**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
        D.C. 20549**
 **______________________**
 **FORM
        10-K**
 
 **ANNUAL
        REPORT PURSUANT TO SECTION 13 OR 15(d)**
 **OF
        THE SECURITIES EXCHANGE ACT OF 1934**
 
 **For
        the Fiscal Year Ended December 31, 2006**
 
 **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”)
              YESü
              NOPublic
                  Service Company of New Mexico (“PNM”)
              YES
              NOüTexas-New
                  Mexico Power Company (“TNMP”)
              YES
              NOü
 
 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
              NOüPNM
              YES
              NOüTNMP
              YESü
              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. ü
 
 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 20, 2007, 76,662,979 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 20, 2007
        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 20, 2007
        was
        9,615 all held indirectly by PNMR (and none held by
        non-affiliates).
 
 On
        June
        30, 2006 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 $24.96 per share reported by The Wall Street
        Journal, was $1,727,649,306.
 
 **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 22,
        2007.
 
 ii
 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.










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-3UNREGULATED
                      OPERATIONS
                  A-5PNM
                      Wholesale
                  A-5First
                      Choice
                  A-6Altura
                  A-6CORPORATE
                      AND OTHER
                  A-7SOURCES
                      OF POWER
                  A-7MARKET
                      REACH
                  A-8FUEL
                      AND WATER SUPPLY
                  A-9RATES
                      AND REGULATION
                  A-10ENVIRONMENTAL
                      MATTERS
                  A-13COMPETITION
                  A-14EMPLOYEES
                  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-28ITEM  5.
                  MARKET
                      FOR THE COMPANY’S COMMON EQUITY, RELATEDSTOCKHOLDER MATTERS
                      AND ISSUER PURCHASES OF EQUITY
                      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-87ITEM  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-24
 
  
  **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.BART
                Best
                    Available Retrofit TechnologiesBLM
                U.S.
                    Department of the Interior Bureau of Land ManagementBoard
                Board
                    of DirectorsBTU
                British
                    Thermal UnitCal
                    PX
                California
                    Power ExchangeCal
                    ISO
                California
                    Independent System OperatorCascade
                Cascade
                    Investment, L.L.C.Company
                PNM
                    Resources, Inc. and SubsidiariesCongress
                United
                    States CongressConstellation
                Constellation
                    Energy Commodities Group, Inc.Decatherm
                1,000,000
                    BTUsDelta
                Delta-Person
                    Limited PartnershipDOE
                Department
                    of EnergyDuke
                Duke
                    Energy CorporationEaR
                Earnings
                    at RiskECJV
                ECJV
                  Holdings, L.L.C.EEI
                Edison
                    Electric InstituteEIP
                Eastern
                    Interconnection ProjectEITF
                Emerging
                    Issues Task ForceEnergyCo
                Joint
                    Venture between PNMR and ECJVEPE
                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 SubsidiariesFIN
                FASB
                    Interpretation NumberFIP
                Federal
                    Implementation PlanFour
                    Corners
                Four
                    Corners Power PlantFPL
                FPL
                    Energy New Mexico Wind, LLCGAAP
                Generally
                    Accepted Accounting Principles in the UnitedStates
                    of America
 vi
 
 
 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.IRS
                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 DepartmentNOPR
                Notice
                    of Proposed RulingNRC
                United
                    States Nuclear Regulatory CommissionNSPS
                New
                    Source Performance StandardsNSR
                New
                    Source ReviewNYMEX
                New
                    York Merchantile ExchangeOASIS
                Open
                    Access Same Time Information SystemOATT
                Open
                    Access Transmission TariffOPEB
                Other
                    Post Employment BenefitsO&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 AgreementPSA
                Power
                    Supply AgreementPUCT
                Public
                    Utility Commission of TexasPUHCA
                The
                    Public Utility Holding Company ActPVNGS
                Palo
                    Verde Nuclear Generating StationReeves
                Reeves
                    Generating StationREC
                Renewable
                    Energy CertificateREP
                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 OrganizationSAB
                SEC
                    Staff Accounting BulletinSCE
                Southern
                    California Edison CompanySCPPA
                Southern
                    California Public Power AuthoritySDG&E
                San
                    Diego Gas and Electric Company
  
 vii
 
 
 SEC
                United
                    States Securities and Exchange CommissionSenate
                    Bill 7
                Legislation
                    that established retail competition in TexasSFAS
                Statement
                    of Financial Accounting StandardsSJCC
                San
                    Juan Coal CompanySJGS
                San
                    Juan Generating StationSO2
                Sulfur
                    DioxideS&P
                Standard
                    and Poors Ratings ServicesTCEQ
                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 RiskVCA
                Voluntary
                    Compliance AgreementWood
                    River
                Wood
                    River Partners, L.P.WSPP
                Western
                    Systems Power Pool
 
   viii
  **PART
          I**
 
 **ITEM
                    1.**
                **BUSINESS**
 
 **THE
          COMPANY**
 **Overview**
 
 PNMR
          or
          the “Company” is an investor-owned holding company of energy and energy-related
          businesses. The Company’s primary subsidiaries are PNM, TNMP, First Choice and
          Altura. 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. PNM began service to TNMP’s New Mexico
          customers effective January 1, 2007. TNMP is a regulated utility operating
          in
          Texas and through December 31, 2006 in New Mexico. In Texas, TNMP provides
          regulated transmission and distribution services. In New Mexico, TNMP provided
          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. Altura operates
          the
          Twin Oaks plant. In addition, PNMR provides energy and technology related
          services through its wholly owned subsidiary, Avistar. In January 2007,
          PNMR and
          ECJV, a wholly owned subsidiary of Cascade, created a new unregulated energy
          company, temporarily named EnergyCo, which will serve expanding U.S. markets
          throughout the Southwest, Texas and the West. Under the terms of the agreement,
          PNMR and ECJV each have a 50 percent ownership interest in EnergyCo, a
          limited
          liability company. The Company’s common stock trades on the New York Stock
          Exchange under the symbol PNM.
 
 PNMR
          was
          incorporated in the State of New Mexico in 2000. PNM was incorporated in
          the
          State of New Mexico in 1917. TNMP’s predecessor was organized in 1925 and TNMP
          is incorporated in the State of Texas.
 
 ***Other
          Information***
 
 These
          filings for PNMR, PNM and TNMP include disclosures for PNMR, PNM and TNMP.
          For
          discussion purposes, this report will use the term “Company” when discussing
          matters of common applicability to PNMR, PNM and TNMP. Discussions regarding
          only PNMR, PNM or TNMP will be clearly indicated as such. A reference to
          “MD&A” in this report refers to “Part II, Item 7. - Management’s Discussion
          and Analysis of Financial Condition and Results of Operation” in this report. A
          reference to a “Note” in this Part I refers to the accompanying notes to
          Consolidated Financial Statements.
 
 Financial
          information relating to amounts of sales, revenue, net income and total
          assets
          of 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.
 
 **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-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/ec and such information is available in
          print,
          without charge, to any shareholder who requests it.
 
 A-1
 
 **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, through December 31, 2006, to 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,
          which
          are located in Southern New Mexico. PNM Electric owns or leases transmission
          lines, interconnected with other utilities in New Mexico, Texas, Arizona,
          Colorado and Utah. The Company’s largest non-affiliated retail electric customer
          was served by PNM Electric and accounted for approximately 8.4% of the
          Company’s
          total retail electric revenues for the year ended December 31,
          2006.
 
 The
          NMPRC
          has established an off-system sales methodology that provides for a sharing
          mechanism whereby a certain amount of revenues from off-system sales are
          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 February 2007, PNM
          filed a
          general rate case that asked the NMPRC to approve an increase in general
          rates,
          the first such request in over 20 years. The proposed increase would go
          into
          effect January 1, 2008, at the expiration of the current four-year rate
          path,
          and would impact 436,000 New Mexico customers. If electric rates were approved
          as proposed, electric revenues would increase $68.9 million annually. PNM
          residential electric rates would increase approximately 13.7 percent, while
          most
          business customers would see rate increases of approximately 10.3 percent.
          (See
“PNM Electric Rate Case” in MD&A).
 
 Weather-normalized
          retail electric load growth was 4.2% in 2006. 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**
 
 **2006**
                
                **2005**
                
                **2004**(Megawatts)Summer
                1,855
                
                1,779
                
                1,655Winter
                1,616
                
                1,530
                
                1,481
 
 PNM
          holds
          long-term, non-exclusive franchise agreements for its electric retail
          operations, with varying expiration dates. These franchise agreements allow
          PNM
          to access public rights-of-way for placement of PNM’s electric facilities.
          Franchise agreements have expired in some areas PNM serves including
          Albuquerque, Santa Fe, and the City of Rio Rancho. PNM remains obligated
          under
          New Mexico state law to provide service to customers in these franchise
          areas
          despite the absence of an effective franchise agreement, so there should
          be no
          direct impact on PNM’s business. The Albuquerque and Rio Rancho metropolitan
          areas accounted for approximately 52% and 10% of PNM Electric’s 2006 electric
          utility operating revenues, respectively (excluding transmission revenues),
          and
          no other franchise area represents more than approximately 10%. Although
          PNM
          does not collect or pay franchise fees in some areas it serves, PNM continues
          to
          collect and pay franchise fees in certain parts of its service territory,
          including Albuquerque, Santa Fe, and the City of Rio Rancho.
 
 PNM
          Electric owns or leases 2,905 circuit miles of electric transmission lines,
          interconnected with other utilities in New Mexico, Arizona, Colorado, Texas
          and
          Utah. Due to rapid load growth in PNM Electric’s service territory in recent
          years and the lack of transmission development, most of the capacity on
          this
          transmission system is fully committed 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.
 
 A-2
 **TNMP
          Electric**
 
 TNMP
          Electric consists of the operations of TNMP. TNMP is a regulated utility
          operating in Texas and, through December 31, 2006, in New Mexico.
 
 In
          New
          Mexico, TNMP provided integrated electricity services that included the
          transmission, distribution, purchase and sale of electricity to its customers
          in
          southwest and south central New Mexico as well as transmission to third parties
          and to PNM through December 31, 2006. PNM began serving these customers
          on
          January 1, 2007.
 
 In
          Texas,
          TNMP Electric provides regulated transmission and distribution services
          under
          the provisions of TECA. TNMP Electric serves a market of small-to-medium-sized
          communities. Most of the communities in TNMP Electric’s service territory have
          populations of less than 50,000. In most areas that TNMP Electric serves,
          it is
          the exclusive provider of transmission and distribution services.
 
 TNMP
          Electric’s Texas territory consists of three non-contiguous areas. One portion
          of this territory extends from Lewisville, which is approximately 10 miles
          north
          of the Dallas-Fort Worth International Airport, eastward to municipalities
          near
          the Red River, and to communities north, west and south of Fort Worth.
          The
          second portion of its territory includes the area along the Texas Gulf
          Coast
          between Houston and Galveston, and the third portion includes areas of
          far west
          Texas between Midland and El Paso. TNMP Electric’s Texas operations lie entirely
          within the ERCOT region. ERCOT is the independent system operator that
          is
          responsible for maintaining reliable operations for the bulk electric power
          supply system in the ERCOT region, which is located entirely within Texas.
          See
“Rates and Regulation” below for more
          information about ERCOT.
 
 TNMP
          Electric provides transmission and distribution services at regulated rates
          to
          various retail electric providers that, in turn, provide retail electric
          service
          within TNMP Electric’s Texas service area. As of December 31, 2006, 58 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 27% of TNMP's total retail electric revenues for the year
          ended
          December 31, 2006. After First Choice, billed revenues of TNMP’s next largest
          customer accounted for approximately 9% of retail electric
          revenues.
 
 TNMP
          holds long-term, non-exclusive franchise agreements for its electric
          transmission and distribution services, with varying expiration dates.
          TNMP
          intends to negotiate and execute new or amended franchise agreements with
          municipalities as they expire. Since TNMP Electric is the exclusive provider
          of
          transmission and distribution services in most areas that it serves the
          absence
          of franchise agreements should not have a direct impact on TNMP’s business. The
          remainder of TNMP's revenues is earned from service provided to facilities
          in
          its service area that lie outside the territorial jurisdiction of the
          municipalities with which TNMP has franchise agreements.
 
 **PNM
          Gas**
 
 PNM
          Gas
          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 2006. No single sales-service
          customer accounted for more than 0.8% of PNM Gas’ therm sales in 2006. PNM holds
          non-exclusive franchises with varying expiration dates.  Franchise
          agreements have expired for the City of Rio Rancho and several smaller
          municipalities, although PNM continues to collect and pay franchise fees
          to each
          of these communities. Franchise agreements have also expired for several
          counties that PNM Gas serves, although counties are not permitted to charge
          franchise fees. PNM Gas remains obligated to serve these franchise areas
          pursuant to state law.
 
 A-3
 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. 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). The NMPRC has 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 2006, 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 1,927 end users that were not PNM Gas customers
          during 2006.
 
 In
          2006,
          43% 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 2006,
          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 73%
          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 2006,
          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**
 
 **Wholesale**
 
 The
          Wholesale segment included in PNMR’s results of operations includes PNM
          Wholesale as well as the results of Altura from the date of acquisition
          of Twin
          Oaks on April 18, 2006 (see Note 2).
 
 *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
          sources of these sales are threefold: 1) PNM’s wholesale plants excluded from
          retail rates; 2) unused capacity of PNM's jurisdictional assets and 3)
          market
          purchases. The 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, 2006, these contracts ranged from
          1 to
          14 year terms with an average term of 6 years. Short-term sales 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. 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.
 
 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
          2006, 2005 and 2004, PNM’s sales in the wholesale electric markets accounted for
          approximately 55%, 58% and 62%, respectively, of its total MWh sales. Of
          the
          total wholesale electric sales made in 2006, 2005 and 2004, 84%, 87% and
          80%,
          respectively, were transacted through purchases for resale. (See Item 2.
          "Properties.")
 
 PNM
          Wholesale has entered into various firm-requirements wholesale electric
          sales
          contracts. These contracts contain fixed capacity charges in addition to
          energy
          charges. Capacity charges are fixed monthly payments for a commitment of
          resources to service the contract requirements. Energy charges are payments
          based on the amount of electricity delivered to the customer intended to
          compensate PNM Wholesale for its variable costs incurred to provide the
          energy.
          PNM Wholesale’s firm-requirements demand was 273 MW in 2006, and is expected,
          based solely on existing contracts, to be 177 MW in 2007, 172 MW in 2008,
          110 MW
          in 2009, 113 MW in 2010 and 116 MW in 2011. Firm-requirements for TNMP’s New
          Mexico customers are included in amounts for 2006. Beginning January 1,
          2007,
          TNMP’s New Mexico customers are included in the PNM Electric load. No
          firm-requirements customer of PNM Wholesale accounted for more than 7.6%
          of the
          Company's total electric sales for resale revenues for the year ended December
          31, 2006.
  
 A-5
 *Altura*
 
 On
          April
          18, 2006, PNMR’s wholly owned subsidiary, Altura, purchased the Twin Oaks
          business, which included a 305 MW coal-fired power plant located 150 miles
          south
          of Dallas, Texas. PNMR acquired Twin Oaks to expand the Company’s merchant
          generation fleet in order to serve a growing wholesale market in the
          Southwest.
 
 Altura
          has assumed two power sales agreements for the Twin Oaks power generated
          by the
          Twin Oaks facility. The first contract is for 100% of the power generated
          by
          Twin Oaks and expires in September 2007. The second contract is for 75%
          of the
          power generated by Twin Oaks that begins October 2007 and expires December
          31,
          2010. Altura will have to market the 25% uncommitted portion of the power
          in the
          Texas wholesale market.
 
 The
          coal
          requirements for Twin Oaks are being supplied by a long-term fuel supply
          agreement. This fuel supply agreement expires when Twin Oaks meets delivery
          of a
          specified number of decatherms. Based on current forecasts of usage, the
          Company
          estimates the contract will expire in 2029. If Twin Oaks were to take only
          the
          minimum delivery amounts specified under this contract, it would expire
          in
          approximately 2040. Altura is not responsible under this agreement for
          the
          decommissioning or reclamation costs of this mine. PNMR has issued a parental
          guarantee on behalf of Twin Oaks’ owner, Altura, guaranteeing Altura’s
          performance under this fuel supply agreement.
 
 The
          Twin
          Oaks purchase agreement also included the development rights for a possible
          600-megawatt expansion of the plant, which PNMR has classified as an intangible
          asset. An additional $2.5 million payment will be made to the seller 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. PNMR has not
          made a
          decision regarding the Twin Oaks expansion, but it is considering a variety
          of
          options, including self development or sale to a third party.
 
 *First
          Choice*
 
 First
          Choice is a certified retail electric provider operating in ERCOT, which
          provides electricity to residential, small and large commercial, industrial
          and
          institutional customers. First Choice’s services include acquiring retail
          customers, setting up retail accounts, handling customer inquiries and
          complaints, and acting as a liaison between the transmission and distribution
          companies and retail customers. First Choice focuses its competitive customer
          acquisition efforts in the major Texas metropolitan areas that are open
          to
          electric choice within ERCOT, including Dallas-Fort Worth, Houston, Corpus
          Christi, and McAllen-Harlingen. 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’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 competitive customer loads. First Choice develops
          short-term load forecasts to identify short-term load surpluses and shortages,
          and to ensure that hedges are in place to cover forecasted sales. To the
          extent
          these short-term load forecasts identify shortages, First Choice covers
          shortages through short-term power purchases or through purchases on the
          ERCOT
          balancing market.
 
 First
          Choice experiences increased sales and operating revenues during the summer
          months as a result of increased air conditioner usage in hot weather. In
          2006,
          approximately 43% of First Choice’s consolidated annual revenues were recorded
          in June, July, August and September.
 
 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.
 
 A-6
 
 In
          2006,
          First Choice Power Retail LP was formed for the purpose of conducting business
          as a retail electric provider in Texas. Although it has not yet started
          operations, regulatory approval for First Choice Power Retail LP to do
          business
          in Texas was granted by the PUCT in 2007.
 
 **CORPORATE
          AND OTHER**
 
 PNMR
          Services Company provides corporate services through shared services agreements
          to PNMR and to all of PNMR's business units, including Altura, Avistar,
          First
          Choice, PNM, TNP and TNMP. 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.
 
 **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, 2006, the
          Company had a 2,638 MW
          generation capacity from these sources.
 
 *Sources
          of Power - Owned*
 
 As
          of
          December 31, 2006, PNMR’s wholly owned subsidiary, Altura, owned 305 MW of
          generation capacity from the Twin Oaks plant. (See Item 2.
“Properties.”)
 
 *Sources
          of Power - PSA*
 
 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 2006. Additionally, Constellation has agreed to supply power in certain
          transactions under the PSA beyond the date when that commitment expired.
          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.)
 
 PNM
 
 *Sources
          of Power - Owned*
 
 As
          of
          December 31, 2006, the total net generation capacity of facilities owned
          by PNM
          was 1,934 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
          89.6% and 89.4% for the years ended December 31, 2006 and 2005, respectively.
          PVNGS’ equivalent availability was 70.0% and 76.0% for the years ended December
          31, 2006 and 2005, respectively. Four Corners’ equivalent availability was 90.5%
          and 86.3% for the years ended December 31, 2006 and 2005, respectively.
          Four
          Corners and PVNGS are operated by APS.
 
 PNM’s
          Lordsburg plant was built to serve wholesale customers and other sales
          rather
          than New Mexico retail customers and, therefore, is not currently included
          in
          the retail rates. However, this plant may be needed in the future to serve
          the
          growing retail load as is the case for Afton, as described below. If so,
          this
          plant 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. This plant was 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.
   A-7
  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 former New Mexico customers, which were
          transferred to PNM effective January 1, 2007. The stipulation was approved
          by
          the NMPRC on October 5, 2006. Afton is currently under construction for
          conversion to combined cycle unit. The construction should be completed
          in
          mid-2007.
 
 In
          November 2004, PNMR Development, a subsidiary of PNMR, purchased a one-third
          interest in Luna. Luna was a 570 MW, partially constructed, natural gas-fired
          power plant near Deming in southern New Mexico. In November 2005, the one-third
          interest in Luna was transferred from PNMR Development to PNM. The purchasers
          invested approximately $100.0 million, one-third from each purchaser, to
          complete construction. PNM managed the construction project which was completed
          in April 2006.
 
 *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.
 
 PNM
          leases portions of PVNGS. See Item 2. “Properties” and Note 7 for additional
          information.
 
 *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 with FPL described below, were 599 MW in 2006 and are expected
          to be
          532 MW in 2007, 532 MW in 2008, 532 MW in 2009, and 457 MW in 2010. 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
          purchased all electricity for its New Mexico customers' needs and
          energy-scheduling services under a wholesale power contract with PNM that
          ended
          December 2006. As discussed above, First Choice provides electricity for
          TNMP’s
          Texas customers.
 
