These contracts, which are derivatives, do not qualify for normal purchase
        and
        sale designation pursuant to GAAP, and are marked to market.
 
 For
        the
        year ended December 31, 2005, PNM Wholesale settled derivative forward contracts
        for the sale of electricity that generated $168.1 million of electric revenues
        by delivering 2.9 million MWh. For the year ended December 31, 2005, PNM
        Wholesale settled derivative forward contracts for the purchase of electricity
        of $168.2 million or 2.8 million MWh to support these contractual sales and
        other open market sales opportunities. For the year ended December 31, 2004,
        PNM
        Wholesale settled derivative forward contracts for the sale of electricity
        that
        generated $159.3 million of electric revenues by delivering 3.0 million MWh.
        PNM
        Wholesale settled derivative forward contracts for the purchase of electricity
        of $143.0 million or 2.8 million MWh to support these contractual sales and
        other open market sales opportunities.
 
 As
        of
        December 31, 2005, PNM Wholesale had open derivative forward contract positions
        to buy $52.6 million and to sell $72.4 million of electricity. At December
        31,
        2005, PNM Wholesale had a gross mark-to-market gain (asset position) on these
        derivative forward contracts of $17.1 million and a gross mark-to-market
        loss
        (liability position) of $16.7 million, recorded in other assets and liabilities,
        respectively. As of December 31, 2004, PNM Wholesale had open derivative
        forward
        contract positions to buy $35.2 million and to sell $39.2 million of
        electricity. At December 31, 2004, PNM Wholesale had a gross mark-to-market
        gain
        (asset position) on these derivative forward contracts of $6.5 million and
        a
        gross mark-to-market loss (liability position) of $5.3 million, recorded
        in
        other assets and liabilities, respectively. The change in mark-to-market
        valuation is recognized in earnings each period and is recorded in operating
        revenues if a sales position, and cost of energy if a purchase position,
        as
        applicable. There is no hedge ineffectiveness on these transactions because
        the
        hedged transactions and the hedged item are based on the same forward
        curve.
 
 PNM
        Wholesale also entered into forward physical contracts for the sale of PNM’s
        electric capacity in excess of its retail and wholesale firm requirement
        needs,
        including reserves. In addition, PNM Wholesale entered into forward physical
        contracts for the purchase of retail needs, including reserves, when resource
        shortfalls exist. PNM Wholesale generally accounts for these as normal sales
        and
        purchases as defined by SFAS 133. From time to time PNM Wholesale makes forward
        purchases to serve its retail needs when the cost of purchased power is less
        than the incremental cost of its generation. At December 31, 2005, PNM Wholesale
        had open forward positions classified as normal sales of electricity of $138.9
        million and normal purchases of electricity of $11.2 million, which will
        be
        reflected in the financial statements upon physical delivery.
 
 B-74
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 The
        operations of PNM Wholesale, including both firm commitments and other wholesale
        sale activities, are managed primarily through a net asset-backed strategy,
        whereby PNM Wholesale’s aggregate net open position is covered by its own excess
        generation capabilities. PNM Wholesale is exposed to market risk if its
        generation capabilities were disrupted or if its retail load requirements
        were
        greater than anticipated. If PNM Wholesale were required to cover all or
        a
        portion of its net open contract position, it would have to meet its commitments
        through market purchases.
 
 Counterparties
        to its financial and physical derivative instruments expose PNM Wholesale
        to
        credit risk in the event of non-performance or non-payment. PNM Wholesale
        uses a
        credit management process to assess and monitor the financial conditions
        of
        counterparties. PNM Wholesale's credit risk with its largest counterparty
        as of
        December 31, 2005 and December 31, 2004 was $20.5 million and $26.2 million,
        respectively.
 
 *Wholesale
        Gas Contracts*
 
 PNM
        Wholesale enters into various fixed-for-float price swaps to manage the price
        risk of certain forward sales of power. These contracts, along with the
        underlying power sales, are marked to market in accordance with GAAP.
 
 For
        the
        year ended December 31, 2005, PNM Wholesale settled derivative forward contracts
        for the sale of gas that generated $26.5 million of revenues and settled
        derivative forward contracts for the purchase of gas of $25.3 million. For
        the
        year ended December 31, 2004, PNM Wholesale settled derivative forward contracts
        for the sale of gas that generated $24.5 million of revenues and settled
        derivative forward contracts for the purchase of gas of $22.9 million.
 
 As
        of
        December 31, 2005, PNM Wholesale had open derivative forward contract positions
        to sell $26.7 million of natural gas and to purchase $1.9 million of natural
        gas. At December 31, 2005, PNM Wholesale had a gross mark-to-market gain
        (asset
        position) on these derivative forward contracts of $14.5 million and a gross
        mark-to-market loss (liability position) of $12.6 million, recorded in other
        current assets and liabilities, respectively. As of December 31, 2004, PNM
        Wholesale had open derivative forward contract positions to sell $13.3 million
        of gas. At December 31, 2004, PNM Wholesale had a gross mark-to-market gain
        (asset position) on these derivative forward contracts of $0.9 million and
        a
        gross mark-to-market loss (liability position) of $0.3 million, recorded
        in
        other assets and liabilities, respectively. The change in mark-to-market
        valuation is recognized in earnings each period and is recorded in operating
        revenues, if a sales position, and cost of energy, if a purchase position,
        as
        applicable. There is no hedge ineffectiveness on these transactions because
        the
        hedged transactions and the hedged item are based on the same forward
        curve.
 
 B-75
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 TNMP
 
 *Carrying
        Amount/Fair Value*
 
 The
        carrying amounts reflected on TNMP’s Consolidated Balance Sheets approximate
        fair value for cash, temporary investments, receivables, and payables due
        to the
        short period of maturity. The
        carrying value for these items reflects the fair value recorded at the date
        of
        acquisition, June 6, 2005, in accordance with SFAS 71. The
        carrying amount and fair value of TNMP’s financial instruments (including
        current maturities) are:
 
 **December
                  31, 2005**
              
              
              **December
                  31, 2004****Carrying**
              
              
              
              
              **Carrying****Amount**
              
              **Fair
                  Value**
              
              
              **Amount**
              
              **Fair
                  Value**(In
                  thousands)Long-term
                  debt
              
              $
              415,864
              
              $
              432,792
              
              
              $
              415,569
              
              $
              434,773
  *Normal
        Purchases and Sales*
 
 In
        the
        normal course of business, TNMP enters into commodity contracts, which include
        components for additional purchases or sales of electricity, in order to
        meet
        customer requirements. Criteria by which option-type and forward contracts
        for
        electricity can qualify for the normal purchase and sales exception has been
        defined by SFAS 133. In accordance with these GAAP pronouncements, management
        has determined that its contracts for electricity qualify for the normal
        purchases and sales exception. Accordingly, TNMP does not account for its
        electricity contracts as derivatives.
 
 **(9)** **Variable
        Interest Entities**
 
 FASB
        Interpretation No. 46, *“Consolidation
        of Variable Interest Entities”* (Revised
        December 2003) (“FIN 46R”), became effective January 1, 2004 for those entities
        considered to be special purpose entities, and March 31, 2004 for others.
        Under
        the model for consolidation promulgated by FIN 46R, a PPA may qualify as
        a
        variable interest if its terms expose the purchaser to variability in supply
        or
        operating costs and the contract is for a significant portion of the entity’s
        generating capacity. PNM evaluated its PPAs under the provisions of FIN 46R
        and
        determined that one purchase contract entered into prior to December 31,
        2003
        qualifies as a variable interest. Although PNM has continued to make ongoing
        efforts to obtain information, PNM was unable to obtain the necessary
        information needed to determine if PNM was the primary beneficiary and if
        consolidation was needed despite efforts including a formal written request
        to
        the operator of the entity supplying power under the PPA. The operator cited
        legal and competitive reasons for refusing to provide the information.
 
 This
        variable interest PPA is a contract under an operating lease to purchase
        132 MW
        of capacity and energy expiring in June 2020. See Note 7 and Note 16 for
        more
        information about the Delta operating lease. The contract contains a fixed
        capacity charge, a fixed O&M charge, and a variable energy charge that
        subjects PNM to the changes in the cost of fuel and O&M. For the year ended
        December 31, 2005, the capacity and O&M charge was $6.4 million and the
        energy charges were $1.1 million. For the year ended December 31, 2004, the
        capacity and O&M charge was $6.0 million and the energy charges were $0.9
        million. The contract is for the full output of a specific gas generating
        plant
        and is currently accounted for as an operating lease by PNM. Under this contract
        PNM is exposed to changes in the costs to produce energy and operate the
        plant.
 
 PNM
        also
        has interests in other variable interest entities created before January
        31,
        2003, for which PNM is not the primary beneficiary. These arrangements include
        PNM’s investment in a limited partnership and certain PNM leases. The aggregate
        maximum loss exposure at December 31, 2005 that PNM could be required to
        record
        in its Consolidated Statement of Earnings as a result of these arrangements
        totals approximately $5.3 million. The creditors of these variable interest
        entities do not have recourse to the general credit of PNMR in excess of
        the
        aggregate maximum loss exposure.
 
 B-76
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 **(10)** **Earnings
        Per Share**
 
 In
        accordance with SFAS No. 128, “ *Earnings
        per Share,”* dual
        presentation of basic and diluted earnings per share has been presented in
        the
        Consolidated Statements of Earnings. Prior years' share amounts have been
        adjusted to reflect the effects of 2004 stock split. The following
        reconciliation illustrates the impact on the share amounts of potential common
        shares and the earnings per share amounts:
 
 **Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003**(In
                  thousands, except per share amounts)**Basic:**Net
                  Earnings Before Cumulative Effect of Changes in
              
              $
              68,153
              
              $
              87,686
              
              $
              58,552Accounting
                  PrincipleCumulative
                  Effect of Changes in Accounting Principle,net
                  of tax of $592 and $23,999
              
              
              (926
              )
              
              -
              
              
              36,621**Net
                  Earnings**
              
              $
              67,227
              
              $
              87,686
              
              $
              95,173Average
                  Number of Common Shares Outstanding
              
              
              65,928
              
              
              60,414
              
              
              59,620**Net
                  Earnings per Share of Common Stock (Basic)**
              
              $
              1.02
              
              $
              1.45
              
              $
              1.60Earnings
                  Before Cumulative Effect of Changes inAccounting
                  Principles
              
              
              1.03
              
              
              1.45
              
              
              0.99Cumulative
                  Effect of Changes in Accounting Principles, net of tax
              
              
              (0.01
              )
              
              -
              
              
              0.61**Net
                  Earnings per Share of Common Stock (Basic)**
              
              $
              1.02
              
              $
              1.45
              
              $
              1.60**Diluted:**Net
                  Earnings Before Cumulative Effect of Changes inAccounting
                  Principle
              
              $
              68,153
              
              $
              87,686
              
              $
              58,552Cumulative
                  Effect of Changes in Accounting Principle,net
                  of tax of $592 and $23,999
              
              
              (926
              )
              
              -
              
              
              36,621**Net
                  Earnings**
              
              $
              67,227
              
              $
              87,686
              
              $
              95,173Average
                  Number of Common Shares Outstanding
              
              
              65,928
              
              
              60,414
              
              
              59,620Diluted
                  Effect of Common Stock Equivalents (a)
              
              
              1,152
              
              
              926
              
              
              585Average
                  Common and Common Equivalent Shares Outstanding
              
              
              67,080
              
              
              61,340
              
              
              60,205**Net
                  Earnings per Share of Common Stock (Diluted)**
              
              $
              1.00
              
              $
              1.43
              
              $
              1.58Earnings
                  Before Cumulative Effect of Changes inAccounting
                  Principles
              
              
              1.01
              
              
              1.43
              
              
              0.97Cumulative
                  Effect of Changes in Accounting Principles, net of tax
              
              
              (0.01
              )
              
              -
              
              
              0.61**Net
                  Earnings per Share of Common Stock (Diluted)**
              
              $
              1.00
              
              $
              1.43
              
              $
              1.58
 
 (a)
              Excludes
                  the effect of average anti-dilutive common stock equivalents related
                  to
                  out of-the-money options of 433,957 shares, 5,883 shares and 871,493
                  shares for the years ended December 31, 2005, 2004 and 2003, respectively.
 
 B-77
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 **(11)** **Income
        Taxes**
 
 PNMR
 
 PNMR’s
        income taxes before cumulative effect of changes in accounting principles
        consist of the following components:
 
 **Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003**(In
                  thousands)Current
                  federal income tax
              
              $
              4,390
              
              $
              10,634
              
              $
              (27,621
              )Current
                  state income tax
              
              
              81
              
              
              2,495
              
              
              (6,169
              )Deferred
                  federal income tax
              
              
              28,070
              
              
              31,725
              
              
              52,154Deferred
                  state income tax
              
              
              3,872
              
              
              7,495
              
              
              12,646Amortization
                  of accumulated investment tax credits
              
              
              (3,552
              )
              
              (3,102
              )
              
              (3,121
              )Total
                  income taxes
              
              $
              32,861
              
              $
              49,247
              
              $
              27,889Charged
                  to operating expenses
              
              $
              19,450
              
              $
              36,062
              
              $
              28,072Charged
                  to other income and deductions
              
              
              13,411
              
              
              13,185
              
              
              (183
              )Total
                  income taxes
              
              $
              32,861
              
              $
              49,247
              
              $
              27,889
 
 PNMR’s
        provision for income taxes, before cumulative effect of changes in accounting
        principles, differed from the federal income tax computed at the statutory
        rate
        for each of the years shown. The differences are attributable to the following
        factors:
 
 **Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003**(In
                  thousands)Federal
                  income tax at statutory rates
              
              $
              36,362
              
              $
              48,127
              
              $
              30,459Investment
                  tax credits
              
              
              (3,552
              )
              
              (3,102
              )
              
              (3,121
              )Flow-through
                  of depreciation items
              
              
              1,903
              
              
              2,091
              
              
              2,033Gains
                  on the sale and leaseback of PVNGS Units 1 and 2
              
              
              (527
              )
              
              (527
              )
              
              (527
              )Annual
                  reversal of deferred income taxes accrued at prior tax
                  rates
              
              
              (2,086
              )
              
              (1,963
              )
              
              (1,963
              )Research
                  and development credit
              
              
              -
              
              
              -
              
              
              (966
              )Affordable
                  housing credit
              
              
              (750
              )
              
              (789
              )
              
              (969
              )Allowance
                  for funds used during construction
              
              
              (623
              )
              
              (453
              )
              
              (906
              )Charitable
                  contribution of appreciated property
              
              
              -
              
              
              (960
              )
              
              -State
                  income tax
              
              
              3,356
              
              
              6,357
              
              
              4,161Other
              
              
              (1,222
              )
              
              466
              
              
              (312
              )Total
                  income taxes
              
              $
              32,861
              
              $
              49,247
              
              $
              27,889Effective
                  tax rate
              
              
              31.63
              %
              
              35.81
              %
              
              32.05
              %
 
 
 B-78
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 The
        components of PNMR’s net accumulated deferred income tax liability were:
 
 **December
                  31,****2005**
              
              **2004**(In
                  thousands)Deferred
                  Tax Assets:Nuclear
                  decommissioning costs
              
              $
              27,610
              
              $
              31,632Regulatory
                  liabilities related to income taxes
              
              
              38,331
              
              
              31,805Minimum
                  pension liability
              
              
              72,443
              
              
              64,139Other
              
              
              58,863
              
              
              43,526Total
                  deferred tax assets
              
              
              197,247
              
              
              171,102Deferred
                  Tax Liabilities:Depreciation
              
              
              (346,693
              )
              
              (263,542
              )Investment
                  tax credit
              
              
              (33,806
              )
              
              (35,360
              )Regulatory
                  assets related to income taxes
              
              
              (86,931
              )
              
              (70,256
              )Asset
                  retirement obligations
              
              
              (16,213
              )
              
              (24,524
              )Deferred
                  charges
              
              
              (10,745
              )
              
              -Other
                  intangibles
              
              
              (26,861
              )
              
              -Recoverable
                  stranded costs
              
              
              (46,585
              )
              
              -Other
              
              
              (114,482
              )
              
              (97,308
              )Total
                  deferred tax liabilities
              
              
              (682,316
              )
              
              (490,990
              )Net
                  Accumulated deferred income tax liabilities
              
              $
              (485,069
              )
              $
              (319,888
              )
 
 The
        following table reconciles the change in PNMR’s net accumulated deferred income
        tax liability to the deferred income tax expense included in the Consolidated
        Statement of Earnings:
 
 **Year
                  Ended****December
                  31, 2005**(In
                  thousands)Net
                  change in deferred income tax liability per above table
              
              $
              165,181Inclusion
                  of TNP deferred tax liabilities
              
              
              (124,947
              )Change
                  in tax effects of income tax related regulatory assets and
                  liabilities
              
              
              (7,725
              )Tax
                  effect of mark-to-market on investments available for sale
              
              
              (6,999
              )Tax
                  effect of excess pension liability
              
              
              8,304Tax
                  effect of cumulative effect of change in accounting
                  principle
              
              
              591Other
              
              
              (6,015
              )Deferred
                  income tax expense
              
              $
              28,390
 
 The
        Company defers investment tax credits related to rate regulated assets and
        amortizes them over the estimated useful lives of those assets.
 
 PNMR’s
        tax years 2001 through 2004 and TNP’s tax years 2002 and 2003 are currently
        under examination by the IRS. Although the Company does not expect any
        significant adjustments to the tax provision as a result of the IRS examination,
        management is unable to determine the final outcome of the IRS examination
        at
        this time.
 
  
 B-79
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 PNM
 
 PNM’s
        income taxes before cumulative effect of changes in accounting principles
        consist of the following components:
 
 **Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003**(In
                  thousands)Current
                  federal income tax
              
              $
              10,070
              
              $
              15,057
              
              $
              (19,824
              )Current
                  state income tax
              
              
              2,289
              
              
              3,327
              
              
              (4,123
              )Deferred
                  federal income tax
              
              
              12,792
              
              
              30,252
              
              
              46,761Deferred
                  state income tax
              
              
              3,237
              
              
              7,163
              
              
              10,897Amortization
                  of accumulated investment tax credits
              
              
              (3,094
              )
              
              (3,102
              )
              
              (3,121
              )Total
                  income taxes
              
              $
              25,294
              
              $
              52,697
              
              $
              30,590Charged
                  to operating expenses
              
              
              8,217
              
              
              37,964
              
              
              28,262Charged
                  to other income and deductions
              
              
              17,077
              
              
              14,733
              
              
              2,328Total
                  income taxes
              
              $
              25,294
              
              $
              52,697
              
              $
              30,590
 
 PNM’s
        provision for income taxes, before cumulative effect of changes in accounting
        principles, differed from the federal income tax computed at the statutory
        rate
        for each of the years shown. The differences are attributable to the following
        factors:
 
 **Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003**(In
                  thousands)Federal
                  income tax at statutory rates
              
              $
              27,445
              
              $
              50,797
              
              $
              31,699Investment
                  tax credits
              
              
              (3,094
              )
              
              (3,102
              )
              
              (3,121
              )Flow-through
                  of depreciation items
              
              
              1,903
              
              
              2,091
              
              
              2,033Gains
                  on the sale and leaseback of PVNGS Units 1 and 2
              
              
              (527
              )
              
              (527
              )
              
              (527
              )Annual
                  reversal of deferred income taxes accrued at prior tax
                  rates
              
              
              (1,963
              )
              
              (1,963
              )
              
              (1,963
              )Research
                  and development credit
              
              
              -
              
              
              -
              
              
              (966
              )Allowance
                  for funds used during construction
              
              
              (615
              )
              
              (430
              )
              
              (893
              )Charitable
                  contribution of appreciated property
              
              
              -
              
              
              (960
              )
              
              -State
                  income tax
              
              
              3,694
              
              
              6,682
              
              
              4,300Other
              
              
              (1,549
              )
              
              109
              
              
              28Total
                  income taxes
              
              $
              25,294
              
              $
              52,697
              
              $
              30,590Effective
                  tax rate
              
              
              32.26
              %
              
              36.31
              %
              
              33.78
              %
 
 
 B-80
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 The
        components of PNM’s net accumulated deferred income tax liability were:
 
 **December
                  31,****2005**
              
              **2004**(In
                  thousands)Deferred
                  Tax Assets:Nuclear
                  decommissioning costs
              
              $
              27,610
              
              $
              31,632Regulatory
                  liabilities related to income taxes
              
              
              28,351
              
              
              31,805Minimum
                  pension liability
              
              
              72,443
              
              
              64,139Other
              
              
              40,105
              
              
              47,252Total
                  deferred tax assets
              
              
              168,509
              
              
              174,828Deferred
                  Tax Liabilities:Depreciation
              
              
              (264,437
              )
              
              (262,039
              )Investment
                  tax credit
              
              
              (32,266
              )
              
              (35,360
              )Regulatory
                  assets related to income taxes
              
              
              (74,231
              )
              
              (70,256
              )Asset
                  retirement obligations
              
              
              (16,222
              )
              
              (24,524
              )Other
              
              
              (114,371
              )
              
              (96,916
              )Total
                  deferred tax liabilities
              
              
              (501,527
              )
              
              (489,095
              )Net
                  Accumulated deferred income tax liabilities
              
              $
              (333,018
              )
              $
              (314,267
              )
 
 The
        following table reconciles the change in PNM’s net accumulated deferred income
        tax liability to the deferred income tax expense included in the Consolidated
        Statement of Earnings:
 
 **Year
                  Ended****December
                  31, 2005**(In
                  thousands)Net
                  change in deferred income tax liability per above table
              
              $
              18,751Change
                  in tax effects of income tax related regulatory assets and
                  liabilities
              
              
              (7,429
              )Tax
                  effect of mark-to-market on investments available for sale
              
              
              (6,999
              )Tax
                  effect of excess pension liability
              
              
              8,304Tax
                  effect of cumulative effect of change in accounting
                  principle
              
              
              331Other
              
              
              (23
              )Deferred
                  income tax expense
              
              $
              12,935
 
 
 
 
 B-81
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 TNMP
 
 TNMP’s
        income taxes before extraordinary item and cumulative effect of change in
        accounting principle consist of the following components:
 
 **Post-**
              
              
              **Pre-**
              
              **Pre-**
              
              **Pre-****Acquisition**
              
              
              **Acquisition**
              
              **Acquisition**
              
              **Acquisition****June
                  6-**
              
              
              **January
                  1-**
              
              **Year
                  Ended**
              
              **Year
                  Ended****December
                  31,**
              
              
              **June
                  6,**
              
              **December
                  31,**
              
              **December
                  31,****2005**
              
              
              **2005**
              
              **2004**
              
              **2003**(In
                  thousands)Current
                  federal income tax
              
              $
              958
              
              
              $
              5,634
              
              $
              6,364
              
              $
              13,619Current
                  state income tax
              
              
              (60
              )
              
              
              676
              
              
              3,048
              
              
              1,354Deferred
                  federal income tax
              
              
              8,328
              
              
              
              (954
              )
              
              15,049
              
              
              (388
              )Deferred
                  state income tax
              
              
              1,268
              
              
              
              (127
              )
              
              2,652
              
              
              (6
              )Amortization
                  of accumulated investmenttax
                  credits
              
              
              (458
              )
              
              
              (328
              )
              
              (722
              )
              
              (874
              )Total
                  income taxes
              
              $
              10,036
              
              
              $
              4,901
              
              $
              26,391
              
              $
              13,705Charged
                  to operating expenses
              
              $
              7,965
              
              
              $
              5,055
              
              $
              13,680
              
              $
              13,044Charged
                  to other income and deductions
              
              
              2,071
              
              
              
              (154
              )
              
              12,711
              
              
              661Total
                  income taxes
              
              $
              10,036
              
              
              $
              4,901
              
              $
              26,391
              
              $
              13,705
 
 TNMP’s
        provision for income taxes, before extraordinary item and cumulative effect
        of
        change in accounting principle, differed from the federal income tax computed
        at
        the statutory rate for each of the periods shown. The differences are
        attributable to the following factors:
 
 **Post-**
              
              
              **Pre-**
              
              **Pre-**
              
              **Pre-****Acquisition**
              
              
              **Acquisition**
              
              **Acquisition**
              
              **Acquisition****June
                  6-**
              
              
              **January
                  1-**
              
              **Year
                  Ended**
              
              **Year
                  Ended****December
                  31,**
              
              
              **June
                  6,**
              
              **December
                  31,**
              
              **December
                  31,****2005**
              
              
              **2005**
              
              **2004**
              
              **2003**(In
                  thousands)Federal
                  income tax at statutory rates
              
              $
              9,753
              
              
              $
              4,956
              
              $
              24,342
              
              $
              13,451Investment
                  tax credits
              
              
              (458
              )
              
              
              (328
              )
              
              (722
              )
              
              (874
              )Annual
                  reversal of deferred income taxes accruedat
                  prior tax rates
              
              
              (123
              )
              
              
              (93
              )
              
              (216
              )
              
              (198
              )State
                  income tax
              
              
              1,208
              
              
              
              549
              
              
              3,048
              
              
              1,354Other
              
              
              (344
              )
              
              
              (183
              )
              
              (61
              )
              
              (28
              )Total
                  income taxes
              
              $
              10,036
              
              
              $
              4,901
              
              $
              26,391
              
              $
              13,705Effective
                  tax rate
              
              
              36.01
              %
              
              
              34.61
              %
              
              36.14
              %
              
              35.15
              %
 
 
 B-82
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 The
        components of TNMP’s net accumulated deferred income tax liability at December
        31 were:
 
 **December
                  31,****2005**
              
              
              **2004**(In
                  thousands)Deferred
                  Tax Assets:Regulatory
                  liabilities related to income taxes
              
              $
              9,980
              
              
              $
              10,602Other
              
              
              2,753
              
              
              
              2,658Total
                  deferred tax assets
              
              
              12,733
              
              
              
              13,260Deferred
                  Tax Liabilities:Utility
                  plant, principally due to depreciation and basisdifferences,
                  including TNP One recoverable stranded cost
              
              
              (82,108
              )
              
              
              (86,606
              )Deferred
                  charges
              
              
              (10,745
              )
              
              
              (5,232
              )Investment
                  tax credit
              
              
              (1,540
              )
              
              
              (2,326
              )Other
                  recoverable stranded costs (non-current)
              
              
              (46,585
              )
              
              
              (46,585
              )Regulatory
                  assets related to income taxes
              
              
              (12,700
              )
              
              
              (13,086
              )Total
                  deferred tax liabilities
              
              
              (153,678
              )
              
              
              (153,835
              )Net
                  Accumulated deferred income tax liabilities
              
              $
              (140,945
              )
              
              $
              (140,575
              )
 
 The
        following table reconciles the change in TNMP’s net accumulated deferred income
        tax liability to the deferred income tax expense included in the Consolidated
        Statement of Earnings:
 
 **Post-**
              
              
              **Pre-****Acquisition**
              
              
              **Acquisition****June
                  6-**
              
              
              **January
                  1-****December
                  31,**
              
              
              **June
                  6,****2005**
              
              
              **2005**(In
                  thousands)Net
                  change in deferred income tax liability per above table
              
              $
              1,636
              
              
              $
              (1,266
              )Change
                  in tax effects of income tax related regulatory assetsand
                  liabilities
              
              
              (296
              )
              
              
              60Other
              
              
              7,798
              
              
              
              (203
              )Deferred
                  income tax expense
              
              $
              9,138
              
              
              $
              (1,409
              )
 
 **(12)** **Pension
        and Other Postretirement Benefits**
 
 PNMR
        and
        its subsidiaries maintain a qualified defined benefit pension plan, a plan
        providing medical and dental benefits to eligible retirees, and an executive
        retirement program (“PNM Plans”). PNMR maintains the legal obligation for the
        benefits owed to participants under these plans. TNMP also maintains a qualified
        defined benefit pension plan covering substantially all of its employees,
        a plan
        providing medical and death benefits to eligible retirees and an executive
        retirement program (“TNMP Plans”).
 
 Participants
        in the PNM Plans include eligible employees and retirees of PNMR and other
        subsidiaries of PNMR. Participants in the TNMP Plans include eligible employees
        and retirees of TNMP, First Choice and other subsidiaries of TNP. The PNM
        pension plan was frozen at the end of 1997 with regard to new participants,
        salary levels and benefits. Additional credited service can be accrued under
        the
        PNM pension plan up to a limit determined by age and service. The TNMP pension
        plan was frozen at December 31, 2005 with regard to new participants, salary
        levels and benefits.
 
 B-83
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
  The
          total
          net periodic benefit cost or income from the PNM Plans, in addition to
          the net
          periodic benefit cost from the TNMP Plans from the date of PNMR’s acquisition of
          TNP, or June 6, 2005 through December 31, 2005, is included in the Consolidated
          Statement of Earnings of PNMR. The TNMP Plan amounts included in the results
          of
          PNMR are as follows: pension plan income of approximately $0.3 million,
          other
          postretirement benefit expense of approximately $0.4 million and executive
          retirement plan expense of less than $0.1 million.
 
 The
        Company has in place, for the PNM and TNMP pension plans and postretirement
        benefits plans, a policy that defines the investment objectives, establishes
        performance goals of the asset managers and provides procedures for the manner
        in which investments are to be reviewed. The plans implement investment
        strategies to achieve the following objectives:
 
 ·
              Maximize
                  the return on assets, commensurate with the risk that the Corporate
                  Investment Committee deem appropriate to: meet the obligations
                  of the
                  pension plans and other postretirement benefits plans; minimize
                  the
                  volatility of expense; and account for contingencies;
                  and
 
 ·
              Generate
                  a rate of return for the total portfolio that equals or exceeds
                  the
                  actuarial investment rate
                  assumption.
 Management
          is responsible for the determination of the asset target mix and the expected
          rate of return. Under SFAS No. 87, *“Employers'
          Accounting for Pensions”* (“SFAS
          87”) and SFAS No. 106, “ *Employers'
          Accounting for Postretirement Benefits Other Than Pensions”* (“SFAS
          106”), the expected long-term rate of return on pension and postretirement
          plan
          assets is calculated on the market-related value of assets. SFAS 87 and
          SFAS 106
          require that actual gains and losses on pension and postretirement plan
          assets
          be recognized in the market-related value of assets equally over a period
          of not
          more than five years, which reduces year-to-year volatility. For the PNM
          Plans
          and TNMP Plans, the market-related value of assets is equal to the prior
          years’
market related value of assets adjusted for contributions, benefit payments
          and
          investment gains and losses that lie within a corridor of plus or minus
          4.0%
          around the expected return on market value. Gains and losses that lie outside
          the corridor are amortized over five years, i.e., if investment return
          is
          outside a range of 5.0% to 13.0% (expected long-term rate of return plus
          or
          minus 4.0%), this market-related valuation recognizes the portion of return
          that
          is outside the range over a five-year period from the year in which the
          return
          occurs. As such, the future value of assets will be impacted as previously
          deferred returns are recorded. A December 31 measurement date is used for
          calculating the values reported for plan assets and benefit
          obligations.
  In
          2003,
          PNM changed the actuarial valuation measurement date for its pension plan
          and
          other postretirement benefits from September 30 to December 31 to better
          reflect
          the actual pension balances as of PNM’s balance sheet dates and recognized a
          cumulative effect of a change in accounting principle of $0.8 million,
          net of
          taxes at $0.5 million.
 
 *Pension
        Plans*
 For
          defined benefit pension plans, the benefit obligation is the “projected benefit
          obligation,” the actuarial present value, as of the measurement date, of all
          benefits attributed by the pension benefit formula to employee service
          rendered
          to that date.
 
 B-84
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 The
        following tables present a reconciliation of the beginning and ending balances
        of the projected benefit obligation and show the change in the benefit
        obligation:
 
 **PNM
                  Plan****Year
                  Ended December 31,****2005**
              
              **2004**(In
                  thousands)Benefit
                  obligation at beginning of year
              
              $
              517,225
              
              $
              463,794Service
                  cost
              
              
              1,907
              
              
              3,524Interest
                  cost
              
              
              30,267
              
              
              29,891Actuarial
                  loss
              
              
              26,453
              
              
              44,691Benefits
                  paid
              
              
              (25,927
              )
              
              (24,675
              )Benefit
                  obligation at end of year
              
              $
              549,925
              
              $
              517,225
 
 **TNMP
                  Plan****Post-**
              
              
              **Pre-**
              
              **Pre-****Acquisition**
              
              
              **Acquisition**
              
              **Acquisition****June
                  6-**
              
              
              **January
                  1-**
              
              **Year
                  Ended****December
                  31,**
              
              
              **June
                  6,**
              
              **December
                  31,****2005**
              
              
              **2005**
              
              **2004**(In
                  thousands)Benefit
                  obligation at beginning of period
              
              $
              85,083
              
              
              $
              81,290
              
              $
              81,833Service
                  cost
              
              
              1,353
              
              
              
              848
              
              
              1,876Interest
                  cost
              
              
              2,499
              
              
              
              1,875
              
              
              4,590Actuarial
                  loss
              
              
              (2,691
              )
              
              
              3,708
              
              
              304Benefits
                  paid
              
              
              (4,501
              )
              
              
              (2,638
              )
              
              (7,313
              )Amendments
              
              
              (2,419
              )
              
              
              -
              
              
              -Benefit
                  obligation at end of period
              
              $
              79,324
              
              
              $
              85,083
              
              $
              81,290
 
 
 B-85
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 The
        following tables present the change in the value of pension plan assets and
        the
        pension plans’ funded status:
 
 **PNM
                  Plan****Year
                  Ended December 31,****2005**
              
              **2004**(In
                  thousands)Fair
                  value of plan assets at beginning of year
              
              $
              445,101
              
              $
              425,654Actual
                  return on plan assets
              
              
              40,911
              
              
              44,122Benefits
                  paid
              
              
              (25,927
              )
              
              (24,675
              )Fair
                  value of plan assets at end of year
              
              
              460,085
              
              
              445,101Funded
                  status
              
              
              (89,840
              )
              
              (72,124
              )Unrecognized
                  net actuarial loss
              
              
              178,991
              
              
              156,850Unrecognized
                  prior service cost
              
              
              2,293
              
              
              2,610Prepaid
                  pension cost
              
              $
              91,444
              
              $
              87,336
 
 **TNMP
                  Plan****Post-**
              
              
              **Pre-**
              
              **Pre-****Acquisition**
              
              
              **Acquisition**
              
              **Acquisition****June
                  6-**
              
              
              **January
                  1-**
              
              **Year
                  Ended****December
                  31,**
              
              
              **June
                  6,**
              
              **December
                  31,****2005**
              
              
              **2005**
              
              **2004**(In
                  thousands)Fair
                  value of plan assets at beginning of period
              
              $
              80,176
              
              
              $
              82,364
              
              $
              85,052Actual
                  return on plan assets
              
              
              6,162
              
              
              
              450
              
              
              4,625Benefits
                  paid
              
              
              (4,501
              )
              
              
              (2,638
              )
              
              (7,313
              )Fair
                  value of plan assets at end of period
              
              
              81,837
              
              
              
              80,176
              
              
              82,364Funded
                  status
              
              
              2,513
              
              
              
              (4,907
              )
              
              1,074Unrecognized
                  net actuarial loss
              
              
              (4,697
              )
              
              
              4,284
              
              
              (1,361
              )Unrecognized
                  prior service cost
              
              
              -
              
              
              
              (791
              )
              
              (840
              )Accrued
                  pension liability
              
              $
              (2,184
              )
              
              $
              (1,414
              )
              $
              (1,127
              )
 
 The
        following table presents the amounts recognized in the Consolidated Balance
        Sheets:
 
 **PNM
                  Plan**
              
              **TNMP
                  Plan****December
                  31,**
              
              **December
                  31,****2005**
              
              **2004**
              
              **2005**
              
              
              **2004**(In
                  thousands)Prepaid
                  pension cost/(Accrued pension liability)
              
              $
              91,444
              
              $
              87,336
              
              $
              (2,184
              )
              
              $
              (1,127
              )Additional
                  minimum pension liability
              
              
              (181,284
              )
              
              (159,460
              )
              
              -
              
              
              
              -Intangible
                  asset
              
              
              2,293
              
              
              2,610
              
              
              -
              
              
              
              -Deferred
                  tax asset
              
              
              70,863
              
              
              62,096
              
              
              -
              
              
              
              -Additional
                  minimum pension liability adjustment *
              
              
              108,128
              
              
              94,754
              
              
              -
              
              
              
              -Net
                  amount recognized
              
              $
              91,444
              
              $
              87,336
              
              $
              (2,184
              )
              
              $
              (1,127
              )
  *
          Included in accumulated other comprehensive income (loss).
 
 B-86
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 The
        following table presents the components of PNM net pension cost/(income)
        recognized in the Consolidated Statements of Earnings:
 
 **PNM
                  Plan**
              
              **Pension
                  Benefits****Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003**(In
                  thousands)Service
                  cost
              
              $
              1,907
              
              $
              3,524
              
              $
              5,189Interest
                  cost
              
              
              30,267
              
              
              29,891
              
              
              28,089Expected
                  long-term rate of return on plan assets
              
              
              (40,168
              )
              
              (39,037
              )
              
              (35,109
              )Amortization
                  of net loss
              
              
              3,569
              
              
              3,956
              
              
              3,910Amortization
                  of prior service cost
              
              
              317
              
              
              317
              
              
              317Net
                  pension cost/(income)
              
              $
              (4,108
              )
              $
              (1,349
              )
              $
              2,396
 
 The
        following significant weighted-average assumptions were used to determine
        the
        PNM projected benefit obligation and net pension cost/(income):
 
 **PNM
                  Plan****2005**
              
              **2004**
              
              **2003**Discount
                  rate for determining projected benefit obligationat
                  December 31
              
              
              5.75
              %
              
              6.00
              %
              
              6.50
              %Discount
                  rate for determining net pension cost/(income)
              
              
              6.00
              %
              
              6.50
              %
              
              6.75
              %Expected
                  long-term rate of return on plan assets
              
              
              9.00
              %
              
              9.00
              %
              
              9.00
              %Rate
                  of compensation increase
              
              
              N/A
              
              
              N/A
              
              
              N/A
 
 The
        assumed discount rate for determining the projected benefit obligation of
        5.75%
        at December 31, 2005 was determined based on a review of long-term high-grade
        bonds and management’s expectations. The discount rate was reduced at December
        31, 2005 and 2004 by 0.25% and 0.50% respectively, resulting in an increase
        in
        the PNM pension benefit obligation of approximately $16.5 million and $31.0
        million at December 31, 2005 and 2004. Should actual experience differ from
        actuarial assumptions, the projected benefit obligation and net pension
        cost/(income) would be affected.
 
 The
        expected long-term rate of return on plan assets of 9.0% at December 31,
        2005
        reflects the average rate of earnings expected on the funds invested, or
        to be
        invested, to provide for the benefits included in the PNM projected benefit
        obligations. Factors that are considered include, but are not limited to,
        historic returns on plan assets, current market information on long-term
        returns
        (e.g., long-term bond rates) and current and target asset allocations between
        asset categories. The target asset allocation is determined based on
        consultations with external investment advisors. The expected long-term rate
        of
        return assumption for the PNM pension plan compares to the actual return
        of 9.7%
        for the year ended December 31, 2005. If all other factors were to remain
        unchanged, it is expected that a 1% decrease in the expected long-term rate
        of
        return would cause PNM’s 2006 net pension income to decrease approximately $4.5
        million (analogous change would result from a 1% increase).
 
 B-87
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 The
        following table presents the components of TNMP net pension cost/(income)
        recognized in the Consolidated Statements of Earnings:
 
 **TNMP
                  Plan**
              
              **Pension
                  Benefits****Post-**
              
              
              **Pre-**
              
              **Pre-**
              
              **Pre-****Acquisition**
              
              
              **Acquisition**
              
              **Acquisition**
              
              **Acquisition****June
                  6-**
              
              
              **January
                  1-**
              
              **Year
                  Ended**
              
              **Year
                  Ended****December
                  31,**
              
              
              **June
                  6,**
              
              **December
                  31,**
              
              **December
                  31,****2005**
              
              
              **2005**
              
              **2004**
              
              **2003**(In
                  thousands)Service
                  cost
              
              $
              1,353
              
              
              $
              848
              
              $
              1,876
              
              $
              1,784Interest
                  cost
              
              
              2,499
              
              
              
              1,875
              
              
              4,590
              
              
              4,897Expected
                  long-term rate of return on plan assets
              
              
              (4,155
              )
              
              
              (2,387
              )
              
              (6,040
              )
              
              (6,960
              )Amortization
                  of prior service cost
              
              
              -
              
              
              
              (49
              )
              
              (116
              )
              
              (116
              )Net
                  pension benefit cost/(income)
              
              $
              (303
              )
              
              $
              287
              
              $
              310
              
              $
              (395
              )
 
 The
        following significant weighted-average assumptions were used to determine
        the
        TNMP projected benefit obligation and net pension cost/(income):
 
 **TNMP
                  Plan****Post-**
              
              
              **Pre-**
              
              **Pre-**
              
              **Pre-****Acquisition**
              
              
              **Acquisition**
              
              **Acquisition**
              
              **Acquisition****June
                  6-**
              
              
              **January
                  1-**
              
              **Year
                  Ended**
              
              **Year
                  Ended****December
                  31,**
              
              
              **June
                  6,**
              
              **December
                  31,**
              
              **December
                  31,****2005**
              
              
              **2005**
              
              **2004**
              
              **2003**(In
                  thousands)Discount
                  rate for determining projected benefitobligation at the end of the period
              
              
              5.75
              %
              
              
              5.25
              %
              
              5.75
              %
              
              6.00
              %Discount
                  rate for determining net pensioncost/(income)
              
              
              5.25
              %
              
              
              5.75
              %
              
              6.00
              %
              
              6.50
              %Expected
                  long-term rate of return on plan assets
              
              
              9.00
              %
              
              
              7.80
              %
              
              7.80
              %
              
              8.50
              %Rate
                  of compensation increase
              
              
              3.50
              %
              
              
              3.50
              %
              
              3.50
              %
              
              3.50
              %
 
 The
        assumed discount rate for determining the projected benefit obligation of
        5.75%
        at December 31, 2005 was determined based on a review of long-term high-grade
        bonds and management’s expectations. The discount rate was increased by 0.50% at
        December 31, 2005 over June 6, 2005, resulting in a decrease in the TNMP
        pension
        benefit obligation of approximately $3.3 million at December 31, 2005. The
        discount rate was reduced at December 31 2004 by 0.25%, resulting in an increase
        in the TNMP pension benefit obligation of approximately $1.7 million at December
        31, 2004. Should actual experience differ from actuarial assumptions, the
        projected benefit obligation and net pension cost/(income) would be
        affected.
 
 The
        expected long-term rate of return on plan assets of 9.0% at December 31,
        2005
        reflects the average rate of earnings expected on the funds invested, or
        to be
        invested, to provide for the benefits included in the TNMP projected benefit
        obligations. Factors that are considered include, but are not limited to,
        historic returns on plan assets, current market information on long-term
        returns
        (e.g., long-term bond rates) and current and target asset allocations between
        asset categories. The target asset allocation is determined based on
        consultations with external investment advisors. The expected long-term rate
        of
        return assumption for the TNMP pension plan compares to the actual return
        of
        8.4% for the year ended December 31, 2005. If all other factors were to remain
        unchanged, it is expected that a 1% decrease in the expected long-term rate
        of
        return would cause TNMP’s 2006 net pension income to decrease approximately $0.8
        million (analogous change would result from a 1% increase).
 
 B-88
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 At
        December 31, 2005 and 2004, the projected and accumulated benefit obligation
        for
        the PNM pension plan are the same, as the PNM pension plan was frozen in
        1997,
        as discussed above. At December 31, 2005, the projected and accumulated benefit
        obligation for the TNMP pension plan are the same, as the TNMP pension plan
        was
        frozen in 2005. The following sets forth the pension plans’ projected and
        accumulated benefit obligation and the fair value of plan assets at the pension
        plans’ measurement date:
 
 **PNM
                  Plan**
              
              **TNMP
                  Plan****December
                  31,**
              
              **December
                  31,****2005**
              
              **2004**
              
              **2005**
              
              
              **2004**(In
                  thousands)Projected
                  benefit obligation
              
              $
              549,925
              
              $
              517,225
              
              $
              79,324
              
              
              $
              81,290Accumulated
                  benefit obligation
              
              $
              549,925
              
              $
              517,225
              
              $
              79,324
              
              
              $
              79,126Fair
                  value of plan assets
              
              $
              460,085
              
              $
              445,101
              
              $
              81,837
              
              
              $
              82,634
 
 The
        following tables set forth the increase (decrease) in minimum liability,
        net of
        tax, included in other comprehensive income:
 
 **PNM
                  Plan****Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003**(In
                  thousands)Included
                  in other comprehensive income
              
              $
              13,376
              
              $
              21,539
              
              $
              (13,972
              )
 
 There
        were no amounts included in other comprehensive income for the TNMP plan
        for the
        years ended December 31, 2005, 2004 or 2003.
 
 
 
 B-89
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 The
        following table outlines the asset allocations for the pension
        plans:
 **PNM
                    Plan**
                
                **TNMP
                    Plan****December
                    31,**
                
                **December
                    31,****2005**
                
                **2004**
                
                **2005**
                
                
                **2004**Equity
                    securities
                60%
                
                60%
                
                66%
                
                
                23%Debt
                    securities
                23%
                
                23%
                
                24%
                
                
                -Real
                    estate
                6%
                
                7%
                
                -
                
                
                -Other
                11%
                
                10%
                
                10%
                
                
                77%100%
                
                100%
                
                100%
                
                
                100%
 The
        pension plans are currently targeting the following asset allocations for
        the
        year ended December 31, 2006:
 
 **PNM**
              
              **TNMP****Plan**
              
              **Plan**Domestic
                  equity
              
              
              47.5%
              
              
              47.5%Non-US
                  equity
              
              
              10.0%
              
              
              10.0%Fixed
                  income
              
              
              22.5%
              
              
              22.5%Real
                  estate
              
              
              5.0%
              
              
              5.0%Private
                  equity
              
              
              5.0%
              
              
              5.0%Absolute
                  return
              
              
              10.0%
              
              
              10.0%100%
              
              
              100%
 
 The
        following pension benefit payments, which reflect expected future service,
        as
        appropriate, are expected to be paid:
 
 **PNM**
              
              **TNMP****Plan**
              
              **Plan**(In
                  thousands)2006
              
              $
              27,096
              
              $
              7,7242007
              
              $
              27,939
              
              $
              7,3462008
              
              $
              29,077
              
              $
              7,5002009
              
              $
              30,507
              
              $
              7,9012010
              
              $
              32,275
              
              $
              7,415Years
                  2011 - 2015
              
              $
              188,000
              
              $
              35,957
  *Other
        Postretirement Benefits*
 
 For
        postretirement benefit plans, the benefit obligation is the “accumulated
        postretirement benefit obligation,” the actuarial present value as of a date of
        all future benefits attributed under the terms of the postretirement benefit
        plan to employee service rendered to that date.
 
 B-90
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 The
        following table presents a reconciliation of the beginning and ending balances
        of the accumulated postretirement benefit obligation and shows the change
        in the
        obligation:
 
 **PNM
                  Plan****Year
                  Ended December 31,****2005**
              
              **2004**(In
                  thousands)Benefit
                  obligation at beginning of year
              
              $
              112,592
              
              $
              114,812Service
                  cost
              
              
              2,764
              
              
              2,286Interest
                  cost
              
              
              6,765
              
              
              6,941Participant
                  contributions
              
              
              1,240
              
              
              1,179Amendments
              
              
              8,641
              
              
              (17,621
              )Unrecognized
                  actuarial loss
              
              
              7,605
              
              
              12,031Benefits
                  paid
              
              
              (7,918
              )
              
              (7,036
              )Benefit
                  obligation at end of year
              
              $
              131,689
              
              $
              112,592
 
 **TNMP
                  Plan****Post-**
              
              
              **Pre-**
              
              **Pre-****Acquisition**
              
              
              **Acquisition**
              
              **Acquisition****June
                  6-**
              
              
              **January
                  1-**
              
              **Year
                  Ended****December
                  31,**
              
              
              **June
                  6,**
              
              **December
                  31,****2005**
              
              
              **2005**
              
              **2004**(In
                  thousands)Benefit
                  obligation at beginning of period
              
              $
              12,864
              
              
              $
              12,209
              
              $
              10,864Service
                  cost
              
              
              290
              
              
              
              195
              
              
              411Interest
                  cost
              
              
              376
              
              
              
              282
              
              
              679Participant
                  contributions
              
              
              505
              
              
              
              438
              
              
              857Amendments
              
              
              517
              
              
              
              -
              
              
              -Unrecognized
                  actuarial loss
              
              
              (817
              )
              
              
              514
              
              
              1,465Benefits
                  paid
              
              
              (928
              )
              
              
              (774
              )
              
              (2,067
              )Benefit
                  obligation at end of period
              
              $
              12,807
              
              
              $
              12,864
              
              $
              12,209
 
 
 B-91
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 The
        following table sets forth the change in the value of plan assets for the
        years
        ended December 31, the plans’ funded status and the accrued postretirement
        benefit obligation liability recognized in the Consolidated Balance
        Sheets:
 
 **PNM
                  Plan****Year
                  Ended December 31,****2005**
              
              **2004**(In
                  thousands)Fair
                  value of plan assets at beginning of year
              
              $
              56,689
              
              $
              50,957Actual
                  return on plan assets
              
              
              2,063
              
              
              5,187Employer
                  contributions
              
              
              6,410
              
              
              6,402Participant
                  contributions
              
              
              1,240
              
              
              1,179Benefits
                  paid
              
              
              (7,918
              )
              
              (7,036
              )Fair
                  value of plan assets at end of year
              
              
              58,484
              
              
              56,689Funded
                  status
              
              
              (73,205
              )
              
              (55,902
              )Unrecognized
                  net actuarial loss
              
              
              84,511
              
              
              79,773Unrecognized
                  prior service cost
              
              
              (27,993
              )
              
              (42,924
              )Accrued
                  postretirement benefit obligation
              
              $
              (16,687
              )
              $
              (19,053
              )
 
 **TNMP
                  Plan****Post-**
              
              
              **Pre-**
              
              **Pre-****Acquisition**
              
              
              **Acquisition**
              
              **Acquisition****June
                  6-**
              
              
              **January
                  1-**
              
              **Year
                  Ended****December
                  31,**
              
              
              **June
                  6,**
              
              **December
                  31,****2005**
              
              
              **2005**
              
              **2004**(In
                  thousands)Fair
                  value of plan assets at beginning of period
              
              $
              5,979
              
              
              $
              5,956
              
              $
              5,689Actual
                  return on plan assets
              
              
              120
              
              
              
              15
              
              
              369Employer
                  contributions
              
              
              786
              
              
              
              344
              
              
              1,099Participant
                  contributions
              
              
              505
              
              
              
              438
              
              
              853Benefits
                  paid
              
              
              (928
              )
              
              
              (774
              )
              
              (2,054
              )Fair
                  value of plan assets at end of period
              
              $
              6,462
              
              
              $
              5,979
              
              $
              5,956Funded
                  status
              
              
              (6,345
              )
              
              
              (6,886
              )
              
              (6,253
              )Unrecognized
                  net transition obligation
              
              
              -
              
              
              
              2,458
              
              
              2,594Unrecognized
                  net actuarial loss
              
              
              (697
              )
              
              
              1,611
              
              
              975Unrecognized
                  prior service cost
              
              
              517
              
              
              
              -
              
              
              -Accrued
                  postretirement benefit obligation
              
              $
              (6,525
              )
              
              $
              (2,817
              )
              $
              (2,684
              )
 
 
 B-92
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 The
        following table presents the components of PNM postretirement benefit cost
        recognized in the Consolidated Statements of Earnings:
 
 **PNM
                  Plan**
              
              **Other
                  Postretirement Benefits****Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003**(In
                  thousands)Service
                  cost
              
              $
              2,764
              
              $
              2,286
              
              $
              3,086Interest
                  cost
              
              
              6,765
              
              
              6,941
              
              
              7,840Expected
                  long-term return on plan assets
              
              
              (5,300
              )
              
              (4,928
              )
              
              (4,592
              )Prior
                  service cost amortization
              
              
              (6,290
              )
              
              (5,462
              )
              
              (2,593
              )Amortization
                  of net loss
              
              
              6,105
              
              
              4,985
              
              
              4,124Adjustment
                  to unrecognized transition obligationand unrecognized prior service cost
              
              
              -
              
              
              (968
              )
              
              -Amortization
                  of transition obligation
              
              
              -
              
              
              -
              
              
              1,817Postretirement
                  benefit cost
              
              $
              4,044
              
              $
              2,854
              
              $
              9,682
 
 The
        following significant weighted-average assumptions were used to determine
        the
        PNM accumulated postretirement benefit obligation and postretirement benefit
        cost:
 
 **PNM
                  Plan****2005**
              
              **2004**
              
              **2003**Discount
                  rate for determining accumulated postretirementbenefit
                  obligation at December 31
              5.75%
              
              6.00%
              
              6.50%Discount
                  rate for determining postretirement benefit cost
              6.00%
              
              6.50%
              
              6.75%Expected
                  long-term rate of return on plan assets
              9.00%
              
              9.00%
              
              9.00%Rate
                  of compensation increase
              N/A
              
              N/A
              
              N/A
 
 The
        assumed discount rate for determining the accumulated postretirement benefit
        obligation of 5.75% was determined based on a review of long-term high-grade
        bonds and management’s expectations. The discount rate was reduced at December
        31, 2005 and 2004 by 0.25% and 0.50% respectively, resulting in an increase
        in
        the PNM accumulated postretirement benefit obligation of approximately $4.0
        million and $6.9 million at December 31, 2005 and 2004. Should actual experience
        differ from actuarial assumptions, the accumulated postretirement benefit
        obligation and postretirement benefit cost would be affected.
 
 The
        expected long-term rate of return on plan assets of 9.0% at December 31,
        2005
        reflects the average rate of earnings expected on the funds invested, or
        to be
        invested, to provide for the benefits included in the PNM accumulated
        postretirement benefit obligations. Factors that are considered include,
        but are
        not limited to, historic returns on plan assets, current market information
        on
        long-term returns (e.g., long-term bond rates) and current and target asset
        allocations between asset categories. The target asset allocation is determined
        based on consultations with external investment advisors. The expected long-term
        rate of return assumption for the PNM postretirement benefit plan compares
        to
        the actual return of 4.6% for the year ended December 31, 2005. If all other
        factors were to remain unchanged, it is expected that a 1% decrease in the
        expected long-term rate of return would cause PNM’s 2006 postretirement benefit
        cost to increase approximately $0.6 million (analogous change would result
        from
        a 1% increase).
 
 The
        Medicare Prescription Drug, Improvement and Modernization Act of 2003 introduced
        a prescription drug benefit under Medicare, named “Medicare Part D” as well as a
        federal subsidy to sponsors of retiree health care benefit plans that provide
        a
        benefit that is at least actuarially equivalent to Medicare Part D. In 2005,
        PNM’s other postretirement benefits plan was amended in response to Medicare
        Part D, effective January 1, 2006, to reimburse retirees for their Medicare
        Part
        D premium up to $35.00 per month. The fair market value of the postretirement
        benefit obligation was actuarially determined using a measurement date of
        August
        1, 2005 and a
  B-93
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 discount
        rate of 5.50%. The weighted average expected rate of return on plan assets
        was
        9.0%. There is no change to the on-going measurement date of the PNM other
        postretirement benefit plan; it will remain December 31. The effect of this
        change was to increase expenses by $1.0 million for year ended December 31,
        2005. In 2004, the PNM other postretirement benefits plan was also amended
        to
        reflect changes to prescription drug benefit coverage based on Medicare Part
        D.
        The effect of this change was to reduce expenses by $1.6 million for 2004.
 
 The
        following table presents the components of TNMP postretirement benefit cost
        recognized in the Consolidated Statements of Earnings:
 
 **TNMP
                  Plan****Post-**
              
              
              **Pre-**
              
              **Pre-**
              
              **Pre-****Acquisition**
              
              
              **Acquisition**
              
              **Acquisition**
              
              **Acquisition****June
                  6-**
              
              
              **January
                  1-**
              
              **Year
                  Ended**
              
              **Year
                  Ended****December
                  31,**
              
              
              **June
                  6,**
              
              **December
                  31,**
              
              **December
                  31,****2005**
              
              
              **2005**
              
              **2004**
              
              **2003**(In
                  thousands)Service
                  cost
              
              $
              290
              
              
              $
              195
              
              $
              411
              
              $
              388Interest
                  cost
              
              
              376
              
              
              
              282
              
              
              679
              
              
              686Expected
                  long-term rate of return on plan assets
              
              
              (241
              )
              
              
              (136
              )
              
              (315
              )
              
              (333
              )Amortization
                  of transition obligation
              
              
              -
              
              
              
              136
              
              
              324
              
              
              324Recognized
                  actuarial (gain) or loss
              
              
              -
              
              
              
              -
              
              
              -
              
              
              (17
              )Postretirement
                  benefit cost
              
              $
              425
              
              
              $
              477
              
              $
              1,099
              
              $
              1,048
 
 
 B-94
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 The
        following significant weighted-average assumptions were used to determine
        the
        TNMP accumulated postretirement benefit obligation and postretirement benefit
        cost:
 
 **TNMP
                  Plan****Post-**
              
              
              **Pre-**
              
              **Pre-**
              
              **Pre-****Acquisition**
              
              
              **Acquisition**
              
              **Acquisition**
              
              **Acquisition****June
                  6-**
              
              
              **January
                  1-**
              
              **Year
                  Ended**
              
              **Year
                  Ended****December
                  31,**
              
              
              **June
                  6,**
              
              **December
                  31,**
              
              **December
                  31,****2005**
              
              
              **2005**
              
              **2004**
              
              **2003**(In
                  thousands)Discount
                  rate for determining accumulatedpostretirement benefit obligation at the endthe period
              5.75%
              
              
              5.25%
              
              5.75%
              
              6.00%Discount
                  rate for determining postretirementbenefit cost
              5.25%
              
              
              5.75%
              
              6.00%
              
              6.50%Expected
                  long-term rate of return on plan assets
              6.90%
              
              
              5.50%
              
              5.50%
              
              6.00%Rate
                  of compensation increase
              N/A
              
              
              N/A
              
              N/A
              
              N/A
 
 The
        assumed discount rate for determining the accumulated postretirement benefit
        obligation of 5.75% was determined based on a review of long-term high-grade
        bonds and management’s expectations. The discount rate was increased by 0.50% at
        December 31, 2005 over June 6, 2005, resulting in a decrease in the TNMP
        pension
        benefit obligation of approximately $0.6 million at December 31, 2005. The
        discount rate was reduced at December 31 2004 by 0.25%, resulting in an increase
        in the TNMP pension benefit obligation of approximately $0.3 million at December
        31, 2004. Should actual experience differ from actuarial assumptions, the
        projected benefit obligation and net pension cost/(income) would be
        affected.
 
 The
        expected long-term rate of return on plan assets of 6.9% at December 31,
        2005
        reflects the average rate of earnings expected on the funds invested, or
        to be
        invested, to provide for the benefits included in the TNMP accumulated
        postretirement benefit obligations. Factors that are considered include,
        but are
        not limited to, historic returns on plan assets, current market information
        on
        long-term returns (e.g., long-term bond rates) and current and target asset
        allocations between asset categories. The target asset allocation is determined
        based on consultations with external investment advisors. The expected long-term
        rate of return assumption for the TNMP postretirement benefit plan compares
        to
        the actual return of 1.08% for the year ended December 31, 2005. If all other
        factors were to remain unchanged, it is expected that a 1% decrease in the
        expected long-term rate of return would cause TNMP’s 2006 postretirement benefit
        cost to increase approximately $0.1 million (analogous change would result
        from
        a 1% increase).
 
 In
        conjunction with the acquisition of TNP, the benefit obligations for the
        TNMP
        pension and other postretirement benefit plans were recorded at fair market
        value as of the date of acquisition in accordance with SFAS 141 and as a
        result,
        an additional pension and postretirement liability of $5.5 million was recorded.
        The fair market value of the obligations was actuarially determined using
        a
        measurement date of June 6, 2005 and a discount rate of 5.25%, based on the
        average yield of high quality investments. The weighted average expected
        rate of
        return on plan assets was 9.0% for the pension and executive retirement plans
        and 6.9% for the other postretirement plans. There is no change to the on-going
        measurement date of the TNMP Plans; it will remain December 31.
 
 B-95
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 The
        following table shows the assumed health care cost trend rates:
 
 **PNM
                  Plan**
              
              **TNMP
                  Plan****December
                  31,**
              
              **December
                  31,****2005**
              
              **2004**
              
              **2005**
              
              
              **2004**Health
                  care cost trend rate assumed for next year
              10.0%
              
              10.0%
              
              N/A
              
              
              N/ARate
                  to which the cost trend rate is assumedto decline (the ultimate trend rate)
              5.0%
              
              6.0%
              
              N/A
              
              
              N/AYear
                  that the rate reaches the ultimate trend rate
              2012
              
              2012
              
              N/A
              
              
              N/A
 
 The
        following tables show the impact of a one-percentage-point change in assumed
        health care cost trend rates:
 
 **PNM
                  Plan****1-Percentage-**
              
              **1-Percentage-****Point
                  Increase**
              
              **Point
                  Decrease**(In
                  thousands)Effect
                  on total of service and interest cost
              
              $
              1,083
              
              $
              (916
              )Effect
                  on postretirement benefit obligation
              
              $
              11,688
              
              $
              (10,049
              )
 
 TNMP’s
        exposure to cost increases in the postretirement benefit plan is minimized
        by a
        provision that limits TNMP’s share of costs under the plan. Costs of the plan in
        excess of the limit are wholly borne by the participants. TNMP reached the
        cost
        limit at the end of 2001. As a result, a one-percentage-point change in assumed
        health care cost trend rates would have no effect on either the 2005 net
        periodic expense or the year-end 2005 postretirement benefit
        obligation.
 
 The
        following table outlines the asset allocation for the other postretirement
        benefits:
 
 **PNM
                  Plan**
              
              **TNMP
                  Plan****December
                  31,**
              
              **December
                  31,****2005**
              
              **2004**
              
              **2005**
              
              
              **2004**Equity
                  securities
              50%
              
              49%
              
              23%
              
              
              23%Debt
                  securities
              50%
              
              51%
              
              77%
              
              
              -Other
              -
              
              -
              
              -
              
              
              77%100%
              
              100%
              
              100%
              
              
              100%
 
 The
        Company is currently targeting an asset allocation of 70% equity securities
        and
        30% debt securities in 2006 for both the PNM and the TNMP other postretirement
        benefits plan.
  PNM
        expects to make contributions totaling $6.2 million to the PNM postretirement
        benefit plan in 2006. TNMP expects to make contributions totaling $0.3 million
        to the TNMP postretirement benefit plan in 2006.
 
 B-96
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 The
        following other postretirement benefit payments, which reflect expected future
        service, as appropriate, are expected to be paid:
 
 **PNM**
              
              **TNMP****Plan**
              
              **Plan**(In
                  thousands)2006
              
              $
              5,529
              
              $
              9022007
              
              $
              5,898
              
              $
              8662008
              
              $
              6,440
              
              $
              8712009
              
              $
              7,037
              
              $
              8782010
              
              $
              7,671
              
              $
              917Years
                  2011 - 2015
              
              $
              49,716
              
              $
              5,053
 
 *Executive
        Retirement Programs*
 
 PNM
 
 PNM
        has
        an executive retirement program. PNM’s projected benefit obligation for this
        program, as of the plan measurement date of December 31, 2005 and 2004, was
        $19.1 million and $20.5 million, respectively. As of December 31, 2005 and
        2004,
        PNM has recognized an additional minimum liability of $4.0 million and $5.3
        million, respectively, for the amount of unfunded accumulated benefits in
        excess
        of accrued pension costs. The change in the unfunded liability is recorded
        as an
        adjustment to accumulated other comprehensive loss on an annual basis in
        accordance with SFAS 87. The net periodic cost for 2005, 2004 and 2003 was
        $1.6
        million, $1.6 million and $1.6 million, respectively. PNM has an irrevocable
        grantor trust established in connection with the executive retirement program.
        Under the terms of the trust, PNM may, but is not obligated to, provide funds
        to
        the trust, which was established with an independent trustee, to aid it in
        meeting its obligations under the program. Marketable securities with a fair
        market value of $6.2 million were in the trust at December 31, 2005. PNM
        did not
        make any contributions to the trust during the years ended December 31, 2005,
        2004 or 2003.
 