 **MARKET
          REACH**
 
 As
          of
          December 31, 2006, PNM owned 50 MW of firm transmission capacity to the
          Mead
          market hub, 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 owned 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**
 
 PNMR
 
 *Twin
          Oaks*
 
 The
          coal
          requirements for Twin Oaks are being supplied by a long-term fuel supply
          agreement. This fuel supply agreement expires when Twin Oaks meets delivery
          of a
          specified number of decatherms. Based on current forecasts of usage, the
          Company
          estimates the contract will expire in 2029. If Twin Oaks were to take only
          the
          minimum delivery amounts specified under this contract, it would expire
          in
          approximately 2040. Altura is not responsible under this agreement for
          the
          decommissioning or reclamation costs of this mine. PNMR has issued a parental
          guarantee on behalf of Twin Oaks’ owner, Altura, guaranteeing Altura’s
          performance under this fuel supply agreement.
 
 *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
          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**2006
                70.4%
                
                $1.75
                
                23.7%
                
                $0.54
                
                5.9%
                
                $6.152005
                71.3%
                
                $1.64
                
                26.3%
                
                $0.46
                
                2.4%
                
                $6.882004
                70.1%
                
                $1.54
                
                28.1%
                
                $0.53
                
                1.8%
                
                $6.94
 
 The
          generation mix for 2007 is expected to be 63.0% coal, 26.0 % nuclear and
          11.0%
          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 for information about PNM’s coal supply.
 
 *Natural
          Gas*
 
 The
          natural gas used as fuel for the electric generating plants 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 and obtains
          its gas
          transportation services from PNM Gas or third party transportation providers.
 
 *Nuclear
          Fuel*
 
 PNM
          is
          one of several participants in PVNGS. (See Note 14.) The fuel cycle for
          PVNGS is
          comprised of the following stages:
 
 ·
                mining
                    and milling of uranium ore to produce uranium
                    concentrates;
 ·
                conversion
                    of uranium concentrates to uranium
                    hexafluoride;
 ·
                enrichment
                    of uranium hexafluoride;
 ·
                fabrication
                    of fuel assemblies;
 ·
                utilization
                    of fuel assemblies in reactors; and
 ·
                storage
                    and disposal of spent nuclear fuel.
  
 A-9
 
 
 The
          PVNGS
          participants have contracted for all of the PVNGS requirements for uranium
          concentrates and conversion services through the spring 2009 reload. PVNGS
          will
          need to purchase additional concentrates and conversion services in 2008
          for the
          fall 2009 reload. 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 for information about PNM's water supply.
 
 **RATES
          AND REGULATION**
 
 The
          items
          below describe certain of the more significant rate and regulatory matters
          that
          are relevant to the Company. See Notes 16 and 17 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.
 
 First
          Choice
 
 First
          Choice is a member of ERCOT, the ISO responsible for maintaining reliable
          operations of the bulk electric power grid in the Texas deregulated electricity
          market. 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 a clearinghouse
          for
          procuring ancillary services.
 
 Members
          of ERCOT include independent retail electric providers, investor owned
          utilities, municipals, cooperatives, independent generators, independent
          power
          marketers, and consumers. The electric market served by ERCOT operates
          under the
          reliability standards set by the North American Electric Reliability Council.
          The PUCT has primary jurisdictional authority over the electric market
          served by
          ERCOT and the reliability of electricity across Texas' main interconnected
          power
          grid.
 
 First
          Choice provides energy to retail customers in ERCOT. As a result of the
          deregulated electricity market in Texas, there are no provisions for the
          specific recovery of fuel and purchased power costs by First Choice. The
          rates
          charged to new customers acquired by First Choice are not regulated by
          the PUCT,
          but are negotiated by First Choice with each customer. As a result, purchased
          power costs will affect First Choice’s operating results.
 
 Altura
 
 The
          Twin
          Oaks plant operates in the deregulated electricity market in Texas served
          by the
          ERCOT ISO.
 
 A-10
 
 PNM
 
 **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.
 
 **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. On
          May 18,
          2006, FERC issued a Notice of Proposed Rulemaking (NOPR) to reform its
          pro forma
          OATT. FERC emphasized that its purpose for the NOPR was not to create new
          market
          structures, redesign approved RTO or ISO markets, require transmission
          owners to
          divest control over transmission, impinge on state jurisdiction, or weaken the
          protection of native load customers. Core OATT elements were retained,
          including
          comparability requirements, protection of native load, state’s jurisdiction over
          bundled retail load, functional unbundling to address undue discrimination,
          and
          reciprocity. PNM and TNMP have filed comments in this proceeding. The NOPR
          is
          still pending before the FERC. The Company cannot predict what impact the
          final
          rule may have on its operations.
 
 In
          November 2005, the FERC issued a NOPR 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 the national transmission grid. In addition
          to the
          incentive proposals, the FERC would implement additional reporting requirements
          for public utilities that operate transmission systems. In July 2006, FERC
          issued its final rule to promote transmission investment through pricing
          reform.
          With its rule, FERC provided various incentives intended to promote transmission
          investment within the context of existing procedural requirements, with
          some
          flexibility. The FERC did not grant outright incentives to any public utility,
          but rather identified incentives that it would allow when justified in
          the
          context of individual utility petitions for declaratory orders or rate
          filings
          made pursuant to existing rate change requirements. Under FERC’s rule, each
          applicant must demonstrate a nexus between the incentive sought and the
          transmission investment being made. In August 2006, various entities, including
          EEI, filed requests for rehearing requesting the FERC to modify its rule.
          The
          Company supported EEI’s position in the filing. The petitions for rehearing are
          currently pending before the FERC. The Company intends to continue to monitor
          and participate in these FERC notices and rulemakings.
 
 **Generation
          Market Power Filings**
 
 On
          December 20, 2004, the FERC issued an order addressing PNM’s updated market
          power analysis, submitted in August 2004 and supplemented thereafter, in
          response to a FERC order in *Acadia
          Power Partners, LLC* .
          In that
          order, the FERC instituted an investigation and proceeding under Section
          206 of
          the Federal Power Act to determine whether PNM may continue to charge
          market-based rates in the PNM and EPE control area markets. PNM submitted
          several filings to the FERC in 2005 and early 2006 designed to show that,
          notwithstanding its failure of certain numerical screens, PNM lacked generation
          market power in both of these control areas.
 
 In
          April
          2006, the FERC issued an order in which it determined that PNM rebutted
          the
          presumption of market power in the PNM control area and, accordingly, terminated
          its investigation into PNM’s continued ability to make sales of wholesale power
          at market-based rates in the control area. The FERC also determined that
          PNM's
          analysis could rebut the presumption of market power in EPE's control area,
          but
          that it needed additional information regarding periods of transmission
          constraint. The FERC order gave PNM 60 days to file additional information
          regarding market power during periods of transmission constraint or,
          alternatively, propose cost-based mitigation measures for the EPE control
          area
          during periods of transmission constraint. In June 2006, PNM filed a proposed
          cost-based mitigated rate proposal to apply in the EPE control area during
          periods of transmission outages and transmission constraints. No comments
          were
          filed objecting to PNM's filing. In September 2006, FERC issued its order
          approving PNM's cost-based mitigated rate proposal in the EPE control area
          during periods of transmission constraints or transmission outages, effective
          March 6, 2006. The FERC order requires that PNM make refunds for any
          transactions since March 6, to the extent PNM had any sales in EPE's control
          area at market rates during periods of transmission constraints or transmission
          outages that exceeded PNM's mitigated rate proposal. PNM has determined
          no such
          refunds were required. With the order, FERC terminated the Section 206
          investigation into PNM's market rate sales in the EPE control area, and
          closed
          its docket on this matter.
 
 A-11
 **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 Enforcement formerly known as the Office of Market Oversight
          and Investigations would perform a compliance audit of the Company. The
          audit
          covers the period from January 2004 to the present and will examine the
          Company’s compliance with the FERC standards of conduct and OASIS requirements,
          compliance of the Company’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 nine months to a year or
          more to
          complete.
 
 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 included a provision that required
          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
          August
          2006, PNM made its annual renewable energy portfolio report filing and
          its 2007
          renewable energy procurement plan filing. In its procurement plan, PNM
          proposed
          to continue to procure renewable energy and renewable energy certificates
          (RECs)
          from wind resources and solar photovoltaic facilities and to seek recovery
          of
          those costs in its next electric rate case. PNM’s procurement plan also
          recommended elimination of the annual ceiling on new customer subscriptions
          to
          PNM's solar photovoltaic program. PNM requested NMPRC approval to procure
          renewable energy and associated RECs under a biomass PPA and to recover
          related
          costs. PNM anticipates it will be able to acquire biomass RECs from the
          PPA
          beginning in 2009. In December 2006, the NMPRC approved PNM’s filing and the
          biomass PPA.
 
 A-12
 
 TNMP
 
 **Regulation**
 
 In
          Texas,
          TNMP provides regulated transmission and distribution services and is subject
          to
          the jurisdiction of the PUCT and certain municipalities with respect to
          rates
          and service. TNMP is subject to traditional cost-of-service regulation
          in Texas.
          TNMP’s transmission and distribution activities in Texas are not subject to
          FERC
          regulation, because those activities occur solely within the ERCOT system
          of
          Texas.
 
 Through
          December 31, 2006, TNMP was subject to the jurisdiction of the NMPRC and
          subject
          to traditional cost-of service regulation within New Mexico and subject
          to the
          jurisdiction of the FERC for some of its activities in New Mexico, including
          the
          issuance of securities and the acquisition or disposition of
          properties.
 
 **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.
 
 **ENVIRONMENTAL
          MATTERS**
 
 PNM
          and
          TNMP like other electric and gas utilities, and the Twin Oaks plant 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.
 
 **Note
          16**
 ·
                Renewable
                    Portfolio Standard
 ·
                Person
                    Station
 ·
                Retired
                    Fossil-Fueled Plant Decommissioning
                    Costs
 ·
                PVNGS
                    Decommissioning Funding
 ·
                Nuclear
                    Spent Fuel and Waste Disposal
 ·
                Environmental
                    Matters Under the Caption “The Clean Air
                    Act”
 ·
                Excess
                    Emission Reports
 ·
                Archaeological
                    Site Disturbance
 
 **Note
          18**
 ·
                Environmental
                    Issues
  
 A-13
 
 **COMPETITION**
 
 Through
          its operating company subsidiaries, PNMR is a merchant utility and a regulated
          energy service provider. As a merchant utility, PNMR is subject to competition
          in the wholesale markets and the deregulated electricity market in Texas.
          Additional information relating to the competitive environment in which
          the
          Company operates in is contained in Part II, Item 7.
 
 **EMPLOYEES**
 
 The
          following table sets forth the number of employees of PNMR, PNM and TNMP
          and for
          each business segment as of December 31, 2006:
 
 **PNMR**
                
                **PNM**
                
                **TNMP**Corporate
                    *
                
                
                774
                
                
                -
                
                
                -PNM
                    Electric
                
                
                1,154
                
                
                1,154
                
                
                -TNMP
                    Electric
                
                
                434
                
                
                -
                
                
                434PNM
                    Gas
                
                
                728
                
                
                728
                
                
                -Wholesale
                    **
                
                
                125
                
                
                65
                
                
                -First
                    Choice
                
                
                71
                
                
                -
                
                
                -Other
                
                
                8
                
                
                -
                
                
                -Total
                
                
                3,294
                
                
                1,947
                
                
                434
 
 *
          Represents employees of PNMR Services Company.
 **
          PNMR
          Wholesale includes 60 employees of Altura.
 
 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, 2006:
 
 **PNMR**
                
                **PNM**PNM
                    Electric
                
                
                483
                
                
                483PNM
                    Gas
                
                
                80
                
                
                80Wholesale
                
                
                44
                
                
                44Total
                
                
                607
                
                
                607
 
 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 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.
 
 **PNMR
          may be unable to meet its ongoing and future financial obligations and
          to pay
          dividends on its common stock if its subsidiaries are unable to pay upstream
          dividends or repay funds to PNMR.**
 
 PNMR
          is a
          holding company and, as such, PNMR has no operations of its own. PNMR’s ability
          to meet its financial obligations and to pay dividends on its common stock
          at
          the current rate is primarily dependent on the net income and cash flows
          of its
          subsidiaries and their ability to pay upstream dividends or to repay funds
          to
          PNMR. Prior to funding PNMR, PNMR’s subsidiaries have financial obligations that
          must be satisfied, including among others, debt service and preferred stock
          dividends.
 
 **PNMR
          may fail to successfully achieve the anticipated benefits from current
          or future
          business development initiatives, joint ventures and acquisitions, including
          the
          acquired Twin Oaks business and the EnergyCo joint
          venture.**
 
 As
          part
          of PNMR’s growth strategy, PNMR is pursuing, and intends to continue to pursue,
          a disciplined business development and acquisition strategy. While PNMR
          expects
          to identify anticipated benefits, potential synergies, cost savings, and
          growth
          opportunities prior to entering into business initiatives and 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
                    business initiative, joint venture or
                    acquisition,
 ·
                inability
                    to retain key employees or key customers of business initiatives,
                    joint
                    ventures or acquired companies,
 ·
                assumption
                    of liabilities unrecognized in the due diligence process,
                    and
 ·
                actual
                    results may differ materially from the anticipated benefits from
                    current
                    or future business development initiatives, joint ventures and
                    acquisitions.
 
 **There
          is no assurance that the EnergyCo joint venture will be able to identify
          and
          implement profitable acquisitions.**
 
 In
          January 2007, PNMR and ECJV, a wholly owned subsidiary of
          Cascade, created a new unregulated energy company, temporarily named
          EnergyCo, which will serve expanding U.S. markets throughout the Southwest,
          Texas and the West. Under the terms of the agreement, PNMR and ECJV each
          have a 50 percent ownership interest in EnergyCo, a limited liability company.
 
 The
          Company intends to capitalize on the growth opportunities in these markets
          through its participation and ownership in EnergyCo. In particular, it
          is
          anticipated that ECJV will commit capital for the acquisition of assets and
          that Cascade will make significant credit guarantees to increase EnergyCo’s
          scale in its three anticipated business lines:
 
 ·
                competitive
                    retail electricity sales;
 ·
                development,
                    operation and ownership of diverse generation assets;
                    and
 ·
                wholesale
                    marketing and trading to optimize its assets.
 
 In
          addition to purchasing energy-related assets, EnergyCo could grow by PNMR
          contributing existing unregulated assets and ECJV, in turn, matching those
          contributions with cash. This would enable PNMR to better separate its
          regulated
          utility operations from its unregulated generation assets and businesses.
          The
          separation of regulated and unregulated operations also would increase
          transparency and reduce complexity in PNMR’s business segments.
 
 A-15
 There
          are
          a number of conditions that must be satisfied in order for EnergyCo to
          operate
          successfully. The parties must agree on the cash and/or assets to be contributed
          by the members of EnergyCo and that that such investment will not result
          in an
          adverse effect on PNMR’s credit ratings. EnergyCo must also receive certain
          financing commitments with respect to its proposed ongoing operations and
          any
          regulatory approvals that may be required in connection with the contributions
          of the members. There can be no assurance that these conditions will be
          satisfied and PNMR may not realize the benefits it anticipates from the
          operation of EnergyCo. In
          addition, there is a risk that EnergyCo will not be able to identify and
          implement profitable acquisitions.
 
 **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 continuing federal regulatory reforms,
          the
          public utility industry continues to undergo change.
 
 The
          Energy Policy Act of 2005 went into effect in February 2006. The legislation
          covers many areas, including the items set forth in Note 17 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 the
          PUHCA of 1935, 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.
 
 **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% by agreeing to:
 
 ·
                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 required the integration of TNMP’s New
          Mexico assets into PNM effective January 1, 2007 and established how synergy
          savings would be allocated among PNM’s gas and electric customers. The
          settlement provided for:
 
 ·
                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 approximately $0.9 million annually, beginning June
                    6, 2005,
    A-16
  ·
                a
                    three-phase rate reduction totaling 15%, beginning January 2006
                    and ending
                    December 2010, to electric customers in southern New Mexico transferred
                    from TNMP to PNM effective January 1, 2007; the rate reduction,
                    which
                    includes TNMP’s annual synergy-savings allocation to customers in southern
                    New Mexico, lowered electric rates by $9.6 million in the first
                    year,
 ·
                elimination
                    of the fuel and purchased power adjustment clauses for electric
                    customers
                    in southern New Mexico in the first quarter of 2006,
                    and
 ·
                maintain
                    separate rates for PNM’s electric customers in southern New Mexico, at a
                    minimum, through 2010.
 
 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
          or
          increased power costs from customers. Therefore, 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.
 
 In
          February 2007, PNM filed an electric rate case requesting an increase in
          general
          electric rates. See Note 17 for additional information relating to this
          rate
          filing. 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
          profit margin for PNM’s natural gas distribution business could be adversely
          affected if PNM does not obtain adequate rate relief and if PNM does not
          control
          its costs.**
 
 On
          May
          30, 2006, PNM filed a general gas rate case that asked the PRC to approve
          an
          increase in the service fees charged to its 481,000 natural gas customers.
          The
          proposal would increase the set monthly fee, the charge tied to monthly
          usage
          and miscellaneous on-demand service fees. Those fees are separate from
          the cost
          of gas charged to customers. The monthly cost of gas charge would not be
          affected by the fee increase. The petition requests an increase in base
          gas
          service rates of $20.5 million and an increase in miscellaneous on-demand
          service rates of approximately $0.2 million. The request is designed to
          provide
          PNM’s gas utility an opportunity to earn an 11% return on equity, which is
          consistent with the average return allowed by ten comparable natural gas
          utilities. The petition also requests approval of a line item that provides
          a
          true-up mechanism for operational costs when system-wide gas consumption
          is
          lower or higher than what is designed in the rates. The NMPRC is expected
          to
          issue an order in the case by the end of April 2007.
 
 PNMR
          and
          PNM are not able to predict what rate treatment PNM will receive. 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 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 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,
                    and
    A-17
  ·
                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.
 
 PNMR
          and
          TNMP are not able to predict what rate treatment TNMP will receive following
          the
          expiration of the retail electric rate provisions in Texas. 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.**
 
 PNMR
          is
          exposed to competition in the unregulated Texas retail electricity market
          through First Choice, which serves customers at competitive rates. In order
          to
          compete effectively in the Texas retail electricity market, First Choice
          must be
          able to attract and retain customers on the basis of cost and service,
          while
          managing the cost of its energy supply. 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 a 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.
 
 **PNM’s
          PVNGS leases describe certain events, including “Events of Loss” and “Deemed
          Loss Events”, the occurrence of which could require PNM to pay the lessor and
          the equity investor, in return for the investor's interest in PVNGS, cash
          in the
          amount provided in the lease and assume debt obligations relating to the
          PVNGS
          leases.**
 
 The
          “Events of Loss” generally relate to casualties, accidents and other events at
          PVNGS, including the occurrence of specified nuclear events, which would
          severely, adversely affect the ability of the operating agent, APS, to
          operate,
          and the ability of PNM to earn a return on its interests in, PVNGS.  The
“Deemed Loss Events” consist mostly of legal and regulatory changes (such as
          issuance by the NRC of specified violation orders, changes in law making
          the
          sale and leaseback transactions illegal, or changes in law making the lessors
          liable for nuclear decommissioning obligations). PNM believes that the
          probability of such “Events of Loss” or “Deemed Loss Events” occurring is remote
          for the following reasons: (1) to a large extent, prevention of “Events of Loss”
and some “Deemed Loss Events” is within the control of the PVNGS participants,
          including PNM, and the PVNGS operating agent, through the general PVNGS
          operational and safety oversight process and (2) with respect to other
“Deemed
          Loss Events,” which would involve a significant change in current law and
          policy, PNM is unaware of any pending proposals or proposals being considered
          for introduction in Congress, or in any state legislative or regulatory
          body
          that, if adopted, would cause any of those events.
   A-18
  **The
          financial performance of PNMR, PNM and TNMP may be adversely affected if
          their
          power plants and transmission and distribution system are not successfully
          operated.**
 
 The
          financial performance of PNMR, PNM and TNMP 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
          excess generation capacity and therefore limit PNM’s ability to
          opportunistically sell excess power in the wholesale market. Diminished
          generation capacity could also result in PNM’s 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 by
          PNM
          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 situation were to occur. Failures of transmission or distribution
          facilities may also cause interruptions in the services that PNM and TNMP
          provide.  These potential generation, distribution and transmission
          problems, and any potentially related service interruptions, could result
          in
          lost revenues and additional costs.
 
 The
          financial performance of PNMR and PNM may be adversely affected if PVNGS
          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. Additional
          information relating to the performance of PVNGS is contained in
          MD&A.
 