 TNMP
 
 TNMP
        provides an excess benefit plan for certain key personnel and retired employees
        whose benefits in the qualified pension plan are restricted under federal
        laws.
        TNMP’s projected benefit obligation for this program, as of the plan measurement
        date of December 31, 2005 and December 31, 2004, was $1.4 million and $3.6
        million, respectively. As of December 31, 2005, TNMP has recognized an
        additional minimum liability of $47,519 for the amount of unfunded accumulated
        benefits in excess of accrued pension costs. The net periodic cost for 2005,
        2004 and 2003 was $0.2 million, $0.5 million and $1.2 million, respectively.
        Effective January 1, 2005, TNMP closed the excess benefit plan to new
        participants.
 
 *Other
        Retirement Plans*
 
 PNMR
 
 PNMR
        sponsors a 401(k) defined contribution plan for eligible employees. PNMR
        contributions to the 401(k) plan consist of a discretionary contribution
        equal
        to 3% of eligible compensation, and a discretionary matching contribution
        equal
        to 75% of the first 6% of eligible compensation contributed by the employee
        on a
        before-tax basis. Beginning January 1, 2004, PNMR made a non-matching
        contribution ranging from 3% to 10% of eligible compensation based on the
        eligible employee’s age. PNMR contributed $15.5 million, $15.2 million and $9.0
        million in the years ended December 31, 2005, 2004 and 2003,
        respectively.
 
 PNMR
        also
        provides executive deferred compensation benefits through two unfunded,
        non-qualified plans. The purpose of these plans is to permit certain key
        employees of PNMR who participate in the 401(k) defined contribution plan
        to
        defer compensation and receive credits without reference to the certain
        limitations on contributions. PNMR contributed $941,475, $430,323 and $21,489
        in
        the years ended December 31, 2005, 2004 and 2003, respectively.
 
 B-97
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 TNMP
 
 TNMP
        sponsors a 401(k) defined contribution plan for eligible employees. TNMP
        contributions to the 401(k) plan consist of a discretionary matching
        contribution equal to 50% of the first 6% of eligible compensation contributed
        by the employee on a before-tax basis. TNMP contributed $1.0 million, $0.4
        million and $0.4 million in the years ended December 31, 2005, 2004 and 2003,
        respectively.
 
 **(13)** **Stock-Based
        Compensation Plans**
 
 PNMR
        is
        the sponsor of the Company’s stock-based compensation plans. PNM and TNMP do not
        sponsor any stock-based compensation plans.
 
 The
        PNMR
        ESPP became effective in March 2003. Eligible employees who have enrolled
        in the
        ESPP may contribute from 1% to 10% of their eligible pay each pay period
        towards
        stock purchases. The ESPP has been authorized to issue up to 375,000 new
        shares
        of PNMR’s common stock. Under the ESPP, 85,354, 76,099 and 29,555 shares were
        issued during the year ended December 31, 2005, 2004 and 2003, respectively.
 
 PNMR’s
        PSP expired in December 2000. The PSP was a non-qualified stock option plan,
        covering a group of management employees. Options to purchase shares of PNMR’s
        common stock were granted at the fair market value of the shares at the close
        of
        business on the date of the grant. Options granted through December 31, 1995
        vested on June 30, 1996 and have an exercise term of up to 10 years. All
        subsequent awards, granted between December 31, 1995 and February 2000, vest
        three years from the grant date of the awards. All options vest upon death,
        disability, retirement, impaction or involuntary termination other than for
        cause. Awards granted in December 2000 vest ratably over three years on the
        anniversary of the grant date. The maximum number of options authorized that
        could be granted through December 31, 2000 was 5.0 million shares of PNMR
        common
        stock. Although the authority to grant options under the PSP expired on December
        31, 2000, the options that were granted continue to be effective according
        to
        their terms.
 
 The
        PEP
        became effective in December 2001 and was amended in 2004 and in 2005. The
        PEP
        provides for the granting of non-qualified stock options, restricted stock
        rights, performance shares, performance units and stock appreciation rights
        to
        officers, key employees and non-employee board members. These options vest
        ratably over three years from the grant date of the award.  The total
        number of shares of PNMR common stock subject to all awards under the PEP
        may
        not exceed 8.25 million, subject to adjustment under certain circumstances
        defined in the PEP. The number of shares of PNMR common stock subject to
        the
        grant of restricted stock rights, performance shares and units and stock
        appreciation rights is limited to 0.45 million shares. Re-pricing of stock
        options is prohibited unless specific shareholder approval is obtained. The
        number of stock options granted in 2005 under the PEP was 689,000 with a
        weighted average exercise price of $27.52. Restricted stock rights granted
        in
        2005 totaled 84,400, with a weighted average fair value (as of grant date)
        of
        $26.46. In addition, 33,568 performance shares were issued in 2005 under
        the
        PEP. During the year ended December 31, 2005, 2004 and 2003, 689,375, 859,256
        and 70,734 options were exercised, respectively.
 
 The
        annual retainer for non-employee directors is payable in cash, stock options
        and
        restricted stock rights granted under the PEP (see above). Previously, the
        annual retainer for non-employee directors was payable in cash and stock
        options
        under PNMR’s DRP. The number of options granted in 2005 under the DRP was 8,400
        shares with an exercise price of $27.52. These options vest ratably over
        three
        years from the grant date of the award. Under the DRP, 21,000, 49,250 and
        3,000
        options were exercised in 2005, 2004 and 2003. The exercise price of stock
        options granted under the DRP is determined by the fair market value of the
        stock at the close of business on the grant date. Although the authority
        to
        grant options under the DRP expired on July 1, 2005 the options that were
        granted continue to be effective according to their terms.
 
 B-98
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 All
        stock
        incentives (options, restricted stock and performance shares) issued to
        employees and non-employee directors are awarded according to the applicable
        plan terms. The source of shares for exercised stock options, delivery of
        vested
        restricted stock and performance shares are shares acquired on the
        open-market, rather than newly issued shares.
 
 A
        summary
        of the status of PNMR’s stock option plans at December 31, and changes during
        the years then ended, is presented below.
 
 **2005**
              
              **2004**
              
              **2003****Weighted**
              
              
              
              **Weighted**
              
              
              
              **Weighted****Average**
              
              
              
              **Average**
              
              
              
              **Average****Exercise**
              
              
              
              **Exercise**
              
              
              
              **Exercise****Fixed
                  Options**
              
              **Shares**
              
              **Price**
              
              **Shares**
              
              **Price**
              
              **Shares**
              
              **Price**Outstanding
                  at beginning of year
              
              3,562,581
              
              $15.94
              
              4,936,716
              
              $14.47
              
              5,274,560
              
              $13.95Granted
              
              697,400
              
              $27.52
              
              905,700
              
              $20.66
              
              1,292,850
              
              $13.22Exercised
              
              1,203,830
              
              $14.81
              
              2,248,632
              
              $14.61
              
              1,587,352
              
              $11.72Forfeited
              
              39,602
              
              $23.02
              
              29,954
              
              $17.05
              
              40,003
              
              $14.01Expired
              
              -
              
              -
              
              1,249
              
              $13.03
              
              3,339
              
              $16.31Outstanding
                  at end of year
              
              3,016,549
              
              
              
              3,562,581
              
              
              
              4,936,716Options
                  exercisable at year-end
              
              1,522,176
              
              
              
              1,695,279
              
              
              
              2,931,217Options
                  available for future grant
              
              4,161,505
              
              
              
              451,255
              
              
              
              1,385,327
 
 
 B-99
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 The
        following table summarizes information about PNMR stock options outstanding
        at
        December 31, 2005:
 
 **Options
                  Outstanding**
              
              **Options
                  Exercisable****Weighted-****Average**
              
              **Weighted**
              
              
              
              **Weighted****Range
                  of**
              
              **Number**
              
              **Remaining**
              
              **Average**
              
              **Number**
              
              **Average****Exercise**
              
              **Outstanding**
              
              **Contractual**
              
              **Exercise**
              
              **Exercisable**
              
              **Exercise****Prices**
              
              **at
                  12/31/05**
              
              **Life**
              
              **Prices**
              
              **at
                  12/31/05**
              
              **Prices**DRP
              $3.667
                  - $8.500
              (a)
              13,500
              
              2.60
              
              $5.63
              
              13,500
              
              $5.63DRP
              $13.433
                  - $27.520
              (b)
              166,150
              
              7.55
              
              $18.07
              
              157,750
              
              $17.56PSP
              $7.667
                  - $16.208
              
              542,019
              
              4.29
              
              $15.00
              
              514,526
              
              $14.99PEP
              $13.033
                  - $27.520
              
              2,294,880
              
              7.93
              
              $20.06
              
              836,400
              
              $16.553,016,549
              
              7.26
              
              $18.97
              
              1,522,176
              
              $16.03
 
 (a)  Represents
        options pertaining to the DRP issued between April 1966 and June
        2000.
 
 (b)  Represents
        options pertaining to the DRP issued between July 2001 and May
        2005.
 
 The
        following table summarizes weighted-average fair value of options granted
        during
        the year:
 
 **2005**
              
              **2004**
              
              **2003**PEP
              
              $
              5.11
              
              $
              3.68
              
              $
              3.27DRP
              
              $
              5.11
              
              $
              3.64
              
              $
              3.43Total
                  fair market value of all options granted (in thousands)
              
              $
              3,564
              
              $
              3,329
              
              $
              1,414
 
 The
        fair
        value of each option grant is determined on the date of grant using the
        Black-Scholes option-pricing model with the following weighted-average
        assumptions:
 
 **2005**
              
              **2004**
              
              **2003**Dividend
                  yield
              
              2.55%
              
              3.26%
              
              5.88%Expected
                  volatility
              
              24.29%
              
              22.90%
              
              45.49%Risk-free
                  interest rates
              
              3.79%
              
              3.21%
              
              4.00%Expected
                  life
              
              4.2
                  years
              
              5.7
                  years
              
              10.0
                  years
 
 **(14)** **Construction
        Program and Jointly-Owned Plants**
 
 PNMR
 
 PNMR’s
        construction expenditures for 2005, which include TNP expenditures from June
        6,
        2005 through December 31, 2005, were approximately $221.8 million, including
        expenditures on jointly-owned projects. PNMR’s proportionate share of operating
        and maintenance expenses for PNM’s jointly-owned plants is included in operating
        expenses in its Consolidated Statements of Earnings. TNMP does not participate
        in the ownership or operation of any generating plants, nor does TNMP own
        or
        operate any generating plants.
 
 B-100
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 PNM
 
 PNM’s
        construction expenditures for 2005 were approximately $167.7 million, including
        expenditures on jointly-owned projects. PNM’s proportionate share of operating
        and maintenance expenses for its jointly-owned plants is included in operating
        expenses in its Consolidated Statements of Earnings.
 
 At
        December 31, 2005, PNM’s interests and investments in jointly - owned
        generating facilities are:
 
 **Station
                  (Fuel Type)**
              
              **Plant
                  in Service**
              
              **Accumulated
                  Depreciation**
              
              **Construction**
                **Work
                  in**
                **Progress**
              
              **Composite
                  Interest**(In
                  thousands)SJGS
                  (Coal)
              
              $
              697,637
              
              $
              405,230
              
              $
              7,248
              
              
              46.30
              %PVNGS
                  (Nuclear) *
              
              $
              275,881
              
              $
              76,438
              
              $
              19,496
              
              
              10.20
              %Four
                  Corners Units 4 and 5 (Coal)
              
              $
              128,602
              
              $
              97,282
              
              $
              279
              
              
              13.00
              %
 
 *
              Includes
                  interest in PVNGS Unit 3, interest in common facilities for all
                  PVNGS
                  units and owned interests in PVNGS Units 1 and
                  2.
 
 *San
        Juan Generating Station*
 
 PNM
        operates and jointly owns SJGS. At December 31, 2005, SJGS Units 1 and 2
        are
        owned on a 50% shared basis with Tucson Electric Power. SJGS Unit 3 is owned
        50%
        by PNM, 41.8% by SCPPA, and 8.2% by Tri-State. SJGS Unit 4 is owned 38.457%
        by
        PNM, 28.8% by M-S-R Public Power Agency, 10.04% by the City of Anaheim,
        California, 8.475% by Farmington, 7.2% by the County of Los Alamos, and 7.028%
        by UAMPS.
 
 *Palo
        Verde Nuclear Generating Station*
 
 PNM
        is a
        participant in the three units of PVNGS, also known as the Arizona Nuclear
        Power
        Project, with APS (the operating agent), Salt River Project, EPE, SCE, SCPPA
        and
        The Department of Water and Power of the City of Los Angeles. PNM has a 10.2%
        undivided interest in PVNGS, with portions of its interests in Units 1 and
        2
        held under leases.
 
 *Four
        Corners Power Plant*
 
 PNM
        is a
        participant in two units of Four Corners with APS (the operating agent),
        EPE,
        Salt River Project, SCE, and Tucson. PNM has a 13% undivided interest in
        Units 4
        and 5 of Four Corners.
 
 *Luna
        Energy Facility*
 
 In
        November 2004, PNMR Development, a subsidiary of PNMR, purchased a one-third
        interest in Luna from Duke Energy North America, LLC. Luna is a 570 MW,
        partially constructed, natural gas-fired power plant near Deming in southern
        New
        Mexico. The purchase price for Luna was $40.0 million in cash, one-third
        from
        each purchaser, Tucson and Phelps Dodge. The purchasers are investing
        approximately $100.0 million, one-third from each purchaser, to complete
        construction. In November 2005, the Company transferred the one-third interest
        from PNMR Development to PNM. PNM will oversee construction and operation
        of the
        Luna plant, which is expected to be operational no later than the second
        quarter
        of 2006.
 
 B-101
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
  **(15)** **Asset
        Retirement Obligations**
 
 *SFAS
        143*
  The
        effects of adoption of SFAS 143 standard are based on the Company’s
        determination of underlying assumptions, such as the Company’s discount rate,
        estimates of the future costs for decommissioning and the timing of the removal
        activities to be performed. Any changes in these assumptions underlying the
        required calculations may require revisions to the estimated ARO when
        identified.
 
 PNMR
  A
        reconciliation of PNMR’s asset retirement obligations is as
        follows:
 
 **December
                  31,**
              
              **December
                  31,****2005**
              
              **2004**(In
                  thousands)Liability
                  at beginning of period
              
              $
              50,361
              
              $
              46,416Liabilities
                  incurred
              
              
              1,251
              
              
              -Accretion
                  expense
              
              
              4,034
              
              
              3,945Liability
                  at end of period
              
              $
              55,646
              
              $
              50,361
 
 PNM
  A
        reconciliation of PNM’s asset retirement obligations is as follows:
 
 **December
                  31,**
              
              **December
                  31,****2005**
              
              **2004**(In
                  thousands)Liability
                  at beginning of period
              
              $
              50,361
              
              $
              46,416Liabilities
                  incurred
              
              
              545
              
              
              -Accretion
                  expense
              
              
              4,034
              
              
              3,945Liability
                  at end of period
              
              $
              54,940
              
              $
              50,361
 
 PNM
        identified the ARO liability on the decommissioning of its nuclear generation
        facilities and fossil fuel generation plants. PNM’s transmission and
        distribution facilities are also subject to SFAS 143. The majority of these
        assets, however, have an indeterminable useful life and settlement date.
        In
        2005, PNM did not identify any material AROs associated with the transmission
        and distribution assets.
 
 Previously,
        PNM had recognized decommissioning costs for its fossil fuel and nuclear
        generation facilities ratably over approved cost recovery periods. Upon
        implementation of SFAS 143 the net difference between the amounts determined
        to
        represent legal AROs under SFAS 143 and PNM’s previous method of accounting for
        decommissioning costs, has been recognized as a cumulative effect of a change
        in
        accounting principle, net of related income taxes. Additionally, certain
        amounts
        accrued for nuclear decommissioning costs over PNM’s legal AROs for its nuclear
        generation facilities have been reclassified as regulatory
        liabilities.
 
 B-102
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 TNMP
 A
          reconciliation of TNMP’s asset retirement obligations is as
          follows:
 
 **December
                  31,**
              
              
              **December
                  31,****2005**
              
              
              **2004**(In
                  thousands)Liability
                  at beginning of period
              
              $
              -
              
              
              $
              -Liabilities
                  incurred
              
              
              639
              
              
              
              -Liability
                  at end of period
              
              $
              639
              
              
              $
              -
 
 *FIN
        47*
 
 In
        2005,
        PNMR, PNM and TNMP adopted FIN 47 and recognized a cumulative effect of a
        change
        in accounting principle that decreased 2005 earnings. The amount is net of
        amounts expensed in prior years for the cost of removal included in
        depreciation.
  The
        amounts in the table below reflect the pro forma ARO liability that would
        have
        been recorded at January 1 and December 31, 2004, assuming FIN 47 had been
        applied during all periods presented and the ARO liability recorded at December
        31, 2005:
 
 **PNMR**
              
              **PNM**
              
              **TNMP**(In
                  thousands)January
                  1, 2004 pro forma ARO liability
              $47,728
              
              $47,671
              
              $
                  543December
                  31, 2004 pro forma ARO liability
              $51,785
              
              $51,723
              
              $
                  589December
                  31, 2005 recorded ARO liability
              $55,646
              
              $54,940
              
              $
                  639
 
 The
        effects of adoption of FIN 47 are based on the Company’s interpretation of FIN
        47 and determination of underlying assumptions, such as the Company’s discount
        rate, estimates of the future costs and the timing of the removal activities
        to
        be performed. Any changes in these assumptions underlying the required
        calculations may require revisions to the estimated ARO when
        identified.
 
 PNMR
        and
        TNMP identified ARO liabilities on the removal of asbestos from certain
        buildings owned in New Mexico. PNM identified an ARO liability on the closure
        requirement of an evaporation pond at one of its generation facilities. In
        addition, PNM and TNMP identified ARO liabilities on the removal of transformers
        and equipment containing polychlorinated biphenyls.
 
 Cumulative
        accretion and accumulated depreciation were recorded for the time period
        from
        the date the liability would have been recognized had the provisions of this
        Interpretation been in effect when the liability was incurred to the date
        of
        adoption of this Interpretation. The cumulative effect of initially applying
        FIN
        47 was recognized as a change in accounting principle. FIN 47 is effective
        for
        2005.
 
 **(16)** **Commitments
        and Contingencies**
 
 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. However,
        the
        Company has recorded a liability where the litigation effects can be reasonably
        estimated and where an outcome is considered probable. The Company does not
        expect that any known lawsuits, environmental costs and commitments will
        have a
        material adverse effect on its financial condition or results of operations,
        although the outcome of litigation, investigations and other legal proceedings
        is inherently uncertain.
 
 B-103
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 The
        Company is involved in various legal proceedings in the normal course of
        its
        business. The associated legal costs for these legal matters are accrued
        when
        incurred. It is also the Company’s policy to accrue for expected legal costs in
        connection with SFAS No. 5, “ *Accounting
        for Contingencies* ”
(“SFAS
        5”) when it is probable that a SFAS 5 liability has been incurred and the amount
        of expected legal costs to be incurred is reasonably estimable. These estimates
        include costs for external counsel and other professional fees.
 
 PNMR
 
 **Tax
        Refund Litigation**
  In
          November 2004, the United States Department of Justice filed a complaint
          against
          PNMR in federal court, alleging that approximately $4.2 million of income
          tax
          refunds claimed and received for the 1998 and 1999 tax years were erroneously
          paid. The complaint sought return of that refund amount, plus interest,
          a 10%
          surcharge and costs. PNMR filed an answer in response to the complaint
          denying
          all the material allegations. The government’s complaint alleged that PNMR did
          not correctly elect to deduct research and experimental expenses, and that
          certain costs did not qualify as research and experimental. In July 2005,
          PNMR
          settled with the DOJ and a joint stipulation of dismissal with prejudice
          was
          filed with the court.
 
 **Net
        Operating Loss Carry Forwards**
  The
          IRS
          has challenged certain net operating loss carry-forwards on PNMR’s 2001 tax
          return. The IRS has issued a “Notice of Proposed Adjustments,” in which the IRS
          proposes to disallow the net operating loss carry-forward. PNMR disagrees
          with
          the proposed adjustment and intends to take all steps available in the
          IRS audit
          and appeals process to vigorously oppose the proposed adjustment. PNMR
          does not
          anticipate that the ultimate resolution of the issue will have a material
          adverse effect on its results of operations or financial
          position.
 
 PNM
 
 **Coal
        Supply**
 
 The
        coal
        requirements for SJGS are being supplied by SJCC, a wholly owned subsidiary
        of
        BHP Billiton. SJCC holds certain federal, state and private coal leases under
        an
        underground coal sales agreement, for purposes of this discussion referred
        to as
        the “coal agreement,” pursuant to which it will supply processed coal for
        operation of the SJGS through 2017. The coal agreement is a cost plus contract.
        SJCC is reimbursed for all costs for mining and delivering the coal plus
        an
        allocated portion of administrative costs. In addition, SJCC receives a return
        on its investment. BHP Minerals International, Inc. has guaranteed the
        obligations of SJCC under the coal agreement. This guarantee is with respect
        to
        SJCC’s obligations as defined in the coal agreement and protects against
        contingencies such as SJCC non-performance, insolvency, bankruptcy,
        reorganization, dissolution, and other corporate or organizational adversities.
        The coal agreement contemplates the delivery of approximately 80 million
        tons of
        coal during its remaining term. That amount would supply substantially all
        the
        requirements of the SJGS through approximately 2017. In 2001, PNM and Tucson
        signed the coal agreement with SJCC to replace two surface mining operations
        with a single underground mine located adjacent to the plant.
  Four
        Corners is supplied with coal under a fuel agreement between the owners and
        BNCC, under which BNCC agreed to supply all the coal requirements for the
        life
        of the plant. The current fuel agreement expires in July 2016. BNCC holds
        a
        long-term coal mining lease, with options for renewal, from the Navajo Nation
        and operates a surface mine adjacent to Four Corners with the coal supply
        expected to be sufficient to supply the units for their estimated useful
        lives.
 
 B-104
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 In
        connection with both the SJGS coal agreement and the Four Corners fuel
        agreement, the owners are required to reimburse SJCC and BNCC for the cost
        of
        coal mine decommissioning or reclamation. Final mine reclamation occurs when
        mining production activities conclude. PNM considers these costs part of
        the
        cost of delivered coal costs over the life of the respective mine. This
        liability is recorded at estimated fair value based on the expected cash
        out-flows to be made to reimburse SJCC and BNCC for their reclamation
        activities. These cash flows are discounted at a credit adjusted risk-free
        rate.
        The liability is accreted and an appropriate incremental cost is recognized
        using the interest method.
 
 In
        2003,
        PNM completed a comprehensive review with the help of an outside consulting
        firm
        of the final reclamation costs for both the surface mines that previously
        provided coal to SJGS and the current underground mine providing coal. Based
        on
        this study, PNM revised its estimates of the final reclamation of the surface
        mine. In addition, the mining contract with BNCC supplying Four Corners was
        renewed until 2016. The final cost of reclamation is expected to be $137.4
        million in accreted dollars. During the year ended December 31, 2005, 2004
        and
        2003, PNM made payments of $11.7 million, $12.9 million and $13.5 million,
        respectively, against this liability. As of December 31, 2005, and 2004,
        $48.3
        million and $47.6 million, respectively, was recognized on PNM’s Consolidated
        Balance Sheet for the obligation for reclamation using the fair value method
        to
        determine the liability.
 
 Per
        the
        Global Electric Agreement (see Note 17), PNM was allowed to collect up to
        $100.0
        million of surface mine final reclamation costs from 2003 to 2020. PNM expects
        to recover the remaining amount in a future rate case. In addition, PNM expects
        to recover the portion of final underground mine reclamation costs related
        to
        New Mexico ratepayers in future rate cases.
 
 The
        underground mine began commercial operation in January 2003. At December
        31,
        2005 and 2004, the balance on PNM’s Consolidated Balance Sheets for the
        reclamation liability related to mining activities was $0.7 million and $1.2
        million, respectively.
 
 **Person
        Station**
 PNM,
          in
          compliance with a Corrective Action Directive issued by the NMED, determined
          that groundwater contamination existed in the deep and shallow groundwater
          at
          PNM’s Person Station site. PNM is required to delineate the extent of the
          contamination and remediate the contaminants in the groundwater at the
          Person
          Station site. The extent of shallow and deep groundwater contamination
          was
          assessed and the results were reported to the NMED. PNM has received the
          renewal
          of the RCRA post-closure care permit for the facility. Remedial actions
          for the
          shallow and deep groundwater were incorporated into the new permit. PNM
          has
          installed and is operating a pump and treatment system for the shallow
          groundwater. The renewed RCRA post-closure care permit allows remediation
          of the
          deep groundwater contamination through natural attenuation. PNM’s current
          estimate to decommission its retired fossil-fueled plants (discussed below)
          includes approximately $1.6 million in additional expenses to complete
          the
          groundwater remediation program at Person Station. The remediation program
          continues on schedule.
 
 **Retired
        Fossil-Fueled Plant Decommissioning Costs**
 
 PNM’s
        retired fossil-fueled generating stations, Person and Santa Fe Stations,
        have
        incurred dismantling and reclamation costs as they are decommissioned. As
        of
        December 31, 2005, and 2004, $2.5 million and $4.2 million, respectively,
        was
        recognized on PNM’s Consolidated Balance Sheet for the obligation for
        decommissioning costs for the Person and Santa Fe Stations.
 
 **Natural
        Gas Supply**
 
 PNM
        Gas
        contracts for the purchase of gas primarily to serve its retail customers.
        The
        majority of these contracts are short-term in nature, supplying the gas needs
        for the current heating season and the following off-season months. The price
        of
        gas is a pass-through, whereby PNM recovers 100% of its cost of gas. There
        is
        also occasion for PNM Gas to purchase gas to source off-system
        sales.
 
 B-105
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 PNM
        Electric, PNM Wholesale and TNMP Electric procure gas supplies independent
        of
        the Company and contract with PNM Gas for transportation services.
 
 **PVNGS
        Decommissioning Funding**
 
 PNM
        has a
        program for funding its share of decommissioning costs for PVNGS. The nuclear
        decommissioning funding program is invested in equities and fixed income
        instruments in qualified and non-qualified trusts. The results of the 2004
        decommissioning cost study indicated that PNM’s share of the PVNGS
        decommissioning costs, excluding spent fuel disposal, would be approximately
        $216.7 million (measured in 2004 dollars).
 
 PNM
        provided an additional $3.6 million, $5.1 million and $3.1 million funding
        for
        the years ended December 31, 2005, 2004 and 2003, respectively, into the
        qualified and non-qualified trust funds. The estimated market value of the
        trusts at December 31, 2005 and 2004 was $105.7 million and $93.7 million,
        respectively.
 
 **Nuclear
        Spent Fuel and Waste Disposal**
 
 Pursuant
        to the Nuclear Waste Policy Act, the DOE is obligated to accept and dispose
        of
        all spent nuclear fuel and other high-level radioactive wastes generated
        by
        domestic power reactors. Under the Nuclear Waste Policy Act, the DOE was
        to
        develop facilities necessary for the storage and disposal of spent nuclear
        fuel
        and to have the first facility in operation by 1998. The DOE has various
        estimates of when such a repository could be opened, ranging from 2012 to
        past
        2015.
 
 APS,
        the
        operator of PVNGS, has fuel storage pools at PVNGS, which accommodates fuel
        from
        normal operation of PVNGS. To continue to allow full core offload capability,
        older fuel is being placed in dry storage casks and removed from the Units.
        Through December 31, 2005, the operator of PVNGS has loaded 34 dry storage
        casks
        and placed the casks in the completed dry storage facility. PNM currently
        estimates that it will incur approximately $51.4 million (in 2004 dollars)
        over
        the life of PVNGS for its share of the fuel costs related to the on-site
        interim
        storage of spent nuclear fuel during the operating life of the plant. PNM
        accrues these costs as a component of fuel expense, meaning that the charges
        are
        accrued as the fuel is burned. During the years ended December 31, 2005,
        2004
        and 2003, PNM incurred expense of $1.0 million, $1.0 million and $1.0 million,
        respectively. At December 31, 2005 and 2004, PNM had $14.1 million and $14.3
        million, respectively, recorded as a liability on its Consolidated Balance
        Sheets for interim storage costs. The dry storage facility has the space
        to hold
        all fuel anticipated to be used during the licensed life of PVNGS.
 
 **PVNGS
        Liability and Insurance Matters**
 The
          PVNGS
          participants have financial protection 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 $300.0 million and the balance
          by
          an industry-wide retrospective assessment program. If losses at any nuclear
          power plant covered by the programs exceed the primary liability insurance
          limit, PNM could be assessed retrospective adjustments. The maximum assessment
          per reactor under the program for each nuclear incident is approximately
          $101.0
          million. The retrospective assessment was subject to an annual limit of
          $10.0
          million per reactor per incident that was increased to $15.0 million as
          described below under "Price-Anderson Act Renewal." Based upon PNM’s 10.2%
          interest in the three PVNGS units, PNM’s maximum potential assessment per
          incident for all three units is approximately $31.0 million, with an annual
          payment limitation of approximately $4.5 million based on the annual limit
          per
          reactor per incident of $15.0 million as discussed above. If the funds
          provided
          by this retrospective assessment program prove to be insufficient, Congress
          could impose revenue-raising measures on the nuclear industry to pay
          claims.
 
 B-106
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 **PVNGS
        Operations**
 
 During
        2005, PVNGS had the lowest capacity factor (measured against maximum dependable
        capacity) that the plant has had since 1994. This reflects bottom quartile
        performance relative to the 103 operating reactors in the United States.
        There
        were nine unscheduled outages during 2005 that had a variety of causes. In
        2004,
        the NRC determined that there had been a safety concern at PVNGS related
        to the
        safety injection systems for the three PVNGS units. This led to a "yellow"
        finding and a $50,000 civil penalty under the NRC’s reactor oversight process. A
        "yellow" finding places a unit in the "degraded safety cornerstone" column
        of
        the NRC’s performance matrix, which results in an enhanced NRC inspection
        regimen. During 2005, the NRC completed its enhanced inspection. The "yellow"
        finding remains unresolved.
 
 PVNGS
        has
        encountered tube cracking in the steam generators. The PVNGS Units 2 steam
        generators were replaced in 2003 and the replacement of PVNGS Unit 1 steam
        generators was completed in December 2005. Completion of installation of
        the
        PVNGS Unit 3 steam generators is expected by December 2007.
 
 APS
        has
        been operating PVNGS Unit 1 at reduced power levels since December 25, 2005
        due
        to a vibration in the PVNGS Unit 1 shutdown cooling lines. As a result, PNM
        is
        receiving approximately 24 MW of power from PVNGS Unit 1 based on its 10.2%
        undivided interest in PVNGS.
 
 Implementation
        of a potential solution preliminarily scheduled by APS for February 2006
        was
        canceled after comprehensive analysis concluded that the desired improvement
        likely would not have been achieved. APS had informed PNM that it was in
        the
        process of formulating other potential remedies to address the issue and
        that it
        was scheduling another attempt to remedy this issue sometime in April 2006.
        APS
        has more recently informed PNM that the preferred solution will require
        Unit 1 to undergo an outage of approximately five weeks in order to effect
        the
        necessary modifications to Unit 1 and that it plans to begin this outage
        in the
        June 2006 timeframe. In addition, an outage of approximately one week for
        preparatory work will begin in mid-March 2006. This preferred solution was
        initially planned for installation in the spring of 2007.
 
 The
        operation of PVNGS not only affects PNM’s ability to make off-system sales, but
        can also cause PNM to purchase power to serve its retail electric customers.
        Based on current forward market energy prices, PNM estimates that operation
        of
        PVNGS Unit 1 at the reduced power level could result in a reduction in
        consolidated gross margin, or operating revenues minus cost of energy sold,
        of
        $3.0 million to $4.0 million per month before income taxes. However, PNM
        is
        taking steps to mitigate the impact on consolidated gross margin while PVNGS
        Unit 1 operates at the reduced power level.
 
 **Price-Anderson
        Act Renewal**
  The
          Energy Policy Act of 2005 (see Note 17) extends the Price-Anderson Act
          for 20
          years.  The Price-Anderson Act provides for immediate, no-fault insurance
          coverage for the public in case of a nuclear reactor accident. It requires
          nuclear plant operators to purchase all the private insurance available
          to them
          (currently $300.0 million) to serve as a primary level of coverage. If
          this
          amount is insufficient to cover claims arising from an accident, companies
          are
          required to contribute to a fund that provides a secondary level of coverage.
          The Energy Policy Act of 2005 raises the maximum required assessment at
          the
          secondary level from $63.0 million to $95.8 million per reactor, which
          is
          already reflected in the $101.0 million maximum assessment discussed under
          “PVNGS Liability and Insurance Matters” above, which includes a provision for
          legal costs, and raises the annual secondary level payout from $10.0 million
          to
          $15.0 million per reactor, adjusting the payout for inflation in the future.
 
 **Water
        Supply**
 
 Because
        of New Mexico’s arid climate and current drought conditions, there is a growing
        concern in New Mexico about the use of water for power plants. The availability
        of sufficient water supplies to meet all the needs of the state, including
        growth, is a major issue. PNM has secured water rights in connection with
        the
        existing plant at Afton, Luna and Lordsburg plants. PNM is in the process
        of
        securing a water supply for the expansion of the Afton plant. Water availability
        does not appear to be an issue for these plants at this time.
 
 B-107
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 The
        Four
        Corners region of New Mexico, in which SJGS and Four Corners are located,
        experienced drought conditions during 2002 through 2004 that could have affected
        the water supply for PNM’s generation plants. In future years, if adequate
        precipitation is not received in the watershed that supplies the Four Corners
        region, the plants could be impacted. Consequently, PNM, APS and BHP Billiton
        have undertaken activities to secure additional water supplies for SJGS,
        Four
        Corners and related mines. The USBR approved two supplemental contracts,
        one
        with the Jicarilla Apache Nation, PNM, and BHP Billiton for the SJGS and
        a
        second contract with the Jicarilla Apache Nation, APS and BHP Billiton for
        Four
        Corners, for a one-year term ending December 31, 2005. PNM has reached an
        agreement for a voluntary shortage sharing agreement with tribes and other
        water
        users in the San Juan Basin for a one-year term ending December 31, 2006.
        Similar agreements were entered into in 2003, 2004 and 2005. PNM is also
        in
        negotiations for a longer-term supplemental contract with the Jicarilla Apache
        Nation. Although the Company does not believe that its operations will be
        materially affected by the drought conditions at this time, it cannot forecast
        the weather situation or its ramifications, or how regulations and legislation
        may impact the Company’s situation in the future, should the shortages occur in
        the future.
 
 **PVNGS
        Water Supply Litigation**
  PNM
          understands that a summons served on APS in 1986 required all water claimants
          in
          the Lower Gila River Watershed of Arizona to assert any claims to water
          on or
          before January 20, 1987, in an action pending in the Maricopa County Superior
          Court. PVNGS is located within the geographic area subject to the summons
          and
          the rights of the PVNGS participants, including PNM, to the use of groundwater
          and effluent at PVNGS are potentially at issue in this action. APS, as
          the PVNGS
          project manager, filed claims that dispute the court’s jurisdiction over the
          PVNGS participants’ groundwater rights and their contractual rights to effluent
          relating to PVNGS and, alternatively, seek confirmation of those rights.
          In
          November 1999, the Arizona Supreme Court issued a decision confirming that
          certain groundwater rights may be available to the federal government and
          Indian
          tribes. In addition, the Arizona Supreme Court issued a decision in September
          2000 affirming the lower court’s criteria for resolving groundwater claims.
          Litigation on both these issues has continue in the trial court. In December
          2005, APS and other parties filed with the Arizona Supreme Court a petition
          requesting interlocutory review of a September 2005 trial court order regarding
          procedures for determining whether groundwater pumping is affecting surface
          water rights. The Court has not yet ruled on the petition. No trial date
          concerning the PVNGS participants’ water rights claims has been set in this
          matter. Although this matter remains subject to further evaluation, PNMdoes
          not
          expect that the described litigation will not have a material adverse impact
          on
          its results of operation or financial position.
 
 **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 (see "Water Supply" above).
          Recently, 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
          at this time anticipate 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**
 
 The
          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. The Company understands that SJCC has reached a settlement
          in
          principle with Western Gas for certain wells in the
  B-108
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 mine
        area. The Western Gas settlement however, does not resolve all of Western
        Gas’
potential claims in the larger San Juan underground mine area. SJCC has also
        reached a settlement with another gas leaseholder, Burlington Resources for
        certain wells in the mine area. PNM cannot predict the outcome of any future
        disputes between SJCC and Western Gas or other gas leaseholders.
 
 **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% 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 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 has stayed these proceedings pursuant
        to
        a request by the parties. In May 2005, APS and the Navajo Nation signed a
        Voluntary Compliance Agreement which would resolve the dispute regarding
        the air
        pollution, and control acts portion of the lawsuit for the term of the Voluntary
        Compliance Agreement. Provided that the EPA acts consistent with the Voluntary
        Compliance Agreement, including delegating Clean Air Act authority to the
        Navajo
        Nation, APS will dismiss the pending claims related to the Clean Air Act.
 
 In
        1998,
        the EPA issued regulations identifying those Clean Air Act provisions for
        which
        it is appropriate to treat Native American tribes in the same manner as states.
        The EPA has announced that it has not yet determined whether the Clean Air
        Act
        would supersede pre-existing binding agreements between the Navajo Nation
        and
        the Four Corners participants that could limit the Navajo Nation’s environmental
        regulatory authority over Four Corners. The Company believes that the Clean
        Air
        Act does not supersede these pre-existing agreements. The Company cannot
        currently predict the outcome of this matter.
 
 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 Supreme Court for review of
        the
        operating permit regulations. Those proceedings have been stayed, pending
        the
        settlement negotiations mentioned above. The Company cannot currently predict
        the outcome of this matter.
 
 **New
        Source Review Rules**
  In
        1999,
        the DOJ, at the request of the EPA, filed complaints against seven companies,
        alleging that the companies over the past 25 years had made modifications
        to
        their plants in violation of the NSR requirements and in some cases the NSPS
        regulations, which could result in the requirement to make costly environmental
        additions to older power plants. Whether or not the EPA will ultimately prevail
        is uncertain at this time. There have been a number of decisions regarding
        the
        pending enforcement cases against the seven companies, and some cases have
        been
        settled. The two most recent decisions, the Alabama Power Company decision
        and
        the Fourth Circuit Court of Appeals decision in the Duke Energy case, accepted
        the legal theories advanced by the companies. In October 2005, the EPA proposed
        changes to its NSR permitting program for electric generating units. This
        proposal would establish a new emissions test for NSR based on the current
        NSPS
        hourly emission increase test. At the same time the EPA announced the proposed
        changes, it also issued a memorandum to the EPA regions reporting that the
        agency’s strategy to reduce emissions from coal-fired power sector is working
        primarily through the Clean Air Interstate Rule and the regional haze rule,
        and
        that it is time to refocus the EPA’s enforcement efforts on other areas. The EPA
        has filed no complaint against PNM, and PNM believes that all of the RMRR
        work
        undertaken at its power plants was and continues to be in accordance with
        the
        requirements of NSR and NSPS.
 
 B-109
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 In
        2003,
        the EPA issued its rule regarding RMRR, clarifying what constitutes RMRR
        of
        damaged or worn equipment, subject to safeguards to assure consistency with
        the
        Clean Air Act. It provides that replacements of equipment are routine only
        if
        the new equipment is (i) identical or functionally equivalent to the equipment
        being replaced; (ii) does not cost more than 20% of the replacement value
        of the
        unit of which the equipment is a part; (iii) does not change the basic design
        parameters of the unit; and (iv) does not cause the unit to exceed any of
        its
        permitted emissions limits. Legal challenges to the RMRR rule have been filed
        by
        several states; other states have intervened in support of the rule. How
        such
        challenges will ultimately be resolved cannot be predicted but an appellate
        court order has stayed the effect of the RMRR rule pending the outcome of
        the
        litigation. The Company is unable to determine the impact of this matter
        on its
        results of operations and financial position.
 
 **The
        Clean Air Act**
 
 In
        2004,
        the EPA proposed revisions to its 1999 regional haze regulations and proposed
        guidelines for best available retrofit technology. The purpose of the regional
        haze regulations is to address regional haze visibility impairment in the
        United
        States’ national parks, wilderness areas and other similar areas. The rule calls
        for all states to establish goals and emission reduction strategies for
        improving visibility in all these areas. In early 2005, the United States
        Court
        of Appeals for the District of Columbia Circuit found that the EPA’s Western
        Regional Air Partnership Annex regulation, an optional alternative approach
        for
        western states, was illegal. In June 2005, the EPA issued the Clean Air
        Visibility Rule. The EPA also issued a proposed rule in the summer of 2005
        to
        address the Western Regional Air Partnership Annex rule that had been
        successfully challenged in the United States Court of Appeals for the District
        of Columbia Circuit. The proposed rule addresses alternative strategies to
        accomplish the requirements of the regional haze rule.
 
 The
        Company cannot predict at this time what the impact of the implementation
        of the
        regional haze rule will be on the Company’s coal-fired power plant operations.
        Potentially, additional sulfur dioxide emission reductions and nitrogen oxide
        emission reductions could be required. The nature and cost of compliance
        with
        these potential requirements cannot be determined at this time. However,
        the
        Company does not anticipate any material adverse impact on its results of
        operations or financial position.
 
 **Citizen
        Suit Under the Clean Air Act**
 
 The
        GCT
        filed a citizen suit in federal district court in New Mexico against PNM
        (but
        not against the other SJGS co-owners) in 2002. The suit alleged two violations
        of the Clean Air Act and related regulations and permits. First, GCT argued
        that
        the plant had violated the federal PSD rules, as well as the corresponding
        provisions of the New Mexico Administrative Code, at SJGS Units 3 and 4.
        Second,
        GCT alleged that the plant had regularly violated the 20% opacity limit
        contained in SJGS’s operating permit and set forth in federal and state
        regulations at Units 1, 3 and 4. The lawsuit sought penalties as well as
        injunctive and declaratory relief. PNM denied the material allegations in
        the
        complaint.
 
 In
        2004,
        the GCT provided a notice of intent to sue as a jurisdictional prerequisite
        to
        filing another citizens’ suit under the Clean Air Act. The notice of intent
        contained allegations that PNM continued to violate the applicable opacity
        standard for SJGS Units 1, 3 and 4 following the filing of the suit above,
        that
        PNM violated its duty to operate SJGS in a manner consistent with good air
        pollution control practices for minimizing pollution and that PNM failed
        to
        properly report emissions deviations and certify compliance with applicable
        air
        emissions standards.
 
 By
        order
        of the court, PNM and GCT entered into settlement discussions. The discussions
        were expanded to include the NMED to address the “Excess Emission Reports”
disclosed below. In March 2005, PNM entered into a consent decree with the
        NMED
        and GCT, which was approved by the court in May 2005. Under the terms of
        the
        consent decree, PNM will spend more than $169.0 million in new pollution
        control
        technology. The capital costs of the technology are currently estimated to
        be
        approximately $132.0 million, with an additional $33.0 to $37.0 million
        estimated for operating and maintenance costs over the next 10 years. PNM
        is
        continuing to work with its consultants and project engineers to refine the
        costs so that the consent decree is complied with in the most economical,
        efficient and effective manner. In addition, the consent decree provides
        that
        stipulated penalties are
  B-110
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 payable
        to the NMED if SJGS emissions exceed specified quarterly averages over the
        course of a calendar year. Approximately $0.6 million in stipulated penalties
        were assessed for the year ended December 31, 2005 and PNM’s portion of the
        penalties is approximately 46%. The consent decree resolves the foregoing
        lawsuit, the notice of intent, and certain threatened air quality claims
        by the
        NMED (see “Excess Emissions Reports” below). PNM plans to file for an air permit
        with the NMED prior to starting construction on certain new equipment required
        by the consent decree. The issue of the plaintiffs’ attorney fees and costs has
        been resolved.
 
 **Four
        Corners Air Emissions**
 
 The
        GCT,
        Sierra Club and National Parks Conservation Association petitioned the EPA
        to
        issue a FIP and a final Title V operating permit to regulate air emissions
        from
        Four Corners. The FIP has been pending at the EPA since 1999, and the petition
        seeks to speed up the process of issuance. The Company is unable to predict
        the
        outcome of this proceeding, but does not anticipate any material adverse
        impact
        on PNMR's or PNM's financial condition or results of operations. APS is the
        operator of Four Corners, and PNM will continue to monitor developments in
        this
        proceeding.
 
 **Excess
        Emissions Reports**
 
 As
        required by law, whenever there are excess emissions from SJGS, due to such
        causes as start-up, shutdown, upset, breakdown or certain other conditions,
        PNM
        makes filings with the NMED. For several years, PNM had been in discussions
        with
        NMED concerning excess emissions reports for the period after January 1997.
        This
        matter was resolved during 2005 in conjunction with the GCT settlement described
        above under “Citizen Suit Under the Clean Air Act.”
 
 **Archaeological
        Site Disturbance**
 
 In
        2002,
        the USFS notified PNM that apparent disturbances to archeological sites had
        been
        discovered in and around the rights-of-way for PNM’s transmission lines in the
        Carson National Forest in New Mexico. PNM had hired Great Southwestern to
        perform certain climb and tighten activities on those transmission
        lines.
 
 PNM
        has
        been verbally advised that the BLM and USFS have decided to not pursue criminal
        actions, but no written confirmation has been received. Although this matter
        has
        been dormant for a very long time, there is a possibility that additional
        action
        could be required to address disturbances on BLM and USFS land, and that
        BLM and
        USFS could pursue potential civil claims.
 
 In
        2004,
        PNM and Great Southwestern entered into an agreement with the NNHPD for a
        survey
        of potential impacts on Navajo Nation land to determine if disturbed cultural
        resources exist. Under the terms of the 2004 agreement, the NNHPD agreed
        to
        release all claims against PNM and Great Southwestern for any impacts on
        Navajo
        Nation land arising from the climb and tighten project. PNM provided survey
        reports to the NNHPD that were accepted by the Navajo Nation in October 2005
        and
        the Company was notified that the NNHPD has determined that damage resulting
        from the climb and tighten project was minimal and a treatment plan will
        not be
        necessary. The NNHPD and the Navajo Nation Division of Natural Resources
        are of
        the opinion that PNM has complied fully with the stipulations set forth in
        the
        2004 agreement, and as such, NNHPD requires no further work from PNM or Great
        Southwestern.
 
 **Santa
        Fe Generating Station**
 PNM
          and
          the NMED conducted investigations of gasoline and chlorinated solvent
          groundwater contamination detected beneath PNM's former Santa Fe Generating
          Station site to determine the source of the contamination pursuant to a
          1992
          settlement agreement between PNM and the NMED.
 
 B-111
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 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 is cleaned up to
        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 former Santa Fe Generating Station site. The investigation
        will
        study possible sources for the chlorinated solvents in the groundwater. The
        NMED
        investigation is ongoing.
 
 **Natural
        Gas Royalties Qui Tam Litigation**
 
 In
        1999,
        a private relator served a complaint alleging violations of the False Claims
        Act
        by PNM and its wholly owned subsidiaries, Sunterra Gas Gathering Company
        and
        Sunterra Gas Processing Company (collectively, the “Company” for purposes of
        this discussion), by purportedly failing to properly measure natural gas
        from
        federal and tribal properties in New Mexico, and consequently, underpaying
        royalties owed to the federal government. The complaint seeks actual damages,
        treble damages, costs and attorneys fees, among other relief.
 
 The
        Company is currently participating with other defendants in a motion to dismiss
        on the ground that the relator does not meet certain jurisdictional requirements
        for bringing suit under the False Claims Act. In May 2005, a Special Master
        issued a report that recommended to the court that several defendants, including
        the Company, be dismissed from the case on this ground. The relator objected
        to
        the Special Master’s recommendation regarding the Company. A hearing on all
        motions regarding the Special Master's report was conducted in December 2005
        in
        the Federal District Court for the District of Wyoming but no ruling has
        been
        issued yet. The Company is vigorously defending this lawsuit. If the Special
        Master’s recommendation regarding dismissal of the Company on jurisdictional
        grounds is not sustained, the Company is unable to estimate the potential
        liability, if any, or to predict the ultimate outcome of this lawsuit.
 
 **Asbestos
        Cases**
 
 PNM
        was
        named in 2003 as one of a number of defendants in 21 personal injury lawsuits
        relating to alleged exposure to asbestos. All of these cases involve claims
        of
        individuals, or their descendents, who worked for contractors building, or
        working at, PNM power plants. Some of the claims relate to construction
        activities during the 1950s and 1960s, while other claims generally allege
        exposure during the last 30 years. PNM has never manufactured, sold or
        distributed products containing asbestos. PNM has been dismissed with prejudice
        from all but two of the remaining cases. PNM was insured by a number of
        different insurance policies during the time period at issue in these cases.
        Although the Company is unable to fully predict the outcome of this litigation,
        the Company believes that these legal proceedings will not have a material
        impact on its results of operations or financial position.
 
 **SESCO
        Matter**
 
 In
        2003,
        the TCEQ requested information from PNM concerning any involvement that PNM
        had
        with SESCO, a former electrical equipment repair and sales company located
        in
        San Angelo, Texas. PNM was informed that the TCEQ and the EPA claim to have
        identified contamination of the soil and groundwater at the site.
 
 TCEQ
        is
        conducting a site investigation of a SESCO facility pursuant to the Texas
        Solid
        Waste Act and the SESCO site has been referred to the Superfund Site Discovery
        and Assessment Program. The primary concern appears to be polychlorinated
        biphenyls in soil and groundwater on and adjacent to the site. The TCEQ is
  B-112
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 conducting
        the site investigation to determine what remediation activities are required
        at
        the SESCO site and to identify potentially responsible parties. In 2004,
        PNM
        submitted its preliminary response to the TCEQ request for information. The
        response states that PNM previously had a requirements contract with SESCO
        for
        the repair of electric transformers. It appears that a number of transformers
        were sent to SESCO for repair. In addition, it appears that PNM sold a number
        of
        retired transformers to SESCO. In February 2005, PNM agreed to participate
        in
        the potentially responsible parties’ committees known as the “Working Group.”
PNM is voluntarily participating with the other potentially responsible parties
        in the investigation and may participate in any required remediation at the
        SESCO facility. PNM is classified as a de minimis potentially responsible
        party.
        The Working Group has compiled a list and percentage involvement of persons
        and
        entities that sent transformers and other equipment to SESCO and has signed
        a
        contract with an environmental contractor to perform a remedial investigation
        and feasibility study for the SESCO site. In addition, the Working Group
        has
        hired common counsel to represent the interest of the Working Group. PNM
        has
        conducted an assessment of the Working Group settlement offer for de minimis
        parties and has agreed to settle for a premium payment of $0.3 million,
        including past contribution credits, to release PNM from further project
        economic and risk liability with certain exceptions. TCEQ has until May 3,
        2006
        to negotiate an administrative order with the Working Group and thus the
        settlement offer is contingent upon final approval of the administrative
        order
        by the TCEQ. PNM is unable to predict the outcome at this time. As discussed
        below, TNMP is also involved in the SESCO matter.
 
 **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.
        PNM
        and SJCC have been participating in various sessions sponsored by EPA to
        consider rulemaking for the disposal of coal combustion products. The rulemaking
        would be pursuant to the Bevill Amendment of the Resource Conservation and
        Recovery Act. 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.
 
 **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
        and other California buyers filed a complaint with the FERC in 2000 against
        sellers into the California wholesale electric market. In 2002, the ALJ issued
        the Proposed Findings on California Refund Liability, in which it determined
        that the Cal ISO had, for the most part, correctly calculated the amounts
        of the
        potential refunds owed by sellers and identified ballpark figures 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. This change increases the amounts PNM will be
        required to refund; however, the precise amounts will not be certain until
        the
        Cal ISO and Cal PX recalculate them.
 
 In
        November 2005, the Cal ISO reported that the Cal PX had concluded the
        publication of settlement statements reflecting the refund amounts for sellers
        and that the Cal ISO is waiting to proceed with the adjustment phase in which
        it
        will complete a recalculation of the refund to account for audited fuel cost
        allowance offsets, emissions offsets, cost-based recovery offsets and interest
        on amounts unpaid and refunds before finalizing its recalculated refund amounts.
        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 their 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
  B-113
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 revenue
        shortfall for their transactions during the refund period. 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 other
        competitive 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. PNM will vigorously pursue its
        administrative and judicial remedies regarding this order. While PNM believes
        it
        has meritorious legal arguments that it intends to pursue, the Company cannot
        predict the outcome of this cost recovery proceeding at this time. In addition,
        the Company has engaged in settlement discussions with California parties
        based
        upon a template provided by the FERC, but is unable to predict whether
        settlement will be reached. (See also, discussion below under “California
        Attorney General Complaint.”)
 
 *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, which is still pending. As
        a participant in the proceedings before the FERC, PNM is also participating
        in
        the appeal proceedings. The Company is unable to predict the ultimate outcome
        of
        this appeal, or whether PNM will ultimately be directed to make any refunds
        for
        these transactions.
 
 *FERC
        Gaming Partnerships Order*
 
 In
        2003,
        in the Gaming
        Partnerships O rder,
        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.
 
 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 either engaged in
        a
        gaming practice that violated the Cal ISO or Cal PX tariffs. Additionally,
        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
  B-114
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 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 have either objected
        to
        the settlement or otherwise sought efforts to stay or overturn FERC’s order. PNM
        cannot predict the final 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 approximately $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 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. PNM participated with other competitive sellers
        requesting rehearing before the full court by the Ninth Circuit, which is
        still
        pending. 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*
 
 Several
        class action lawsuits have been filed in California state courts against
        electric generators and marketers, alleging that the defendants violated
        the law
        by manipulating the market to grossly inflate electricity prices. Named
        defendants in these lawsuits include Duke and related entities along with
        other
        named sellers into the California market and numerous other unidentified
        defendants. Certain of these lawsuits were consolidated for hearing in
        California state court. In 2002, the named defendants served a cross-claim
        on
        PNM. Duke also cross-claimed against many of the other sellers into the
        California market. In October 2005, PNM received an indication that Duke
        intended to dismiss all cross-complaints against other sellers once its maximum
        liability was confirmed by final approval of its settlement in the original
        class action lawsuits. Based upon this indication, various cross-defendants,
        including PNM, entered into a contingent settlement with Duke under which
        Duke
        would conditionally dismiss the cross-complaints against PNM and others in
        anticipation of the California state court approving the settlement between
        Duke
        and the original California plaintiffs. In January 2006, the Duke settlement
        in
        the original class action lawsuits was approved, thereby removing the
        contingency in the settlement with the cross-defendants, including PNM. The
        settlement with Duke is now final.
 
 B-115
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 In
        May
        2005, the California Attorney General filed a lawsuit in California state
        court
        against PNM, PowerEx, a Canadian energy trading company, 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. The lawsuit claims that California customers were overcharged
        over a billion dollars and requests the court to award actual and treble
        damages. In June 2005, PowerEx filed a Notice of Removal that served to remove
        the lawsuit to the Federal District Court for the Eastern District of
        California. Both PNM and PowerEx filed motions to dismiss the lawsuit, based
        in
        part on legal precedent in the Ninth Circuit holding that state antitrust
        claims
        asserting unlawful wholesale power prices under the Federal Power Act are
        preempted and a complainant’s only remedy lies in FERC proceedings. Such
        proceedings are already currently pending at the FERC and the California
        Attorney General is involved in these proceedings. The Company’s motion to
        dismiss is still pending as well as the California Attorney General’s motion to
        remand the case back to state court, which both PNM and PowerEx have opposed.
        The Company cannot predict the outcome of this litigation, or whether PNM
        will
        be required to make any refunds or pay damages as a result of this
        litigation.
 
 *Block
        Forward Agreement Litigation*
 
 In
        2002,
        PNM was served with a declaratory relief complaint filed by the State of
        California in California state court. The state’s declaratory relief complaint
        seeks a determination that the state is not liable for the commandeering
        of
        certain energy contracts known as Block Forward Agreements. The Block Forward
        Agreements were a form of futures contracts for the purchase of electricity
        at
        below-market prices and served as security for payment by PG&E and SCE for
        their electricity purchases through the Cal PX. When PG&E and SCE defaulted
        on payment obligations incurred through the Cal PX, the Cal PX moved to
        liquidate the Block Forward Agreements to satisfy in part the obligations
        owed
        by PG&E and SCE. Before the Cal PX could liquidate the Block Forward
        Agreements, the State of California commandeered them for its own purposes.
 
 PNM
        filed
        a complaint against the State of California in California state court in
        2002,
        seeking damages for the state’s commandeering of the Block Forward Agreements
        and requesting judicial coordination with the state’s declaratory relief
        complaint. In 2004 the various parties in the case were presented with a
        proposed stipulation under which the sellers would agree that the Cal PX
        would
        represent their interest in the proceedings, the sellers would agree to be
        bound
        by any judgment in the case, the sellers would dismiss their complaints against
        the State of California, and in turn, the State of California would dismiss
        its
        cross-complaints against the sellers, and the Cal PX would amend its complaint
        to indicate that it is bringing the lawsuit on behalf of the sellers. PNM
        agreed
        with the stipulation and executed the stipulation agreement. The Company
        cannot
        predict the outcome of the litigation involving the Cal PX and the State
        of
        California, or whether PNM will be awarded any damages as a result of the
        litigation.
 
 In
        separate proceedings before the FERC involving the collection of costs
        associated with the Cal PX wind-up activities, the subject of the Block Forward
        Agreement litigation became an element of the ongoing settlement discussions.
        In
        September 2005, the parties to the Cal PX wind-up costs proceedings included,
        as
        part of the settlement terms, that the California market participants, including
        PNM, will have the option to voluntarily agree to continue funding on a
        going-forward basis the expenses associated with the Block Forward Agreement
        litigation. Alternatively, market participants could agree to take an assignment
        of the Cal PX’s claim and they could then continue to prosecute the claim with
        the condition that any recovery that may ultimately be achieved would be
        deposited into a FERC account for distribution as the FERC deems appropriate.
        In
        October 2005, the FERC issued its order accepting the Cal PX wind-up settlement.
        Two parties have elected to opt-in to fund the litigation. PNM has not made
        the
        choice to opt-in and fund the litigation. Given the two settlements PNM has
        entered into in these proceedings, there is no further participation by PNM
        in
        the Block Forward Agreement litigation.
 
 **Wholesale
        Power Marketing Antitrust Suit**
 
 In
        2004,
        PNM received notice that it was included in a list of 56 defendants that
        were
        sued by the City of Tacoma Department of Public Utilities in federal district
        court in the State of Washington. PNM was listed in a class of defendants
        referred to as the Trading Defendants, who allegedly engaged in buying, selling
        and marketing power in California and other locations in the western United
        States. The complaint alleged the Trading Defendants acted in concert among
        themselves and with Non-Defendant Trading Co-Conspirators and engaged in
        conduct
        that
  B-116
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 amounted
        to market manipulation. The complaint identified specific conduct that allegedly
        amounted to market manipulation, including the submission of false information
        and misrepresentation regarding load schedules, bids, power supply, transmission
        congestion, source and destination of energy, the supply and provision of
        energy
        and ancillary services. The complaint alleged the activities of the Trading
        Defendants, along with Generator Defendants and the Co-Conspirators, resulted
        in
        substantially increased prices for energy in the Pacific Northwest spot market
        in excess of what otherwise would have been the price and asserted damages
        in
        excess of $175.0 million from the multiple defendants. There have been three
        Ninth Circuit decisions that, collectively, appear to make the plaintiff’s case
        more difficult to prevail. As a result, PNM joined a motion to dismiss the
        City
        of Tacoma Department of Public Utilities complaint given Ninth Circuit
        precedent. In February 2005, the district court judge in the case granted
        defendants’ motion to dismiss. As a result, the antitrust lawsuit against PNM
        filed by the City of Tacoma Department of Public Utilities was dismissed.
        In
        March 2005, the City of Tacoma Department of Public Utilities filed an appeal
        in
        the Ninth Circuit contesting the district court’s decision to dismiss the
        complaint. PNM participated in the appeal in support of the dismissal and
        joined
        in defendants’ brief filed in the Ninth Circuit, as well as a motion for summary
        affirmance. The appeal and defendants’ motion for summary affirmance of the
        district court is pending before the Ninth Circuit and the Company cannot
        predict the outcome of this appeal, or whether PNM will be required to make
        any
        refunds or pay damages as a result of this litigation.
 
 TNMP
 
 **SESCO
        Matter**
 
 As
        discussed above in the PNM “SESCO Matter,” in 2003, the TCEQ notified
        approximately 50 companies, including TNMP, that releases of hazardous
        substances had been documented from a site owned and operated by SESCO. TNMP
        purchased transformers from the vendor and also sent some transformers to
        the
        vendor for repair and/or disposal. The owner and operator of the site have
        filed
        for bankruptcy and the site is under the control of the bankruptcy trustee.
        In
        2004, 15 of the companies identified by TCEQ as potentially responsible parties,
        including TNMP, formed the initial Working Group to manage the remediation
        efforts and determine the allocation of responsibility among the potentially
        responsible parties. TNMP is classified as a de minimis potentially responsible
        party. The Working Group has compiled a list and percentage involvement of
        persons and entities that sent transformers and other equipment to SESCO
        and has
        signed a contract with an environmental contractor to perform a remedial
        investigation and feasibility study for the SESCO site. In addition, the
        Working
        Group has hired common counsel to represent the interest of the Working Group.
        TNMP has
        conducted an assessment of the Working Group settlement offer for de minimis
        parties and has agreed to settle for a premium payment of $0.3 million,
        including past contribution credits, to release TNMP from further project
        economic and risk liability with certain exceptions. TCEQ has until May 3,
        2006
        to negotiate an administrative order with the Working Group and thus the
        settlement offer is contingent upon final approval of the administrative
        order
        by the TCEQ. TNMP
        is
        unable to predict the outcome at this time.
 
 **TNMP
        True-Up Proceeding**
 
 In
        2004,
        the PUCT issued its first order in TNMP’s stranded cost 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. The PUCT decision established $87.3 million as TNMP’s stranded costs.
 
 In
        April
        2005, the PUCT ruled that TNMP be allowed recovery of $39.2 million of carrying
        charges on stranded costs for the period January 1, 2002 through July 21,
        2004.
        In accordance with provisions within SFAS No. 92, *“Regulated
        Enterprises - Accounting for Phase-In Plans”* (“SFAS
        92”), TNMP recorded $27.2 million of carrying charges to its Consolidated
        Statement of Earnings for the period January 1, 2002 through July 21, 2004,
        in
        2004. TNMP was limited in its recognition for income statement purposes to
        only
        the debt related portion of the carrying charges, and TNMP was prohibited
        from
        income statement recognition of the equity portion of the carrying charges
        until
        the actual receipt of those amounts from customers. As of December 31, 2005,
        the
        accrual for the debt related portion was $33.9 million and the equity related
        portion totaled $25.6 million.
 
 B-117
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 In
        July
        2005, the PUCT confirmed TNMP's calculation of the carrying costs on stranded
        costs in a written order. TNMP and other parties have filed petitions for
        judicial review of the July PUCT order and the appeals are pending in district
        court in Austin, Texas. Additionally, the PUCT is considering a change in
        its
        rules that would reduce the amount of carrying charges recognized in earnings
        by
        TNMP on a prospective basis. The PUCT has not yet issued a final order and
        thus
        the Company cannot currently quantify the effect this may have on its results
        of
        operations or financial position.
 
 **Power
        Resource Group Litigation**
 
 Since
        1998, TNMP has been engaged in litigation in the state and federal courts
        with
        PRG involving the effectiveness of certain PUCT rules that implement PURPA
        regulations. PRG claims that if the FERC regulations had been properly
        implemented in Texas, TNMP would have been required to make a long-term purchase
        of electricity from PRG. PRG appealed to the United States District Court
        of
        Appeals for the Fifth Circuit, the ruling in favor of TNMP and the PUCT by
        the
        United States District Court for the Western District of Texas. The court
        ruled
        in favor of TNMP and the PUCT in June 2005. PRG
        has
        filed a petition with the United States Supreme Court.
 