 Demand
          for power could exceed supply capacity, resulting in increased costs for
          purchasing capacity in the open market or building additional generation
          capabilities.
 
 Through
          its operating subsidiaries, PNMR is currently obligated to supply power
          to
          retail customers and wholesale customers. At peak times, the demand for
          power
          required to meet this obligation could exceed PNMR’s available generation
          capacity, as was the case with the reduced availability of PVNGS in 2006
          and
          2005. Market or competitive forces may require that PNMR’s operating
          subsidiaries purchase capacity on the open market or build additional generation
          capabilities. Because regulators or market conditions may not permit the
          operating subsidiaries to pass all of these purchase or construction costs
          on to
          their customers, the operating subsidiaries may not be able to recover
          any of
          these costs or may have exposure to regulatory lag associated with the
          time
          between the incurrence of costs of purchased or constructed capacity and
          the
          recovery in customers’ rates. These situations could have negative impacts on
          net income and cash flows for PNMR and the affected operating subsidiary.
 
 **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 as
                    described below,
 ·
                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,
 ·
                the
                    ability of First Choice to attract and retain customers,
                    and
 ·
                the
                    expiration of price-to-beat rates in
                    Texas.
 
 **The
          operating results of PNMR and its operating subsidiaries are affected by
          weather
          conditions and may fluctuate on a seasonal and quarterly basis.**
 
 Electric
          power generation and natural gas distribution are generally seasonal businesses.
          Demand for power from PNMR’s electric operations peaks during the hot summer
          months, while demand for natural gas peaks during the winter. As a result,
          the
          operating results of PNMR and its operating subsidiaries may fluctuate
          substantially on a seasonal basis. In addition, PNMR and its operating
          subsidiaries have historically sold less power, and consequently earned
          less
          income, when weather conditions are milder. Temperature extremes inside
          an
          operating subsidiary’s service territory may reduce the amount of power
          available to sell on the wholesale market. Unusually mild weather in the
          future
          could reduce the revenues, net income, available cash and borrowing ability
          of
          PNMR and its operating subsidiaries.
 
 A-19
 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. Drought
          conditions or actions taken by regulators or legislators could limit PNM’s
          supply of water, and 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.
 
 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.
 
 A-20
 The
          ratings from rating agencies reflect only the views of such rating agencies
          and
          are not recommendations to buy, to sell or to hold securities. Each rating
          should be evaluated independently of any other rating. Any downgrade or
          withdrawal of the current ratings of PNMR, PNM or TNMP 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 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, including possible future requirements
          to address concerns about global climate change,  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 environmental 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.
 
 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.**
 
 PNMR’s
          unregulated strategy is focused on some of the nation’s growing power markets.
          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 the EnergyCo joint venture, load forecasts, acquisition opportunities
          and
          wholesale energy sales and related revenues.
  Since
          PNM’s sales in the wholesale electric market accounted for approximately 55%
          of
          total MWh sales in 2006, the impact on PNMR’s and PNM’s financial results could
          be material if PNMR does not successfully compete for wholesale customers
          and
          generation plant acquisition opportunities. 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.
 As
          of
          December 31, 2006, PNM’s long-term contracts to supply power ranged from 1 to 14
          year terms with an average term of 6 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 and in adjacent markets.
 
 A-21
 **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, nuclear fuel 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 and amortizing intangible
          assets for impairment whenever indicators of impairment exist pursuant
          to SFAS
          No. 142 “ *Goodwill
          and Other Intangible Assets* ”
(“SFAS
          142”) and 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. PNMR, PNM and TNMP determined that no
          triggering events occurred during 2006 for their tangible long-lived assets
          and
          amortizing intangible assets.
 
 PNM
          will
          continue to analyze all tangible long-lived assets and amortizing intangible
          assets for impairment on an on-going basis in accordance with SFAS 144
          and SFAS
          142.
 
 **Impairments
          of goodwill and intangible assets of PNMR and its subsidiaries could adversely
          affect their business, financial position, liquidity and results of operations.**
 
 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.
 
 A-22
 *TNP*
 
 As
          of
          December 31, 2006, PNMR had $495.7 million of goodwill composed of $363.8
          million of goodwill at TNMP and $131.9 million of goodwill at First Choice
          , as
          a result of the acquisition of TNP in 2005. As required by SFAS 142, PNMR
          and
          TNMP 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, beginning in 2005, 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.
 
 The
          TNP
          acquisition settlement in New Mexico required the integration of TNMP’s New
          Mexico assets into PNM. TNMP’s New Mexico assets were transferred to PNM
          effective January 1, 2007, including the portion of goodwill related to
          TNMP’s
          New Mexico assets. As a result, PNM will record goodwill that will be subject
          to
          impairment testing pursuant to SFAS 142.
 
 *Twin
          Oaks*
 
 The
          purchase in 2006 of the Twin Oaks plant included the development rights
          for a
          possible 600-megawatt expansion of the plant valued at $25 million, which
          PNMR
          has classified as an intangible asset. The rights have an indefinite life.
          Therefore no amortization is recognized, but the asset is evaluated for
          impairment each reporting period.
 
 **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),
 ·
                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 of
          2005 and the repeal of the PUHCA of 2005. See Note 17 for further
          discussion.
  A-23
 **ITEM
          1B.**  **UNRESOLVED
          STAFF COMMENTS**
 
 None.
 
 
 
 A-24
  **ITEM
          2.**  **PROPERTIES**
 
 PNMR
 
 The
          significant properties owned by PNMR include those owned by PNM, TNMP and
          Altura
          and are disclosed below.
 
 PNM
 
 **Electric**
 
 PNM’s
          ownership and capacity in electric generating stations in commercial service
          as
          of December 31, 2006 follow:
  **Total
                    Net****Generation****Type**
                
                **Name**
                
                **Location**
                
                **Capacity (MW)**Coal
                
                SJGS
                    (a)
                
                Waterflow,
                    New Mexico
                
                765Coal
                
                Four
                    Corners (b)
                
                Fruitland,
                    New Mexico
                
                192Gas/Oil
                
                Reeves
                    Station (i)
                
                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)Gas
                    (CC)
                
                Luna
                    (h)
                
                Deming,
                    New Mexico
                
                1901,934
 
  (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. Units 4 and 5 at
                    Four Corners
                    are jointly owned with SCE, APS, Salt River Project, Tucson and
                    EPE and
                    are operated by APS.
 (c)
                Subject
                    to NMPRC approval, PNM plans to close the Las Vegas Generating
                    Station in
                    2011.
 (d)
                Afton
                    is currently a gas or oil fired combustion turbine plant in La
                    Mesa, NM.
                    PNM is in the process of converting Afton to a combined cycle
                    plant and
                    bringing 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 which were transferred to PNM effective January
                    1, 2007.
 (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
                    of
                    approximately 2.3% in 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.
 (h)
                PNM
                    owns 33.3% of Luna. Luna is not included in retail rates. Luna’s power is
                    being sold into the wholesale
                    market.
 (i)
                PNM
                    owns 154 MW of generation capacity at Reeves in Albuquerque,
                    NM.
 
 **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.
 
 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
          has
          132 MW of generation capacity in Albuquerque under an operating lease.
          The power
          from Reeves, Lordsburg and the 132 MW under the operating lease 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. (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, 2006, PNM owned, jointly owned or leased, 2,905 circuit miles
          of
          electric transmission lines, 4,388 miles of distribution overhead lines,
          4,791
          cable miles of underground distribution lines (excluding street lighting)
          and
          239 substations.
 
 **Gas**
 
 As
          of
          December 31, 2006, 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 1,572 miles of
          pipe and
          compression facilities. The distribution systems consisted of 12,549 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.
 
 PNMR
 
 PNMR’s
          wholly owned subsidiary Altura owns Twin Oaks, a 305 MW coal-fired power
          plant
          located in Bremond, Texas which is approximately 150 miles south of Dallas,
          Texas.
 
 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 and El Paso. TNMP owned New Mexico transmission and distribution
          facilities which are located in southwest and south central New Mexico,
          including the cities of Alamogordo, Ruidoso, Silver City, Lordsburg and
          surrounding communities until TNMP’s New Mexico assets were transferred to PNM
          on January 1, 2007. TNMP also owns and leases service and office facilities
          in
          other areas throughout its service territory.
 
 A-26
 **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.
  ·
                PVNGS
                    Water Supply Litigation ·
                San
                    Juan River Adjudication ·
                Navajo
                    Nation Environmental Issues ·
                Citizen
                    Suit Under the Clean Air Act ·
                Four
                    Corners Federal Implementation Plan
                    Litigation ·
                Santa
                    Fe Generating Station ·
                Natural
                    Gas Royalties Qui Tam Litigation ·
                Archaeological
                    Site Disturbance ·
                Legal
                    Proceedings discussed under the caption "Western United States
                    Wholesale
                    Power Market" ·
                Wholesale
                    Power Marketing Antitrust Suit ·
                TNMP
                    True-Up Proceeding
 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, 2007 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
                51
                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
                53
                Senior
                    Vice President and ChiefFinancial
                    Officer
                January
                    2006Vice
                    President and Chief Financial Officer,Omaha
                    Public Power District
                November
                    1999A.
                    A. Cobb
                59
                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
                57
                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
                58
                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
                49
                Senior
                    Vice President, Energy Resources (PNMR and PNM)
                March
                    2004Vice
                    President, Energy Supply, Trading andServices,
                    TECO Energy, Inc.
                January
                    2001W.D.
                    Hobbs3
                63
                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
                    2000T.
                    G. Sategna
                53
                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.
 
 
 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. Ranges of sales
          prices of
          PNMR’s common stock, reported as composite transactions (Symbol: PNM), and
          dividends declared on the common stock for 2006 and 2005, by quarters,
          are as
          follows:
 
 **Quarter
                    Ended**
                
                **Range
                    of**
                  **Sales
                    Prices**
                
                **Dividends****High**
                
                **Low**
                
                **Per
                    Share****2006**December
                    31
                
                $
                32.07
                
                $
                27.47
                
                $
                0.220September
                    30
                
                $
                28.94
                
                $
                25.41
                
                $
                0.440June
                    30
                
                $
                26.60
                
                $
                23.92
                
                $
                -March
                    31
                
                $
                25.50
                
                $
                22.49
                
                $
                0.220Fiscal
                    Year
                
                $
                32.07
                
                $
                22.49
                
                $
                0.880**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
 
 Dividends
          declared during the quarter ended September 30, 2006 include a $0.22 per
          share
          dividend declared on July 18, 2006 for the quarter ended June 30, 2006
          and a
          $0.22 per share dividend declared on September 26, 2006 for the quarter
          ended
          September 30, 2006.
 
 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
          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. On February
          13,
          2007, the board approved a 4.5% increase in the Company’s common stock dividend.
          This increase raised the quarterly dividend to $0.23 per share, for an
          indicated
          annual rate of $0.92 per share. PNMR targets a payout ratio of 50% to 60%
          of
          consolidated earnings.
 
 On
          February 20, 2007, there were 14,087 holders of record of the Company’s common
          stock.
 
 See
          MD&A - Liquidity and Capital Resources - Dividends, for a discussion on
          limitations on the payments of dividends and 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 2006 and 2005.
 
 **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 which are included from the date
          of
          acquisition on June 6, 2005. PNMR results also include results for the
          Twin Oaks
          business from the date of acquisition on April 18, 2006.
 
 **PNM
          RESOURCES, INC. AND SUBSIDIARIES**
 
 **2006**
                
                **2005**
                
                **2004**
                
                **2003**
                
                **2002**(In
                    thousands except per share amounts and ratios)**Total
                    Operating Revenues**
                
                $
                2,471,669
                
                $
                2,076,810
                
                $
                1,604,792
                
                $
                1,455,653
                
                $
                1,118,694**Net
                    Earnings Before Cumulative Effect of Changes****in
                    Accounting Principles**
                
                $
                122,114
                
                $
                68,153
                
                $
                87,686
                
                $
                58,552
                
                $
                63,686**Net
                    Earnings**
                
                $
                122,114
                
                $
                67,227
                
                $
                87,686
                
                $
                95,173
                
                $
                63,686**Net
                    Earnings per Common Share**Basic
                
                $
                1.75
                
                $
                1.02
                
                $
                1.45
                
                $
                1.60
                
                $
                1.09Diluted
                
                $
                1.73
                
                $
                1.00
                
                $
                1.43
                
                $
                1.58
                
                $
                1.07**Cash
                    Flow Data**Net
                    cash flows provided from operating activities
                
                $
                244,424
                
                $
                210,108
                
                $
                235,142
                
                $
                225,915
                
                $
                97,359Net
                    cash flows used in investing activities
                
                $
                (799,575
                )
                $
                (154,300
                )
                $
                (143,838
                )
                $
                (98,790
                )
                $
                (200,427
                )Net
                    cash flows provided by (used in) financing activities
                
                $
                610,371
                
                $
                (4,804
                )
                $
                (86,803
                )
                $
                (118,133
                )
                $
                78,362**Total
                    Assets**
                
                $
                6,165,624
                
                $
                5,124,709
                
                $
                3,487,635
                
                $
                3,378,629
                
                $
                3,247,227**Long-Term
                    Debt**
                
                $
                1,765,907
                
                $
                1,746,395
                
                $
                987,823
                
                $
                987,210
                
                $
                980,092**Common
                    Stock Data**Market
                    price per common share at year end
                
                $
                31.10
                
                $
                24.49
                
                $
                25.29
                
                $
                18.73
                
                $
                15.88Book
                    value per common share at year end
                
                $
                21.86
                
                $
                18.39
                
                $
                17.91
                
                $
                17.67
                
                $
                16.46Average
                    number of common shares outstanding
                
                
                69,829
                
                
                65,928
                
                
                60,414
                
                
                59,620
                
                
                58,677Dividends
                    declared per common share
                
                $
                0.880
                
                $
                0.785
                
                $
                0.665
                
                $
                0.600
                
                $
                0.587Return
                    on average common equity
                
                
                8.2
                %
                
                5.6
                %
                
                8.1
                %
                
                9.3
                %
                
                6.4
                %**Capitalization**Common
                    stockholders’ equity
                
                
                48.8
                %
                
                42.3
                %
                
                52.4
                %
                
                51.9
                %
                
                49.5
                %Preferred
                    stock without mandatory redemptionrequirements
                
                
                0.3
                
                
                0.4
                
                
                0.6
                
                
                0.6
                
                
                0.7Long-term
                    debt
                
                
                50.9
                
                
                57.3
                
                
                47.0
                
                
                47.5
                
                
                49.8100.0
                %
                
                100.0
                %
                
                100.0
                %
                
                100.0
                %
                
                100.0
                %
 
  
 A-32
 **PNM
            RESOURCES, INC. AND SUBSIDIARIES**
 **COMPARATIVE
            OPERATING STATISTICS**
 **2006**
                
                **2005**
                
                **2004**
                
                **2003**
                
                **2002****Regulated
                    Operations****PNM
                    Electric MWh Sales**Residential
                
                
                2,764,299
                
                
                2,652,475
                
                
                2,509,449
                
                
                2,405,488
                
                
                2,298,542Commercial
                
                
                3,635,423
                
                
                3,526,133
                
                
                3,450,503
                
                
                3,379,147
                
                
                3,254,576Industrial
                
                
                1,327,287
                
                
                1,277,156
                
                
                1,283,769
                
                
                1,292,711
                
                
                1,612,723Other
                
                
                258,294
                
                
                256,202
                
                
                253,393
                
                
                247,255
                
                
                267,070Total
                    PNM Electric MWh Sales
                
                
                7,985,303
                
                
                7,711,966
                
                
                7,497,114
                
                
                7,324,601
                
                
                7,432,911**TNMP
                    Electric MWh Sales ***Residential
                
                
                2,748,751
                
                
                1,839,741
                
                
                -
                
                
                -
                
                
                -Commercial
                
                
                2,565,488
                
                
                1,399,864
                
                
                -
                
                
                -
                
                
                -Industrial
                
                
                2,157,507
                
                
                1,263,452
                
                
                -
                
                
                -
                
                
                -Other
                
                
                121,227
                
                
                72,262
                
                
                -
                
                
                -
                
                
                -Total
                    TNMP MWh Sales
                
                
                7,592,973
                
                
                4,575,319
                
                
                -
                
                
                -
                
                
                -**PNM
                    Gas Throughput - Decatherms**(In
                    thousands):Residential
                
                
                27,556
                
                
                28,119
                
                
                30,618
                
                
                27,416
                
                
                29,627Commercial
                
                
                10,409
                
                
                10,554
                
                
                11,639
                
                
                10,810
                
                
                12,009Industrial
                
                
                581
                
                
                369
                
                
                413
                
                
                485
                
                
                749Transportation
                
                
                39,202
                
                
                37,013
                
                
                43,208
                
                
                50,756
                
                
                44,889Other
                
                
                6,450
                
                
                9,780
                
                
                13,871
                
                
                5,510
                
                
                4,807Total
                    PNM Gas Throughput
                
                
                84,198
                
                
                85,835
                
                
                99,749
                
                
                94,977
                
                
                92,081**Unregulated
                    Operations****Wholesale
                    MWh Sales ****Long-term
                    contracts
                
                
                4,331,374
                
                
                2,516,907
                
                
                2,943,372
                
                
                2,469,707
                
                
                844,169Short-term
                    sales
                
                
                7,207,172
                
                
                8,069,751
                
                
                9,057,172
                
                
                9,432,297
                
                
                8,605,985Total
                    PNM Wholesale MWh Sales
                
                
                11,538,546
                
                
                10,586,658
                
                
                12,000,544
                
                
                11,902,004
                
                
                9,450,154**First
                    Choice MWh Sales ***Residential
                
                
                2,481,557
                
                
                1,591,005
                
                
                -
                
                
                -
                
                
                -Mass-market
                
                
                549,143
                
                
                400,839
                
                
                -
                
                
                -
                
                
                -Mid-market
                
                
                1,132,028
                
                
                478,531
                
                
                -
                
                
                -
                
                
                -Other
                
                
                48,053
                
                
                29,780
                
                
                -
                
                
                -
                
                
                -Total
                    First Choice MWh Sales
                
                
                4,210,781
                
                
                2,500,155
                
                
                -
                
                
                -
                
                
                -
 
 *
                TNMP
                    and First Choice are reported from the date of acquisition, June
                    6,
                    2005.
 **
                Wholesale
                    includes Twin Oaks from the date of acquisition, April 18,
                    2006.
 
 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 2,332,098 and 1,644,675 MWh used by customers
          of
          TNMP Electric at December 31, 2006 and 2005, respectively, who have chosen
          First
          Choice as their REP.
 
 A-33
 **PNM
          RESOURCES, INC. AND SUBSIDIARIES**
 **COMPARATIVE
          OPERATING STATISTICS**
 **2006**
                    
                    **2005**
                    
                    **2004**
                    
                    **2003**
                    
                    **2002**(In
                        thousands)**Regulated
                        Operations****PNM
                        Electric Revenues**Residential
                    
                    $
                    222,099
                    
                    $
                    216,890
                    
                    $
                    206,950
                    
                    $
                    203,710
                    
                    $
                    197,174Commercial
                    
                    
                    257,661
                    
                    
                    254,480
                    
                    
                    251,092
                    
                    
                    252,876
                    
                    
                    247,800Industrial
                    
                    
                    62,515
                    
                    
                    61,146
                    
                    
                    61,905
                    
                    
                    64,549
                    
                    
                    82,009Transmission
                    
                    
                    28,940
                    
                    
                    21,509
                    
                    
                    18,327
                    
                    
                    19,453
                    
                    
                    23,857Other
                    
                    
                    20,934
                    
                    
                    19,951
                    
                    
                    20,138
                    
                    
                    19,876
                    
                    
                    19,956Total
                        PNM Electric Revenues
                    
                    $
                    592,149
                    
                    $
                    573,976
                    
                    $
                    558,412
                    
                    $
                    560,464
                    
                    $
                    570,796**TNMP
                        Electric Revenues ***Residential
                    
                    $
                    89,378
                    
                    $
                    57,145
                    
                    $
                    -
                    
                    $
                    -
                    
                    $
                    -Commercial
                    
                    
                    88,767
                    
                    
                    51,670
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -Industrial
                    
                    
                    40,501
                    
                    
                    25,189
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -Other
                    
                    
                    38,344
                    
                    
                    20,346
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -Total
                        TNMP Revenues
                    
                    $
                    256,990
                    
                    $
                    154,350
                    
                    $
                    -
                    
                    $
                    -
                    
                    $
                    -**PNM
                        Gas Revenues**Residential
                    
                    $
                    328,690
                    
                    $
                    311,043
                    
                    $
                    292,163
                    
                    $
                    226,799
                    
                    $
                    176,284Commercial
                    
                    
                    102,877
                    
                    
                    98,929
                    
                    
                    92,128
                    
                    
                    72,269
                    
                    
                    53,734Industrial
                    
                    
                    4,749
                    
                    
                    3,375
                    
                    
                    2,889
                    
                    
                    2,820
                    
                    
                    2,872Transportation
                    
                    
                    14,420
                    
                    
                    13,813
                    
                    
                    15,274
                    
                    
                    18,906
                    
                    
                    17,735Other
                    
                    
                    58,093
                    
                    
                    84,282
                    
                    
                    88,467
                    
                    
                    37,473
                    
                    
                    26,781Total
                        PNM Gas Revenues
                    
                    $
                    508,829
                    
                    $
                    511,442
                    
                    $
                    490,921
                    
                    $
                    358,267
                    
                    $
                    277,406**Unregulated
                        Operations****Wholesale
                        Revenues ****Long-term
                        contracts
                    
                    $
                    283,411
                    
                    $
                    154,692
                    
                    $
                    158,085
                    
                    $
                    135,674
                    
                    $
                    58,546Short-term
                        sales
                    
                    
                    422,104
                    
                    
                    473,336
                    
                    
                    430,158
                    
                    
                    417,486
                    (a)
                    
                    285,234Total
                        PNM Wholesale Revenues
                    
                    $
                    705,515
                    
                    $
                    628,028
                    
                    $
                    588,243
                    
                    $
                    553,160
                    
                    $
                    343,780**First
                        Choice Revenues ***Residential
                    
                    $
                    345,961
                    
                    $
                    198,218
                    
                    $
                    -
                    
                    $
                    -
                    
                    $
                    -Mass-market
                    
                    
                    81,917
                    
                    
                    53,111
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -Mid-market
                    
                    
                    125,510
                    
                    
                    46,584
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -Other
                    
                    
                    31,511
                    
                    
                    18,417
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -Total
                        First Choice Revenues
                    
                    $
                    584,899
                    
                    $
                    316,330
                    
                    $
                    -
                    
                    $
                    -
                    
                    $
                    -
 *
                TNMP
                    and First Choice are reported from the date of acquisition, June
                    6,
                    2005.
 **
                Wholesale
                    includes Twin Oaks from the date of acquisition, April 18,
                    2006.
 