 **(17)** **Regulatory
        and Rate Matters**
 
 PNMR
 
 **Energy
        Policy Act**
 
 In
          August
          2005, the Energy Policy Act of 2005 was enacted, effective February 2006.
          Implementation of various portions of the law requires the issuance of
          rules by
          the FERC. The FERC has adopted final rules implementing various provisions
          of
          the Energy Policy Act including rules pertaining to repeal of PUHCA 1935
          and
          implementation of PUHCA 2005, the FERC’s expanded mergers and acquisitions
          approval authority and prohibition of energy market manipulation. FERC
          has also
          issued a number of other proposed rules that are pending, including rules
          pertaining to preventing undue discrimination in transmission services
          and
          electric reliability standards. The Company will continue to monitor, and
          participate in as appropriate, the FERC and other proceedings involving
          implementation of the Energy Policy Act, in order to assess the implications
          of
          the new law and rules on its operations.
 
 **Retail
        Competition**
 
 The
        Texas
        electricity market has been open to retail competition since 2002. In accordance
        with Senate Bill 7, TNMP provides transmission and distribution services
        at
        regulated rates to various retail electric providers that, in turn, provide
        retail electric service within TNMP’s Texas service area. First Choice, TNMP’s
        affiliated retail electric provider, performs activities related to the sale
        of
        electricity to retail customers in Texas.
 
 In
        2004,
        several changes to customer protection rules in Texas became effective. Of
        the
        changes, the rules related to disconnection for non-payment and the required
        amount of a customer deposit is having the greatest impact on First Choice.
        The
        new rule for disconnection for non-payment states that if a customer does
        not
        make a payment or payment arrangement until after the final due date specified
        in the disconnect notice, the retail electric provider is allowed to disconnect
        the customer. The previous rule only allowed the retail electric provider
        to
        terminate service and transfer the customer to the retail electric provider
        that
        was affiliated with the customer’s transmission and distribution service
        provider, or to the provider of last resort for non-payment. The new rule
        also
        increases the amount of deposit required from customers.
 
 First
        Choice is responsible for energy supply related to the sale of electricity
        to
        retail customers in Texas. Senate Bill 7 contains no provisions for the specific
        recovery of fuel and purchased power costs, although First Choice can request
        that the PUCT change the price-to-beat fuel factor twice a year to recognize
        changes in natural gas prices. The rates charged to new customers acquired
        by
        First Choice outside of TNMP’s service territory are not regulated by the PUCT,
        but are negotiated with each customer. As a result, changes in fuel and
        purchased power costs will affect First Choice’s operating results.
 
 B-118
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 **Price-to-Beat
        Fuel Factor**
 
 In
        October 2005, the PUCT approved First Choice’s request to increase its
        price-to-beat fuel factor. First Choice estimates that the increase in the
        price-to-beat fuel factor increased 2005 revenues by approximately $9.4 million,
        based on an increase in the fuel factor to $0.0771485 per kilowatt hour from
        October 29 through December 31, 2005. The price-to-beat fuel factor
        automatically increased again to $0.0791777 per kilowatt hour on January
        1,
        2006. If natural gas markets decline from the levels embedded in its current
        price-to-beat fuel factors, First Choice will file a request to reset its
        price-to-beat fuel factor shortly before the PUCT issues an order in TNMP's
        60-day rate review case. Resulting rates will be effective within 30 days
        of a
        final order in TNMP's 60-day rate review.
 
 Under
        the
        PUCT’s final order approving the acquisition of TNP by PNMR, First Choice is
        required to file its post-true-up price-to-beat adjustment filing to adjust
        its
        price-to-beat fuel factor within ten days of the earlier of: (1) the issuance
        of
        a proposed decision in TNMP’s 60-day rate review, or (2) the filing of a
        unanimous settlement of TNMP’s 60-day rate review. If the average of the 20-day
        rolling price of natural gas is less than the average 20-day rolling price
        in
        First Choice’s current price-to-beat fuel factor, then First Choice will be
        required to decrease the fuel factor by the percentage change. As this
        adjustment is based on future natural gas prices, the Company cannot predict
        the
        impact this requirement will have on its results of operations or financial
        position.
 
 **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 resulting rates will take effect no later than 30 days following
        a final order on TNMP’s 60-day rate review. 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 acquisition stipulation. First
        Choice’s price-to-beat base rate case hearing was consolidated with TNMP’s
        60-day rate review hearing and is set for April 2006 (see “60-Day Rate Review”
below).
 
 **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 2007. Additionally, Constellation has agreed
        to
        supply power in certain transactions under the agreement beyond the date
        when
        that commitment expires.
 
 In
        2004,
        FCPSP, a bankruptcy remote entity, was created pursuant to the agreement
        with
        Constellation to hold all customer contracts, wholesale power contracts,
        and
        certain natural gas 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 is restricted
        by
        covenants that limit the size of FCPSP's unhedged market positions and require
        that sales by FCPSP retain a positive retail margin. The agreement does 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 increases Constellation's credit exposure to FCPSP beyond
        a
        limit based on Constellation's liens in cash and accounts receivable,
        Constellation will have no obligation to supply additional power to customers
        of
        FCPSP unless FCPSP provides letters of credit or other collateral acceptable
        to
        Constellation, and FCPSP will be constrained in its ability to sign up
        additional customers until that credit shortfall is corrected.
 
 FCPSP
        may
        terminate the agreement upon 30 days' prior written notice to Constellation
        for
        any reason, but the agreement and all liens securing the agreement remain
        in
        effect with respect to transactions entered into prior to the termination
        until
        both parties have fulfilled all of their obligations with respect to such
        transactions or such transactions have been terminated for default or reasons
        related to regulatory changes.
 
 B-119
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 PNM
 
 **Global
        Electric Agreement**
 
 The
        Global Electric Agreement was signed in 2003. The Global Electric Agreement
        provided for the repeal of a majority of the Restructuring Act, a fixed rate
        path, procedures for PNM’s participation in unregulated generating plant
        activities and other regulatory issues. In accordance with this rate path,
        PNM
        reduced its retail rates by 2.5% in September 2005. The rate path is effective
        through December 31, 2007, at which time rates are subject to review by the
        NMPRC. As a result of the repeal of the Restructuring Act, PNM re-applied
        the
        accounting requirements of SFAS 71, as amended, to its regulated generation
        activities.
 
 **Transmission
        Rate Case**
 
 In
        March
        2005, PNM filed a notice with the FERC to increase its wholesale electric
        transmission revenues by approximately $7.8 million annually. If approved,
        the
        rate increase would apply to all of PNM's wholesale electric transmission
        service customers, which includes other utilities, electric co-operatives
        and
        entities that purchase wholesale transmission service from PNM. The proposed
        rate increase will not impact PNM's retail customers. In May 2005, the FERC
        issued an order in the case suspending the new rates for the standard five-month
        period and made the new rates effective November 1, 2005, subject to refund.
        Settlement discussions are continuing with FERC staff and the parties to
        the
        proceeding. The Company is unable to predict the outcome of the rate proceeding
        or if the parties will be able to reach a settlement in the case.
 
 **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 charge adjustment clause, SPS has been
        overcharging PNM for deliveries of energy under three contracts, and continues
        to do so. PNM requested that the FERC investigate SPS’ charges under its fuel
        clause for the period 2001 through 2004. Charges for 2005 and 2006 are being
        addressed in a separate case currently pending before the FERC, in which
        PNM is
        an intervenor. PNM’s complaint also alleges that SPS’ rates for interruptible
        power sales are excessive and requested that the FERC set a refund effective
        date of September 13, 2005 for these rates. A settlement conference was held
        before a FERC settlement judge in January 2006. Additionally, in November
        2005,
        SPS filed an electric transmission rate case proposing to raise rates charged
        to
        customers effective July 2006. PNM has intervened in the case and objected
        to
        the proposed rate increase. PNM is currently awaiting a procedural order
        in the
        SPS rate case. While PNM and SPS continue to engage in settlement discussions,
        PNM cannot predict the outcome of these SPS proceedings at the
        FERC.
 
 TNMP
 
 **Acquisition
        Agreements**
 
 In
        2005,
        the PUCT approved a settlement agreement outlining terms and conditions
        necessary for the PUCT to find the acquisition of TNP and its subsidiaries,
        TNMP
        and First Choice Power, to be in the public interest. Among other issues,
        the
        settlement agreement calls for:
 ·
              a
                  two-year electric rate freeze that includes a $13.0 million annual
                  rate
                  reduction in TNMP's retail delivery rates effective May 1,
                  2005;
 ·
              an
                  authorized return on equity of 10.25% on an implied capital structure
                  of
                  60% debt and 40% equity for certain reporting
                  purposes;
 ·
              the
                  use of a 60/40% debt/equity capital structure in TNMP's next base
                  rate
                  case if filed before January 1, 2009;
                  and
 ·
              a
                  $6.0 million synergy savings credit amortized over 24 months effective
                  after the close of the transaction.
  B-120
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 Also
          in
          2005, the NMPRC approved a stipulation in connection with the acquisition
          of
          TNP. Among other issues, the stipulation calls for:
 
 ·
              a
                  three-phase rate reduction totaling 15%, to TNMP’s electric customers in
                  southern New Mexico, beginning January 2006 and ending December
                  2010; the
                  rate reduction will lower TNMP electric rates by approximately
                  $9.6
                  million in the first year;
 ·
              an
                  imputed 55/45% debt/equity structure with an assumed rate of return
                  on
                  equity of 10.5% for TNMP;
 ·
              PNM
                  to remain the power supplier for TNMP’s New Mexico needs through 2010;
                  and
 ·
              integration
                  of TNMP’s New Mexico assets into PNM effective January 1, 2007, the
                  companies, however, will maintain separate rates through
                  2010.
 
 **60-Day
        Rate Review**
 
 In
        November 2005, TNMP made its required 60-day rate review filing. TNMP’s case
        establishes a competition transition charge for recovery of the true-up balance.
        TNMP’s competition transition charge will take effect no later than 30 days
        following a final order on TNMP’s 60-day rate review. TNMP’s 60-day rate review
        is set for hearing in April 2006.
 
 **Final
        Fuel Reconciliation**
 
 In
        2004,
        the PUCT issued an order that disallowed $15.7 million of fuel and energy
        related purchased power costs that TNMP incurred in 2000 and 2001, prior
        to
        retail competition. TNMP recorded a $10.1 million charge to earnings, net
        of tax
        effect, for the disallowance in 2003, and subsequently appealed the PUCT
        decision to the district court. In June 2005, the District Court affirmed
        the
        PUCT order, effectively denying TNMP’s appeal.
 
 **(18)** **Environmental
        Issues**
 
 The
        normal course of operations of the Company necessarily involves activities
        and
        substances that expose the Company to potential liabilities under laws and
        regulations protecting the environment. 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, even though the past acts may
        have
        been lawful at the time they occurred. Sources of potential environmental
        liabilities include the Federal Comprehensive Environmental Response
        Compensation and Liability Act of 1980 and other similar statutes.
 
 The
        Company records its environmental liabilities when site assessments or remedial
        actions are probable and a range of reasonably likely cleanup costs can be
        estimated. The Company reviews its sites and measures the liability quarterly,
        by assessing a range of reasonably likely costs for each identified site
        using
        currently available information, including existing technology, presently
        enacted laws and regulations, experience gained at similar sites, and the
        probable level of involvement and financial condition of other potentially
        responsible parties. These estimates include costs for site investigations,
        remediation, operations and maintenance, monitoring and site closure. Unless
        there is a probable amount, the Company records the lower end of such reasonably
        likely range of costs (classified as other long-term liabilities at undiscounted
        amounts).
 
 B-121
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 The
        Company’s recorded liability estimated to remediate its identified sites was as
        follows:
 
 **PNMR**
              
              **PNM**
              
              **TNMP****December
                  31,**
              
              **December
                  31,**
              
              **December
                  31,****2005**
              
              **2004**
              
              **2005**
              
              **2004**
              
              **2005**
              
              
              **2004**(In
                  thousands)$5,285
              
              $5,835
              
              $4,700
              
              $5,835
              
              $585
              
              
              $615
 
 The
        Company expended the following for remediation:
 
 **Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003**(In
                  thousands)**PNMR**
              $465
              
              $267
              
              $3,156**PNM**
              $443
              
              $267
              
              $3,156
 
 **Post-**
              
              
              **Pre-**
              
              **Pre-**
              
              **Pre-****Acquisition**
              
              
              **Acquisition**
              
              **Acquisition**
              
              **Acquisition****June
                  6-**
              
              
              **January
                  1-**
              
              **Year
                  Ended**
              
              **Year
                  Ended****December
                  31,**
              
              
              **June
                  6,**
              
              **December
                  31,**
              
              **December
                  31,****2005**
              
              
              **2005**
              
              **2004**
              
              **2003**(In
                  thousands)**TNMP**
              $22
              
              
              $20
              
              $-
              
              $-
 
 The
        ultimate cost to clean up the Company’s identified sites may vary from its
        recorded liability due to numerous uncertainties inherent in the estimation
        process, such as the extent and nature of contamination, the scarcity of
        reliable data for identified sites, and the time periods over which site
        remediation is expected to occur. The Company expects that the majority of
        the
        December 31, 2005 environmental liability will be paid over the next five
        years,
        funded by cash generated from operations. Future environmental obligations
        are
        not expected to have a material impact on the results of operations or financial
        condition of the Company.
 
 
 
 B-122
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 **(19)** **Accumulated
        Other Comprehensive Income (Loss)**
 
 Accumulated
        other comprehensive income (loss) reports a measure for accumulated changes
        in
        equity of the Company that results from transactions and other economic events
        other than transactions with shareholders. The following tables set forth
        the
        changes in each component of accumulated other comprehensive income (loss)
        net
        of tax:
 
 PNMR
 
 **Additional**
              
              **Mark-to-****Unrealized**
              
              **minimum**
              
              **market
                  for**
              
              **Accumulated****gain
                  (loss)**
              
              **pension**
              
              **certain**
              
              **other****on**
              
              **liability**
              
              **derivative**
              
              **comprehensive****securities**
              
              **adjustment**
              
              **transactions**
              
              **income
                  (loss)**(In
                  thousands)**Balance
                  at December 31, 2002**
              
              $
              1,446
              
              $
              (85,464
              )
              $
              (10,703
              )
              $
              (94,721
              )Period
                  change in:Additional
                  minimum pension liability adjustment
              
              
              -
              
              
              9,589
              
              
              -
              
              
              9,589Unrealized
                  holding gains arising from the period
              
              
              1,916
              
              
              -
              
              
              -
              
              
              1,916Reclassification
                  adjustment for gains included innet
                  income
              
              
              (672
              )
              
              -
              
              
              -
              
              
              (672
              )Change
                  in fair market value of designated cashflow
                  hedges
              
              
              -
              
              
              -
              
              
              10,401
              
              
              10,401**Balance
                  at December 31, 2003**
              
              
              2,690
              
              
              (75,875
              )
              
              (302
              )
              
              (73,487
              )Period
                  change in:Additional
                  minimum pension liability adjustment
              
              
              -
              
              
              (21,996
              )
              
              -
              
              
              (21,996
              )Unrealized
                  holding gains arising from the period
              
              
              1,849
              
              
              -
              
              
              -
              
              
              1,849Reclassification
                  adjustment for gains included innet
                  income
              
              
              (1,137
              )
              
              -
              
              
              (485
              )
              
              (1,622
              )Change
                  in fair market value of designated cash flow hedges
              
              
              -
              
              
              -
              
              
              5,443
              
              
              5,443**Balance
                  at December 31, 2004**
              
              
              3,402
              
              
              (97,871
              )
              
              4,656
              
              
              (89,813
              )Period
                  change in:Additional
                  minimum pension liability adjustment
              
              
              -
              
              
              (12,701
              )
              
              -
              
              
              (12,701
              )Unrealized
                  holding gains arising from the period
              
              
              4,498
              
              
              -
              
              
              -
              
              
              4,498Reclassification
                  adjustment for gains included innet
                  income
              
              
              (4,464
              )
              
              -
              
              
              (953
              )
              
              (5,417
              )Change
                  in fair market value of designated cash flow hedges
              
              
              -
              
              
              -
              
              
              11,844
              
              
              11,844**Balance
                  at December 31, 2005**
              
              $
              3,436
              
              $
              (110,572
              )
              $
              15,547
              
              $
              (91,589
              )
 
 B-123
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 PNM
 
 **Additional**
              
              **Mark-to-****Unrealized**
              
              **minimum**
              
              **market
                  for**
              
              **Accumulated****gain
                  (loss)**
              
              **pension**
              
              **certain**
              
              **other****on**
              
              **liability**
              
              **derivative**
              
              **comprehensive****securities**
              
              **adjustment**
              
              **transactions**
              
              **income
                  (loss)**(In
                  thousands)**Balance
                  at December 31, 2002**
              
              $
              1,005
              
              $
              (85,464
              )
              $
              (9,671
              )
              $
              (94,130
              )Period
                  change in:Additional
                  minimum pension liability adjustment
              
              
              -
              
              
              9,589
              
              
              -
              
              
              9,589Unrealized
                  holding gains arising from the period
              
              
              2,357
              
              
              -
              
              
              -
              
              
              2,357Reclassification
                  adjustment for gains included innet
                  income
              
              
              (672
              )
              
              -
              
              
              -
              
              
              (672
              )Change
                  in fair market value of designated cash flow hedges
              
              
              -
              
              
              -
              
              
              9,369
              
              
              9,369**Balance
                  at December 31, 2003**
              
              
              2,690
              
              
              (75,875
              )
              
              (302
              )
              
              (73,487
              )Period
                  change in:Additional
                  minimum pension liability adjustment
              
              
              -
              
              
              (21,996
              )
              
              -
              
              
              (21,996
              )Unrealized
                  holding gains arising from the period
              
              
              1,849
              
              
              -
              
              
              -
              
              
              1,849Reclassification
                  adjustment for gains included innet
                  income
              
              
              (1,137
              )
              
              -
              
              
              (485
              )
              
              (1,622
              )Change
                  in fair market value of designated cash flow hedges
              
              
              -
              
              
              -
              
              
              5,443
              
              
              5,443**Balance
                  at December 31, 2004**
              
              
              3,402
              
              
              (97,871
              )
              
              4,656
              
              
              (89,813
              )Period
                  change in:Additional
                  minimum pension liability adjustment
              
              
              -
              
              
              (12,672
              )
              
              -
              
              
              (12,672
              )Unrealized
                  holding gains arising from the period
              
              
              4,498
              
              
              -
              
              
              -
              
              
              4,498Reclassification
                  adjustment for gains included innet
                  income
              
              
              (4,464
              )
              
              -
              
              
              (953
              )
              
              (5,417
              )Change
                  in fair market value of designated cash flow hedges
              
              
              -
              
              
              -
              
              
              12,889
              
              
              12,889**Balance
                  at December 31, 2005**
              
              $
              3,436
              
              $
              (110,543
              )
              $
              16,592
              
              $
              (90,515
              )
 
 
 B-124
 **PNM
                RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
                SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
                MEXICO POWER COMPANY**  **AND
                SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
                31, 2005, 2004 and 2003**
  TNMP
 
 **Additional**
              
              **Mark-to-****Unrealized**
              
              **minimum**
              
              **market
                  for**
              
              **Accumulated****gain
                  (loss)**
              
              **pension**
              
              **certain**
              
              **other****on**
              
              **liability**
              
              **derivative**
              
              **comprehensive****securities**
              
              **adjustment**
              
              **transactions**
              
              **income
                  (loss)**(In
                  thousands)**Pre-Acquisition:****Balance
                  at December 31, 2002**
              
              $
              -
              
              $
              (214
              )
              $
              (1,166
              )
              $
              (1,380
              )Period
                  change in:Additional
                  minimum pension liability adjustment
              
              
              -
              
              
              214
              
              
              -
              
              
              214Change
                  in fair market value of designated cash flow hedges
              
              
              -
              
              
              -
              
              
              (1,111
              )
              
              (1,111
              )**Balance
                  at December 31, 2003**
              
              $
              -
              
              $
              -
              
              $
              (2,277
              )
              $
              (2,277
              )Period
                  change in:Change
                  in fair market value of designated cash flow hedges
              
              
              -
              
              
              -
              
              
              516
              
              
              516**Balance
                  at December 31, 2004**
              
              $
              -
              
              $
              -
              
              $
              (1,761
              )
              $
              (1,761
              )Period
                  change in:Change
                  in fair market value of designated cash flow hedges
              
              
              -
              
              
              -
              
              
              1,761
              
              
              1,761**Balance
                  at June 6, 2005**
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -**Post
                  Acquisition:**Period
                  change in:Additional
                  minimum pension liability adjustment
              
              $
              -
              
              $
              (29
              )
              $
              -
              
              $
              (29
              )**Balance
                  at December 31, 2005**
              
              $
              -
              
              $
              (29
              )
              $
              -
              
              $
              (29
              )
 
 
 
 B-125
 **PNM
                RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
                SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
                MEXICO POWER COMPANY**  **AND
                SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
                31, 2005, 2004 and 2003**
  **(20)** **Related
        Party Transactions**
 
 PNMR,
        PNM
        and TNMP are considered related parties as defined in SFAS No. 57,
“ *Related
        Party Disclosures* .” Since
        TNMP became a related party effective on the date of PNMR’s acquisition of TNP,
        the reported amounts for TNMP reflect the period from June 6, 2005 through
        December 31, 2005.
 
 PNMR
        Services Company provides corporate services to PNMR and its subsidiaries
        including PNM, Avistar, TNP, TNMP and First Choice per shared services
        agreements. These services are billed at cost on a monthly basis and allocated
        to the subsidiaries.
 
 PNMR
        files a consolidated federal income tax return with its affiliated companies.
        A
        tax allocation agreement exists between PNMR and each of its affiliated
        companies. The general operation of these agreements is that the subsidiary
        company will compute its taxable income on a stand-alone basis. If the result
        is
        a net tax liability, such amount shall be paid to PNMR. If there are net
        operating losses and/or tax credits, the subsidiary shall receive payment
        for
        the tax savings from PNMR to the extent that PNMR is able to utilize those
        benefits. For the year ended December 31, 2005, PNM and TNMP made tax-sharing
        payments of $2.9 million and $20.9 million, respectively, to PNMR. TNMP payments
        are for the period from June 6 through December 31, 2005. For the year ended
        December 31, 2004, PNM made tax-sharing payments of $20.7 million to PNMR.
        For
        the year ended December 31, 2003, PNMR made tax-sharing payments of $11.0
        million to PNM.
 
 In
        February 2006, the Board approved intercompany borrowing arrangements between
        PNMR and its subsidiaries that would authorize each subsidiary to borrow
        up to
        $50.0 million from PNMR.
 
 PNM
        and
        TNMP have engaged in, and may in the future engage in, affiliate transactions
        in
        the normal course of business. These transactions primarily consist of power
        and
        transmission purchases by TNMP from PNM. Transactions between affiliates
        are
        reported separately on their financial statements, but are eliminated in
        the
        consolidation of PNMR’s financial statements.
 
 
 
 
 
 B-126
 **PNM
                RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
                SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
                MEXICO POWER COMPANY**  **AND
                SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
                31, 2005, 2004 and 2003**
  PNMR
        and PNM
 
 Pursuant
        to agreement, PNM has issued a promissory note for $20.0 million to PNMR
        payable
        on or before September 30, 2006. Under the agreement, PNM agrees to pay all
        applicable interest on the outstanding balance at the interest rates provided
        in
        the agreement. As of December 31, 2005 there is no outstanding balance on
        the
        promissory note.
 
 PNM
        sells
        electricity and energy-scheduling services to TNMP under a long-term wholesale
        power contract. PNM also sells transmission services to TNMP and TNMP provides
        transmission services to PNM under an agreement.
 
 The
        tables below describe the nature and amount of transactions PNM has with
        PNMR
        and TNMP. Since TNMP became a related party effective on the date of PNMR’s
        acquisition of TNP, the reported amounts for TNMP reflect the period from
        June
        6, 2005 through December 31, 2005.
 
 **At
                  or For the Year Ended December 31,****2005**
              
              **2004**
              
              **2003**(In
                  thousands)**PNMR
                  Transactions With PNM**Shared
                  services billings from PNMR to PNM
              
              $
              118,158
              
              $
              113,895
              
              $
              108,863Shared
                  services receivable/payable
              
              $
              36,099
              
              $
              31,875
              
              $
              32,998**PNM
                  Transactions with TNMP**Electricity
                  and energy scheduling servicebillings
                  from PNM to TNMP
              
              $
              24,253
              
              $
              -
              
              $
              -Electricity
                  and energy scheduling servicesreceivable
              
              $
              4,063
              
              $
              -
              
              $
              -Transmission
                  billings from PNM to TNMP
              
              $
              1,172
              
              $
              -
              
              $
              -Transmission
                  charges receivable
              
              $
              174
              
              $
              -
              
              $
              -Transmission
                  billings to PNM from TNMP
              
              $
              169
              
              $
              -
              
              $
              -Transmission
                  charges payable
              
              $
              26
              
              $
              -
              
              $
              -
 
 TNMP
 
 TNMP
        purchases all the electricity for its New Mexico customers' needs (except
        for
        one major customer) and energy-scheduling services under the long-term wholesale
        power contract with PNM described above. TNMP also purchases transmission
        services from PNM in New Mexico. Additionally, TNMP provides transmission
        services to PNM in New Mexico.
 
 B-127
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 Effective
        with the close of the acquisition of TNP on June 6, 2005, all TNMP employees
        who
        were providing corporate support to TNP and First Choice became employees
        of
        PNMR Services Company. PNMR Services Company provides corporate services
        to TNMP
        per a shared services agreement.
 
 **At
                  or For the Year Ended****December
                  31,****2005**(In
                  thousands)**TNMP
                  Transactions With PNM**Electricity
                  and energy scheduling servicebillings
                  to TNMP from PNM
              $24,253Electricity
                  and energy scheduling services payable
              $ 
                  4,063Transmission
                  billings to TNMP from PNM
              $
                   1,172Transmission
                  charges payable
              $  
                    174Transmission
                  billings from TNMP to PNM
              $   
                  169Transmission
                  charges receivable
              $ 
                      26**TNMP
                  Transactions with PNMR**Shared
                  services billings to TNMP from PNMR
              $
                   9,048Shared
                  services payable
              $ 
                  2,975
 
 **(21)** **New
        Accounting Pronouncements**
 
 In
        December 2004, the FASB issued SFAS No. 153, *"Exchanges
        of Nonmonetary Assets-An Amendment of APB Opinion No. 29, Accounting for
        Nonmonetary Transactions"* (“SFAS
        153”). ** SFAS 153
        eliminates the exception from fair value measurement for nonmonetary exchanges
        of similar productive assets and replaces it with an exception for exchanges
        that do not have commercial substance. SFAS 153 specifies that a nonmonetary
        exchange has commercial substance if the future cash flows of the entity
        are
        expected to change significantly as a result of the exchange. SFAS 153 is
        effective for fiscal periods beginning after June 15, 2005, and is required
        to
        be adopted beginning on January 1, 2006. The Company is currently evaluating
        the
        effect that the adoption of SFAS 153 will have on its results of operations
        and
        financial condition but does not expect it to have a material
        impact.
 
 In
        May
        2005, the FASB issued SFAS No. 154, *“Accounting
        Changes and Error Corrections”* (“SFAS
        154”). SFAS 154 applies to all voluntary changes in accounting principle, and
        changes the requirements for accounting for and reporting of a change in
        accounting principle. SFAS 154 requires retrospective application to prior
        periods’ financial statements of a voluntary change in accounting principle
        unless it is impracticable. Prior accounting rules required that most voluntary
        changes in accounting principle be recognized by including in net income
        of the
        period of the change the cumulative effect of changing to the new accounting
        principle. SFAS 154 will improve financial reporting because its requirements
        enhance the consistency of financial information between periods. SFAS 154
        requires that a change in the method of depreciation, amortization, or depletion
        for long-lived, non-financial assets be accounted for as a change in accounting
        estimate that is affected by a change in accounting principle. Previously,
        such
        a change was reported as a change in accounting principle. SFAS 154 is effective
        for accounting changes and corrections of errors made in fiscal years beginning
        after December 15, 2005. The Company does not expect that the adoption will
        have
        a significant effect on its results of operations or financial condition
        when
        adopted.
 
 In
        November 2005, the FASB issued Staff Position Nos. FAS 115-1 and 124-1, *“The
        Meaning of Other-Than-Temporary Impairment and Its Application to Certain
        Investments”* (“FSP
        115-1 and
        124-1”). FSP 115-1 and 124-1 provides guidance in determining when an investment
        is impaired, whether that impairment is other-than-
  B-128
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 temporary
        and the measurement of an impairment loss. FSP 115-1 and 124-1 is applicable
        to
        reporting periods beginning January 1, 2006. The adoption of FSP 115-1 and
        124-1
        is not expected to have a material impact on the Company’s Consolidated
        Financial Statements.
 
 **(22)** **Subsequent
        Event**
  In
          January 2006, Altura, an indirect wholly owned subsidiary of PNMR, entered
          into
          an agreement with subsidiaries of Sempra to purchase the Twin Oaks power
          facility in an acquisition of assets for $480.0 million in cash. PNMR and
          Sempra
          are also parties to the agreement and have agreed to provide parental guarantees
          for certain obligations of their respective subsidiaries relating to the
          acquisition.
 
 The
          Twin
          Oaks power facility is a 305 MW coal-fired power plant located 150 miles
          south
          of Dallas, Texas. Under the agreement, substantially all of the assets
          and
          contractual commitments relating to Twin Oaks are to be transferred to
          Altura
          upon closing, including fuel supply and power purchase and sale agreements.
          The
          agreement also includes the development rights for a possible 600 MW expansion
          of the plant. The necessary permits are expected to be granted in 2007.
          An
          additional $2.5 million payment will be made to Sempra upon the issuance
          of an
          air permit for the expansion and an additional $2.5 million will be paid
          upon
          Altura beginning construction of the expansion.
 
 The
          transaction is expected to close no earlier than April 17, 2006, subject
          to
          third-party consents and anti-trust clearance under the Hart-Scott-Rodino
          Act.
          PNMR has arranged for bridge financing to close the transaction. It is
          expected
          that the permanent financing will come from the issuance of debt and equity.
 
 B-129
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 **(23)** **Quarterly
        Operating Results (Unaudited)**
 
 PNMR
 
 The
        unaudited operating results for PNMR by quarters for 2005 and 2004 are as
        follows:
 **Quarter
                    Ended****March
                    31**
                
                **June
                    30**
                
                **September
                    30**
                
                **December
                    31**(In
                    thousands, except per share amounts)**2005:**Operating
                    Revenues
                $427,913
                
                $405,254
                
                $597,117
                
                $646,526Operating
                    Income
                37,557
                
                14,458
                
                49,685
                
                35,669Net
                    Earnings Before Cumulative Effectof
                    Change in Accounting Principle
                30,509
                
                1,541
                
                28,483
                
                7,620Net
                    Earnings
                30,509
                
                1,541
                
                28,483
                
                6,694
                (a)Net
                    Earnings Per Share (Basic):Net
                    Earnings Before Cumulative Effectof
                    Change in Accounting Principle
                0.50
                
                0.02
                
                0.41
                
                0.11Net
                    Earnings
                0.50
                
                0.02
                
                0.41
                
                0.10Net
                    Earnings Per Share (Diluted):Net
                    Earnings Before Cumulative Effectof
                    Change in Accounting Principle
                0.50
                
                0.02
                
                0.41
                
                0.11Net
                    Earnings
                0.50
                
                0.02
                
                0.41
                
                0.10**2004:**Operating
                    Revenues
                $437,372
                
                $370,403
                
                $386,855
                
                $410,162Operating
                    Income
                33,534
                
                22,264
                
                32,215
                
                24,885Net
                    Earnings
                24,778
                
                16,849
                
                27,417
                
                18,642Net
                    Earnings Per Share (Basic)
                0.41
                
                0.28
                
                0.45
                
                0.31Net
                    Earnings Per Share (Diluted)
                0.41
                
                0.28
                
                0.45
                
                0.30
 (a)
        In
        2005, PNMR adopted FIN
        47 and
        recognized a cumulative effect of a change in accounting principle that
        decreased 2005 earnings $0.9 million, net of the income tax benefit, or $0.01
        per diluted common share.
 
 In
        the
        opinion of management of PNM, all adjustments (consisting of normal recurring
        accruals) necessary for a fair statement of the results of operations for
        such
        periods have been included.
 