 (a)
                Includes
                    intersegment sales of $1,535 in
                    2003.
 
 A-34
 
 **PNM
                    RESOURCES, INC. AND SUBSIDIARIES****COMPARATIVE
                    OPERATING STATISTICS****2006**
                
                **2005**
                
                **2004**
                
                **2003**
                
                **2002****Regulated
                    Operations****PNM
                    Electric Customers**Residential
                
                
                388,775
                
                
                378,116
                
                
                367,491
                
                
                358,099
                
                
                345,588Commercial
                
                
                45,678
                
                
                44,721
                
                
                43,425
                
                
                42,391
                
                
                41,092Industrial
                
                
                279
                
                
                281
                
                
                290
                
                
                296
                
                
                311Other
                
                
                829
                
                
                838
                
                
                818
                
                
                822
                
                
                796Total
                    PNM Electric Customers
                
                
                435,561
                
                
                423,956
                
                
                412,024
                
                
                401,608
                
                
                387,787**TNMP
                    Electric Customers ***Residential
                
                
                224,418
                
                
                222,688
                
                
                -
                
                
                -
                
                
                -Commercial
                
                
                39,380
                
                
                36,582
                
                
                -
                
                
                -
                
                
                -Industrial
                
                
                595
                
                
                121
                
                
                -
                
                
                -
                
                
                -Other
                
                
                1,073
                
                
                878
                
                
                -
                
                
                -
                
                
                -Total
                    TNMP Customers
                
                
                265,466
                
                
                260,269
                
                
                -
                
                
                -
                
                
                -**PNM
                    Gas Customers**Residential
                
                
                451,518
                
                
                440,624
                
                
                430,578
                
                
                421,104
                
                
                411,642Commercial
                
                
                36,045
                
                
                35,136
                
                
                34,993
                
                
                34,645
                
                
                35,194Industrial
                
                
                45
                
                
                42
                
                
                47
                
                
                46
                
                
                58Transportation
                
                
                26
                
                
                26
                
                
                23
                
                
                40
                
                
                27Other
                
                
                1,995
                
                
                2,654
                
                
                2,931
                
                
                2,983
                
                
                3,664Total
                    PNM Gas Customers
                
                
                489,629
                
                
                478,482
                
                
                468,572
                
                
                458,818
                
                
                450,585**Unregulated
                    Operations****Wholesale
                    Customers ****Long-term
                    and short-term
                
                
                75
                
                
                76
                
                
                68
                
                
                72
                
                
                76Total
                    Wholesale Customers
                
                
                75
                
                
                76
                
                
                68
                
                
                72
                
                
                76**First
                    Choice Customers ***Residential
                
                
                206,412
                
                
                178,128
                
                
                -
                
                
                -
                
                
                -Mass-market
                
                
                21,948
                
                
                23,914
                
                
                -
                
                
                -
                
                
                -Mid-market
                
                
                14,308
                
                
                6,649
                
                
                -
                
                
                -
                
                
                -Other
                
                
                3,006
                
                
                1,760
                
                
                -
                
                
                -
                
                
                -Total
                    First Choice Customers
                
                
                245,674
                
                
                210,451
                
                
                -
                
                
                -
                
                
                -**PNM
                    Generation Statistics**Reliable
                    Net Capability - MW
                
                
                1,934
                
                
                1,744
                
                
                1,729
                
                
                1,742
                
                
                1,734Coincidental
                    Peak Demand - MW
                
                
                1,855
                
                
                1,779
                
                
                1,655
                
                
                1,661
                
                
                1,478Average
                    Fuel Cost per Million BTU
                
                $
                1.7143
                
                $
                1.4711
                
                $
                1.3751
                
                $
                1.4120
                
                $
                1.3910BTU
                    per KWh of Net Generation
                
                
                10,641
                
                
                10,706
                
                
                10,442
                
                
                10,854
                
                
                10,568
 
 *
                TNMP
                    and First Choice are reported from the date of acquisition, June
                    6,
                    2005.
 **
                Wholesale
                    includes Twin Oaks from the date of acquisition, April 18,
                    2006.
 
 The
          customers reported above for TNMP Electric and First Choice include 139,337
          and
          150,787 customers of TNMP Electric at December 31, 2006 and 2005, respectively,
          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**
 
 The
            following discussion and analysis should be read in conjunction with
            the
            Consolidated Financial Statements and Notes, Item 1A "Risk Factors" and
            “Disclosure Regarding Forward Looking Statements" in this Item 7. Trends
            and
            contingencies of a material nature are discussed to the extent known.
 
 **Results
            of Operations**
 
 PNMR’s
            net earnings for the year ended December 31, 2006 were $122.1 million,
            or $1.73
            per diluted share of common stock, compared to $67.2 million or $1.00
            per
            diluted share of common stock in 2005. The increase in earnings was driven
            primarily by the acquisition of Twin Oaks, load growth at PNM Electric
            and Gas,
            and First Choice Power, which PNMR did not own until the TNP acquisition
            in June
            2005. Additional increases include increases in Wholesale margins due
            to first
            quarter forward sales, long-term contract growth, and increased market
            price
            spreads. These increases were partially offset by below normal levels
            of plant
            performance as a result of unexpected plant outages 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.
            Also
            affecting PNMR’s earnings was the last phase of an agreed upon 2003 electric
            rate reduction at PNM which went into effect in September 2005, charges
            for
            financing, reduced natural gas consumption, and a New Mexico rate reduction
            at
            TNMP, which went into effect in January 2006.
 
 **Overview
            of Structure of Regulated and Unregulated Operations**
 
 Through
            its operating company subsidiaries, PNMR is a merchant utility and a
            regulated
            energy service provider. PNM Wholesale is engaged in the sale and marketing
            of
            electricity in the competitive wholesale energy marketplace. Altura sells
            power
            generated from the Twin Oaks plant, located in central Texas, which was
            acquired
            in April 2006. First Choice is a retail electric provider in Texas. PNM
            is an
            integrated electric and gas utility operating in New Mexico under the
            jurisdiction of the NMPRC. TNMP is a regulated utility in Texas operating
            under
            the jurisdiction of the PUCT in Texas and through December 31, 2006,
            operated
            under the jurisdiction of the NMPRC in New Mexico.
 
 ***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, through December 31, 2006 to 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.
            Beginning January 1, 2007, PNM began providing retail electric service
            to TNMP’s
            former New Mexico customers, which are located in southern New Mexico.
            PNM
            Electric owns or leases transmission lines, interconnected with other
            utilities
            in New Mexico, Texas, Arizona, Colorado and Utah.
  A-36
  **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, through December
            31,
            2006, in New Mexico. TNMP’s operations are subject to traditional cost of
            service regulation. TNMP provides regulated transmission and distribution
            services in Texas under the TECA.
 
 Through
            December 31, 2006, TNMP provided integrated electric services that included
            the
            transmission, distribution, purchase and sale of electricity to its New
            Mexico
            customers as well as transmission to third parties and to PNM. Effective
            January
            1, 2007 TNMP’s New Mexico business was transferred to PNM. PNM Wholesale was
            TNMP’s sole supplier for TNMP’s load in New Mexico prior to the transfer of
            assets to PNM.
 
 ***Unregulated
            Operations***
 
 **Wholesale**
 
 The
            Wholesale segment included in PNMR’s results of operations includes PNM
            Wholesale as well as the results of Altura from the date of acquisition
            of Twin
            Oaks on April 18, 2006 (see Note 2).
 
 **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 expired December 31, 2006, and short-term sales.
            PNM
            Wholesale sells the unused capacity of retail 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, PNMR 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 PNMR 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.
 
 **Altura**
 
 On
            April
            18, 2006, PNMR’s wholly owned subsidiary, Altura, purchased the Twin Oaks
            business, which included a 305 MW coal-fired power plant located 150
            miles south
            of Dallas, Texas. PNMR acquired Twin Oaks to expand the Company’s merchant
            generation fleet in order to serve a growing wholesale market in the
            Southwest.
 
 The
            Twin
            Oaks purchase agreement also includes the development rights for a possible
            600-megawatt expansion of the plant, which PNMR has classified as an
            intangible
            asset. An additional $2.5 million payment will be made to the seller
            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. PNMR has
            not made a
            decision regarding the Twin Oaks expansion, but it is considering a variety
            of
            options, including self development or sale to a third party.
  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 the TECA.
            Although First Choice is regulated in certain respects by the PUCT under
            ERCOT,
            PNMR 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 the PUHCA and created PNMR Services
            Company,
            which began operating on January 1, 2005. The PUCHA was repealed effective
            February 2006.
 
 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
            with
            PNMR Services Company.
 
 PNMR
            Services Company provides corporate services to PNMR and its subsidiaries
            including Avistar, Altura, First Choice, PNM, TNMP and TNP based on shared
            services agreements. These services are billed at cost and are allocated
            to PNMR
            and its subsidiaries.
 
 As
            a
            result of the creation of the EnergyCo, PNMR Services Company entered
            into a
            corporate services agreement with EnergyCo effective January 2007.
 
 **Competitive
            Strategy**
 
 PNMR’s
            vision is to “Build America’s Best Merchant Utility.” To achieve this objective,
            management intends to:
 
 ***Expand
            Regulated and Unregulated Operations*** ****
 
 PNMR
            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 formation of the EnergyCo joint venture in 2007, the
            acquisitions of Twin Oaks in 2006 and TNP in 2005, and the acquisition
            of an
            interest in the Luna plant in 2004, PNMR 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 PNMR knows
            well.
            PNMR 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.
 
 PNMR’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 November 2006, PNM extended its existing wholesale power
            agreement
            with the Overton Power District #5 in Nevada by five years. The new agreement
            immediately replaces a two-year contract and calls for PNM to provide
            Overton
            with up to 50 MWof power through December 2012. The relationship with
            Overton, a
            public utility district serving 10,000 customers in the eastern Clark
            County,
            Nevada, dates to October 2003 when PNM agreed to deliver up to 25 MW
            of power.
            The contract has been extended and expanded over the years. In October
            2005, PNM
            entered into a 150 MW long-term sale contract with APS that begins in
            June 2007.
            PNM currently provides more than 600 megawatts of peak power to various
            wholesale customers in New Mexico, Arizona, Nevada and California.
 
 In
            addition, PNMR expects that First Choice, which was a part of the TNP
            acquisition, will continue to provide a solid foundation for participation
            in
            the competitive retail market in Texas. In addition, PNMR also intends
            to
            continue to provide energy and technology related services through its
            wholly
            owned subsidiary, Avistar.
 
 A-38
 ***Acquire
            Additional Generating Assets in the Southwest Region***
 
 PNMR
            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 PNMR’s retail and wholesale load while
            maintaining diversity of fuel mix. PNMR also plans to increase long-term
            sales
            contracts in tandem with increases in its generation capacity, facilitated
            by
            the formation of the EnergyCo joint venture in 2007, and the acquisitions
            of
            Twin Oaks in 2006 and TNP in 2005 and an interest in the Luna plant in
            2004. As
            in the past, PNMR 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 while
            expanding
            its business operations.
 
 ***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.
            In
            2006, PNMR issued additional common stock to repay acquisition-related
            debt and
            to strengthen its balance sheet. Pursuant to the terms of the PNM Direct
            Plan,
            PNMR began offering new shares of PNMR common stock through the plan
            beginning
            June 1, 2006. In August 2006, PNMR entered into an equity distribution
            agreement
            to offer and sell up to eight million shares of PNMR common stock from
            time to
            time provided that the aggregate gross proceeds from such sales will
            not exceed
            $200.0 million. In 2006, PNMR sold 2.0 million shares of its common stock
            through the PNMR Direct Plan and the equity distribution agreement for
            net
            proceeds of $55.3 million. In December 2006, PNMR issued 5,750,000 shares
            of its
            common stock in a public offering and received net proceeds of approximately
            $170.8 million. PNMR used the net proceeds from all of these common stock
            sales
            to retire debt associated with the acquisition of Twin Oaks. See “Financing
            Activities - PNMR” below in “Liquidity and Capital Resources” for further
            details of this transaction. In addition, PNMR plans to complete the
            permanent
            financing for the acquisition of the Twin Oaks facility while maintaining
            the
            Company's investment grade rating.
 
 ***Commitment
            to Corporate Citizenship***
 
 PNMR
            is
            committed to its guiding principle, “Do the Right Thing.” This commitment serves
            as the cornerstone of PNMR’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 goals for reducing
            water
            usage, improving air quality, reducing waste streams and becoming a leader
            in
            the development of renewable energy. In addition, PNMR is a member of
            the United
            States Climate Action Partnership, a group
            of
            businesses and leading environmental organizations that
            have come together to call on the federal government to quickly enact
            strong
            national legislation to require significant reductions of greenhouse
            gas
            emissions and has issued a landmark
            set of principles and recommendations to
            underscore the urgent need for a policy framework on climate
            change.
 
 **Overview
            of Developments Impacting Results of Operations and Competitive Strategy**
 
 ***EnergyCo
            Joint Venture***
 
 The
            EnergyCo joint venture with ECJV is a new unregulated energy company
            that will
            serve expanding U.S. markets throughout the Southwest, Texas and the
            West. 
ECJV is a wholly owned subsidiary of Cascade, which is PNMR’s second-largest
            shareholder.
 
 PNMR’s
            strategy for unregulated operations is focused on some of the nation’s growing
            power markets. PNMR intends to capitalize on the growth opportunities
            in these
            markets through its participation and ownership in EnergyCo. In particular,
            it
            is anticipated that ECJV will commit capital for the acquisition of assets
            and that Cascade will make significant credit guarantees to increase
            EnergyCo’s
            scale in its anticipated business lines:
 
 A-39
 ·
                Competitive
                    retail electricity sales; ·
                Development,
                    operation and ownership of diverse generation assets;
                    and ·
                Wholesale
                    marketing and trading to optimize its assets. 
 In
            addition to purchasing energy-related assets, EnergyCo could grow by
            PNMR
            contributing existing unregulated assets and ECJV, in turn, matching
            those
            contributions with cash. This would enable PNMR to better separate its
            regulated
            utility operations from its unregulated generation assets and
            businesses.
 
 ***Twin
            Oaks Acquisition***
 
 In
            April
            2006, Altura purchased the Twin Oaks business to expand the Company’s merchant
            generation fleet in order to serve a growing wholesale market in the
            Southwest.
            For additional discussion, see “Altura” above.
 
 ***PVNGS
            Operations***
 
 PNM
            is a
            participant in PVNGS, of which APS is the operating agent. During 2006,
            PVNGS’
equivalent availability was 70.0% and, as a result, PVNGS had the lowest
            equivalent availability factor that the plant has experienced since 1993.
            PVNGS
            is expected to be in the bottom quartile of performance for 2006, relative
            to
            the 103 operating reactors in the United States. During 2005, PVNGS’ equivalent
            availability was 76.0%.
 
 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.
            The NRC utilizes a grading system where a green finding level indicates
            very low
            risk significance and therefore having little or no impact on safety.
            By
            contrast, white, yellow, or red inspection findings each, respectively,
            represent a greater degree of safety significance. 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. In 2005
            and 2006,
            the NRC performed its enhanced inspections. 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 PVNGS
            Unit 1 steam generators were replaced in 2005. Replacement of the PVNGS
            Unit 3
            steam generators should be completed by December 2007. The replacement
            steam
            generators contain tubing material significantly more resistant to in-service
            cracking.
 
 APS
            operated PVNGS Unit 1 at reduced power levels from December 25, 2005
            through
            March 18, 2006, due to a vibration in the PVNGS Unit 1 shutdown cooling
            lines.
            On March 18, 2006, APS shut down PVNGS Unit 1 completely to perform inspections
            and tests. APS reconnected Unit 1 to the electrical grid on July 7, 2006.
            The
            unit achieved full power on July 16, 2006.
 
 PVNGS
            Unit 1 was shut down on September 19, 2006 because of recurring problems
            with
            five of its 36-pressurizer heaters and returned to service on October
            16, 2006.
            PVNGS Unit 1 was automatically shut down on October 21, 2006 because
            of a
            problem with control rod indicators and then returned to service on October
            23,
            2006.
 
 On
            October 19, 2006, PVNGS Unit 3 was shut down manually after two condensate
            pumps
            shut down. The problem was in part of the unit generating system, not
            its
            reactor cooling or emergency systems. Repairs were made and PVNGS Unit
            3
            returned to service on October 21, 2006.
 
 The
            reduced operation of PVNGS not only affected PNM’s ability to make off-system
            sales, but also caused PNM to purchase power to serve its retail electric
            customers. PNM estimates that reduced performance at PVNGS, particularly
            the
            extended outage at PVNGS Unit 1, resulted in a $15.5 million decrease
            in 2006
            earnings.
  A-40
  In
            October 2006, the NRC conducted an inspection of the PVNGS emergency
            diesel
            generators after a PVNGS Unit 3 generator did not activate during routine
            inspections on July 25 and September 22, 2006 and issued a preliminary
            white
            finding level. The NRC held a public regulatory conference in January
            2007 to
            discuss its preliminary findings. On February 22, 2007, the NRC issued
            a “white”
finding (low to moderate safety significance) for the emergency diesel
            generator
            matter. In connection with its finding, the NRC stated that it would
“use the
            NRC Action Matrix to determine the most appropriate response and any
            increase in
            NRC oversight, or actions [APS, as PVNGS operating agent, needs] to take
            in
            response to the most recent performance deficiencies” and notify APS of its
            determination at a later date. Under the NRC’s Action Matrix, this finding,
            coupled with a previous NRC “yellow” finding relating to the 2004 matter
            involving PVNGS’s safety injection systems, will place one or more PVNGS units
            in the “multiple/repetitive degraded cornerstone” column of the NRC’s Action
            Matrix, which will result in an enhanced NRC inspection regimen .
            APS has
            reported that it is continuing to implement its plan to improve PVNGS’s
            operational performance.
 
 The
            financial performance of PNMR and PNM may be adversely affected if PVNGS
            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.
 
 ***Proposed legislation
            in New Mexico and Texas***
 
 Multiple
            pieces of legislation have been introduced in the Texas and New Mexico
            legislative sessions which could impact the Company. In New Mexico, a bill
            that increases the Renewable Portfolio Standard from its current requirements
            of
            10% by 2011 to a renewable mandate of 15% by 2015 and 20% by 2020. The
            bill also establishes a 5% energy efficiency goal by 2015. Another piece of
            legislation would provide up to $60 million in state tax credits for
            the
            development of clean coal and solar thermal projects and would provide
            utilities
            the opportunity to seek cost recovery for environmental projects above
            and
            beyond compliance levels. Under proposed legislation, the state would
            fund the Low Income Home Energy Assistance Program for a recurring amount
            of
            $6.0 million a year.
 
 In
            Texas,
            two pieces of legislation are aimed at increasing competition and lowering
            the
            cost of residential electricity following deregulation of the market
            in 1999.
            The first bill, focusing on the Texas retail market, expands the powers
            of
            the PUCT to encourage competition by permitting the PUCT to release
            customer information of non-competitive companies' customers to competitive
            providers and allows the PUCT to study the reasonableness of residential
            rates
            and make changes to rates to ensure reasonableness. Another bill, focused
            on the
            Texas wholesale market, restricts the amount of electric capacity a utility
            can
            generate within Texas, or a zonal boundary or market, at 20 percent.
 
 The
            Company is unable to predict the final form of any legislation that may
            be
            enacted in either New Mexico or Texas or the impact of such legislation,
            if any,
            on the Company.
 
  A-41
  **RESULTS
            OF OPERATION - PNMR**
 
 **YEAR
            ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31,
            2005**
 
 PNMR’s
            net earnings for the year ended December 31, 2006 were $122.1 million,
            or $1.73
            per diluted share of common stock, compared to $67.2 million or $1.00
            per
            diluted share of common stock in 2005. The increase in earnings was driven
            primarily by the acquisition of Twin Oaks in April 2006, load growth
            at PNM
            Electric and Gas, and First Choice Power, which PNMR did not own until
            the TNP
            acquisition in June 2005. Additional increases include increases in Wholesale
            margins due to first quarter forward sales, long-term contract growth,
            and
            increased market price spreads, which were partially offset by below
            normal
            levels of plant performance as a result of unexpected plant outages 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. Also affecting PNMR’s earnings was the last phase of an agreed upon 2003
            electric rate reduction at PNM which went into effect in September 2005,
            charges
            for financing, reduced natural gas consumption, and a New Mexico rate
            reduction
            at TNMP, which went into effect in January 2006.
 
 In
            addition to the reasons discussed above, earnings also increased due
            to the
            reduction of acquisition-related and other non-recurring charges of $31.7
            million, net of income taxes, which were driven by lower acquisition
            integration
            costs of $7.4 million, turbine impairment of $9.0 million, charges related
            to
            the issuance of equity-linked units of $7.3 million, TNP debt refinancing
            costs
            of $5.1 million, a software write-off of $2.7 million, charges associated
            with
            the NMPRC’s approval of the TNP acquisition of $1.4 million, and the cumulative
            effect of adoption of FASB Interpretation No. 47, *“Accounting
            for Conditional Asset Retirement Obligations”* (“FIN
            47”) of $0.9 million. These decreases were partially offset by costs incurred
            as
            part of the formation of EnergyCo of $2.1 million.
 
 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-42
  **Regulated
            Operations**
 
 **PNM
            Electric**
 
 The
            table
            below sets forth the operating results for PNM Electric:
  **Year
                        Ended****December
                        31,****2006**
                    
                    **2005**
                    
                    **Variance**(In
                        thousands)**Operating
                        revenues**
                    
                    **$**
                    **592,149**
                    
                    **$**
                    **573,976**
                    
                    **$**
                    **18,173**Less:
                        Cost of energy
                    
                    
                    195,155
                    
                    
                    210,169
                    
                    
                    (15,014
                    )Intersegment
                        energy transfer
                    
                    
                    (6,355
                    )
                    
                    (35,829
                    )
                    
                    29,474**Gross
                        margin**
                    
                    
                    **403,349**
                    
                    
                    **399,636**
                    
                    
                    **3,713**Energy
                        production costs
                    
                    
                    120,582
                    
                    
                    118,633
                    
                    
                    1,949Transmission
                        and distribution O&M
                    
                    
                    33,023
                    
                    
                    30,462
                    
                    
                    2,561Customer
                        related expense
                    
                    
                    16,173
                    
                    
                    19,454
                    
                    
                    (3,281
                    )Administrative
                        and general
                    
                    
                    10,396
                    
                    
                    11,001
                    
                    
                    (605
                    )**Total
                        non-fuel O&M**
                    
                    
                    **180,174**
                    
                    
                    **179,550**
                    
                    
                    **624**Corporate
                        allocation
                    
                    
                    69,923
                    
                    
                    64,170
                    
                    
                    5,753Depreciation
                        and amortization
                    
                    
                    59,610
                    
                    
                    69,798
                    
                    
                    (10,188
                    )Taxes
                        other than income taxes
                    
                    
                    22,814
                    
                    
                    19,726
                    
                    
                    3,088Income
                        taxes
                    
                    
                    14,212
                    
                    
                    13,065
                    
                    
                    1,147**Total
                        non-fuel operating expenses**
                    
                    
                    **346,733**
                    
                    
                    **346,309**
                    
                    
                    **424****Operating
                        income**
                    
                    **$**
                    **56,616**
                    
                    **$**
                    **53,327**
                    
                    **$**
                    **3,289**
 The
            following table shows electric revenues by customer class and average
            customers:
 
 **PNM
            Electric Revenues**
 
 **Year
                      Ended****December
                      31,****2006**
                  
                  **2005**
                  
                  **Variance**(In
                      thousands, except customers)Residential
                  
                  $
                  222,099
                  
                  $
                  216,890
                  
                  $
                  5,209Commercial
                  
                  
                  257,661
                  
                  
                  254,480
                  
                  
                  3,181Industrial
                  
                  
                  62,515
                  
                  
                  61,146
                  
                  
                  1,369Transmission
                  
                  
                  28,940
                  
                  
                  21,509
                  
                  
                  7,431Other
                  
                  
                  20,934
                  
                  
                  19,951
                  
                  
                  983$
                  592,149
                  
                  $
                  573,976
                  
                  $
                  18,173Average
                      customers
                  
                  
                  430,212
                  
                  
                  417,986
                  
                  
                  12,226
 
  A-43
  The
            following table shows electric sales by customer class:
 
 **PNM
            Electric Sales**
 
 **Year
                      Ended****December
                      31,****2006**
                  
                  **2005**
                  
                  **Variance**(Megawatt
                      hours)Residential
                  
                  
                  2,764,299
                  
                  
                  2,652,475
                  
                  
                  111,824Commercial
                  
                  
                  3,635,423
                  
                  
                  3,526,133
                  
                  
                  109,290Industrial
                  
                  
                  1,327,287
                  
                  
                  1,277,156
                  
                  
                  50,131Other
                  
                  
                  258,294
                  
                  
                  256,202
                  
                  
                  2,0927,985,303
                  
                  
                  7,711,966
                  
                  
                  273,337
 
 Operating
            revenues increased $18.2 million, or 3.2%, from the prior year. Retail
            electricity sales increased 3.5% to 8.0 million MWhs in 2006 compared
            to 7.7
            million MWhs in 2005. Average customers grew 2.9% year over year. Customer
            load
            growth, when normalized for the impact of weather, increased revenues
            by $23.6
            million. In addition, transmission revenues increased $7.4 million as
            a result
            of a transmission rate increase, an increase in revenues from point-to-point
            customers, and an increase in intercompany transmission revenues. Joint
            use
            revenues increased $0.7 million due to an increase in contract fees and
            late
            payment charges. These increases were partially offset by a decrease
            in revenues
            of $9.6 million, due to a 2.5% rate reduction which was effective beginning
            September 2005, and $4.2 million as a result of lower usage due to milder
            weather.
 
 Gross
            margin, or operating revenues minus cost of energy sold and intersegment
            energy
            transfer, increased $3.7 million, or 0.9%, from the prior year, primarily
            due to increased customer growth, which was partially offset by weather
            and the
            rate decrease discussed above.
 
 Total
            non-fuel O&M expenses increased $0.6 million, or 0.4%, from the prior year.
            Energy production costs increased $1.9 million, or 1.6%, primarily due
            to
            increased outage costs of $1.7 million at PVNGS and $1.4 million at SJGS
            as well
            as an increased incentive bonus at PVNGS of $0.9 million, which were
            partially
            offset by decreased plant outage costs at Reeves and Four Corners and
            the
            reversal of the Palo Verde decommissioning liability in excess of the
            required
            amount. In addition, a new water sharing agreement at SJGS, which started
            in
            January 2006, increased energy production costs by $0.5 million. Transmission
            and distribution O&M expenses increased $2.6 million, or 8.4%, primarily due
            to increased maintenance costs of $1.1 million, resulting primarily from
            outage
            restoration and reliability purposes, an increase in labor costs of $0.9
            million, and an increase in the cost of materials of $0.3 million. Customer
            related expenses decreased $3.3 million, or 16.9%, primarily due to reductions
            in temporary labor costs of $1.3 million, consulting costs of $0.9 million,
            and
            media campaign costs of $0.7 million. Administrative and general expenses
            decreased $0.6 million, or 5.5%, due to the write-off of fiber optic
            study costs
            of $2.6 million in 2005 that did not recur in 2006, higher capitalized
            costs of
            $2.4 million due to increased construction activity, which reduced the
            costs
            allocated to administrative and general expense, lower insurance costs
            of $1.2
            million, and reduced legal fees of $1.0 million, which were partially
            offset by
            higher performance-based compensation costs of $3.4 million and increased
            labor
            costs of $2.3 million and an increased incentive bonus at PVNGS of $0.5
            million.
 
 Depreciation
            and amortization decreased $10.2 million, or 14.6%, from the prior year
            primarily due to an increase in the estimated useful life at SJGS, which
            was
            partially offset by asset additions. Taxes other than income increased
            $3.1
            million, or 15.7%, due to a general increase in property taxes from various
            taxing authorities, and an increase in employer payroll taxes associated
            with
            increased performance-based compensation.
 
 Effective
            January 1, 2007, TNMP’s New Mexico operations were transferred to PNM
            Electric.
  A-44
  **TNMP
            Electric**
 
 PNMR
            acquired TNP, the parent of TNMP, on June 6, 2005, and results in this
            section
            are presented from the acquisition date.
 
 The
            table
            below sets forth the operating results for TNMP Electric:
 
 **Year
                      Ended**
                  
                  **For
                      the Period**
                    **June
                      6 -****December
                      31,**
                  
                  **December
                      31,****2006**
                  
                  **2005**(In
                      thousands)**Operating
                      revenues**
                  
                  **$**
                  **256,990**
                  
                  **$**
                  **154,350**Less:
                      Cost of energy
                  
                  
                  103,021
                  
                  
                  58,014**Gross
                      margin**
                  
                  
                  **153,969**
                  
                  
                  **96,336**Transmission
                      and distribution O&M
                  
                  
                  20,871
                  
                  
                  12,403Customer
                      related expense
                  
                  
                  5,204
                  
                  
                  3,111Administrative
                      and general
                  
                  
                  (3,239
                  )
                  
                  415**Total
                      non-fuel O&M**
                  
                  
                  **22,836**
                  
                  
                  **15,929**Corporate
                      allocation
                  
                  
                  32,048
                  
                  
                  9,386Depreciation
                      and amortization
                  
                  
                  31,576
                  
                  
                  17,596Taxes
                      other than income taxes
                  
                  
                  24,351
                  
                  
                  14,261Income
                      taxes
                  
                  
                  4,258
                  
                  
                  8,442**Total
                      non-fuel operating expenses**
                  
                  
                  **115,069**
                  
                  
                  **65,614****Operating
                      income**
                  
                  **$**
                  **38,900**
                  
                  **$**
                  **30,722**
 
 
 The
            following table shows electric revenues by customer class and average
            customers:
 
 **TNMP
            Electric Revenues**
 
 **Year
                      Ended**
                  
                  **For
                      the period**
                    **June
                      6 -****December
                      31,**
                  
                  **December
                      31,****2006**
                  
                  **2005**(In
                      thousands, except customers)Residential
                  
                  $
                  89,378
                  
                  $
                  57,145Commercial
                  
                  
                  88,767
                  
                  
                  51,670Industrial
                  
                  
                  40,501
                  
                  
                  25,189Other
                  
                  
                  38,344
                  
                  
                  20,346$
                  256,990
                  
                  $
                  154,350Average
                      customers*
                  
                  
                  262,838
                  
                  
                  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 144,866 and 154,252
            customers of TNMP Electric at December 31, 2006 and 2005, respectively,
            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-45
  The
            following table shows electric sales by customer class:
 
 **TNMP
            Electric Sales ***
 
 **Year
                      Ended**
                  
                  **For
                      the period**
                    **June
                      6 -****December
                      31,**
                  
                  **December
                      31,****2006**
                  
                  **2005**(Megawatt
                      hours)Residential
                  
                  
                  2,748,751
                  
                  
                  1,839,741Commercial
                  
                  
                  2,565,488
                  
                  
                  1,399,864Industrial
                  
                  
                  2,157,507
                  
                  
                  1,263,452Other
                  
                  
                  121,227
                  
                  
                  72,2627,592,973
                  
                  
                  4,575,319
 
 
 *
            The
            MWhs reported above include 2,332,098 and 1,644,675 MWhs used by customers
            of
            TNMP Electric at December 31, 2006 and 2005, respectively, who have chosen
            First
            Choice as their REP. The 2005 comparative MWhs have been changed to include
            unbilled as well as billed MWhs for comparability with 2006 numbers.
            These MWhs
            are also included below in the First Choice segment.
 
 TNMP
            Electric’s gross margin was $154.0 million for 2006. The significant factors
            that impacted gross margin include a decrease in revenues due to rate
            reductions
            in both Texas and New Mexico, milder weather, increased transmission
            costs, and
            higher purchase power prices in New Mexico. These decreases were partially
            offset by customer growth year over year and the collection of Competitive
            Transition Charges beginning in December 2006.
 
 Effective
            January 1, 2007, TNMP’s New Mexico operations were transferred to PNM
            Electric.
  A-46
  **PNM
            Gas**
 
 The
            table
            below sets forth the operating results for PNM Gas:
 
 **Year
                      Ended****December
                      31,****2006**
                  
                  **2005**
                  
                  **Variance**(In
                      thousands)**Operating
                      revenues**
                  
                  **$**
                  **508,829**
                  
                  **$**
                  **511,442**
                  
                  **$**
                  **(2,613**
                  **)**Less:
                      Cost of energy
                  
                  
                  361,873
                  
                  
                  364,205
                  
                  
                  (2,332
                  )**Gross
                      margin**
                  
                  
                  **146,956**
                  
                  
                  **147,237**
                  
                  
                  **(281**
                  **)**Energy
                      production costs
                  
                  
                  2,273
                  
                  
                  2,444
                  
                  
                  (171
                  )Transmission
                      and distribution O&M
                  
                  
                  27,881
                  
                  
                  27,817
                  
                  
                  64Customer
                      related expense
                  
                  
                  16,830
                  
                  
                  19,616
                  
                  
                  (2,786
                  )Administrative
                      and general
                  
                  
                  7,862
                  
                  
                  3,487
                  
                  
                  4,375**Total
                      non-fuel O&M**
                  
                  
                  **54,846**
                  
                  
                  **53,364**
                  
                  
                  **1,482**Corporate
                      allocation
                  
                  
                  41,103
                  
                  
                  37,028
                  
                  
                  4,075Depreciation
                      and amortization
                  
                  
                  23,991
                  
                  
                  22,548
                  
                  
                  1,443Taxes
                      other than income taxes
                  
                  
                  8,937
                  
                  
                  8,010
                  
                  
                  927Income
                      taxes
                  
                  
                  2,266
                  
                  
                  5,853
                  
                  
                  (3,587
                  )**Total
                      non-fuel operating expenses**
                  
                  
                  **131,143**
                  
                  
                  **126,803**
                  
                  
                  **4,340****Operating
                      income**
                  
                  **$**
                  **15,813**
                  
                  **$**
                  **20,434**
                  
                  **$**
                  **(4,621**
                  **)**
 
 The
            following table shows gas revenues by customer and average
            customers:
 
 **PNM
            Gas Revenues**
 
 **Year
                      Ended****December
                      31,****2006**
                  
                  **2005**
                  
                  **Variance**(In
                      thousands, except customers)Residential
                  
                  $
                  328,690
                  
                  $
                  311,043
                  
                  $
                  17,647Commercial
                  
                  
                  102,877
                  
                  
                  98,929
                  
                  
                  3,948Industrial
                  
                  
                  4,749
                  
                  
                  3,375
                  
                  
                  1,374Transportation*
                  
                  
                  14,420
                  
                  
                  13,813
                  
                  
                  607Other
                  
                  
                  58,093
                  
                  
                  84,282
                  
                  
                  (26,189
                  )$
                  508,829
                  
                  $
                  511,442
                  
                  $
                  (2,613
                  )Average
                      customers
                  
                  
                  482,270
                  
                  
                  471,321
                  
                  
                  10,949
 
 *Customer-owned
            gas.
  A-47
  The
            following table shows gas throughput by customer class:
 
 **PNM
            Gas Throughput**
 
 **Year
                      Ended****December
                      31,****2006**
                  
                  **2005**
                  
                  **Variance**(Thousands
                      of decatherms)Residential
                  
                  
                  27,556
                  
                  
                  28,119
                  
                  
                  (563
                  )Commercial
                  
                  
                  10,409
                  
                  
                  10,554
                  
                  
                  (145
                  )Industrial
                  
                  
                  581
                  
                  
                  369
                  
                  
                  212Transportation*
                  
                  
                  39,202
                  
                  
                  37,013
                  
                  
                  2,189Other
                  
                  
                  6,450
                  
                  
                  9,780
                  
                  
                  (3,330
                  )84,198
                  
                  
                  85,835
                  
                  
                  (1,637
                  )
 
 *Customer-owned
            gas.
 
 PNM
            Gas
            purchases natural gas in the open market and resells it at no profit
            to its
            sales-service customers. As a result, increases or decreases in gas revenues
            driven by gas costs do not impact the consolidated gross margin or earnings
            of
            PNM Gas. Operating revenues decreased $2.6 million, or 0.5%, from the
            prior
            year. Increased gas prices in 2006 resulted in an increase in revenues
            of $66.0,
            with an additional $14.2 million attributable to customer growth. These
            increases were more than offset by $54.1 million of decreased usage due
            to
            customer conservation, $24.5 million of reduced off-system sales transactions
            resulting from a lack of market activity, and $3.8 million of decreased
            usage
            due to milder weather. As a result of the customer conservation and milder
            weather in 2006, sales volumes decreased 1.9%. Average customer counts
            increased
            2.3% year over year.
 
 Gross
            margin, or operating revenues minus cost of energy sold, decreased $0.3
            million,
            or 0.2%, from the prior year. Reduced customer usage resulting from customer
            conservation caused gross margin to decrease $5.9 million. Milder weather
            and
            reduced off-system sales transactions also reduced margin compared to
            the prior
            year. These decreases were partially offset by customer growth, as discussed
            above, which increased margin $6.5 million.
 
 Total
            non-fuel O&M expenses increased $1.5 million, or 2.8%, from the prior year.
            Customer related expenses decreased $2.8 million, or 14.2%, due to lower
            costs
            for advertising of $1.7 million, temporary labor of $1.4 million, and
            consulting
            of $0.3 million. These decreases were partially offset by higher bad
            debt
            expense of $0.7 million. Administrative and general expenses increased
            $4.4
            million, or 125.5%, primarily due to higher performance-based compensation
            costs
            of $2.7 million, increased labor costs of $0.9 million, and higher insurance
            costs of $0.7 million.
 
 Depreciation
            and amortization increased $1.4 million, or 6.4%, largely due to asset
            and
            software additions placed in service during 2005. Taxes other than income
            taxes
            increased $0.9 million, or 11.6%, as a result of an increase in property
            taxes
            and employer payroll taxes associated with increased performance-based
            compensation.
 