 
 B-130
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 PNM
 
 The
        unaudited operating results for PNM by quarters for 2005 and 2004 are as
        follows:
 
 **Quarter
                  Ended****March
                  31**
              
              **June
                  30**
              
              **September
                  30**
              
              **December
                  31**(In
                  thousands, except per share amounts)**2005:**Operating
                  Revenues
              $427,676
              
              $352,266
              
              $403,532
              
              $491,983Operating
                  Income
              38,655
              
              9,166
              
              18,098
              
              10,413Net
                  Earnings Before Cumulative Effectof
                  Change in Accounting Principle
              32,354
              
              3,998
              
              11,134
              
              5,106Net
                  Earnings
              32,354
              
              3,998
              
              11,134
              
              4,600
              (a)**2004:**Operating
                  Revenues
              $437,121
              
              $370,275
              
              $386,677
              
              $409,894Operating
                  Income
              35,131
              
              21,679
              
              33,566
              
              27,996Net
                  Earnings
              27,357
              
              15,791
              
              27,548
              
              21,170
 
 (a)
        In
        2005, PNM adopted FIN
        47 and
        recognized a cumulative effect of a change in accounting principle that
        decreased 2005 earnings $0.5 million, net of the income tax benefit.
 
 In
        the
        opinion of management of PNM, all adjustments (consisting of normal recurring
        accruals) necessary for a fair statement of the results of operations for
        such
        periods have been included.
 
 B-131
 **PNM
              RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
              SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
              MEXICO POWER COMPANY**  **AND
              SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December
              31, 2005, 2004 and 2003**
 
 TNMP
 The
            unaudited operating results for TNMP by quarters for 2005 and 2004 are
            as
            follows:
  **Quarter/Period
                    Ended****Pre-Acquisition
                    ***
                
                
                **Post-Acquisition*****March
                    31**
                
                **April
                    1-**
                  **June
                    6**
                
                
                **June
                    6-30**
                
                **September
                    30**
                
                **December
                    31**(In
                    thousands)**2005:**Operating
                    Revenues
                $
                    65,882
                
                $
                    46 938
                
                
                $
                    19,235
                
                $
                    71,441
                
                $
                    63,674Operating
                    Income
                12,370
                
                9,169
                
                
                4,105
                
                15,214
                
                10,627Net
                    Earnings BeforeCumulative
                    Effectof
                    Change inAccounting
                    Principle
                2,876
                
                6,384
                
                
                2,547
                
                9,643
                
                5,641Net
                    Earnings
                2,876
                
                6,384
                
                
                2,547
                
                9,643
                
                5,260
                (a)
  **Quarter
                        Ended****March
                        31**
                    
                    **June
                        30**
                    
                    **September
                        30**
                    
                    **December
                        31**(In
                        thousands)**Pre-Acquisition
                        *****2004:**Operating
                        Revenues
                    $
                        61,653
                    
                    $
                        65,069
                    
                    $
                        74,732
                    
                    $
                        68,211Operating
                        Income
                    11,563
                    
                    12,384
                    
                    17,080
                    
                    13,745Net
                        Earnings Before Extraordinary Item
                    4,744
                    
                    5,600
                    
                    10,809
                    
                    25,490Extraordinary
                        Item
                    -
                    
                    (97,836)
                    (b)
                    -
                    
                    -Net
                        Earnings
                    4,744
                    
                    (92,236)
                    
                    10,809
                    
                    25,490
 (a)
        In
        2005, TNMP adopted FIN 47 and recognized a cumulative effect of a change
        in
        accounting principle that decreased 2005 earnings $0.4 million, net of the
        income tax benefit.
 
 (b)
        During 2004, TNMP recorded an extraordinary loss of $97.8 million, net of
        tax of
        $57.3 million, related to the PUCT true-up proceeding regarding TNMP’s stranded
        costs. See Note 1.
 
 *
        On June
        6, 2005, PNMR completed the acquisition of TNP, parent company of TNMP,
        effective at 8:00 AM Central Daylight Time.
 
 
 B-132
 
 REPORT
        OF
        INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To
        the
        Board of Directors and Stockholders of
 PNM
        Resources, Inc. and Public Service Company of New Mexico
 Albuquerque,
        New Mexico
 
 We
        have
        audited the consolidated financial statements of PNM Resources, Inc. and
        subsidiaries and Public Service Company of New Mexico and subsidiary
        (collectively, the “Companies”) as of December 31, 2005 and 2004, and for each
        of the three years in the period ended December 31, 2005, management's
        assessment of the effectiveness of the Companies’ internal control over
        financial reporting as of December 31, 2005, and the effectiveness of the
        Companies’ internal control over financial reporting as of December 31, 2005,
        and have issued our reports thereon dated March 8, 2006 (which reports express
        unqualified opinions and include explanatory paragraphs regarding the adoption
        of Statement of Financial Accounting Standards No. 143, *Accounting
        for Asset Retirement Obligations,* effective January 1, 2003, and Financial Accounting Standards Board Financial
        Interpretation No. 47, *Accounting
        for Conditional Asset Retirement Obligations* in 2005,
        the change in actuarial valuation measurement date for the pension plan and
        other post-retirement benefits from September 30 to December 31, during 2003,
        and PNM Resources, Inc.’s acquisition of TNP Enterprises, Inc. in 2005); such
        consolidated financial statements and reports are included elsewhere in this
        Form 10-K. Our audits also included the financial statement schedules of
        the
        Companies listed in Item 15. These financial statement schedules are the
        responsibility of the Companies’ management. Our responsibility is to express an
        opinion based on our audits. In our opinion, such financial statement schedules,
        when considered in relation to the basic consolidated financial statements
        taken
        as a whole, present fairly, in all material respects, the information set
        forth
        therein.
 
 
 /s/
        DELOITTE & TOUCHE LLP
 
 
 Philadelphia,
        Pennsylvania
 March
        8,
        2006
 
 
 
 
 B-133
 
 REPORT
        OF
        INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To
        the
        Board of Directors and Stockholders of
 Texas-New
        Mexico Power Company
 Fort
        Worth, Texas
 
 We
        have
        audited the consolidated financial statements of Texas-New Mexico Power Company
        and subsidiaries (collectively, the “Company”) as of December 31, 2005 and 2004
        and the periods June 6, 2005 to December 31, 2005, January 1, 2005 to June
        6,
        2005 and each of the years ended December 31, 2004 and 2003, and have issued
        our
        report thereon dated March 8, 2006 (which report expresses an unqualified
        opinion and includes explanatory paragraphs regarding PNM Resources, Inc.’s
        acquisition of Texas-New Mexico Power Company and its parent TNP Enterprises,
        Inc. in 2005 and the adoption of Financial Accounting Standards Board Financial
        Interpretation No. 47, *Accounting
        for Conditional Asset Retirement Obligations* in
        2005); such consolidated financial statements and report are included elsewhere
        in this Form 10-K. Our audit also included the financial statement schedule
        of
        the Company listed in Item 15. The financial statement schedule is the
        responsibility of the Company's management. Our responsibility is to express
        an
        opinion based on our audit. In our opinion, such financial statement schedule,
        when considered in relation to the basic consolidated financial statement
        taken
        as a whole, presents fairly, in all material respects, the information set
        forth
        therein.
 
 
 /s/
        DELOITTE & TOUCHE LLP
 
 
 Philadelphia,
        Pennsylvania
 March
        8,
        2006
 
 
 
 
 B-134
  **SCHEDULE
        I**
 
 **PNM
                  RESOURCES, INC****.****CONDENSED
                  FINANCIAL INFORMATION OF PARENT COMPANY****BALANCE
                  SHEET****S****As
                  of December 31,****2005**
              
              **2004**(In
                  thousands)**Assets**Cash
                  and cash equivalents
              
              $
              12,219
              
              $
              388Intercompany
                  receivables
              
              
              144,510
              
              
              81,886Other
                  current assets
              
              
              14,390
              
              
              14,560Total
                  current assets
              
              
              171,119
              
              
              96,834Property,
                  plant and equipment, net of accumulateddepreciation
                  of $7,063 and $10,066
              
              
              20,289
              
              
              47,343Long-term
                  investments
              
              
              8,220
              
              
              22,001Investment
                  in subsidiaries
              
              
              1,811,285
              
              
              1,091,997Other
                  long-term assets
              
              
              15,999
              
              
              7,261Total
                  long-term assets
              
              
              1,855,793
              
              
              1,168,602**Total
                  Assets**
              
              $
              2,026,912
              
              $
              1,265,436**Liabilities
                  and Stockholders' Equity**Short-term
                  debt
              
              $
              194,000
              
              $
              34,000Current
                  liabilities
              
              
              94,348
              
              
              34,476Long-term
                  debt
              
              
              343,463
              
              
              147Other
                  long-term liabilities
              
              
              16,809
              
              
              7,421Total
                  liabilities
              
              
              648,620
              
              
              76,044Common
                  stock outstanding (no par value, 120,000,000 shares
                  authorized:issued
                  68,786,286 and 60,464,595 at December 31, 2005 and 2004,
                  respectively)
              
              
              813,425
              
              
              638,826Accumulated
                  comprehensive income, net of tax
              
              
              244
              
              
              -Retained
                  earnings
              
              
              564,623
              
              
              550,566Total
                  common stockholders' equity
              
              
              1,378,292
              
              
              1,189,392**Total
                  Liabilities and Stockholders' Equity**
              
              $
              2,026,912
              
              $
              1,265,436
 
 See
        notes
        to the consolidated financial statements.
 
 
 
 B-135
 **PNM
                    RESOURCES, INC.****CONDENSED
                    FINANCIAL INFORMATION OF PARENT COMPANY****STATEMENTS
                    OF EARNINGS****Year
                    ended December 31,****2005**
                
                **2004**
                
                **2003**(In
                    thousands)**Operating
                    revenues**
                
                $
                -
                
                $
                -
                
                $
                24,999**Operating
                    expenses**
                
                
                14,303
                
                
                5,157
                
                
                21,974Operating
                    income (loss)
                
                
                (14,303
                )
                
                (5,157
                )
                
                3,025**Other
                    income and deductions:**Equity
                    in earnings of subsidiaries
                
                
                93,344
                
                
                90,176
                
                
                94,105Other
                    income
                
                
                3,775
                
                
                1,258
                
                
                2,600Other
                    deductions
                
                
                (32,426
                )
                
                (932
                )
                
                (5,207
                )Net
                    other income and deductions
                
                
                64,693
                
                
                90,502
                
                
                91,498**Income
                    before income taxes**
                
                
                50,390
                
                
                85,345
                
                
                94,523**Income
                    tax benefit**
                
                
                (16,877
                )
                
                (2,341
                )
                
                (1,451
                )**Net
                    Earnings Before Cumulative Effect of Changes in****Accounting
                    Principles**
                
                
                67,267
                
                
                87,686
                
                
                95,974Cumulative
                    effect of changes in accounting principles, net oftax
                    expense of $26, $0 and $525
                
                
                (40
                )
                
                -
                
                
                (801
                )**Net
                    Earnings**
                
                $
                67,227
                
                $
                87,686
                
                $
                95,173
 
 See
          notes
          to the consolidated financial statements.
 
 
 B-136
 
 **SCHEDULE
                  I****PNM
                  RESOURCES, INC.****CONDENSED
                  FINANCIAL INFORMATION OF PARENT COMPANY****STATEMENTS
                  OF CASH FLOWS****Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003**(In
                  thousands)**Cash
                  Flows From Operating Activities:**Net
                  earnings
              
              $
              67,227
              
              $
              87,686
              
              $
              95,173Adjustments
                  to reconcile net earnings to net cash flowsfrom
                  operating activities:Depreciation
                  and amortization
              
              
              677
              
              
              2,604
              
              
              1,735Allowance
                  for equity funds used during construction
              
              
              -
              
              
              (66
              )
              
              (38
              )Accumulated
                  deferred income tax
              
              
              (6,281
              )
              
              2,131
              
              
              6,213Equity
                  in earnings of subsidiaries
              
              
              (93,344
              )
              
              (90,176
              )
              
              (94,105
              )Equity-linked
                  units charge
              
              
              11,348
              
              
              -
              
              
              -Other
              
              
              (2,123
              )
              
              -
              
              
              -Changes
                  in certain assets and liabilities:Other
                  assets
              
              
              (9,039
              )
              
              (9,030
              )
              
              (1,591
              )Accounts
                  payable
              
              
              (2,992
              )
              
              1,053
              
              
              4,328Accrued
                  income tax
              
              
              77,554
              
              
              (28,013
              )
              
              6,473Other
                  liabilities
              
              
              (28,360
              )
              
              14,999
              
              
              20,711Net
                  cash flows provided (used) from operating activities
              
              
              14,667
              
              
              (18,812
              )
              
              38,899**Cash
                  Flows From Investing Activities:**Property
                  plant and equipment
              
              
              (615
              )
              
              (7,256
              )
              
              (9,363
              )Redemption
                  of short-term investments
              
              
              -
              
              
              -
              
              
              80,291Luna
                  investment
              
              
              
              
              
              (13,379
              )Investment
                  in subsidiaries
              
              
              (557,229
              )
              
              -
              
              
              -Sale
                  of bond investment
              
              
              -
              
              
              12,247
              
              
              -Cash
                  dividends from subsidiaries
              
              
              140,500
              
              
              23,000
              
              
              49,581EIP
                  sale
              
              
              -
              
              
              -
              
              
              36,925Equity
                  contribution to subsidiaries
              
              
              -
              
              
              -
              
              
              (139,257
              )Other
              
              
              478
              
              
              174
              
              
              (8,207
              )Net
                  cash flows provided (used) in investing activities
              
              
              (416,866
              )
              
              14,786
              
              
              9,970**Cash
                  Flows From Financing Activities:**Short-term
                  borrowings
              
              
              160,000
              
              
              33,282
              
              
              -Long-term
                  debt repayments
              
              
              -
              
              
              -
              
              
              (26,152
              )Long-term
                  debt borrowings
              
              
              347,250
              
              
              -
              
              
              -Issuance
                  of common stock
              
              
              101,231
              
              
              -
              
              
              -Exercise
                  of employee stock options
              
              
              (9,735
              )
              
              (16,430
              )
              
              (9,639
              )Dividends
                  paid
              
              
              (51,128
              )
              
              (38,263
              )
              
              (36,115
              )Change
                  in intercompany accounts
              
              
              (135,620
              )
              
              24,980
              
              
              23,592Other
              
              
              2,032
              
              
              -
              
              
              290Net
                  cash flows generated (used) by financing activities
              
              
              414,030
              
              
              3,569
              
              
              (48,024
              )Increase
                  (Decrease) in Cash and Cash Equivalents
              
              
              11,831
              
              
              (457
              )
              
              845Beginning
                  of Year
              
              
              388
              
              
              845
              
              
              -End
                  of Year
              
              $
              12,219
              
              $
              388
              
              $
              845**Supplemental
                  cash flow disclosures:**Interest
                  paid, net
              
              $
              16,780
              
              $
              (3,145
              )
              $
              576Income
                  taxes refunded, net
              
              $
              (4,179
              )
              $
              (3,098
              )
              $
              (18,070
              )Non-cash
                  dividends from subsidiaries
              
              $
              13,150
              
              $
              -
              
              $
              -
 See
        notes
        to the consolidated financial statements.
 
 
 B-137
 **SCHEDULE
                    II****PNM
                    RESOURCES, INC. AND SUBSIDIARIES****VALUATION
                    AND QUALIFYING ACCOUNTS**Additions
                
                DeductionsBalance
                    at
                
                Charged
                    to
                
                Charged
                    tobeginning
                    of
                
                costs
                    and
                
                other
                
                Write-off
                
                Balance
                    atDescription
                
                year
                
                expenses
                
                accounts
                
                adjustments
                
                end
                    of year(In
                    thousands)Allowance
                    for doubtful accounts,year
                    ended December 31:2003
                
                $
                    15,575
                
                $
                    (3,540)
                
                $      
                      -
                
                $
                    2,751
                
                $
                    9,2842004
                
                $  
                    9,284
                
                $  
                    1,731
                
                $       
                     -
                
                $
                    9,686
                
                $
                    1,3292005
                
                $  
                    1,329
                
                $  
                    2,780
                
                $
                    1,611
                (a)
                $
                    2,067
                
                $
                    3,653(b)Allowance
                    for market and creditvolatility
                    year ended December 31:2003
                
                $  
                    2,433
                
                $
                    (2,433)
                
                $      
                     -
                
                $    
                       -
                
                $      
                     -2004
                
                $          
                    -
                
                $     
                    110
                
                $ 
                     164
                
                $  
                    210
                
                $  
                       642005
                
                $        64
                
                $     
                    115
                
                $      
                     -
                
                $  
                        6
                
                $  
                     173
 (a)  Represents
        the TNP allowance for doubtful accounts at June 6, 2005.
 
 (b)  Recorded
        in other deferred credits on the Consolidated Balance Sheets.
 
 
 
 
 
 B-138
  **SCHEDULE
                  II****PUBLIC
                  SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY****A
                  WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.****VALUATION
                  AND QUALIFYING ACCOUNTS**Additions
              
              DeductionsBalance
                  at
              
              Charged
                  to
              
              Charged
                  tobeginning
                  of
              
              costs
                  and
              
              other
              
              Write-off
              
              Balance
                  atDescription
              
              year
              
              expenses
              
              accounts
              
              adjustments
              
              end
                  of year(In
                  thousands)Allowance
                  for doubtful accounts,year
                  ended December 31:2003
              
              $
                  15,575
              
              $
                  (3,540)
              
              $    
                  -
              
              $
                  2,751
              
              $
                  9,2842004
              
              $  
                  9,284
              
              $ 
                  1,731
              
              $    
                  -
              
              $
                  9,686
              
              $
                  1,3292005
              
              $  
                  1,329
              
              $    
                  140
              
              $   
                   -
              
              $     
                  34
              
              $
                  1,435(a)Allowance
                  for market and creditvolatility
                  year ended December 31:2003
              
              $  
                  2,433
              
              $
                  (2,433)
              
              $    
                   -
              
              $  
                          -
              
              $   
                       -2004
              
              $     
                       -
              
              $    
                  110
              
              $
                  164
              
              $  
                   210
              
              $  
                     642005
              
              $       
                  64
              
              $    
                  115
              
              $    
                   -
              
              $     
                    6
              
              $  
                   173
  (a)  Recorded
        in other deferred credits on the Consolidated Balance Sheets.
 
 
 B-139
 
 **SCHEDULE
                  II****TEXAS-NEW
                  MEXICO POWER COMPANY AND SUBSIDIARIES****A
                  WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.****VALUATION
                  AND QUALIFYING ACCOUNTS**Additions
              
              DeductionsBalance
                  at
              
              Charged
                  to
              
              Charged
                  tobeginning
                  of
              
              costs
                  and
              
              other
              
              Write-off
              
              Balance
                  atDescription
              
              year
              
              expenses
              
              accounts
              
              adjustments
              
              end
                  of year(In
                  thousands)Allowance
                  for doubtful accounts,year
                  ended December 31:**Pre-Acquisition
                  ***2003
              
              $
                  172
              
              $
                  358
              
              $  
                   -
              
              $
                  174
              
              $
                  3562004
              
              $
                  356
              
              $
                  (39)
              
              $   
                  -
              
              $
                  126
              
              $
                  191January
                  1 - June 6, 2005
              
              $
                  191
              
              $
                  (68)
              
              $   
                  -
              
              $
                    52
              
              $ 
                   71**Post-Acquisition
                  ***June
                  6 - December 31, 2005
              
              $  
                  71
              
              $
                  100
              
              $  
                   -
              
              $  
                  71
              
              $
                  100
  
 *
        On June
        6, 2005, PNMR completed the acquisition of TNP, parent company of TNMP,
        effective at 8:00 AM Central Daylight Time.
 
  
 B-140
 
 **ITEM
        9.**  **CHANGES
        IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE**
 
 None.
 
 **ITEM
        9A.**  **CONTROLS
        AND PROCEDURES**
 
 (a)
        Evaluation of disclosure controls and procedures.
 
 PNMR,
        PNM
        and TNMP each maintain 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 each of the registrants’ disclosure controls and procedures as
        of the end of the period covered by this report conducted by the registrants’
management, with the participation of the Chief Executive and Chief Financial
        Officers, the Chief Executive and Chief Financial Officers believe that these
        controls and procedures are effective to ensure that each of the registrants
        is
        able to collect, process, and disclose the information it is required to
        disclose in the reports it files with the SEC within the required time periods.
 
 (b)
        Management’s report on internal control over financial reporting.
 
 Management’s
        Report on Internal Control Over Financial Reporting appears on pages B-5
        and
        B-6. These reports are incorporated by reference herein. Management has excluded
        the acquired company, TNP, from their report on internal control over financial
        reporting. TNP’s results of operations are significant to the Company’s
        consolidated financial statements. The financial statements of TNP Enterprises,
        Inc. and its subsidiaries reflect total assets and revenues constituting
        29 and
        20 percent, respectively, of the related consolidated financial statement
        amounts as of and for the year ended December 31, 2005. A material change
        in the
        Company’s internal control over financial reporting due to the acquisition has
        been disclosed below.
 
 (c)
        Changes in internal controls.
 
 There
        have been no changes in the Company’s internal controls over financial reporting
        for the quarter ended December 31, 2005, that have materially affected, or
        are
        reasonably likely to materially affect, the Company’s internal control over
        financial reporting.
 
 **TNP
        Acquisition**
 
 With
        the
        acquisition, the Company developed an interface process in the second quarter
        to
        transfer the financial reporting information from TNP to the system that
        the
        Company uses to produce its consolidated financial statements for internal
        and
        external reporting. This was the only material change in internal control
        that
        resulted from the acquisition. The Company is currently undergoing a diligent
        effort to ensure TNP’s compliance with Section 404 of the Sarbanes-Oxley Act of
        2002. As integration activities occur, the Company continues to integrate
        the
        Company’s internal controls. This effort will continue until June of 2006, at
        which time TNP is required to be in compliance with the Act.
 
 **ITEM
        9B.**  **OTHER
        INFORMATION**
 
 None.
 
 
 C-1
  **PART
        III**
 
 **ITEM
        10.**  **DIRECTORS
        AND EXECUTIVE OFFICERS OF THE COMPANY**
 
 Reference
        is hereby made to “Proposal 1: Election of Directors” in the Company’s Proxy
        Statement relating to the annual meeting of stockholders to be held on May
        16,
        2006 (the “2006 Proxy Statement”), to PART I, SUPPLEMENTAL ITEM - “EXECUTIVE
        OFFICERS OF THE COMPANY” in this Form 10-K, “Other Matters” - “Section 16(a)
        Beneficial Ownership Reporting Compliance” and “Code of Ethics” in the 2006
        Proxy Statement. The Company intends to satisfy the disclosure requirements
        of
        Form 8-K relating to amendments to the Company’s code of ethics applicable to
        its senior executive and financial officers by posting such information on
        its
        Internet website. Information about the Company’s website is included under Part
        I, Item 1 - “Company Website.”
 
 The
        Company’s common stock and the publicly issued equity-linked units are listed on
        the New York Stock Exchange. As a result, the Company’s Chief Executive Officer
        is required to make an annual certification to the New York Stock Exchange
        stating that he was not aware of any violations by the Company of the New
        York
        Stock Exchange corporate governance listing standards. The Company’s Chief
        Executive Officer made the most recent certification to the New York Stock
        Exchange on June 10, 2005.
 
 **ITEM
        11.**  **EXECUTIVE
        COMPENSATION**
 
 Reference
        is hereby made to “Executive Compensation”, “Retirement Plan and Related
        Matters”, “Employment Contracts, Termination of Employment and Change in Control
        Agreements” and “Director Compensation” in the 2006 Proxy Statement.
 
 **ITEM
        12.**  **SECURITY
        OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
        MATTERS**
 
 Reference
        is hereby made to “PNM Resources Common Stock Owned by Executive Officers and
        Directors,” “Ownership of More Than Five Percent of PNM Resources Common Stock”
and “Equity Compensation Plan Information” in the 2006 Proxy Statement.
 
 **ITEM
        13.**  **CERTAIN
        RELATIONSHIPS AND RELATED TRANSACTIONS**
 
 Reference
        is hereby made to the 2006 Proxy Statement for such disclosure as may be
        required by this item.
 
 **ITEM
        14.**  **PRINCIPAL
        ACCOUNTANT FEES AND SERVICES**
 
 Reference
        is hereby made to “Audit and Ethics Committee Report” and “Independent Auditor
        Fees” in the 2006 Proxy Statement. Independent auditor fees for PNM and TNMP are
        reported in the 2006 Proxy Statement for PNMR. All such fees are fees of
        PNMR.
        TNMP auditor fees are included from the date of PNMR’s acquisition of TNP, June
        6, 2005.
 
 The
        following table represents aggregate fees billed to TNMP for the period of
        January 1 through June 6, 2005 and the year ended December 31, 2004 by Deloitte
        & Touche LLP, TNMP’s principal accounting firm.
 
 **January
                  1 -**
              
              **Year
                  Ended****June
                  6, 2005**
              
              **December
                  31, 2004**(In
                  thousands)Audit
                  Fees (a)
              
              $
              124
              
              $
              467Audit-related
                  Fees (b)
              
              
              45
              
              
              28Tax
                  Fees (c)
              
              
              4
              
              
              5All
                  Other Fees
              
              
              -
              
              
              -Total
                  Fees
              
              $
              173
              
              $
              500
 
 D-1
 The
        relevant Audit Committee pre-approved all audit fees in 2005 and
        2004.
 
 (a)
              Audit
                  fees represent fees for professional services provided in connection
                  with
                  the audit of financial statements and review of quarterly financial
                  statements and audit services provided in connection with other
                  statutory
                  or regulatory filings.
 (b)
              Audit-related
                  fees consisted primarily of accounting consultations, employee
                  benefit
                  plan audits, and other attestation
                  services.
 (c)
              Includes
                  fees for tax compliance, tax planning and tax
                  advice.
 
 D-2


**PART
      IV**





**ITEM
      15.**  **EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES**





(a) - 1.  See
      Index
      to Financial Statements under Item 8.


(a) - 2.  Financial
      Statement Schedules for the years 2005, 2004, and 2003 are omitted for the
      reason that they are not required or the information is otherwise supplied
      under
      Item 8.





(a) - 3-A.  Exhibits
      Filed:





**Exhibit
                No****.**
            
            **Description**2.1
            PNMR
            Purchase
                and Sale Agreement, dated as of January 14, 2006 among Twin Oaks
                Power LP,
                Twin Oaks Power III, LP, Sempra Energy, Altura Power L.P. and PNM
                Resources (Confidential treatment was requested for portions of the
                exhibit, and such portions were omitted from this exhibit filed and
                were
                filed separately with the Securities and Exchange
                Commission)4.6
            PNMR
            Pledge
                Agreement, dated as of October 7, 2005, between PNMR and U.S. Bank
                National Association4.9
            PNMR
            Remarketing
                Agreement, dated as of October 7, 2005, among PNMR, Banc of America
                Securities LLC, as remarketing agent and U.S. Bank National Association
                as
                purchase contract agent.4.10
            PNMR
            Registration
                Rights Agreement, dated as of October 7, 2005, between PNMR, as issuer
                and
                Cascade Investment, LLC, as initial holder.10.13
            PNM
            Dividend,
                Assignment and Assumption Agreement, dated November 18, 2005 between
                PNMR
                Development and Management Corporation and PNM10.24**
            PNMR
            Form
                of the award agreement for restricted stock rights granted after
                2005
                under the Omnibus Performance Equity Plan10.31**
            PNMR
            2006
                Officer Incentive Plan10.43**
            PNMR
            Third
                Amendment to the PNM Resources, Inc. Non-Union Severance Pay Plan
                effective October 1, 200510.132
            PNM
            Stipulation
                in the matter of PNM’s application for approval of a certificate of public
                convenience and necessity for the Afton Generating Station, Case
                No.
                05-00275-UT, dated November 30, 200512.1
            PNMR
            Ratio
                of Earnings to Fixed Charges12.2
            PNMR
            Ratio
                of Earnings to Combined Fixed Charges and Preferred Stock
                Dividends21
            PNMR
            Certain
                subsidiaries of PNM Resources, Inc.23.1
            PNMR
            Consent
                of Deloitte & Touche LLP for PNM Resources, Inc.23.2
            PNM
            Consent
                of Deloitte & Touche LLP for Public Service Company of New
                Mexico23.3
            TNMP
            Consent
                of Deloitte & Touche LLP for Texas-New Mexico Power
                Company31.1
            PNMR
            Chief
                Executive Officer Certification Pursuant to Section 302 of the
                Sarbanes-Oxley Act of 200231.2
            PNMR
            Chief
                Financial Officer Certification Pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002




E-1





**Exhibit
                No****.**
            
            **Description**31.3
            PNM
            Chief
                Executive Officer Certification Pursuant to Section 302 of the
              Sarbanes-Oxley
                Act of 200231.4
            PNM
            Chief
                Financial Officer Certification Pursuant to Section 302 of the
              Sarbanes-Oxley
                Act of 200231.5
            TNMP
            Chief
                Executive Officer Certification Pursuant to Section 302 of the
                Sarbanes-Oxley Act of 200231.6
            TNMP
            Chief
                Financial Officer Certification Pursuant to Section 302 of the
                Sarbanes-Oxley Act of 200232.1
            PNMR
            Chief
                Executive Officer Certification Pursuant to Section 906 of the
                Sarbanes-Oxley Act of 200232.2
            PNMR
            Chief
                Financial Officer Certification Pursuant to Section 906 of the
                Sarbanes-Oxley Act of 200232.3
            PNM
            Chief
                Executive Officer Certification Pursuant to Section 906 of the
                Sarbanes-Oxley Act of 200232.4
            PNM
            Chief
                Financial Officer Certification Pursuant to Section 906 of the
                Sarbanes-Oxley Act of 200232.5
            TNMP
            Chief
                Executive Officer Certification Pursuant to Section 906 of the
                Sarbanes-Oxley Act of 200232.6
            TNMP
            Chief
                Financial Officer Certification Pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002





(a) - 3-B.
      Exhibits Incorporated By Reference:





The
      documents listed below are being filed (as shown above) or have been previously
      filed on behalf of PNM Resources, PNM or TNMP and are incorporated by reference
      to the filings set forth below pursuant to Exchange Act Rule 12b-32 and
      Regulation S-K section 10, paragraph (d).