  A-48
  **Unregulated
            Operations**
 
 **Wholesale**
 
 The
            table
            below sets forth the operating results for Wholesale:
 
 **Year
                      Ended****December
                      31,****2006**
                  
                  **2005**
                  
                  **Variance**(In
                      thousands)**Operating
                      revenues**
                  
                  **$**
                  **705,515**
                  
                  **$**
                  **628,028**
                  
                  **$**
                  **77,487**Less:
                      Cost of energy
                  
                  
                  507,800
                  
                  
                  506,935
                  
                  
                  865Intersegment
                      energy transfer
                  
                  
                  6,355
                  
                  
                  35,829
                  
                  
                  (29,474
                  )**Gross
                      margin**
                  
                  
                  **191,360**
                  
                  
                  **85,264**
                  
                  
                  **106,096**Energy
                      production costs
                  
                  
                  41,343
                  
                  
                  29,614
                  
                  
                  11,729Transmission
                      and distribution O&M
                  
                  
                  104
                  
                  
                  54
                  
                  
                  50Customer
                      related expense
                  
                  
                  1,023
                  
                  
                  879
                  
                  
                  144Administrative
                      and general
                  
                  
                  7,800
                  
                  
                  6,446
                  
                  
                  1,354**Total
                      non-fuel O&M**
                  
                  
                  **50,270**
                  
                  
                  **36,993**
                  
                  
                  **13,277**Corporate
                      allocation
                  
                  
                  7,025
                  
                  
                  4,395
                  
                  
                  2,630Depreciation
                      and amortization
                  
                  
                  26,101
                  
                  
                  15,669
                  
                  
                  10,432Taxes
                      other than income taxes
                  
                  
                  6,192
                  
                  
                  3,439
                  
                  
                  2,753Income
                      taxes
                  
                  
                  25,687
                  
                  
                  3,612
                  
                  
                  22,075**Total
                      non-fuel operating expenses**
                  
                  
                  **115,275**
                  
                  
                  **64,108**
                  
                  
                  **51,167****Operating
                      income**
                  
                  **$**
                  **76,085**
                  
                  **$**
                  **21,156**
                  
                  **$**
                  **54,929**
 
 The
            following table shows revenues by customer class:
 
 **Wholesale
            Revenues**
 
 **Year
                      Ended****December
                      31,****2006**
                  
                  **2005**
                  
                  **Variance**(In
                      thousands)Long-term
                      contracts
                  
                  $
                  283,411
                  
                  $
                  154,692
                  
                  $
                  128,719Short-term
                      sales
                  
                  
                  422,104
                  
                  
                  473,336
                  
                  
                  (51,232
                  )$
                  705,515
                  
                  $
                  628,028
                  
                  $
                  77,487
 
  A-49
  The
            following table shows sales by customer class:
 
 **Wholesale
            Sales**
 
 **Year
                      Ended****December
                      31,****2006**
                  
                  **2005**
                  
                  **Variance**(Megawatt
                      hours)Long-term
                      contracts
                  
                  
                  4,331,374
                  
                  
                  2,516,907
                  
                  
                  1,814,467Short-term
                      sales
                  
                  
                  7,207,172
                  
                  
                  8,069,751
                  
                  
                  (862,579
                  )11,538,546
                  
                  
                  10,586,658
                  
                  
                  951,888
 
 Operating
            revenues increased $77.5 million, or 12.3%, from the prior year. This
            increase
            in wholesale electric sales was primarily due to increased long-term
            contracts
            of $128.7 million, or 83.2%. The acquisition of Twin Oaks increased long-term
            revenue by $125.1 million, of which $53.6 million related to an existing
            power
            agreement and $70.9 million for the amortization of the fair value of
            a sales
            contract existing as of the date of the acquisition (see Note 2). Other
            increases in long-term revenue include the growth of long-term contracts
            of $9.3
            million, which were partially offset by reduced SO 2 allowance sales of $5.0 million. Short-term revenues decreased by $51.2
            million,
            or 10.8%, primarily due to reduced marketing activity and a 2.0% decrease
            in
            average short-term sales prices. Wholesale sold 11.5 million MWh of electricity
            in 2006 compared to 10.6 million MWh in 2005, an increase of 9.0%.
 
 Gross
            margin, or operating revenues minus cost of energy sold and intersegment
            energy
            transfer, increased $106.1 million, or 124.4%, from the prior year, primarily
            due to the acquisition of Twin Oaks, which increased margin $86.3
            million .
            In
            addition, margin increased due
            to
            the forward sale of first quarter 2006 excess resources in September
            2005 when
            market prices were high. When prices fell in early 2006, PNM Wholesale
            covered
            the forward sales with lower-priced market purchases and utilized the
            excess
            resources to create additional sales opportunities. This strategy resulted
            in an
            increase in gross margin of approximately $10.8 million. Increased margins
            due
            to the growth of long-term contracts and higher market price spreads
            were
            partially offset by the reduction in SO 2 allowance sales discussed above and a $6.2 million decrease due to reduced
            base-load plant availability and increased retail load, which reduced
            the
            availability of less expensive excess energy for sale in the wholesale
            market.
 
 Total
            non-fuel O&M expenses increased $13.3 million, or 35.9%, from the prior
            year. Energy production costs increased $11.7 million, or 39.6%, due
            primarily
            to the addition of Twin Oaks costs of $6.9 million and Luna costs of
            $1.8
            million, which the Company did not have in 2005, increased outage costs
            of $3.5
            million at PVNGS and $0.2 million at SJGS and an increased incentive
            bonus at
            PVNGS of $0.7 million, which was partially offset by the reversal of
            PVNGS
            decommissioning liability in excess of the required amount of $0.5 million
            and
            decreased plant outage costs at Reeves and Four Corners. Administrative
            and
            general costs increased $1.4 million, or 21.0% primarily due to the addition
            of
            Twin Oaks costs of $0.8 million and an increased incentive bonus at PVNGS
            of
            $0.8 million, which was partially offset by higher capitalized costs
            in 2006 of
            $0.5 million due to increased construction activity which reduced administrative
            and general expenses.
 
 Depreciation
            and amortization increased $10.4 million, or 66.6%, from the prior year
            primarily due to the addition of Twin Oaks and depreciation expense for
            assets
            placed in service during 2005, partially offset by lower depreciation
            rates at
            SJGS, Afton and Lordsburg power plants. Taxes other than income increased
            $2.8
            million or 80.1% primarily due to the addition of Twin Oaks.
  A-50
  **First
            Choice**
 
 PNMR
            acquired TNP on June 6, 2005, and results in this section are presented
            from the
            acquisition date .
 
 The
            table
            below sets forth the operating results for First Choice:
 
 **Year
                      Ended**
                  
                  **For
                      the Period**
                    **June
                      6 -****December
                      31,**
                  
                  **December
                      31,****2006**
                  
                  **2005**(In
                      thousands)**Operating
                      revenues**
                  
                  **$**
                  **584,899**
                  
                  **$**
                  **316,330**Less:
                      Cost of energy
                  
                  
                  455,126
                  
                  
                  243,053**Gross
                      margin**
                  
                  
                  **129,773**
                  
                  
                  **73,277**Customer
                      related expense
                  
                  
                  14,416
                  
                  
                  2,539Administrative
                      and general
                  
                  
                  30,620
                  
                  
                  13,008**Total
                      non-fuel O&M**
                  
                  
                  **45,036**
                  
                  
                  **15,547**Corporate
                      allocation
                  
                  
                  14,457
                  
                  
                  8,434Depreciation
                      and amortization
                  
                  
                  2,026
                  
                  
                  1,094Taxes
                      other than income taxes
                  
                  
                  5,276
                  
                  
                  3,916Income
                      taxes
                  
                  
                  22,152
                  
                  
                  15,450**Total
                      non-fuel operating expenses**
                  
                  
                  **88,947**
                  
                  
                  **44,441****Operating
                      income**
                  
                  **$**
                  **40,826**
                  
                  **$**
                  **28,836**
 
 
 The
            following table shows electric revenues by customer class and average
            customers:
 
 **First
            Choice Electric Revenues**
 
 **Year
                      Ended**
                  
                  **For
                      the Period**
                    **June
                      6 -****December
                      31,**
                  
                  **December
                      31,****2006**
                  
                  **2005**(In
                      thousands, except customers)Residential
                  
                  $
                  345,961
                  
                  $
                  198,218Mass-market
                  
                  
                  81,917
                  
                  
                  53,111Mid-market
                  
                  
                  125,510
                  
                  
                  46,584Other
                  
                  
                  31,511
                  
                  
                  18,417$
                  584,899
                  
                  $
                  316,330Actual
                      customers(1,
                      2)
                  
                  
                  245,674
                  
                  
                  210,451
 
 (1)
                See
                    note above in the TNMP Electric segment discussion about the
                    impact of
                    TECA. (2)
                Due
                    to the competitive nature of First Choice’s business, actual customer
                    count at December 31 is presented in the table above as a more
                    representative business indicator than the average customers
                    that are
                    shown in the table for TNMP customers. First Choice had 224,003
                    average
                    customers and 209,464 average customers for the years ended December
                    31,
                    2006 and 2005, respectively. 
  A-51
  The
            following table shows electric sales by customer class:
 
 **First
            Choice Electric Sales ***
 
 **For
                      the period****Year
                      Ended**
                    **December
                      31,**
                  
                  **June
                      6 -**
                    **December
                      31,****2006**
                  
                  **2005**(Megawatt
                      hours)Residential
                  
                  
                  2,481,557
                  
                  
                  1,591,005Mass-market
                  
                  
                  549,143
                  
                  
                  400,839Mid-market
                  
                  
                  1,132,028
                  
                  
                  478,531Other
                  
                  
                  48,053
                  
                  
                  29,7804,210,781
                  
                  
                  2,500,155
 
 
 *
            See
            note above in the TNMP Electric segment discussion about the impact of
            TECA.
 
 First
            Choice’s gross margin was $129.8 million for 2006. The significant factors that
            impacted gross margin include customer growth, increases in competitive
            and
            price-to-beat sales prices, an increase in trading margins, and the amortization
            of the fair value of sales and purchase contracts existing at the time
            of the
            acquisition. As part of the acquisition of TNP, PNMR determined the fair
            value
            of a First Choice contractual obligation to purchase power and an obligation
            to
            sell power that are being amortized over the contract lives, or approximately
            three years. These increases were partially offset by reduced usage due
            to
            milder weather and higher purchased power prices. Significant factors
            that
            increased non-fuel O&M in 2006 include the initial costs of outsourcing
            customer service operations and higher bad debt expense.
 
 **Corporate
            and Other**
 
 *Energy
            Production Costs*
 
 Corporate
            and other energy production costs decreased $14.9 million in 2006 as
            a result of
            the write-down of a turbine of $15.0 million in 2005.
 
 *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 $30.5 million, or 22.1%, to $168.8
            compared to
            the prior year. This increase was primarily due to $20.0 million in additional
            expenses for insurance, benefits, and corporate support activities for
            TNP,
            which PNMR did not incur until the acquisition of TNP in June 2005. Wages
            and
            benefit costs increased $7.6 million due to additional employees providing
            corporate services and increases in the payout of employee incentive
            programs.
            Stock-based compensation expense increased $5.9 million due to the adoption
            of
            SFAS 123R “ *Share-Based
            Payment* ”
(see
            Note 13). Additional increases include higher audit fees and costs related
            to
            the cost of compliance with the Sarbanes-Oxley Act of $2.1 million, increased
            consulting costs associated with corporate projects of $1.4 million,
            and
            increased postretirement costs in accordance with SFAS No. 106, *“Employers’
            Accounting for Postretirement Benefits Other Than Pensions”* (“SFAS
            106”) of $1.3 million. These increases were partially offset by lower costs
            relating to the integration of the TNP acquisition of $9.1 million.
 
 *Depreciation
            Expense*
 
 Corporate
            and other depreciation expense decreased $3.1 million, or 25.4%, to $9.0
            million, primarily due to the write-off of software costs in the second
            quarter
            of 2005 that did not recur in 2006 offset, in part, by an increase in
            the asset
            base.
  A-52
  *Taxes
            Other Than Income*
 
 Corporate
            and other taxes other than income increased $1.1 million, or 33.6%, to
            $4.3
            million primarily due to an increase in payroll taxes from a transfer
            of
            employees to Corporate and increased wages related to stock-based
            compensation.
 
 **PNMR
            Consolidated**
 
 *Other
            Income and Deductions*
 
 Other
            income decreased $4.3 million and other deductions decreased by $16.5
            million,
            for a net increase in other income and deductions of $12.2 million. The
            increase
            is a result of a 2005 activity related to the Company’s equity investment
            program, a $3.1 million write down of the Wood River investments offset
            by a
            $0.5 million gain on investments from the Company’s equity investment program.
            This program was discontinued and there was no additional equity investment
            activity in 2006. In addition, there was an $11.3 million charge in 2005
            related
            to the issuance of equity-linked securities (see Note 6), and a $2.5
            million
            contribution by PNMR to the PNM Resources Foundation in 2005. These increases
            were partially offset by lower realized gains of $3.5 million related
            to the
            rebalancing of the PVNGS decommissioning trust assets and a decrease
            of $1.0
            million due to the unwinding of an interest rate swap.
 
 Interest
            income decreased $3.1 million, or 7.4%, primarily due to lower interest
            income
            of $2.2 million as a result of a lower level of investment income in
            the Palo
            Verde capital trust and interest earned in 2005 from the investment of
            cash
            received from PNMR’s issuance of equity-linked units of $1.9 million. These
            decreases were partially offset by a $0.5 million increase in interest
            income
            earned on PVNGS decommissioning trust assets.
 
 Carrying
            charges on regulatory assets increased $2.6 million from the prior year.
            This
            represents interest income on TNMP regulatory assets that were not acquired
            until June 6, 2005.
 
 *Interest
            Charges*
 
 PNMR’s
            consolidated interest charges increased by $51.8 million from the prior
            year.
            The increase is primarily due to $20.6 million of interest charges related
            to
            the bridge loan associated with the Altura purchase of Twin Oaks, which
            occurred
            on April 18, 2006, $12.8 million of interest charges related to debt
            from the
            TNP operations, which PNMR did not incur until the acquisition of TNP
            in June
            2005, $9.9 million due to an increase in PNMR commercial paper and other
            short-term borrowings, interest and refinancing costs of $6.8 million
            related to
            the equity-linked units issued in March and October of 2005, $3.0 million
            of
            interest charges for pollution control bonds converted from a variable
            interest
            rate to a higher fixed interest rate, and $2.6 million of interest charges
            related to rate increases on PNMR interest rate swaps. These increases
            were
            partially offset by $1.7 million of interest capitalized in connection
            with
            capital construction projects and $2.3 million of debt retirement in
            connection
            with the purchase of TNP in June 2005.
 
 *Income
            Taxes*
 
 PNMR’s
            consolidated income tax expense was $64.0 million for the year ended
            December
            31, 2006 compared to $32.9 million in 2005. The increase in consolidated
            income
            tax expense was due to the impact of higher earnings. PNMR’s effective operating
            income tax rates for the years ended December 31, 2006 and 2005 were
            34.43% and
            30.80%, respectively. PNMR’s effective non-operating income tax rates for the
            years ended December 31, 2006 and 2005 were 33.90% and 32.92%,
            respectively.
 
  A-53
  **RESULTS
            OF OPERATION - PNM**
 
 **YEAR
            ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31,
            2005**
 
 PNM’s
            segments are PNM Electric, PNM Gas and Wholesale. The PNM Electric and
            PNM Gas
            segments are identical to the segments presented above in “Results of
            Operations” for PNMR. The Wholesale segment reported for PNM does not include
            Altura (see Note 2 and Note 3).
 
 PNM’s
            operating revenues decreased by $51.7 million, or 3.1%, from the prior
            year.
            Gross margin increased $23.2 million, or 3.7%, compared to 2005. PNM
            Electric
            segment gross margins increased $3.7 million from the prior year, while
            PNM Gas
            segment gross margins remained flat, as discussed above. PNM Wholesale
            segment
            gross margins increased $19.8 million, resulting predominately from increased
            marketing activity due to first quarter 2006 forward sales, long-term
            contract
            growth, the addition of Luna operations, higher market price spreads
            and greater
            availability at base-load coal plants, partially offset by reduced availability
            at PVNGS and increased retail loads, which caused a decrease in energy
            available
            to sell in the wholesale market.
 
 Total
            operating expenses decreased $80.2 million, or 5.0%, from the prior year,
            of
            which $74.9 million is a decrease in cost of energy included in gross
            margin
            above.
 
 Administrative
            and general costs decreased $3.3 million, or 1.9%, primarily due to lower
            consulting, temporary labor and marketing costs, partially offset by
            increased
            incentive-based compensation and bad debt expenses.
 
 Energy
            Production costs decreased $8.4 million, or 5.1%, as a result of the
            $15.0
            million write-off of a turbine in 2005, partially offset by increased
            outage and
            maintenance costs at base-load power plants of $5.7 million and the addition
            of
            Luna operations of $1.8 million.
 
 Depreciation
            and amortization expenses decreased $16.2 million, or 14.0%, primarily
            as a
            result of an increase in the life expectancy at the SJGS, Afton and Lordsburg
            power plants of $15.5 million, the write-off of software costs in the
            second
            quarter of 2005 of $4.5 million, and reduced expenses on fully depreciated
            assets of $3.2 million, partially offset by increased expenses as a result
            of
            additions to fixed assets of $6.2 million and the addition of an asset
            retirement obligation for an existing asset at Lordsburg of $0.7
            million.
 
 Transmission
            and distribution costs increased $2.7 million, or 4.6%, primarily due
            to higher
            maintenance, material and labor costs.
 
 Taxes
            other than income increased $3.8 million, or 12.2%, due to a general
            increase in
            property taxes from various taxing authorities and an increase in payroll
            taxes
            associated with higher performance-based compensation.
 
 PNM’s
            consolidated income tax expense was $40.0 million for 2006, compared
            to $25.3
            million for 2005. PNM’s effective operating income tax rates for 2006 and 2005
            were 34.47% and 27.01%, respectively. PNM’s effective non-operating income tax
            rates for 2006 and 2005 were 37.62% and 35.59%, respectively.
 
 Effective
            January 1, 2007, TNMP’s New Mexico operations were transferred to PNM
            Electric.
 
 
  A-54
  **RESULTS
            OF OPERATION - TNMP**
 
 **YEAR
            ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31,
            2005**
 
 TNMP
            operates in only one reportable segment, “TNMP Electric.” Results include the
            effect of the purchase accounting on June 6, 2005. Amounts for the period
            January 1 through June 6, 2005 are pre-acquisition and amounts after
            June 6,
            2005 are post-acquisition. (See Note 1.)
 
 TNMP’s
            operating revenues decreased $10.2 million, or 3.8%, from the prior year.
            Gross
            margin decreased $11.3 million, or 6.8%, compared to 2005. The significant
            factors that impacted gross margin include a decrease in revenues due
            to rate
            reductions in conjunction with the acquisition in both Texas and New
            Mexico,
            milder weather resulting in reduced usage, increased transmission expense,
            and
            higher purchase power costs. These decreases were partially offset by
            customer
            growth and higher sales prices.
 
 Total
            operating expenses increased $2.4 million, or 1.1%, from the prior year,
            of
            which $1.1 million is an increase in cost of energy included in gross
            margin
            above.
 
 Administrative
            and general expenses increased $8.8 million, or 35.0%, primarily due
            to
            increased labor, employee benefits, consulting, and insurance expenses
            allocated
            to TNMP from PNMR and higher incentive-based compensation.
 
 TNMP’s
            consolidated income tax expense was $7.3 million in 2006, compared to
            $14.9
            million in 2005. TNMP’s effective operating income tax rates for 2006 and 2005
            were 29.91% and 35.66%, respectively. TNMP’s effective non-operating income tax
            rates for 2006 and 2005 were 34.97% and 34.74%, respectively.
 
 Effective
            January 1, 2007 TNMP’s New Mexico operations were transferred to PNM
            Electric.
 
  A-55
  **RESULTS
            OF OPERATION - PNMR**
 
 **YEAR
            ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31,
            2004**
 
 PNMR’s
            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; ·
                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-56
  **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-57
  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-based 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.
 
 
  A-58
  **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
                  
                  $
                  57,145Commercial
                  
                  
                  51,670Industrial
                  
                  
                  25,189Other
                  
                  
                  20,346$
                  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-59
  The
            following table shows electric sales by customer class:
 
 **TNMP
            Electric Sales ***
 
 **For
                      the period**
                    **June
                      6 - December 31, 2005**(Megawatt
                      hours)Residential
                  
                  
                  1,839,741Commercial
                  
                  
                  1,399,864Industrial
                  
                  
                  1,263,452Other
                  
                  
                  72,2624,575,319
 
 *
            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-60
  **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-61
  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.
 
  A-62
  **Unregulated
            Operations**
 
 **PNM
            Wholesale**
 
 The
            table
            below sets forth the operating results for PNM Wholesale:
  **Year
                        Ended****December
                        31,****2005**
                    
                    **2004**
                    
                    **Variance**(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**
                    **)**
 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
 
  A-63
  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 SO 2 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 SO 2 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.
  A-64
  **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-65
  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 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-66
  *Cumulative
            Effect of a Change in Accounting Principle*
 
 Effective
            January 1, 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. 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-67
  **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-68
  **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-69
  **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 and Unbilled Revenues*
 
 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 the 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 No. 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-70
  *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 the Twin Oaks business and 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 the Twin Oaks business on April 18, 2006 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 PNMR for all periods subsequent to April 18, 2006. The purchase accounting
            entries are reflected on PNMR's financial statements as of the purchase
            date.
 
 The
            acquisition of TNP in 2005 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 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 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 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.
 