**Exhibit
                No.**
            **Description
                of Exhibit**
            
            **Filed
                as Exhibit:**
            **Registrant(s)File
                No:****Plan
                of Acquisition**2.0
            Stock
                Purchase Agreement, dated as of July 24, 2004 by and between PNM
                Resources
                and SW Acquisition, L.P
            
            2.0
                to PNM Resources’ Current Report on Form 8-K filed July 28,
                2004
            333-32170
              PNMR2.1
            Purchase
                and Sale Agreement, dated as of January 14, 2006 among Twin Oaks
                Power LP,
                Twin Oaks Power III, LP, Sempra Energy, Altura Power L.P. and PNM
                Resources (Confidential treatment was requested for portions of the
                exhibit, and such portions were omitted from this exhibit filed and
                were
                filed separately with the Securities and Exchange
                Commission)
            
            2.1
                to the Company’s Annual Report on Form 10-K for the year ended December
                31, 2005
            1-32462
              PNMR**Articles
                of Incorporation and By-laws**3.1
            Articles
                of Incorporation of PNM Resources, as amended through June 27,
                2005
            
            3.1
                to the Company’s Quarterly Report on Form 10-Q for the quarter ended June
                30, 2005
            1-32462
              PNMR




E-2


**Exhibit
                No.**
            **Description
                of Exhibit**
            
            **Filed
                as Exhibit:**
            **Registrant(s)
                File No:**3.2
            Restated
                Articles of Incorporation of PNM, as amended through May 31,
                2002
            
            3.1.1
                to the Company’s Quarterly Report on Form 10-Q for the quarter ended June
                30, 2002
            1-6986
              PNM3.3
            Articles
                of Incorporation of TNMP, as amended through July 7, 2005
            
            3.1.2
                to the Company’s Quarterly Report on Form 10-Q for the quarter ended June
                30, 2005
            2-97230
              TNMP3.4
            Bylaws
                of PNM Resources, Inc. with all amendments to and including February
                14,
                2006
            
            3.1
                to the Company’s Current Report on Form 8-K filed February 17,
                2006.
            1-32462
              PNMR3.5
            Bylaws
                of PNM with all amendments to and including May 31, 2002
            
            3.1.2
                to the Company’s Report on Form 10-Q for the fiscal quarter ended June 30,
                2002
            1-6986
              PNM3.6
            Bylaws
                of TNMP as adopted on August 4, 2005
            
            3.2.3
                to the Company’s Quarterly Report on Form 10-Q for the quarter ended June
                30, 2005
            2-97230
              TNMP**Indentures**‡**PNMR**4.1
            Purchase
                Contract and Pledge Agreement, dated as of March 30, 2005, among
                PNMR,
                JPMorgan Chase Bank, N.A., as Purchase Contract Agent, and U.S. Bank
                Trust
                National Association, as Collateral Agent, Custodial Agent and Securities
                Intermediary, with Form of Corporate Unit included as Exhibit A and
                Form
                of Treasury Unit included as Exhibit B thereto
            
            10.1
                to PNMR’s Current Report on Form 8-K filed March 31, 2005
            1-32462
              PNMR4.2
            Indenture,
                dated as of March 15, 2005, between PNMR and JPMorgan Chase Bank,
                N.A., as
                Trustee
            
            10.2
                to PNMR’s Current Report on Form 8-K filed March 31, 2005
            1-32462
              PNMR4.3
            Supplemental
                Indenture No. 1, dated as of March 30, 2005, between the Company
                and
                JPMorgan Chase Bank, N.A. as Trustee, with Form of Senior Note included
                as
                Exhibit A thereto
            
            10.3
                to PNMR’s Current Report on Form 8-K filed March 31, 2005
            333-32170
              PNMR4.4
            Remarketing
                Agreement, dated as of March 30, 2005, among PNMR, Banc of America
                Securities LLC, as Remarketing Agent, and JPMorgan Chase Bank, N.A.,
                as
                Purchase Contract Agent
            
            10.4
                to PNMR’s Current Report on Form 8-K filed March 31, 2005
            1-32462
              PNMR4.5
            Purchase
                Contract Agreement, dated as of October 7, 2005, between PNMR and
                U.S.
                Bank National Association, as purchase contract agent, with Form
                of
                Corporate Unit included as Exhibit A and Form of Treasury Unit included
                as
                Exhibit B thereto
            
            4.10
                to the Company’s Quarterly Report on Form 10-Q for the quarter ended
                September 30, 2005
            1-32462
              PNMR






E-3




**Exhibit
                No.**
            **Description
                of Exhibit**
            ****
            **Filed
                as Exhibit:**
            **Registrant(s)
                File No:**4.6
            Pledge
                Agreement, dated as of October 7, 2005, between PNMR and U.S. Bank
                National Association
            
            4.6
                to the Company's Annual Report on Form 10-K for the year ended December
                31, 2005
            1-32462
              PNMR4.7
            Indenture,
                dated as of October 7, 2005, between PNMR and U.S. Bank National
                Association, as trustee
            
            4.11
                to the Company’s Quarterly Report on Form 10-Q for the quarter ended
                September 30, 2005
            1-32462
              PNMR4.8
            Supplemental
                Indenture, dated as of October 7, 2005, between PNMR and U.S. Bank
                National Association, as trustee, with Form of Senior Note included
                as
                Exhibit A thereto
            
            4.12
                to the Company’s Quarterly Report on Form 10-Q for the quarter ended
                September 30, 2005
            1-32462
              PNMR4.9
            Remarketing
                Agreement, dated as of October 7, 2005, among PNMR, Banc of America
                Securities LLC, as remarketing agent and U.S. Bank National Association
                as
                purchase contract agent.
            
            4.9
                to the Company's Annual Report on Form 10-K for the year ended December
                31, 2005
            1-32462
              PNMR4.10
            Registration
                Rights Agreement, dated as of October 7, 2005, between PNMR, as issuer
                and
                Cascade Investment, LLC, as initial holder.
            
            4.10
                to the Company's Annual Report on Form 10-K for the year ended December
                31, 2005
            1-32462
              PNMR**PNM**4.11
            Indenture
                of Mortgage and Deed of Trust dated as of June 1, 1947, between PNM
                and
                The Bank of New York (formerly Irving Trust Company), as Trustee,
                together
                with the Ninth Supplemental Indenture dated as of January 1, 1967,
                the
                Twelfth Supplemental Indenture dated as of September 15, 1971, the
                Fourteenth Supplemental Indenture dated as of December 1, 1974 and
                the
                Twenty-Second Supplemental Indenture dated as of October 1, 1979
                thereto
                relating to First Mortgage Bonds of PNM
            
            4-(d)
                to PNM’s Registration Statement No. 2-99990
            2-99990
              PNM4.12
            Fifty-third
                Supplemental Indenture, dated as of March 11, 1998, supplemental
                to
                Indenture of Mortgage and Deed of Trust, dated as of June 1, 1947,
                between
                PNM and The Bank of New York(formerly Irving Trust Company), as
                trustee
            
            4.3
                to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
                1998
            1-6986
              PNM4.13
            Indenture
                (for Senior Notes), dated as of March 11, 1998, between PNM and The
                Chase
                Manhattan Bank, as Trustee
            
            4.4
                to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
                1998
            1-6986
              PNM






E-4




**Exhibit
              No.**
            **Description
                of Exhibit**
            ****
            **Filed
                as Exhibit:**
            **Registrant(s)
                File No:**4.14
            First
                Supplemental Indenture, dated as of March 11, 1998, supplemental
                to
                Indenture, dated as of March 11, 1998, Between PNM and The Chase
                Manhattan
                Bank, as Trustee
            
            4.5
                to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
                1998
            1-6986
              PNM4.15
            Second
                Supplemental Indenture, dated as of March 11, 1998, supplemental
                to
                Indenture, dated as of March 11, 1998, Between PNM and The Chase
                Manhattan
                Bank, as Trustee
            
            4.6
                to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
                1998
            1-6986
              PNM4.16
            Third
                Supplemental Indenture, dated as of October 1, 1999 to Indenture
                dated as
                of March 11, 1998, between PNM and The Chase Manhattan Bank, as
                Trustee
            
            4.6.1
                to PNM’s Annual Report on Form 10-K for the fiscal year ended December 31,
                1999
            1-6986
              PNM4.17
            Fourth
                Supplemental Indenture, dated as of May 1, 2003 to Indenture dated
                as of
                March 11, 1998, between PNM and JPMorgan Chase Bank (formerly The
                Chase
                Manhattan Bank), as Trustee
            
            4.6.2
                to PNM’s Quarterly Report on Form 10-Q for the quarter ended June 30,
                2003
            1-6986
              PNM4.18
            Fifth
                Supplemental Indenture, dated as of May 1, 2003 to Indenture dated
                as of
                March 11, 1998, between PNM and JPMorgan Chase Bank, as
                Trustee
            
            4.6.3
                to PNM’s Quarterly Report on Form 10-Q for the quarter ended June 30,
                2003
            1-6986
              PNM4.19
            Sixth
                Supplemental Indenture, dated as of May 1, 2003 to Indenture dated
                as of
                March 11, 1998, between PNM and JPMorgan Chase Bank, as
                Trustee
            
            4.6.4
                to PNM’s Quarterly Report on Form 10-Q for the quarter ended June 30,
                2003
            1-6986
              PNM4.20
            Indenture
                (for Senior Notes), dated as of August 1, 1998, between PNM and The
                Chase
                Manhattan Bank, as Trustee
            
            4.1
                to PNM’s Registration Statement No. 33-53367
            333-53367
              PNM4.21
            First
                Supplemental Indenture, dated August 1, 1998, supplemental to Indenture,
                dated as of August 1, 1998, between PNM and The Chase Manhattan Bank,
                as
                Trustee
            
            4.3
                to PNM’s Current Report on Form 8-K Dated August 7, 1998
            1-6986
              PNM4.22
            Second
                Supplemental Indenture, dated September 1, 2003, supplemental to
                Indenture, dated as of August 1, 1998, between PNM and JPMorgan Chase
                Bank
                (formerly, The ChaseManhattan Bank), as Trustee
            
            4.7.1
                to PNM’s Quarterly Report on Form 10-Q for the quarter ended September 30,
                2003
            1-6986
              PNM**TNMP**4.23
            Indenture,
                dated January 1, 1999 between TNMP and JPMorgan Chase Bank (successor
                to
                The Chase Bank of Texas, N. A.), as Trustee
            
            4(w)
                to TNMP’s Annual Report on Form 10-K for the year ended December 31,
                1998
            2-97230
              TNMP4.24
            First
                Supplemental Indenture, dated January 1, 1999, to Indenture, dated
                January
                1, 1999, between TNMP and JPMorgan Chase Bank (successor to The Chase
                Bank
                of Texas, N. A.), as Trustee
            
            4(x)
                to TNMP’s Annual Report on Form 10-K for the year ended December 31,
                1998
            2-97230
              TNMP






E-5




**Exhibit
                No.**
            **Description
                of Exhibit**
            
            **Filed
                as Exhibit:**
            **Registrant(s)
                File No:**4.25
            Second
                Supplemental Indenture, dated June 1, 2003, to Indenture, dated January
                1,
                1999, between TNMP and JPMorgan Chase Bank (successor to The Chase
                Bank of
                Texas, N. A.), as Trustee
            
            4
                to TNMP’s Quarterly Report on Form 10-Q for the quarter ended June 30,
                2003
            2-97230
              TNMP**Material
                Contracts**10.1
            Amended
                and Restated Credit Agreement, dated as of August 15, 2005, among
                PNM
                Resources, Inc., the lenders party thereto, Bank of America, N.A.,
                as
                administrative agent and Wachovia Bank, National Association, as
                syndication agent.
            
            10.1
                to the Company’s Current Report on Form 8-K filed August 19,
                2005
            1-32462
              PNMR10.2
            Amended
                and Restated Guaranty Agreement, dated as of August 15, 2005, executed
                by
                PNM Resources, Inc., as Guarantor.
            
            10.1
                to the Company’s Current Report on Form 8-K filed August 19,
                2005
            1-32462
              PNMR10.3
            Joinder
                Agreement, dated as of September 30, 2005, between TNMP, as borrower
                and
                Bank of America, as administrative agent
            
            10.3
                to the Company’s Quarterly Report on Form 10-Q for the quarter ended
                September 30, 2005
            2-97230
              TNMP10.4
            Old
                Credit Agreement, dated as of November 15, 2004, among PNM Resources,
                the
                lenders party thereto, Bank of America, N.A., as administrative agent
                and
                Wachovia Bank National Association, as syndication agent
            
            10.1
                to PNM Resources’ Current Report on Form 8-K filed November 18,
                2004
            333-32170
              PNMR10.5
            Unit
                Purchase Agreement dated as of August 13, 2004 between PNM Resources
                and
                Cascade Investment, L.L.C.
            
            99
                to PNM Resources’ Current Report on Form 8-K filed August 19,
                2004
            333-32170
              PNMR10.6
            First
                Supplement to Unit Purchase Agreement, dated as of June 4, 2005,
                between
                PNMR and Cascade
            
            99.2
                to the Company’s Current Report on Form 8-K filed June 10,
                2005
            1-32462
              PNMR10.7
            Second
                Supplement to Unit Purchase Agreement, dated as of July 1, 2005,
                between
                PNMR and Cascade
            
            99.1
                to the Company’s Current Report on Form 8-K filed July 8,
                2005
            1-32462
              PNMR10.8
            Third
                Supplement to Unit Purchase Agreement, dated as of August 12, 2005,
                between PNMR and Cascade and Fourth Supplement to Unit Purchase Agreement,
                dated as of September 30, 2005, between PNMR and Cascade
            
            10.4
                and 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarter
                ended September 30, 2005
            1-32462
              PNMR






E-6




**Exhibit
              No.**
            **Description
                of Exhibit**
            
            **Filed
                as Exhibit:**
            **Registrant(s)
                File No:**10.9
            Investment
                Agreement dated as of June 6, 2005, between PNMR and TNP
            
            10.1
                to PNMR’s Current Report on Form 8-K filed June 10, 2005
            1-32462
              PNMR10.10
            PNM
                Resources, Inc.  3,400,000 Shares of Common Stock Underwriting
                Agreement dated March 23, 2005
            
            10.1
                to PNMR’s Current Report on Form 8-K filed March 29, 2005
            1-32462
              PNMR10.11
            PNM
                Resources, Inc. 4,300,000, 6.75% Equity Units Underwriting Agreement
                dated
                March 23, 2005
            
            10.2
                to PNMR’s Current Report on Form 8-K filed March 29, 2005
            1-32462
              PNMR10.12
            Credit
                Agreement dated as of August 17, 2005, among PNM, the lenders party
                thereto, Wachovia Bank, National Association, as administrative agent
                and
                Union Bank of California, N.A., as syndication agent
            
            10.3
                to the Company’s Current Report on Form 8-K filed August 19,
                2005
            1-6986
              PNM10.13
            Dividend,
                Assignment and Assumption Agreement, dated November 18, 2005 between
                PNMR
                Development and Management Corporation and PNM (Luna Energy
                Facility)
            
            10.13
                to the Company’s Annual Report on form 10-K for the year ended December
                31, 2005
            1-6986
              PNM10.14
            Purchase
                and Sale Agreement by and between Duke Energy North America, LLC,
                as
                seller, and PNM Resources, Phelps Dodge Energy Services, LLC and
                Tucson
                Electric Power Company, as purchasers dated as of November 12,
                2004
            
            10.5
                to the Company’s Annual Report on Form 10-K for the year ended December
                31, 2004
            333-32170
              PNMR10.15
            Distribution,
                Assignment and Assumption Agreement dated February 24, 2005 among
                PNMR
                Development and Management Corporation, Luna Power, LLC, Tucson Electric
                Power Company ("TEP") and Phelps Dodge Energy Services, LLC
                ("Phelps")
            
            10.136
                to the Company’s Quarterly Report on Form 10-Q for the quarter ended March
                31, 2005
            1-32462
              PNMR10.16
            Engineering,
                Procurement and Construction Agreement, dated as of February 24,
                2005,
                among Fluor Enterprises, Inc., as contractor and PNMR Development
                and
                Management Corporation, Tucson Electric Power Company  and Phelps
                Dodge Energy Services, LLC (collectively referred to as  owner).
                (Confidential treatment was requested for portions of this exhibit,
                and
                such portions were omitted from this exhibit filed and were filed
                separately with the Securities and Exchange Commission)
            
            10.137
                to the Company’s Current Report on Form 8-K filed October 12,
                2005
            1-32462
              PNMR10.17
            Receivables
                Sale Agreement, dated as of April 8, 2003, between PNM Receivables
                Corp.,
                as buyer and PNM as originator
            
            10.89
                to the Company’s Quarterly Report on Form 10-Q for the quarter ended June
                30, 2003
            1-6986
              PNM




E-7




**Exhibit
              No.**
            **Description
                of Exhibit**
            
            **Filed
                as Exhibit:**
            **Registrant(s)
                File No:**10.18
            Receivables
                Purchase Agreement, dated as of April 8, 2003, among PNM Receivables
                Corp., as seller, PNM, as servicer, EagleFunding Capital Corporation,
                as
                conduit investor, Fleet National Bank, as an alternate investor and
                Fleet
                Securities, Inc., as managing agent and deal agent.
            
            10.90
                to the Company’s Quarterly Report on Form 10-Q for the quarter ended June
                30, 2003
            1-6986
              PNM10.19
            Amendment
                No.1 to Receivables Purchase Agreement dated June 19, 2003; Amendment
                No.
                2 to Receivables Purchase Agreement dated April 6, 2004 and Amendment
                No.
                3 to Receivables Purchase Agreement dated October 15, 2004, among
                PNM
                Receivables Corp., as seller, PNM, as servicer, the Investors, Bank
                of
                America, N.A., as successor in interest to Fleet Securities, Inc.,
                as
                managing agent and deal agent
            
            10.90.1
                to PNM’s Quarterly Report on Form 10-Q for the quarter ended September 30,
                2004
            1-6986
              PNM10.20
            Consent
                and Waiver Dated as of April 5, 2005 to Receivables Purchase Agreement
                Dated as of April 8, 2003 among PNM Receivables Corp., as seller,
                PNM, as
                servicer, the Investors, Bank of America, N.A., as successor-in-interest
                to Fleet Securities, Inc., as managing agent and deal
                agent
            
            10.9
                to the Company’s Quarterly Report on Form 10-Q for the quarter ended June
                30, 2005
            1-6986
              PNM10.21**
            PNM
                Resources, Inc. Amended and Restated Omnibus Performance Equity Plan
                dated
                May 17, 2005 (“PEP”)
            
            4.1
                to PNM Resources’ Form S-8 Registration Statement filed May 17,
                2005
            333-125010
              PNMR10.22**
            Form
                of the award agreement for non-qualified stock options granted under
                the
                PEP
            
            10.1
                to the Company’s Current Report on Form 8-K filed February 17,
                2006
            1-32462
              PNMR10.23**
            Form
                of the award agreement for restricted stock rights granted in 2004
                and
                2005 under the PEP
            
            10.2
                to the Company’s Current Report on Form 8-K filed February 17,
                2006
            1-32462
              PNMR10.24**
            Form
                of award agreement for restricted stock rights granted after 2005
                under
                the PEP
            
            10.24
                to the Company’s Annual Report on Form 10-K for the year ended December
                31, 2005
            1-32462
              PNMR10.25**
            Changes
                in Director Compensation
            
            10.138
                to the Company’s Quarterly Report on Form 10-Q for the quarter ended March
                31, 2005
            1-32462
              PNMR10.26**
            PNM
                Resources, Inc. Executive Savings Plan dated December 29,
                2003
            
            10.75
                to PNM Resources and PNM’s Annual Report on Form 10-K for the fiscal year
                ended December 31, 2003
            333-32170
              PNMR10.27**
            PNM
                Resources, Inc. Executive Savings Plan II dated December 15,
                2004
            
            4
                to PNM Resources’ Registration Statement on Form S-8, File No. 333-12391,
                filed December 17, 2004
            333-12391
              PNMR




E-8




**Exhibit
              No.**
            **Description
                of Exhibit**
            
            **Filed
                as Exhibit:**
            **Registrant(s)
                File No:**10.28**
            First
                Amendment to the PNM Resources, Inc. Executive Savings Plan II effective
                June 3, 2005
            
            10.56.1
                to the Company’s Quarterly Report on Form 10-Q for the quarter ended June
                30, 2005
            1-32462
              PNMR10.29**
            Texas-New
                Mexico Company Excess Benefit Plan, As Amended and Restated Effective
                October 1, 1996.
            
            10.63
                to the Company’s Quarterly Report on Form 10-Q for the quarter ended June
                30, 2005
            2-97230
              TNMP10.30**
            Amendment
                to TNMP Excess Benefit Plan, effective January 1, 2005
            
            10.1
                to the Company’s Current Report on Form 8-K filed December 14,
                2005
            2-97230
              TNMP10.31**
            2006
                Officer Incentive Plan
            
            10.31
                to the Company’s Annual Report on Form 10-K for the year ended December
                31, 2005
            1-32462
              PNMR10.32**
            2005
                Officer Incentive Plan Amended (August 2, 2005)
            
            10.30
                to the Company’s Quarterly Report on Form 10-Q for the quarter ended
                September 30, 2005
            1-32462
              PNMR10.33**
            Summary
                of Executive Time Off Policy Effective January 1, 2006
            
            10.31
                to the Company’s Quarterly Report on Form 10-Q for the quarter ended
                September 30, 2005
            1-32462
              PNMR10.34**
            Restated
                and Amended Public Service Company of New Mexico Accelerated Management
                Performance Plan (1988) (August 16, 1988) (refiled)
            
            10.23
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1998
            1-6986
              PNM10.35**
            First
                Amendment to Restated and Amended Public Service Company of New Mexico
                Accelerated Management Performance Plan (1988) (August 30, 1988)
                (refiled)
            
            10.23.1
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1998
            1-6986
              PNM10.36**
            Second
                Amendment to Restated and Amended Public Service Company of New Mexico
                Accelerated Management Performance Plan (1988) (December 29, 1989)
                (refiled)
            
            10.23.2
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1998
            1-6986
              PNM10.37**
            Second
                [Third] Amendment to the Restated and Amended Public Service Company
                of
                New Mexico Accelerated Management Performance Plan (1988) dated December
                8, 1992
            
            10.22.1
                to PNM's Annual Report on Form 10-K for fiscal year ended December
                31,
                2004.
            1-6986
              PNM10.38**
            Fourth
                Amendment to the Restated and Amended Public Service Company of New
                Mexico
                Accelerated Management Performance Plan, as amended effective December
                7,
                1998
            
            10.23.4
                to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
                1999
            1-6986
              PNM10.39**
            Fifth
                Amendment dated November 27, 2002 to the Restated and Amended PNM
                Resources, Inc. Accelerated Performance Management Plan
            
            10.23.5
                to the Company’s Annual Report on Form 10-K for the fiscal year ended
                December 31, 2002
            333-32170
              PNMR




E-9




**Exhibit
              No.**
            **Description
                of Exhibit**
            
            **Filed
                as Exhibit:**
            **Registrant(s)
                File No:**10.40**
            Sixth
                Amendment dated December 9, 2003 to the PNM Resources, Inc. Restated
                and
                Amended Accelerated Performance Management Plan
            
            10.23.6
                to the Company’s Annual Report on Form 10-K for the fiscal year ended
                December 31, 2003
            333-32170
              PNMR10.41**
            Non-Union
                Severance Pay Plan of PNM Resources, Inc. dated November 19,
                2004
            
            10.31
                to the Company’s Annual Report on Form 10-K for the fiscal year ended
                December 31, 2004
            333-32170
              PNMR10.42**
            First
                Amendment to the PNM Resources, Inc. Non-Union Severance Pay Plan
                effective April 1, 2005 and Second Amendment to the PNM Resources,
                Inc.
                Non-Union Severance Pay Plan effective June 6, 2005.
            
            10.31.1
                and 10.31.2 to the Company’s Quarterly Report on Form 10-Q for the quarter
                ended June 30, 2005
            1-32462
              PNMR10.43**
            Third
                Amendment to the PNM Resources, Inc. Non-Union Severance Pay Plan
                effective October 1, 2005
            
            10.43
                to the Company’s Annual Report on Form 10-K for the fiscal year ended
                December 31, 2005
            1-32462
              PNM10.44**
            PNM
                Service Bonus Plan dated October 23, 1984
            
            19.4
                to PNM’s Quarterly Report on Form 10-Q or the quarter ended September 30,
                1988
            1-6986
              PNM10.45**
            First
                Amendment dated November 20, 1985 to PNM Service Bonus
                Plan
            
            10.11.1
                to PNM’s Annual Report on Form 10-K for the fiscal year ending December
                31, 1985
            1-6986
              PNM10.46**
            Second
                Amendment dated December 29, 1989 to PNM Service Bonus
                Plan
            
            10.27.2
                to PNM’s Annual Report on Form 10-K for the fiscal year ending December
                31, 1989
            1-6986
              PNM10.47**
            Second
                [Third] Amendment dated December 7, 1998 to PNM Service Bonus
                Plan
            
            10.45
                to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
                1999
            1-6986
              PNM10.48**
            Fourth
                Amendment dated November 27, 2002 to PNM Resources, Inc. Service
                Bonus
                Plan
            
            10.45.4
                to the Company’s Annual Report on Form 10-K for the fiscal year ended
                December 31, 2002
            333-32170
              PNMR10.49**
            Fifth
                Amendment dated December 9, 2003 to PNM Resources, Inc. Service Bonus
                Plan
            
            10.45.5
                to the Company’s Annual Report on Form 10-K for the fiscal year ended
                December 31, 2003
            333-32170
              PNMR10.50**
            Public
                Service Company of New Mexico OBRA ‘93 Retirement Plan
              effective
                November 15, 1993
            
            10.4
                to PNM’s Quarterly Report on Form 10-Q for the quarter ended September 30,
                1993
            1-6986
              PNM10.51**
            First
                Amendment to the Public Service Company of New Mexico OBRA ’93 Retirement
                Plan, as amended effective December 7, 1998
            
            10.48.1
                to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
                1999
            1-6986
              PNM10.52**
            Second
                Amendment dated November 27, 2002 to the PNM Resources, Inc. OBRA
’93
                Retirement Plan
            
            10.48.2
                to the Company’s Annual Report on Form 10-K for the year ended December
                31, 2002
            333-32170
              PNMR10.53**
            Third
                Amendment dated December 9, 2003 to the PNM Resources, Inc. OBRA
’93
                Retirement Plan
            
            10.48.3
                to the Company’s Annual Report on Form 10-K for the year ended December
                31, 2003
            333-32170
              PNMR






E-10




**Exhibit
              No.**
            **Description
                of Exhibit**
            
            **Filed
                as Exhibit:**
            **Registrant(s)
                File No:**10.54**
            Public
                Service Company of New Mexico Section 415 Plan dated January 1,
                1994
            
            10.50
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1993
            1-6986
              PNM10.55**
            First
                Amendment dated December 7, 1998 and Second Amendment dated August
                7, 1999
                to PNM Section 415 Plan and Third Amendment dated November 27, 2002
                to the
                PNM Resources, Inc. Section 415 Plan
            
            10.50.1
                to the Company’s Annual Report in Form 10-K for the fiscal year ended
                December 31, 2002
            333-32170
              PNMR10.56**
            Fourth
                Amendment dated December 9, 2003 to the PNM Resources, Inc. Section
                415
                Plan
            
            10.50.2
                to the Company’s Annual Report in Form 10-K for the fiscal year ended
                December 31, 2003
            333-32170
              PNMR10.57**
            PNM
                Resources, Inc. Officer Retention Plan dated October 21,
                2003
            
            10.51
                to the Company’s Annual Report in Form 10-K for the fiscal year ended
                December 31, 2003
            333-32170
              PNMR10.58**
            First
                Amendment to PNM Resources, Inc. Officer Retention Plan dated December
                16,
                2004
            
            10.46
                to the Company’s Annual Report in Form 10-K for the fiscal year ended
                December 31, 2004
            333-32170
              PNMR10.59*
            PNM
                Resources Executive Spending Account Plan dated December 9,
                2003
            
            10.52
                to the Company’s Annual Report on Form 10-K for fiscal year ended December
                31, 2003
            333-32170
              PNMR10.60**
            First
                Amendment to PNM Resources Executive Spending Account Plan effective
                January 1, 2004
            
            10.52.1
                to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
                2004
            333-32170
              PNMR10.61**
            Third
                Restated and Amended Public Service Company of New Mexico Performance
                Stock Plan effective March 10, 1998
            
            10.74
                to PNM's Quarterly Report on Form 10-Q for the quarter ended March
                31,
                1998
            1-6986
              PNM10.62**
            First
                Amendment to the Third Restated and Amended Public Service Company
                of New
                Mexico Performance Stock Plan Dated February 7, 2000
            
            10.74.1
                to PNM's Quarterly Report on Form 10-Q for the quarter ended March
                31,
                2000
            1-6986
              PNM10.63**
            Second
                Amendment to the Third Restated and Amended Public Service Company
                of New
                Mexico Performance Stock Plan, effective December 7, 1998
            
            10.74.2
                to PNM's Annual Report on Form 10-K for the fiscal year ended December
                31,
                2000
            1-6986
              PNM10.64**
            Third
                Amendment to the Third Restated and Amended Public Service Company
                of New
                Mexico Performance Stock Plan, effective December 10, 2000
            
            10.74.3
                to PNM’s Annual Report on Form 10-K for the fiscal year ended December 31,
                2000
            1-6986
              PNM10.65**
            Fourth
                Amendment to Third Restated and Amended Public Service Company of
                New
                Mexico Performance Stock Plan dated December 31, 2001
            
            4.3.5
                to PNM Resources’ Post-Effective Amendment No. 1 to Form S-8 Registration
                Statement filed December 31, 2001
            333-03303
              PNMR10.66**
            Fifth
                Amendment to the Third Restated and Amended PNM Resources, Inc.
                Performance Stock Plan dated September 6, 2002
            
            10.74.5
                to the Company’s Quarterly Report on Form 10-Q for the quarter ended
                September 30, 2002
            333-32170
              PNMR




E-11




**Exhibit
              No.**
            **Description
                of Exhibit**
            
            **Filed
                as Exhibit:**
            **Registrant(s)
                File No:**10.67**
            PNM
                Resources, Inc.
              Director
                Retainer Plan,
              dated
                December 31, 2001
            
            4.3
                to PNM Resources, Inc.
              Post-Effective
                Amendment No. 1 to Form S-8 Registration Statement filed December
                31,
                2001
            333-03289
              PNMR10.68**
            First
                Amendment dated
              February
                17, 2003 to
              PNM
                Resources, Inc. Director Retainer Plan
            
            10.40.1
                to the Company’s Quarterly Report on Form 10-Q for the quarter ended March
                31, 2003
            333-32170
              PNMR10.69**
            Supplemental
                Employee Retirement Agreement, dated March 14, 2000 for Patrick T.
                Ortiz
            
            10.80
                to PNM's Quarterly Report on Form 10-Q for the quarter ended March
                31,
                2000
            1-6986
              PNM10.70**
            Supplemental
                Employee Retirement Agreement, dated March 22, 2000 for Jeffry E.
                Sterba
            
            10.81
                to PNM's Quarterly Report on Form 10-Q for the quarter ended March
                31,
                2000
            1-6986
              PNM10.71**
            Retention
                Bonus Agreement executed October 31, 2003 for Jeffry
                Sterba
            
            10.83
                to the Company’s Annual Report on Form 10-K for the year ended December
                31, 2003
            333-32170
              PNMR10.72**
            PNM
                Resources Officer Life Insurance Plan dated April 28, 2004
            
            10.24.1
                to the Company’s Quarterly Report on Form 10-Q for the quarter ended March
                31, 2004
            333-32170
              PNMR10.73**
            First
                Amendment to PNM Resources Officer Life Insurance Plan dated December
                16,
                2004
            
            10.27
                to the Company’s Annual Report on Form 10-K for the fiscal year ended
                December 31, 2004.
            333-32170
              PNMR10.74**
            Long
                Term Care Insurance Plan effective January 1, 2003
            
            10.87
                to the Company’s Annual Report on Form 10-K for the year ended December
                31, 2002
            333-32170
              PNMR10.75**
            Executive
                Long Term Disability effective January 1, 2003
            
            10.88
                to the Company’s Annual Report on Form 10-K for the year ended December
                31, 2002
            333-32170
              PNMR10.76
            Supplemental
                Indenture of Lease
              dated
                as of July 19, 1966 between PNM and other participants in the Four
                Corners
                Project and the Navajo Indian Tribal Council
            
            4-D
                to PNM’s Registration Statement No. 2-26116
            2-26116
              PNM10.77
            Amendment
                and Supplement No. 1 to Supplemental and Additional Indenture of
                Lease
                dated April 25, 1985 between the Navajo Tribe of Indians and Arizona
                Public Service Company, El Paso Electric Company, Public Service
                Company
                of New Mexico, Salt River Project Agricultural Improvement and Power
                District, Southern California Edison Company, and Tucson Electric
                Power
                Company (refiled)
            
            10.1.1
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1995
            1-6986
              PNM




E-12




**Exhibit
              No.**
            **Description
                of Exhibit**
            
            **Filed
                as Exhibit:**
            **Registrant(s)
                File No:**10.78
            Water
                Supply Agreement between the Jicarilla Apache Tribe and Public Service
                Company of New Mexico, dated July 20, 2000
            
            10.5
                to PNM’s Quarterly Report of Form 10-Q for the quarter ended September 30,
                2001
            1-6986
              PNM10.79
            Arizona
                Nuclear Power Project Participation Agreement among PNM and Arizona
                Public
                Service Company, Salt River Project Agricultural Improvement and
                Power
                District, Tucson Gas & Electric Company and El Paso Electric Company,
                dated August 23, 1973
            
            5-T
                to PNM’s Registration Statement No. 2-50338
            2-50338
              PNM10.80
            Amendments
                No. 1 through No. 6 to Arizona Nuclear Power Project Participation
                Agreement
            
            10.8.1
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1991
            1-6986
              PNM10.81
            Amendment
                No. 7 effective April 1, 1982, to the Arizona Nuclear Power Project
                Participation Agreement (refiled)
            