 A-71
 *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 and TNMP Plans for
            the
            year ending December 31, 2006 .
            This
            assumption will be 8.75% for both the PNM and TNMP Plans for 2007. 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 8.0% and a premium for
            active
            management of 1.0% 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 2007
            net
            pension income to decrease approximately $4.7 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 2007 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, as revised by SFAS No. 158, “ *Employers’
            Accounting for Defined Benefit Pension and Other Postretirement
            Plans* ” (“SFAS
            158”), 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, as revised, 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 and TNMP Plans to 6.10% at December 31,
            2006 from
            5.75% at December 31, 2005. Decreasing the discount rate by 0.35% would
            have
            increased 2006 pension income for PNM by approximately $0.7 million and
            would
            have no impact on TNMP pension expense.  The discount rate assumption will
            be 6.10% for both the PNM and TNMP plans for 2007.
 
 Based
            on
            an expected rate of return of 8.75%, a discount rate of 6.10% and various
            other
            assumptions, it is estimated that the PNM pension income for the qualified
            and
            non-qualified pension plans will be approximately $3.3 million in 2007
            and $2.5
            million in 2008. It is estimated that TNMP pension income for the qualified
            and
            non-qualified pension plans will be approximately $2.5 million in 2007
            and $2.4
            million in 2008. 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.
 
 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. Note 12 also discusses the material impact of the
            accounting changes to the balance sheets as a result of implementing
            SFAS 158 as
            of December 31, 2006.
  A-72
  *Market
            Risk*
 
 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, 2006, PNMR had cash and short-term investments of $123.4
            million
            compared to $68.2 million in cash and short-term investments at December
            31,
            2005.
 
 Cash
            provided by operating activities for the year ended December 31, 2006
            was $244.4
            million compared to $210.1 million for the year ended December 31, 2005.
            PNMR's
            net earnings excluding non-cash items decreased to $254.9 million for
            the year
            ended December 31, 2006 from $263.2 million for the prior year. The decrease
            in
            net earnings excluding non-cash items was primarily due to the impacts
            from
            PVNGS performance, retail electric rate reductions for PNM and TNMP and
            increased interest expense. The decrease in net earnings excluding non-cash
            items was partially offset by twelve months of earnings at First Choice
            and
            TNMP, compared to seven months of earnings in 2005 and retail load growth.
            The
            decrease in cash from net earnings excluding non-cash items was more
            than offset
            by an increase in cash collections of net receivables that were outstanding
            at
            the end of 2005. Increased PNM Gas net receivables at the end of 2005
            caused by
            higher gas prices and seasonal gas usage were collected during the first
            part of
            2006, along with increased PNM Wholesale net receivables due to increased
            market
            prices and forward sales entered into at the end of 2005 were collected
            in the
            first quarter of 2006.
 
 Cash
            used
            for investing activities was $799.6 million for the year ended December
            31, 2006
            compared to $154.3 million for the year ended December 31, 2005. Cash
            used for
            investing activities in 2006 was driven primarily by the purchase of
            the Twin
            Oaks business for $480.0 million and cash payments of $309.3 million
            for utility
            plant additions, including the Luna plant. Cash used for investing activities
            in
            2005 was primarily for cash payments of $211.2 million for utility plant
            additions, including the Luna plant, which was offset in part by $46.0
            million
            in cash acquired as part of the TNP acquisition.
 
 Cash
            provided by financing activities was $610.4 million for the year ended
            December
            31, 2006 compared to cash used for financing activities of $4.8 million
            for the
            year ended December 31, 2005. The change in cash for financing activities
            was
            due to a combination of factors. In 2006, PNMR borrowed $480.0 million
            in
            short-term debt and used the proceeds to acquire the Twin Oaks business.
            Also in
            2006, PNMR issued common stock for $226.1 million and used the proceeds
            to repay
            a portion of the short-term borrowings for Twin Oaks and borrowed $182.7
            million
            in short-term debt, in part, to fund its construction program. In 2005,
            PNMR
            issued equity-linked units for $339.8 million and a portion of the proceeds
            were
            used to acquire TNP. Also in 2005, PNMR issued $101.2 million of common
            stock,
            redeemed $224.6 million of TNP preferred stock and repaid $399.6 million
            of
            long-term debt related to the acquisition of TNP, 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, which
            did not
            recur in 2006. In addition, PNMR borrowed $237.5 million in short-term
            debt in
            2005, in part, to fund its construction program.
 
 PNM
 
 At
            December 31, 2006, PNM had cash and short-term investments of $11.9 million
            compared to $12.7 million in cash and short-term investments at December
            31,
            2005.
 
 Cash
            provided by operating activities for the year ended December 31, 2006
            was $97.5
            million compared to $171.3 million for the year ended December 31, 2005.
            PNM's
            net earnings excluding non-cash items decreased to $169.0 million for
            the year
            ended December 31, 2006 from $204.2 million for the prior year. The decrease
            in
            net earnings excluding non-cash items was primarily due to the impacts
            from
            PVNGS performance and the retail electric rate reduction, which was partially
            offset by retail load growth. In addition, intercompany cash payments
            for
            employee benefit costs and prepayments for services contributed to the
            decrease
            in cash provided by operating activities.
 
 A-73
 Cash
            used
            for investing activities was $219.2 million for the year ended December
            31, 2006
            compared to $150.9 million for the prior year. The increase in cash used
            for
            investing activities was due primarily to increased utility plant additions
            in
            2006 compared to 2005.
 
 Cash
            flows provided by financing activities were $120.8 million for the year
            ended
            December 31, 2006 compared to cash used for financing activities of $24.1
            million for the prior year. Cash provided by financing activities in
            2006 was
            due primarily to cash received from short-term borrowings of $122.1 million.
            In
            2005, cash received from short-term borrowings of $67.8 million was more
            than
            offset by the payment of $91.5 million in dividends in 2005, including
            $91.0
            million in dividends to PNMR.
 
 TNMP
 
 At
            December 31, 2006, TNMP had cash and short-term investments of $2.5 million
            compared to $16.2 million in cash and short-term investments at December
            31,
            2005.
 
 TNMP's
            cash provided by operating activities for the year ended December 31,
            2006 was
            $33.8 million compared to $67.2 million for the prior year. TNMP's net
            earnings
            excluding non-cash items decreased to $39.3 million for the year ended
            December
            31, 2006 from $66.7 million for the prior year. The decrease in cash
            provided by
            operating activities and the decrease in net earnings excluding non-cash
            items
            was due primarily due to the impacts of rate reductions in both Texas
            and New
            Mexico.
 
 Cash
            used
            for investing activities, which was primarily for utility plant additions,
            was
            $47.6 million for the year ended December 31, 2006, a slight increase
            from $42.8
            million for the prior year.
 
 Cash
            provided by financing activities for year ended December 31, 2006 was
            $0.1
            million compared to cash used for financing activities of $74.0 million
            for the
            prior year. During 2005, TNMP, a wholly owned subsidiary of TNP, paid
            $62.0
            million to redeem a portion of the TNMP common stock held by TNP. TNMP
            also paid
            dividends of $12.0 million to TNP in 2005.
 
 *Pension
            and Other Postretirement Benefits*
 
 PNMR
 
 The
            total
            2006 contributions to the PNM Plans, in addition to contributions to
            the TNMP
            Plans are included in PNMR’s Consolidated Statement of Cash Flows for the year
            ended December 31, 2006. See the PNM and TNMP contribution discussion
            below.
 
 PNM
 
 During
            2006, PNM did not make any contributions to its qualified pension plan
            and does
            not anticipate making any contributions to the qualified pension plan
            in 2007.
            PNM made contributions totaling $6.9 million to its postretirement benefit
            plan
            for the plan year 2006 and expects to make contributions totaling $6.5
            million
            to its postretirement benefit plan in 2007.
 
 TNMP
 
 During
            2006, TNMP did not make any contributions to its qualified pension plan
            and does
            not anticipate making any contributions to the qualified pension plan
            in 2007.
            TNMP made contributions totaling $0.7 million to its postretirement benefit
            plan
            for the plan year 2006 and expects to make contributions totaling $0.6
            million
            to its postretirement benefit plan in 2007.
  A-74
 
 *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, including upgrades relating to pollution
            control, upgrading and expanding the electric and gas transmission and
            distribution systems and purchasing nuclear fuel. Projections for total
            capital
            requirements for 2007, including TNMP and First Choice, are $424.3 million.
            After applying capital trust payments expected to be received of $23.3
            million,
            the net capital requirements are $401.0 million. Projections for construction
            expenditures for 2007 constitute $353.2 million of this total. Total
            capital
            requirements for the years 2007-2011, including TNMP and First Choice,
            are
            projected to be $2,377.9 million. After applying capital trust payments
            expected
            to be received of $146.9 million, the net capital requirements are $2,231.0
            million. Construction expenditures are projected to be $1,952.3 million
            of the
            total. This projection includes $27.9 million for completion of expansion
            at
            Afton. These estimates are under continuing review and subject to on-going
            adjustment.
 
 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, 2006, 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, including the acquisition
            of
            the Twin Oaks business. It is expected that permanent financing for the
            $480
            million purchase price of Twin Oaks will come from the issuance of debt
            and
            equity structured to maintain PNMR’s investment grade rating. As of February 20,
            2007, $230.5 million of the term loan due April 17, 2007 had been repaid
            and
            $249.5 million remained outstanding. The Company anticipates that internal
            cash
            generation and current debt capacity in combination with the Twin Oaks
            permanent
            financing will be sufficient to meet all of its capital requirements
            and
            construction expenditures for the years 2007 through 2011. 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
            2007 are $285.6 million. After applying capital trust payments expected
            to be
            received of $23.3 million, the net capital requirements are $262.3 million.
            Projections for construction expenditures for 2007 constitute $285.1
            million of
            this total. Total capital requirements for the years 2007 through 2011
            are
            projected to be $1,642.8 million. After applying capital trust payments
            expected
            to be received of $146.9 million, the net capital requirements are $1,495.9
            million. Construction expenditures are projected to be $1,640.2 million
            of this
            total. These estimates are under continuing review and subject to on-going
            adjustment. This includes $27.9 million for PNM’s expansion of Afton as
            discussed above. PNM’s capital requirements include $116.0 million for the SJGS
            environmental project to install low NOx combustion control and mercury
            reduction technologies in SJGS Units 1, 2, 3 and 4 as well as equipment
            to
            increase SO 2 controls. The project is scheduled in four phases and completion is anticipated
            in March of 2009. Also included in PNM’s capital requirements are $24.0 million
            for the Rio Puerco second phase loop and $38.0 million to add a 345kv
            switching
            station to Rio Puerco. The second phase loop project will install approximately
            15 miles of gas pipeline parallel to the Rio Puerco Main Line and the
            switching
            station will add transmission capabilities allowing PNM to meet forecasted
            future load growth. The above projections are also subject to on-going
            adjustment.
  A-75
  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 2007 are $46.8 million. Total capital requirements are
            projected to be $219.0 million for the years 2007 through 2011. These
            estimates
            are under continuing review and subject to on-going adjustment.
 
 After
            receipt of required regulatory approvals, including approval from the
            FERC,
            TNMP’s New Mexico and Arizona assets were transferred to PNM effective January
            1, 2007. In accordance with conditions imposed by the FERC on debt previously
            issued by TNMP, the Company committed that an appropriate proportion
            of debt
            issued under those FERC conditions would be retired with cash contributed
            by
            PNMR and that the retired TNMP debt would be equal to, at a minimum,
            the ratio
            of TNMP New Mexico and Arizona property additions to Texas property additions
            funded by such debt. The Company also committed that TNMP debt would
            be retired
            to the extent necessary or advisable to maintain a TNMP equity to debt
            capitalization ratio in excess of 30%, to maintain any required interest
            coverage ratios, and to maintain TNMP’s credit rating. No TNMP debt has yet been
            retired as a result of the asset transfer.
 
 PNMR
 
 *Liquidity*
 
 As
            of
            February 20, 2007, 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
            20, 2007,
            there were no amounts borrowed under the PNMR Facility and there were
            no amounts
            borrowed under the local lines of credit.
 
 At
            February 20, 2007, 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 20, 2007, First Choice had no borrowings
            outstanding under the PNMR Facility; however, First Choice had $2.7 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 20, 2007, there were $270.7 million of borrowings outstanding
            under
            this program. PNMR's agreements with its commercial paper dealers require
            prompt
            notice to the dealers of any change in PNMR’s financial condition that would be
            material to holders or potential holders of the commercial paper, including
            any
            downgrading or notice of potential downgrading in rating.
 
 *Security
            Ratings*
 
 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.
  A-76
  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
 
 *Liquidity*
 
 As
            of
            February 20, 2007, PNM had $413.5 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
            and $13.5 million in local lines of credit. As of February 20, 2007,
            there were
            no amounts borrowed against the local lines of credit or the PNM Facility;
            however, $3.1 million of letters of credit were outstanding, which reduces
            the
            available capacity under the PNM Facility
 
 At
            February 20, 2007, PNM also had a $20.0 million borrowing arrangement
            with PNMR,
            which is not included in the $413.5 million of liquidity arrangements
            discussed
            above. As of February 20, 2007 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
            20, 2007,
            PNM had $226.3 million in commercial paper outstanding under this program.
            PNM's
            agreements with its commercial paper dealers require prompt notice to
            the
            dealers of any change in PNM’s financial condition that would be material to
            holders or potential holders of the commercial paper, including any downgrading
            or notice of potential downgrading in rating.
 
 *Security
            Ratings*
 
 PNMR’s
            ability to access the capital markets at a reasonable cost to meet its
            capital
            needs is dependent upon several factors, including (1) its ability to
            earn a
            fair return on equity, (2) its results of operations, (3) its credit
            ratings,
            (4) receipt of regulatory approvals for its transaction in the capital
            markets,
            and (5) conditions in the financial 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 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, 2006, 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, 2006, Moody’s rated PNM’s senior unsecured notes as Baa2 and its
            preferred stock as Ba1. PNM's commercial paper program is rated P-2 by
            Moody's,
            but was lowered to A-3 from A-2 by S&P in January 2006.
 
 *PNM
            Electric Rate Case*
 
 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
            February 2007, PNM filed a general rate case requesting the NMPRC to
            approve an
            increase in general rates, the first such request in over 20 years. The
            proposed
            increase would go into effect January 1, 2008, at the expiration of the
            current
            four-year rate path, and would impact 436,000 New Mexico customers. If
            electric
            rates were approved as proposed, electric revenues would increase $68.9
            million
            annually. PNM residential electric rates would increase approximately
            13.7
            percent, while most business customers would see rate increases of approximately
            10.3 percent.
 
 A-77
  PNM’s
            electric rate filing also requests NMPRC approval for:
 ·
                a
                    fuel and purchased power cost adjustment
                    clause; ·
                a
                    mechanism that would allow the timely recovery of costs incurred
                    for
                    environmental capital improvements through a bill
                    surcharge; ·
                the
                    introduction of summer and consumption-based rates designed to
                    encourage
                    energy efficiency and better reflect the seasonal nature of PNM’s cost to
                    provide power; and ·
                a
                    return on equity of 10.75 percent. 
 As
            proposed, the environmental improvement rate rider would undergo periodic
            regulatory review and approval to ensure recovery of only the actual
            amount of
            environmental improvement costs. It also would apply only to the additional
            environmental costs incurred between rate cases.
 
 TNMP
 
 TNMP
            is a
            borrower and can issue notes of up to $100.0 million under the PNMR Facility.
            Any borrowings made by TNMP under this sublimit are not guaranteed by
            PNMR. At
            February 20, 2007, TNMP had no outstanding borrowings under the PNMR
            Facility,
            but did have $2.0 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.
 
 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, 2006, S&P rated TNMP’s senior unsecured notes at BBB. As
            of December 31, 2006, 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, a 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 $165.1 million as of December
            31, 2006
            and $170.9 million as of December 31, 2005.
 
 *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-78
 
 PNMR
 
 The
            following table sets forth PNMR’s long-term contractual obligations as of
            December 31, 2006:
 
 **Payments
                      Due****Less
                      than**
                  
                  
                  
                  
                  
                  **After****Contractual
                      Obligations**
                  
                  **Total**
                  
                  **1
                      year**
                  
                  **2-3
                      years**
                  
                  **4-5
                      years**
                  
                  **5
                      years**(In
                      thousands)Long-Term
                      Debt (a)
                  
                  $
                  1,760,593
                  
                  $
                  -
                  
                  $
                  727,473
                  
                  $
                  347,250
                  
                  $
                  685,870Interest
                      on Long-Term Debt (b)
                  
                  
                  827,898
                  
                  
                  102,750
                  
                  
                  164,191
                  
                  
                  94,330
                  
                  
                  466,627Equity-Linked
                      Units ForwardContracts
                  
                  
                  10,055
                  
                  
                  6,095
                  
                  
                  3,960
                  
                  
                  -
                  
                  
                  -Interest
                      on Forward Contracts
                  
                  
                  294
                  
                  
                  251
                  
                  
                  43
                  
                  
                  -
                  
                  
                  -Capital
                      Leases
                  
                  
                  9,339
                  
                  
                  3,298
                  
                  
                  4,021
                  
                  
                  1,749
                  
                  
                  271Operating
                      Leases
                  
                  
                  329,167
                  
                  
                  30,788
                  
                  
                  59,686
                  
                  
                  53,829
                  
                  
                  184,864Purchased
                      Power Agreements
                  
                  
                  257,646
                  
                  
                  90,785
                  
                  
                  60,217
                  
                  
                  19,944
                  
                  
                  86,700Coal
                      Contracts (c)
                  
                  
                  1,229,393
                  
                  
                  70,562
                  
                  
                  144,627
                  
                  
                  149,359
                  
                  
                  864,845Other
                      Purchase Obligations (d)
                  
                  
                  1,959,900
                  
                  
                  360,800
                  
                  
                  707,200
                  
                  
                  891,900
                  
                  
                  -Total
                  
                  $
                  6,384,285
                  
                  $
                  665,329
                  
                  $
                  1,871,418
                  
                  $
                  1,558,361
                  
                  $
                  2,289,177
 
 (a)
                Represents
                    total long-term debt excluding unamortized discount of $0.7
                    million. (b)
                Represents
                    the annual interest expense on fixed and variable rate debt.
                    Projections
                    of interest expense on variable rate debt are based on interest
                    rates as
                    of December 31, 2006. (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. 
 PNM
 
 The
            following table sets forth PNM’s long-term contractual obligations as of
            December 31, 2006:
 
 **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)
                  
                  
                  695,569
                  
                  
                  53,708
                  
                  
                  94,217
                  
                  
                  81,017
                  
                  
                  466,627Operating
                      Leases
                  
                  
                  307,145
                  
                  
                  27,075
                  
                  
                  53,395
                  
                  
                  49,200
                  
                  
                  177,475Capital
                      Leases
                  
                  
                  2,306
                  
                  
                  710
                  
                  
                  1,180
                  
                  
                  361
                  
                  
                  55Purchased
                      Power Agreements
                  
                  
                  151,623
                  
                  
                  12,582
                  
                  
                  29,752
                  
                  
                  22,589
                  
                  
                  86,700Coal
                      Contracts (c)
                  
                  
                  699,974
                  
                  
                  50,762
                  
                  
                  106,127
                  
                  
                  112,159
                  
                  
                  430,926Other
                      Purchase Obligations (d)
                  
                  
                  1,646,900
                  
                  
                  291,800
                  
                  
                  577,000
                  
                  
                  778,100
                  
                  
                  -Total
                  
                  $
                  4,489,387
                  
                  $
                  436,637
                  
                  $
                  1,161,671
                  
                  $
                  1,043,426
                  
                  $
                  1,847,653
 
 (a)
                Represents
                    total long-term debt excluding unamortized premium of $0.3
                    million. (b)
                Represents
                    the annual interest expense on fixed and variable rate debt.
                    Projections
                    of interest expense on variable rate debt are based on interest
                    rates as
                    of December 31, 2006. (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.   A-79
 TNMP
 
 The
            following table sets forth TNMP’s long-term contractual obligations as of
            December 31, 2006:
 
 **Payments
                      Due****Contractual
                      Obligations**
                  
                  **Total**
                  
                  **Less
                      than**
                    **1
                      year**
                  
                  **2-3
                      years**
                  
                  **4-5
                      years**
                  
                  **After**
                    **5
                      years**(In
                      thousands)Long-Term
                      Debt (a)
                  
                  $
                  416,626
                  
                  $
                  -
                  
                  $
                  416,626
                  
                  $
                  -
                  
                  $
                  -Interest
                      on Long-Term Debt (b)
                  
                  
                  49,072
                  
                  
                  25,728
                  
                  
                  23,344
                  
                  
                  -
                  
                  
                  -Operating
                      Leases
                  
                  
                  757
                  
                  
                  374
                  
                  
                  366
                  
                  
                  2
                  
                  
                  15Capital
                      Leases
                  
                  
                  6,909
                  
                  
                  2,523
                  
                  
                  2,782
                  
                  
                  1,388
                  
                  
                  216Other
                      Purchase Obligations (c)
                  
                  
                  219,700
                  
                  
                  47,500
                  
                  
                  92,200
                  
                  
                  80,000
                  
                  
                  -Total
                  
                  $
                  693,064
                  
                  $
                  76,125
                  
                  $
                  535,318
                  
                  $
                  81,390
                  
                  $
                  231
 
 (a)
                Represents
                    total long-term debt excluding unamortized discount of $0.5
                    million. (b)
                Represents
                    the annual interest expense on fixed and variable rate debt.
                    Projections
                    of interest expense on variable rate debt are based on interest
                    rates as
                    of December 31, 2006. (c)
                Represents
                    commitments for capital expenditures, pension and postretirement
                    benefit
                    obligations and other obligations. 
 *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.
 