            10.8.2
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1991
            1-6986
              PNM10.82
            Amendment
                No. 8 effective September 12, 1983, to the Arizona Nuclear Power
                Project
                Participation Agreement (refiled)
            
            10.58
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1993
            1-6986
              PNM10.83
            Amendment
                No. 9 to Arizona Nuclear Power Project Participation Agreement dated
                as of
                June 12, 1984 (refiled)
            
            10.8.4
                to PNM’s Annual Report of the Registrant on Form 10-K for fiscal year
                ended December 31, 1994
            1-6986
              PNM10.84
            Amendment
                No. 10 dated as of November 21, 1985 and Amendment No. 11 dated as
                of June
                13, 1986 and effective January 10, 1987 to Arizona Nuclear Power
                Project
                Participation Agreement (refiled)
            
            10.8.5
                to PNM’s Annual Report of the Registrant on Form 10-K for fiscal year
                ended December 31, 1994
            1-6986
              PNM10.85
            Amendment
                No. 12 to Arizona Nuclear Power Project Participation Agreement dated
                June
                14, 1988, and effective August 5, 1988
            
            19.1
                to PNM's Quarterly Report on Form 10-Q for the quarter ended September
                30,
                1990
            1-6986
              PNM10.86
            Amendment
                No. 13 to the Arizona Nuclear Power Project Participation Agreement
                dated
                April 4, 1990, and effective June 15, 1991
            
            10.8.10
                to PNM’s Annual Report on Form 10-K for the fiscal year ended December 31,
                1990
            1-6986
              PNM10.87
            Amendment
                No. 14 to the Arizona Nuclear Power Project Participation Agreement
                effective June 20, 2000
            
            10.8.9
                to PNM’s Annual Report on Form 10-K for the fiscal year ended December 31,
                2000
            1-6986
              PNM10.88
            Underground
                Coal Sales Agreement, dated August 31, 2001 among San Juan Coal Company,
                PNM and Tucson Electric Power Company
            
            10.85
                to PNM’s Quarterly Report on Form 10-Q for the quarter ending September
                31, 2001 (Confidential treatment was requested for portions of this
                exhibit, and such portions were omitted from this exhibit filed and
                were
                filed separately with the Securities and Exchange
                Commission)
            1-6986
              PNM




E-13




**Exhibit
              No.**
            **Description
                of Exhibit**
            
            **Filed
                as Exhibit:**
            **Registrant(s)
                File No:**10.89
            Amendment
                One to Underground Coal Sales Agreement dated December 15, 2003 among
                San
                Juan Coal Company, PNM and Tucson Electric Coal Company
            
            10.9.1
                to PNM’s Amended Report on Form 10-K for fiscal year ended December 31,
                2003 (Confidential treatment was requested for portions of this exhibit,
                and such portions were omitted from this exhibit filed and were filed
                separately with the Securities and Exchange Commission)
            1-6986
              PNM10.90
            Amendment
                Two to Underground Coal Sales Agreement effective September 15, 2004
                among
                San Juan Coal Company, PNM and Tucson Electric Coal
                Company
            
            10.9.2
                to PNM’s Quarterly Report on Form 10-Q for the quarter ended September 30,
                2004
            1-6986
              PNM10.91
            Amendment
                Three to Underground Coal Sales Agreement executed April 29, 2005
                among
                San Juan Coal Company, PNM and Tucson Electric Coal Company (Confidential
                treatment was requested for portions of this exhibit, and such portions
                were omitted from this exhibit filed and were filed separately with
                the
                Securities and Exchange Commission)
            
            10.86.1
                to the Company’s Quarterly Report on Form 10-Q for the quarter ended June
                30, 2005
            1-6986
              PNM10.92
            San
                Juan Unit 4 Early Purchase and Participation Agreement dated as of
                September 26, 1983 between PNM and M-S-R Public Power Agency, and
                Modification No. 2 to the San Juan Project Agreements dated December
                31,
                1983 (refilled)
            
            10.11
                to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
                1994
            1-6986
              PNM10.93
            Amendment
                No. 1 to the Early Purchase and Participation Agreement between Public
                Service Company of New Mexico and M-S-R Public Power Agency, executed
                as
                of December 16, 1987, for San Juan Unit 4 (refiled)
            
            10.11.1
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1997
            1-6986
              PNM





10.94
            Amendment
                No. 3 to the San Juan Unit 4 Early Purchase and Participation Agreement
                between Public Service Company of New Mexico and M-S-R Public Power
                Agency, dated as of October 27, 1999
            
            10.11.3
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1999
            1-6986
              PNM10.95
            Amended
                and Restated San Juan Unit 4 Purchase and Participation Agreement
                dated as
                of December 28, 1984 between PNM and the Incorporated County of Los
                Alamos
                (refiled)
            
            10.12
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1994
            1-6986
              PNM




E-14




**Exhibit
              No.**
            **Description
                of Exhibit**
            
            **Filed
                as Exhibit:**
            **Registrant(s)
                File No:**10.96
            Amendment
                No. 1 to the Amended and Restated San Juan Unit 4 Purchase and
                Participation Agreement between Public Service Company of New Mexico
                and
                M-S-R Public Power Agency, dated as of October 27, 1999
            
            10.12.1
                to PNM’s Annual Report Form 10-K for fiscal year ended December 31,
                1999
            1-6986
              PNM10.97
            Amendment
                No. 2 to the San Juan Unit 4 Purchase Agreement and Participation
                Agreement between Public Service Company of New Mexico and The
                Incorporated County of Los Alamos, New Mexico, dated October 27,
                1999
            
            10.13
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1999
            1-6986
              PNM10.98
            Participation
                Agreement among PNM, Tucson Electric Power Company and certain financial
                institutions relating to the San Juan Coal Trust dated as of December
                31,
                1981 (refiled)
            
            10.14
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1992
            1-6986
              PNM10.99
            Interconnection
                Agreement dated November 23, 1982, between PNM and Southwestern Public
                Service Company (refiled)
            
            10.16
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1992
            1-6986
              PNM10.100*
            Facility
                Lease dated as of December 16, 1985 between The First National Bank
                of
                Boston, as Owner Trustee, and Public Service Company of New Mexico
                together with Amendments No. 1, 2 and 3 thereto (refiled)
            
            10.18
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1995
            1-6986
              PNM10.101*
            Amendment
                No. 4 dated as of March 8, 1995, to Facility Lease between Public
                Service
                Company of New Mexico and the First National Bank of Boston, dated
                as of
                December 16, 1985
            
            10.18.5
                to the PNM's Quarter Report on Form10-Q for the quarter ended March
                31,
                1995
            1-6986
              PNM10.102
            Facility
                Lease dated as of July 31, 1986, between the First National Bank
                of
                Boston, as Owner Trustee, and Public Service Company of New Mexico
                together with Amendments No. 1, 2 and 3 thereto (refiled)
            
            10.19
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1996
            1-6986
              PNM10.103
            Facility
                Lease dated as of August 12, 1986, between The First National Bank
                of
                Boston, as Owner Trustee, and Public Service Company of New Mexico
                together with Amendments No. 1 and 2 thereto (refiled)
            
            10.20
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1996
            1-6986
              PNM10.104
            Amendment
                No. 2 dated as of April 10, 1987 to Facility Lease dated as of August
                12,
                1986, as amended, between The First National Bank of Boston, not
                in its
                individual capacity, but solely as Owner Trustee under a Trust Agreement,
                dated as of August 12, 1986, with MFS Leasing Corp., Lessor and Public
                Service Company of New Mexico, Lessee (refiled)
            
            10.20.2
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1998
            1-6986
              PNM




E-15




**Exhibit
              No.**
            **Description
                of Exhibit**
            
            **Filed
                as Exhibit:**
            **Registrant(s)
                File No:**10.105
            Amendment
                No. 3 dated as of March 8, 1995, to Facility Lease between Public
                Service
                Company of New Mexico and the First National Bank of Boston, dated
                as of
                August 12, 1986
            
            10.20.4
                to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
                1995
            1-6986
              PNM10.106
            Facility
                Lease dated as of December 15, 1986, between The First National Bank
                of
                Boston, as Owner Trustee, and Public Service Company of New Mexico
                (Unit 1
                Transaction) together with Amendment No. 1 thereto
                (refiled)
            
            10.21
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1996
            1-6986
              PNM10.107
            Facility
                Lease dated as of December 15, 1986, between The First National Bank
                of
                Boston, as Owner Trustee, and Public Service Company of New Mexico
                Unit 2
                Transaction) together with Amendment No. 1 thereto
                (refiled)
            
            10.22
                to PNM’s Annual Report of the Registrant on Form 10-K for fiscal year
                ended December 31, 1996
            1-6986
              PNM10.108
            Amendment
                No. 2 dated as of April 10, 1987 to the Facility Lease dated as of
                August
                12, 1986 between The First National bank of Boston, as Owner Trustee,
                and
                PNM. (Unit 2 transaction.) (This is an amendment to a Facility Lease
                which
                is substantially similar to the Facility Lease filed as Exhibit 28.1
                to
                the Company’s Current Report on Form 8-K dated August 18,
                1986)
            
            10.53
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1987
            1-6986
              PNM10.109
            San
                Juan Unit 4 Purchase and Participation Agreement Public Service Company
                of
                New Mexico and the City of Anaheim, California dated April 26,
                1991
            
            19.2
                to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
                1991
            1-6986
              PNM10.110
            Amendment
                No. 1 to the San Juan Unit 4 Purchase and Participation Agreement
                between
                Public Service Company of New Mexico and The City of Anaheim, California,
                dated October 27, 1999
            
            10.36.1
                to Annual Report PNM’s on Form 10-K for fiscal year ended December 31,
                1999
            1-6986
              PNM10.111
            Restated
                and Amended San Juan Unit 4 Purchase and Participation Agreement
                between
                Public Service Company of New Mexico and Utah Associated Municipal
                Power
                Systems
            
            10.2.1
                to PNM’s Quarterly Report on Form 10-Q for the quarter ended September 30,
                1993
            1-6986
              PNM10.112
            Amendment
                No. 1 to the Restated and Amended San Juan Unit 4 Purchase And
                Participation Agreement between Public Service Company of New Mexico
                And
                Utah Associated Municipal Power Systems, dated October 27,
                1999
            
            10.38.1
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1999
            1-6986
              PNM




E-16




**Exhibit
              No.**
            **Description
                of Exhibit**
            
            **Filed
                as Exhibit:**
            **Registrant(s)
                File No:**10.113
            Participation
                Agreement dated as of June 30, 1983 among Security Trust Company,
                as
                Trustee, PNM, Tucson Electric Power Company and certain financial
                institutions relating to the San Juan Coal Trust (refiled)
            
            10.61
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1993
            1-6986
              PNM10.114
            Master
                Decommissioning Trust Agreement for Palo Verde Nuclear Generating
                Station
                dated March 15, 1996, between Public Service Company of New Mexico
                and
                Mellon Bank, N.A.
            
            10.68
                to PNM's Quarterly Report on Form 10-Q for the quarter ended March
                31,
                1996
            1-6986
              PNM10.115
            Amendment
                Number One to the Master Decommissioning Trust Agreement for Palo
                Verde
                Nuclear Generating Station dated January 27, 1997, between Public
                Service
                Company of New Mexico and Mellon Bank, N.A.
            
            10.68.1
                to PNM's Annual Report on Form 10-K for fiscal year ended December
                31,
                1997
            1-6986
              PNM





10.116
            Amendment
                Number Two to the Master Decommissioning Trust Agreement for Palo
                Verde
                Nuclear Generating Station between Public Service Company of New
                Mexico
                and Mellon Bank, N.A.
            
            10.68.2
                to PNM's Annual Report on Form 10-K for fiscal year ended December
                31,
                2003
            1-6986
              PNM10.117
            Refunding
                Agreement No. 8A, dated as of December 23, 1997, among PNM, the Owner
                Participant Named Therein, State Street Bank and Trust Company, as
                Owner
                Trustee, The Chase Manhattan Bank, as Indenture Trustee, and First
                PV
                Funding Corporation
            
            10.73
                to PNM's Quarterly Report on Form 10-Q for the quarter ended March
                31,
                1998
            1-6986
              PNM10.118
            PVNGS
                Capital Trust—Variable Rate Trust Notes—PVNGS Note Agreement dated as of
                July 31, 1998
            
            10.76
                to PNM's Quarterly Report on Form 10-Q for the quarter ended September
                30,
                1998
            1-6986
              PNM10.119
            San
                Juan Project Participation Agreement dated as of October 27, 1999,
                among
                Public Service Company of New Mexico, Tucson Electric Power Company,
                The
                City of Farmington, New Mexico, M-S-R Public Power Agency, The
                Incorporated County of Los Alamos, New Mexico, Southern California
                Public
                Power Authority, City of Anaheim, Utah Associated Municipal Power
                System
                and Tri-State Generation and Transmission Association,
                Inc.
            
            10.77
                to PNM's Quarterly Report on Form 10-Q for the quarter ended September
                30,
                1999
            1-6986
              PNM10.120
            January
                12, 1994 Stipulation
            
            10.53
                to PNM’s Annual Report on form 10-K for fiscal year ended December 31,
                1993
            1-6986
              PNM10.121
            New
                Mexico Public Service Commission Order dated July 30, 1987, and Exhibit
                I
                thereto, in NMPUC Case No. 2004, regarding the PVNGS decommissioning
                trust
                fund (refiled)
            
            10.67
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1997
            1-6986
              PNM




E-17




**Exhibit
              No.**
            **Description
                of Exhibit**
            
            **Filed
                as Exhibit:**
            **Registrant(s)
                File No:**10.122
            Stipulation
                in the matter of the Commission’s investigation of the rates for electric
                service of Public Service Company of New Mexico, Rate Case No. 2761,
                dated
                May 21, 1999
            
            10.78
                to PNM's Quarterly Report on Form 10-Q for the quarter ended September
                30,
                1999
            1-6986
              PNM10.123
            Stipulation
                in the matter of the Commission’s investigation of the rates for electric
                service of Public Service Company of New Mexico, Rate Case No. 2761,
                dated
                May 27, 1999
            
            10.78.1
                to PNM's Quarterly Report on Form 10-Q for the quarter ended September
                30,
                1999
            1-6986
              PNM10.124
            Stipulation
                in the matter of PNM’s transition plan Utility Case No. 3137, dated
                October 10, 2002 as amended by Amendment to Stipulated Agreement
                dated
                October 18, 2002
            
            10.86
                to the Company’s Annual Report on Form 10-K for the year ended December
                31, 2002
            1-6986
              PNM10.125
            Settlement
                Agreement between Public Service Company of New Mexico and Creditors
                of
                Meadows Resources, Inc. dated November 2, 1989 (refiled)
            
            10.34
                to PNM’s Quarterly Report on Form 10-Q for quarter ended June 30,
                2000
            1-6986
              PNM10.126
            First
                Amendment dated April 24, 1992 to the Settlement Agreement dated
                November
                2, 1989 among Public Service Company of New Mexico, the lender parties
                thereto and collateral agent (refiled)
            
            10.34.1
                to PNM’s Quarterly Report on Form 10-Q for quarter ended June 30,
                2000
            1-6986
              PNM10.127
            Amendment
                dated April 11, 1991 among Public Service Company of New Mexico,
                certain
                banks and Chemical Bank and Citibank, N.A., as agents for the
                banks
            
            19.1
                to PNM’s Quarterly Report on Form 10-Q for the quarter ended September 30,
                1991
            1-6986
              PNM10.128
            Agreement
                of PNM pursuant to Item 601(b)(4)(iii) of Regulation S-K
                (refiled)
            
            10.62
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1993
            1-6986
              PNM10.129
            Stipulation
                dated February 28, 2005 in NMPRC Case No. 04-00315-UT regarding the
                application of PNM Resources and TNMP for approval of the TNP
                acquisition
            
            10.134
                to the Company’s Quarterly Report on Form 10-Q for the quarter ended March
                31, 2005
            1-32462
              PNMR/
              TNMP10.130
            Settlement
                Agreement dated February 3, 2005, between PNM Resources, Inc. and
                Texas-New Mexico Power Company, the cities of Dickenson, Lewisville,
                La
                Marque, Ft. Stockton and Friendswood, Texas, the Legal and Enforcement
                Division of the Public Utility Commission of Texas, the Office of
                Public
                Utility Counsel, the Texas Industrial Energy Consumers and the Alliance
                for Retail Markets
            
            10.1-10.1.7
                to the Company’s Current Report on Form 8-K filed February 7, 2005
            1-32462
              PNMR/
              TNMP




E-18




**Exhibit
              No.**
            **Description
                of Exhibit**
            
            **Filed
                as Exhibit:**
            **Registrant(s)
                File No:**10.131
            Consent
                Decree entered into by PNM on March 9, 2005 relating to the citizen
                suit
                under the Clean Air Act and the excess emissions report matter for
                SJGS
            
            10.135
                to the Company’s Quarterly Report on Form 10-Q for the quarter ended March
                31, 2005
            1-6986
              PNM10.132
            Stipulation
                in the matter of PNM’s application for approval of a certificate of public
                convenience and necessity for the Afton Generating Station, Case
                No.
                05-00275-UT, dated November 30, 2005
            
            10.132
                to the Company’s Annual report on Form 10-K for the year ended December
                31, 2005
            1-6986
              PNM10.133
            Contract
                dated April 29, 1987 between TNMP and El Paso Electric
                Company
            
            10(f),
                Form 8 applicable to TNMP’s Annual Report on Form 10-K for the year ended
                December 31, 1986
            2-97230
              TNMP10.134
            Interconnection
                Agreement between TNMP and Plains Electric Generation and Transmission
                Cooperative, Inc. dated July 19, 1984
            
            10(j),
                Form 8 applicable to TNMP’s Annual Report on Form 10-K for the year ended
                December 31, 1986
            2-97230
              TNMP10.135
            Interchange
                Agreement between TNMP and El Paso Electric Company dated April 29,
                1987
            
            10(l),
                Form 8 applicable to TNMP’s Annual Report on Form 10-K for the year ended
                December 31, 1986
            2-97230
              TNMP10.136
            Amendment
                No.1, dated November 21, 1994, to Interchange Agreement between TNMP
                and
                El Paso Electric Company
            
            10(nn)1
                to TNMP’s Annual Report on Form 10-K for the year ended December 31,
                1994
            2-97230
              TNMP10.137
            DC
                Terminal Participation Agreement between TNMP and El Paso Electric
                Company
                dated December 8, 1981 as amended
            
            10(m),
                Form 8 applicable to TNMP’s Annual Report on Form 10-K for the year ended
                December 31, 1986
            2-97230
              TNMP10.138
            Wholesale
                Requirements Power Sale and Services Agreement between PNM and TNMP
                dated
                June 29, 2001
            
            10(i)
                to TNMP’s Form S-4/A filed November 4, 2003
            333-108522
              TNMP10.139
            Power
                Supply Service Agreement dated December 22, 2003 between First Choice
                Power Special Purpose, L.P. (as assignee of First Choice Power, L.P.,
                f/k/a First Choice Power, Inc.) and Constellation Power Source, Inc.
                (Confidential treatment was requested for portions of this exhibit,
                and
                such portions were omitted from this exhibit filed and were filed
                separately with the Securities and Exchange Commission)
            
            10.1
                to TNP’s Quarterly Report on Form 10-Q for the quarter ended June 30,
                2004
            2-8980010.140
            Amendment
                No. 1 to Power and Services Agreement dated June 1, 2004 between
                First
                Choice Power Special Purpose, L.P. and Constellation Power Services,
                Inc.
                (Confidential treatment was requested for portions of this exhibit,
                and
                such portions were omitted from this exhibit filed and were filed
                separately with the Securities and Exchange Commission)
            
            10.2
                to TNP’s Quarterly Report on Form 10-Q for the quarter ended June 30,
                2004
            2-89800




E-19




**Exhibit
              No.**
            **Description
                of Exhibit**
            
            **Filed
                as Exhibit:**
            **Registrant(s)
                File No:**10.141
            Amendment
                No.2 to Power and Services Agreement dated August 25th,
                2004, between First Choice Power Special Purpose and Constellation
                Energy
                Commodities Group(Confidential
                treatment was requested for portions of this exhibit, and such portions
                were omitted from this exhibit filed and were filed separately with
                the
                Securities and Exchange Commission)
            
            10.1
                to TNP’s Quarterly Report on Form 10-Q for the quarter ended March 31,
                2005
            2-8980010.142
            Amendment
                No.3 to Power and Services Agreement dated March 7th,
                2005, between First Choice Power Special Purpose and Constellation
                Energy
                Commodities Group(Confidential
                treatment was requested for portions of this exhibit, and such portions
                were omitted from this exhibit filed and were filed separately with
                the
                Securities and Exchange Commission)
            
            10.2
                to TNP’s Quarterly Report on Form 10-Q for the quarter ended March 31,
                2005
            2-8980018.1
            Letter
                from Deloitte & Touche LLP regarding change in accounting principle
                for PNM Resources, Inc.
            
            18.1
                to the Company's Annual Report on Form 10-K for fiscal year ended
                December
                31, 2003
            333-32170
              PNMR18.2
            Letter
                from Deloitte & Touche LLP regarding change in accounting principle
                for Public Service Company of New Mexico
            
            18.2
                to the Company's Annual Report on Form 10-K for fiscal year ended
                December
                31, 2003
            1-6986
              PNM21
            Certain
                subsidiaries of PNM Resources
            
            21
                to the Company’s Annual Report on Form 10-K for the year ended December
                31, 2005
            1-32462
              PNMR99.2*
            Participation
                Agreement dated as of December 16, 1985, among the Owner Participant
                named
                therein, First PV Funding Corporation. The First National Bank of
                Boston,
                in its individual capacity and as Owner Trustee (under a Trust Agreement
                dated as of December 16, 1985 with the Owner Participant), Chemical
                Bank,
                in its individual capacity and as Indenture Trustee (under a Trust
                Indenture, Mortgage, Security Agreement and Assignment of Rents dated
                as
                of December 16, 1985 with the Owner Trustee), and Public Service
                Company
                of New Mexico, including Appendix A definitions together with Amendment
                No. 1 dated July 15, 1986 and Amendment No. 2 dated November 18,
                1986
                (refiled)
            
            99.2
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1995
            1-6986
              PNM




E-20




**Exhibit
              No.**
            **Description
                of Exhibit**
            
            **Filed
                as Exhibit:**
            **Registrant(s)
                File No:**99.3
            Trust
                Indenture, Mortgage, Security Agreement and Assignment of Rents dated
                as
                of December 16, 1985, between the First National Bank of Boston,
                as Owner
                Trustee, and Chemical Bank, as Indenture Trustee together with
                Supplemental Indentures Nos. 1 and 2 (refiled)
            
            99.3
                to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
                1996
            1-6986
              PNM99.3.3
            Supplemental
                Indenture No. 3 dated as of March 8, 1995, to Trust Indenture Mortgage,
                Security Agreement and Assignment of Rents between The First National
                Bank
                of Boston and Chemical Bank dated as of December 16, 1985
            
            99.3.3
                to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
                1995
            1-6986
              PNM99.4*
            Assignment,
                Assumption and Further Agreement dated as of December 16, 1985, between
                Public Service Company of New Mexico and The First National Bank
                of
                Boston, as Owner Trustee (refiled)
            
            99.4
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1995
            1-6986
              PNM99.5
            Participation
                Agreement dated as of July 31, 1986, among the Owner Participant
                named
                herein, First PV Funding Corporation, The First National Bank of
                Boston,
                in its individual capacity and as Owner Trustee (under a Trust Agreement
                dated as of July 31, 1986, with the Owner Participant), Chemical
                Bank, in
                its individual capacity and as Indenture Trustee (under a Trust Indenture,
                Mortgage, Security Agreement and Assignment of Rents dated as of
                July 31,
                1986, with the Owner Trustee), and Public Service Company of New
                Mexico,
                including Appendix A definitions together with Amendment No. 1 thereto
                (refiled)
            
            99.5
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1996
            1-6986
              PNM





99.6
            Trust
                Indenture, Mortgage, Security Agreement and Assignment of Rents dated
                as
                of July 31, 1986, between The First National Bank of Boston, as Owner
                Trustee, and Chemical Bank, as Indenture Trustee together with
                Supplemental Indenture No. 1 thereto (refiled)
            
            99.6
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1996
            1-6986
              PNM99.7
            Assignment,
                Assumption, and Further Agreement dated as of July 31, 1986, between
                Public Service Company of New Mexico and The First National Bank
                of
                Boston, as Owner Trustee (refiled)
            
            99.7
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1996
            1-6986
              PNM




E-21




**Exhibit
              No.**
            **Description
                of Exhibit**
            
            **Filed
                as Exhibit:**
            **Registrant(s)
                File No:**99.8
            Participation
                Agreement dated as of August 12, 1986, among the Owner Participant
                named
                therein, First PV Funding Corporation. The First National Bank of
                Boston,
                in its individual capacity and as Owner Trustee (under a Trust Agreement
                dated as of August 12, 1986, with the Owner Participant), Chemical
                Bank,
                in its individual capacity and as Indenture Trustee (under a Trust
                Indenture, Mortgage, Security Agreement and Assignment of Rents dated
                as
                of August 12, 1986, with the Owner Trustee), and Public Service Company
                of
                New Mexico, including Appendix A definitions (refiled)
            
            99.8
                to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
                1997
            1-6986
              PNM99.8.1*
            Amendment
                No. 1 dated as of November 18, 1986, to Participation Agreement dated
                as
                of August 12, 1986 (refiled)
            
            99.8.1
                to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
                1997
            1-6986
              PNM99.9*
            Trust
                Indenture, Mortgage, Security Agreement and Assignment of Rents dated
                as
                of August 12, 1986, between the First National Bank of Boston, as
                Owner
                Trustee, and Chemical Bank, as Indenture Trustee together with
                Supplemental Indenture No. 1 thereto (refiled)
            
            99.9
                to PNM’s Annual Report of the Registrant on Form 10-K for fiscal year
                ended December 31, 1996
            1-6986
              PNM99.9.2
            Supplemental
                Indenture No. 2 dated as of March 8, 1995, to Trust Indenture, Mortgage,
                Security Agreement and Assignment of Rents between The First National
                Bank
                of Boston and Chemical Bank dated as of August 12, 1986
            
            99.9.1
                to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
                1995
            1-6986
              PNM99.10*
            Assignment,
                Assumption, and Further Agreement dated as of August 12, 1986,
                between Public Service Company of New Mexico and The First National
                Bank
                of Boston, as Owner Trustee (refiled)
            
            99.10
                to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
                1997
            1-6986
              PNM99.11*
            Participation
                Agreement dated as of December 15, 1986, among the Owner Participant
                named
                therein, First PV Funding Corporation, The First National Bank of
                Boston,
                in its individual capacity and as Owner Trustee (under a Trust Agreement
                dated as of December 15, 1986, with the Owner Participant), Chemical
                Bank,
                in its individual capacity and as Indenture Trustee (under a Trust
                Indenture, Mortgage, Security Agreement and Assignment of Rents dated
                as
                of December 15, 1986, with the Owner Trustee), and Public Service
                Company
                of New Mexico, including Appendix A definitions (Unit 1 Transaction)
                (refiled)
            
            99.1
                to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
                1997
            1-6986
              PNM




E-22




**Exhibit
              No.**
            **Description
                of Exhibit**
            
            **Filed
                as Exhibit:**
            **Registrant(s)
                File No:**99.12
            Trust
                Indenture, Mortgage, Security Agreement and Assignment of Rents dated
                as
                of December 15, 1986, between The First National Bank of Boston,
                as Owner
                Trustee, and Chemical Bank, as Indenture Trustee (Unit 1 Transaction)
                (refiled)
            
            99.12
                to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
                1997
            1-6986
              PNM99.13
            Assignment,
                Assumption and Further Agreement dated as of December 15, 1986, between
                Public Service Company of New Mexico and The First National Bank
                of
                Boston, as Owner Trustee (Unit 1 Transaction) (refiled)
            
            99.13
                to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
                1997
            1-6986
              PNM99.14
            Participation
                Agreement dated as of December 15, 1986, among the Owner Participant
                named
                therein, First PV Funding Corporation, The First National Bank of
                Boston,
                in its individual capacity and as Owner Trustee (under a Trust Agreement
                dated as of December 15, 1986, with the Owner Participant), Chemical
                Bank,
                in its individual capacity and as Indenture Trustee (under a Trust
                Indenture, Mortgage, Security Agreement and Assignment of Rents dated
                as
                of December 15, 1986, with the Owner Trustee), and Public Service
                Company
                of New Mexico, including Appendix A definitions (Unit 2 Transaction)
                (refiled)
            
            99.14
                to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
                1997
            1-6986
              PNM99.15
            Trust
                Indenture, Mortgage, Security Agreement and Assignment of Rents dated
                as
                of December 31, 1986, between the First National Bank of Boston,
                as Owner
                Trustee, and Chemical Bank, as Indenture Trustee (Unit 2 Transaction)
                (refiled)
            
            99.15
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1996
            1-6986
              PNM99.16
            Assignment,
                Assumption, and Further Agreement dated as of December 15, 1986,
                between
                Public Service Company of New Mexico and The First National Bank
                of
                Boston, as Owner Trustee (Unit 2 Transaction) (refiled)
            
            99.16
                to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
                1997
            1-6986
              PNM99.17*
            Waiver
                letter with respect to “Deemed Loss Event” dated as of August 18, 1986,
                between the Owner Participant named therein, and Public Service Company
                of
                New Mexico (refiled)
            
            99.17
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1996
            1-6986
              PNM99.18*
            Waiver
                letter with respect to Deemed Loss Event” dated as of August 18, 1986,
                between the Owner Participant named therein, and Public Service Company
                of
                New Mexico (refiled)
            
            99.18
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1996
            1-6986
              PNM




E-23




**Exhibit
              No.**
            **Description
                of Exhibit**
            
            **Filed
                as Exhibit:**
            **Registrant(s)
                File No:**99.19
            Agreement
                No. 13904 (Option and Purchase of Effluent), dated April 23, 1973,
                among
                Arizona Public Service Company, Salt River Project Agricultural
                Improvement and Power District, the Cities of Phoenix, Glendale,
                Mesa,
                Scottsdale, and Tempe, and the Town of Youngtown (refiled)
            
            99.19
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1996
            1-6986
              PNM99.20
            Agreement
                for the Sale and Purchase of Wastewater Effluent, dated June 12,
                1981,
                Among Arizona Public Service Company, Salt River Project Agricultural
                Improvement and Power District and the City of Tolleson, as amended
                (refiled)
            
            99.20
                to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
                1996
            1-6986
              PNM99.21*
            1996
                Supplemental Indenture dated as of September 27, 1996 to Trust Indenture,
                Mortgage, Security Agreement and Assignment of Rents dated as of
                December
                16, 1985 between State Street Bank and Trust Company, as Owner Trustee,
                and The Chase Manhattan Bank, as Indenture Trustee
            
            99.21
                to PNM’s Quarterly Report on Form 10-Q for the quarter ended September 30,
                1996
            1-6986
              PNM99.22
            1997
                Supplemental Indenture, dated as of December 23, 1997, to Trust Indenture,
                Mortgage, Security Agreement and Assignment of Rents, dated as of
                August
                12, 1986, between State Street Bank and Trust, as Owner Trustee,
                and The
                Chase Manhattan Bank, as Indenture Trustee
            
            99.22
                to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 30,
                1998
            1-6986
              PNM











___________


*
            One
                or more additional documents, substantially identical in all material
                respects to this exhibit, have been entered into, relating to one
                or more
                additional sale and leaseback transactions. Although such additional
                documents may differ in other respects (such as dollar amounts and
                percentages), there are no material details in which such additional
                documents differ from this exhibit.





**  Designates
      each management contract or compensatory plan or arrangement required to be
      identified pursuant to paragraph 3 of Item 15(a) of Form 10 -K.








‡ Certain
      instruments defining the rights of holders of long-term debt of the registrants
      included in the financial statements of registrants filed herewith have been
      omitted because the total amount of securities authorized thereunder does not
      exceed 10% of the total assets of registrants. The registrants hereby agree
      to
      furnish a copy of any such omitted instrument to the SEC upon
      request.














E-24


**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:
                    April 18, 2006
                /s/
                    Thomas G. SategnaThomas
                    G. SategnaVice
                    President and Corporate Controller(Officer
                    duly authorized to sign this
                    report)
  E-25