 PNMR’s
            term loan agreement for financing the acquisition of Twin Oaks in April
            2006
            (see Note 2) includes customary covenants that are substantially the
            same as
            those covenants included in the PNMR Facility, including requirements
            that PNMR
            maintain a debt-to-capital ratio, inclusive of certain off-balance sheet
            debt
            and adjusted for other factors, of less than 65%. The term loan agreement
            includes customary events of default, including a cross default provision
            and a
            change in control provision. If an event of default occurs, the administrative
            agent may, or upon the request and direction of lenders holding more
            than 50% of
            the outstanding term loan shall, declare the unpaid principal and interest
            on
            the term loan to be due and payable. Such acceleration will occur automatically
            in the event of an insolvency or bankruptcy default.
 
 Twin
            Oaks
            has a fuel supply agreement to supply its lignite coal needs. This coal
            contract
            has certain purchase obligations even if no deliveries are made. As of
            November
            1, 2006, Twin Oaks has met its minimum purchase obligations for 2006.
            Based on
            forecasted future prices, for the years 2007 through 2008, Twin Oaks
            must make
            minimum payments of $39.2 million. For the years 2009 through 2010, Twin
            Oaks
            must make payments of $37.9 million. For years thereafter, Twin Oaks
            has minimum
            payment requirements of $452.3 million. PNMR issued a parental guarantee
            on
            behalf of Twin Oaks’ owner, Altura, guaranteeing Altura’s performance under this
            fuel supply agreement.
 
 A-80
 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.
 
 *Financing
            Activities*
 
 PNMR
 
 *Twin
            Oaks Financing*
 
 On
            April
            18, 2006, PNMR entered into a short-term loan agreement for temporary
            financing
            of the Twin Oaks acquisition (see Note 2). Under the term loan agreement,
            PNMR
            was permitted to borrow up to $480.0 million in a single draw on or after
            April
            18, 2006, to finance the acquisition of Twin Oaks and related expenses.
            Term
            loans made under this agreement bear interest at a base rate (the greater
            of the
            prime rate in effect and the Federal Funds rate plus 1⁄2 of 1%) or an adjusted
            Eurodollar rate (equal to the British Bankers Association LIBOR rate
            plus an
            additional percentage based on PNMR’s then current long-term senior unsecured
            non-credit enhanced debt rating). On April 18, 2006, PNMR borrowed $480.0
            million under the term loan agreement. PNMR must repay the loan by April
            17,
            2007, unless accelerated in accordance with the terms of the agreement
            or
            prepaid in whole or in part upon the issuance of certain additional equity
            or
            debt. As of February 20, 2007, $230.5 million of the term loan had been
            repaid
            and $249.5 million remained outstanding. It is anticipated that this
            remaining
            principal amount will be repaid through the issuance of additional debt
            and
            equity structured to maintain PNMR’s investment grade rating.
  A-81
 
 *Shelf
            Registration Statement*
 
 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, 2006, PNMR had
            approximately $400.0 million of remaining unissued securities under this
            registration statement.
 
 *Interest
            Rate Swaps*
 
 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, 2006, to 6.01%. The swap is accounted for
            as a
            fair-value hedge with a negative fair-market value (liability position)
            of
            approximately $4.2 million as of December 31, 2006.
 
 *Forward
            Starting Swaps*
 
 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%, to 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, 2006, 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. These two interest rate swaps were sold
            on May 19,
            2006. The current amount recorded in other comprehensive income will
            be
            recognized in income over a 3 year period ending in November 2009.
 
 *Sale
            of PNMR Common Stock*
 
 Pursuant
            to the terms of the PNM Direct Plan, PNMR began offering new shares of
            PNMR
            common stock through the plan beginning in June 2006. PNMR may also waive
            the
            maximum investment limit upon request in individual cases pursuant to
            the terms
            of the plan. In August 2006, PNMR entered into an equity distribution
            agreement
            to offer and sell up to 8 million shares of PNMR common stock from time
            to time.
            The agreement provides that PNMR will not sell more shares than needed
            for the
            aggregate gross proceeds from such sales to reach $200.0 million. For
            the year
            ended December 31, 2006. PNMR had sold a combined total of 2.0 million
            shares of
            its common stock through the PNMR Direct Plan and the equity distribution
            agreement for net proceeds of $55.3 million, at a weighted average price
            of
            $27.63.
 
 In
            December 2006, PNMR issued 5,750,000 shares of its common stock in a
            public
            offering at $30.79 per share. PNMR received net proceeds from this offering,
            after deducting underwriting discounts and commissions and estimated
            expenses,
            of approximately $170.8 million. PNMR used the net proceeds from these
            stock
            sales to prepay debt associated with the acquisition of Twin
            Oaks.
  A-82
 
 *TNP
            Acquisition*
 
 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.
 
 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
            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 and certain restrictions
            applicable to PNMR under these securities.
 
 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, 2006, 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. TNMP 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. See “Capital Requirements, TNMP” above for
            additional information related to TNMP’s commitment to maintain certain
            capitalization ratios.
 
 *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 its operating subsidiaries.
 
 PNM
            paid
            cash dividends of $0.0 million, $91.0 million and $23.0 million to PNMR
            for the
            years ended December 31, 2006, 2005 and 2004, respectively. TNMP paid
            no cash
            dividends to PNMR in 2006. In 2005, TNMP paid cash dividends of $12.0
            million to
            its parent company. Altura paid $5.0 million in cash dividends to PNMR
            in
            2006.
 
 A-83
 A
            NMPRC
            order imposes 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 pay dividends from 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. On February 13, 2007, the Board of PNMR approved
            a common
            stock dividend of $0.23 per share for an indicated annual dividend of
            $0.92 per
            share.
 
 PNMR
 
 PNMR’s
            capitalization ratios, including current maturities of long-term debt,
            at
            December 31, 2006 and December 31, 2005, are shown below:
 
 **December
                      31,**
                  
                  **December
                      31,****2006**
                  
                  **2005**Common
                      Equity
                  48.8%
                  
                  42.3%Preferred
                      Stock of Subsidiary
                  0.3%
                  
                  0.4%Long-term
                      Debt
                  50.9%
                  
                  57.3%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 $165.1 million as of December 31, 2006 and $170.9
            million as of December 31, 2005.
 
 The
            change in PNMR’s capitalization ratios is due primarily to the issuance of 7.9
            million shares of common stock during 2006.
 
 PNM
 
 PNM’s
            capitalization ratios, including current maturities of long-term debt,
            at
            December 31, 2006 and December 31, 2005, are shown below:
 
 **December
                      31,**
                  
                  **December
                      31,****2006**
                  
                  **2005**Common
                      Equity
                  54.1%
                  
                  50.2%Preferred
                      Stock
                  0.5%
                  
                  0.6%Long-term
                      Debt
                  45.4%
                  
                  49.2%Total
                      Capitalization
                  100.0%
                  
                  100.0%
 
  A-84
  
 TNMP
 
 TNMP’s
            capitalization ratios, including current maturities of long-term debt,
            at
            December 31, 2006 and December 31, 2005, are shown below:
 
 **December
                      31,**
                  
                  **December
                      31,****2006**
                  
                  **2005**Common
                      Equity
                  55.0%
                  
                  54.6%Long-term
                      Debt
                  45.0%
                  
                  45.4%Total
                      Capitalization
                  100.0%
                  
                  100.0%
 
 **COMPETITION**
 
 Under
            current law, TNMP 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. 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 2002. The Company is exposed
            to
            competition in the unregulated Texas retail electricity market through
            First
            Choice, which serves customers at competitive rates. In order to compete
            effectively in the Texas retail electricity market, First Choice must
            be able to
            attract and retain customers on the basis of cost and service, while
            managing
            the cost of its energy supply.
 
 Since
            2002, electric consumers in Texas have been encouraged to switch from
            their
            traditional retail energy provider, such as TNMP, to a competitive 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 expired on December 31, 2006. On
            January 1,
            2007 new providers of last resort were 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 ceased 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
            Matters*
 
 See
            Notes
            16, 17 and 18 for a discussion of commitments and contingencies, rate
            and
            regulatory matters and environmental issues facing the Company.
  A-85
  **NEW
            ACCOUNTING STANDARDS**
 
 See
            Note
            21 for a discussion of FIN 48, “ *Accounting
            for Uncertainty in Income Taxes* ,”
which
            was issued by the FASB in July 2006, SFAS 157, “ *Fair
            Value Measurements* ,”
issued
            by the FASB in September 2006 and SFAS 159, “ *The
            Fair Value Option for Financial Assets and Financial
            Liabilities* ,”
issued
            by the FASB in February 2007. The Company is currently evaluating the
            impact of
            these accounting pronouncements, if any, on its financial statements.
 
 The
            Company has evaluated SFAS 155, “ *Accounting
            for Certain Hybrid Instruments* ,”
issued
            by the FASB in February 2006 and SAB 108, “ *Considering
            the Effects of Prior Year Misstatements When Quantifying Misstatements
            in the
            Current Year Financial Statements* ,”
issued
            by the SEC staff in September 2006, and determined these two new pronouncements
            do not have a material impact on the Company’s financial statements. See Note 13
            and Note 12, respectively, for a discussion on the impact to the financial
            statements for SFAS 123R and SFAS 158.
 
 **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
                      risk that EnergyCo is unable to identify and implement profitable
                      acquisitions, ·
                  The
                      potential unavailability of cash from PNMR’s subsidiaries due to
                      regulatory, statutory and contractual
                      restrictions, ·
                  The
                      outcome of any appeals of the PUCT order in the stranded cost
                      true-up
                      proceeding, ·
                  The
                      ability of First Choice to attract and retain
                      customers, ·
                  Changes
                      in ERCOT protocols, ·
                  Changes
                      in the cost of power acquired by First
                      Choice, ·
                  Collections
                      experience, ·
                  Insurance
                      coverage available for claims made in
                      litigation, ·
                  Fluctuations
                      in interest rates, ·
                  Conditions
                      in the financial markets affecting PNMR’s permanent financing for the Twin
                      Oaks power plant acquisition, ·
                  Weather, ·
                  Water
                      supply, ·
                  Changes
                      in fuel costs, ·
                  Availability
                      of fuel supplies, ·
                  The
                      effectiveness of risk management and commodity risk
                      transactions, ·
                  Seasonality
                      and other changes in supply and demand in the market for electric
                      power, ·
                  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,   A-86
 
 ·
                  The
                      risk that the Company and its subsidiaries may have to commit
                      to
                      substantial capital investments and additional operating costs
                      to comply
                      with new environmental control requirements including possible
                      future
                      requirements to address concerns about global climate
                      change, ·
                  The
                      risks associated with completion of generation, including pollution
                      control equipment at SJGS and the expansion of the Afton Generating
                      Station, transmission, distribution and other projects, 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, and ·
                  The
                      performance of state, regional and national
                      economies.
 See
            Item
            7A. “Quantitative and Qualitative Disclosure About Market Risk” for information
            about the risks associated with the use of derivative financial
            instruments.
 
 **SECURITIES
            ACT DISCLAIMER**
 
 Certain
            securities, 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.
 
 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 Director of Internal Audit
            and the
            Director of Financial Risk Management, which is assigned responsibility
            for
            establishing and enforcing the policies, procedures and limits and evaluating
            the risks inherent in proposed transactions, on an enterprise-wide
            basis.
 
 The
            RMC’s
            responsibilities specifically include: establishment of a general policy
            regarding risk exposure levels and activities in each of the business
            segments;
            authority to approve the types of instruments traded; authority to establish
            a
            general policy regarding counterparty exposure and limits; authorization
            and
            delegation of transaction limits; review and approval of controls and
            procedures; review and approval of models and assumptions used to calculate
            mark-to-market and risk exposure; authority to approve and open brokerage
            and
            counterparty accounts; review of hedging and risk activities; and quarterly
            reporting to the 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).
  A-87
  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 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. 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.
 
 *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.
 
 PNMR
 
 The
            acquisition of TNP occurred on June 6, 2005; therefore First Choice activity
            is
            included in the PNMR activity from June 6, 2005.
  A-88
  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,****2006**
                  
                  **2005**(In
                      thousands)Mark-to-Market
                      Energy Contracts:Current
                      asset
                  
                  $
                  43,680
                  
                  $
                  21,857Long-term
                      asset
                  
                  
                  10,982
                  
                  
                  21,292Total
                      mark-to-market assets
                  
                  
                  54,662
                  
                  
                  43,149Current
                      liability
                  
                  
                  (42,020
                  )
                  
                  (17,718
                  )Long-term
                      liability
                  
                  
                  (9,176
                  )
                  
                  (20,903
                  )Total
                      mark-to-market liabilities
                  
                  
                  (51,196
                  )
                  
                  (38,621
                  )Net
                      fair value of mark-to-market energy contracts
                  
                  $
                  3,466
                  
                  $
                  4,528
 
 The
            mark-to-market energy transactions represent net assets at December 31,
            2006 and
            December 31, 2005 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,****2006**
                  
                  **2005**(In
                      thousands)Sources
                      of Fair Value Gain/(Loss):Fair
                      value at beginning of year
                  
                  $
                  4,528
                  
                  $
                  2,073Amount
                      realized on contracts deliveredduring
                      period
                  
                  
                  (6,722
                  )
                  
                  (3,673
                  )Changes
                      in fair value
                  
                  
                  5,660
                  
                  
                  6,128Net
                      fair value at end of period
                  
                  $
                  3,466
                  
                  $
                  4,528Net
                      change recorded as mark-to-market
                  
                  $
                  (1,062
                  )
                  $
                  2,455
 
 The
            net
            change in fair value on PNMR’s commodity derivative instruments designated as
            hedging instruments is summarized as follows:
 
 **Year
                      Ended****December
                      31,****2006**
                  
                  **2005****Type
                      of Derivative**
                  
                  **Hedge
                      Instruments**(In
                      thousands)Change
                      in fair value of energy contracts
                  
                  $
                  27,932
                  
                  $
                  18,015Change
                      in fair value of gas fixed for float swaps
                  
                  
                  (22,857
                  )
                  
                  797Change
                      in the fair value of options
                  
                  
                  988
                  
                  
                  (1,097
                  )Net
                      change in fair value
                  
                  $
                  6,063
                  
                  $
                  17,715
 
  A-89
  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** **,
            2006**
 
 **Maturities****Less
                      than****1
                      Year**
                  
                  **1-3
                      Years**
                  
                  **4+
                      Years**
                  
                  **Total**(In
                      thousands)$1,660
                  
                  $1,530
                  
                  $276
                  
                  $3,466
 
 As
            of
            December 31, 2006, a decrease in market pricing of PNM’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%.
 
 Management
            evaluates the availability of market data for the Company's commodity
            derivative
            instruments. As of December 31, 2006, Risk Management has established
            that valid
            market pricing exists for gas swap commodities for up to 5 years; as
            of December
            31, 2005, valid market price for gas swap commodities was available for up
            to 18-months.  The change in liquidity periods is a Change in Accounting
            Estimate under SFAS No. 154, *Accounting
            Changes and Error Corrections* .
            The
            effect on income from continuing operations and net income was an increase
            of $2.5 million. Fluctuating commodity prices on open positions prevent
            the
            Company from predicting with certainty the future impact of the change
            in
            estimate.
 
 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,****2006**
                  
                  **2005**(In
                      thousands)Mark-to-Market
                      Energy Contracts:Current
                      asset
                  
                  $
                  21,310
                  
                  $
                  10,309Long-term
                      asset
                  
                  
                  10,592
                  
                  
                  21,292Total
                      mark-to-market assets
                  
                  
                  31,902
                  
                  
                  31,601Current
                      liability
                  
                  
                  (20,623
                  )
                  
                  (8,440
                  )Long-term
                      liability
                  
                  
                  (8,694
                  )
                  
                  (20,903
                  )Total
                      mark-to-market liabilities
                  
                  
                  (29,317
                  )
                  
                  (29,343
                  )Net
                      fair value of mark-to-market energy contracts
                  
                  $
                  2,585
                  
                  $
                  2,258
 
 The
            mark-to-market energy transactions represent net assets at December 31,
            2006 and
            December 31, 2005 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-90
  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,****2006**
                  
                  **2005**(In
                      thousands)Sources
                      of Fair Value Gain/(Loss):Fair
                      value at beginning of year
                  
                  $
                  2,258
                  
                  $
                  2,073Amount
                      realized on contracts deliveredduring
                      period
                  
                  
                  (144
                  )
                  
                  (2,319
                  )Changes
                      in fair value
                  
                  
                  471
                  
                  
                  2,504Net
                      fair value at end of period
                  
                  $
                  2,585
                  
                  $
                  2,258Net
                      change recorded as mark-to-market
                  
                  $
                  327
                  
                  $
                  185
 
 The
            net
            change in fair value on PNM’s commodity derivative instruments designated as
            hedging instruments are summarized as follows:
 
 **Year
                      Ended****December
                      31,****2006**
                  
                  **2005****Type
                      of Derivative**
                  
                  **Hedge
                      Instruments**(In
                      thousands)Change
                      in fair value of energy contracts
                  
                  $
                  (5,210
                  )
                  $
                  18,015Change
                      in fair value of gas fixed for float swaps
                  
                  
                  (22,810
                  )
                  
                  1,684Net
                      change in fair value
                  
                  $
                  (28,020
                  )
                  $
                  19,699
 
 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** **,
            2006**
 
 **Maturities****Less
                      than****1
                      Year**
                  
                  **1-3
                      Years**
                  
                  **4+
                      Years**
                  
                  **Total**(In
                      thousands)$687
                  
                  $1,622
                  
                  $276
                  
                  $2,585
 
 As
            of
            December 31, 2006, 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%.
 
 *PNM
            Wholesale*
 
 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. The Company utilizes the Monte Carlo
            simulation
            model of VaR. The Monte Carlo model utilizes a random generated simulation
            based
            on historical volatility to generate portfolio values. VaR models are
            relatively
            sophisticated. The quantitative risk information, however, is limited
            by
   A-91
  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 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.
 
 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 is $5.0 million. For the year ended December 31, 2006,
            the
            average VaR amount for these transactions was $1.3 million, with high
            and low
            VaR amounts for the period of $3.7 million and $0.4 million, respectively.
            The
            VaR amount for these transactions at December 31, 2006 was $0.8 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
            zero, respectively. The total VaR amount for these transactions at December
            31,
            2005 was $3.5 million.
 
 *First
            Choice*
 
 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 customers, 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.
 
 *Credit
            Risk*
 
 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 procedures in place to
            ensure
            that increases in credit risk measures that exceed the prescribed limits
            are
            reviewed and, if deemed necessary, acted upon to reduce exposures.
  A-92
  The
            following table provides information related to Wholesale’s credit exposure as
            of December 31, 2006. The Company does not hold any credit collateral
            as of
            December 31, 2006. 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 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, 2006**
 
 **Net****(b)**
                  
                  **Number**
                  
                  **Exposure****Net**
                  
                  **of**
                  
                  **of****Credit**
                  
                  **Counter**
                  
                  **Counter-****Risk**
                  
                  **-parties**
                  
                  **parties****Rating
                      (a)**
                  
                  **Exposure**
                  
                  **>10%**
                  
                  **>10%**(Dollars
                      in thousands)Investment
                      grade
                  
                  $
                  104,387
                  
                  
                  2
                  
                  $
                  48,792Non-investment
                      grade
                  
                  
                  491
                  
                  
                  -
                  
                  
                  -Internal
                      ratingsInvestment
                      grade
                  
                  
                  153
                  
                  
                  -
                  
                  
                  -Non-investment
                      grade
                  
                  
                  3,595
                  
                  
                  -
                  
                  
                  -Total
                  
                  $
                  108,626
                  
                  
                  
                  
                  $
                  48,792
 
 (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-93
  **PNM
            Wholesale**
 **Maturity
            of Credit Risk Exposure**
 **December
            31, 2006**
 
 **Total****Less
                      than**
                  
                  
                  
                  
                  
                  **Net****Rating**
                  
                  **2
                      Years**
                  
                  **2-5
                      Years**
                  
                  **>5
                      Years**
                  
                  **Exposure**(In
                      thousands)Investment
                      grade
                  
                  $
                  92,372
                  
                  $
                  10,992
                  
                  $
                  1,023
                  
                  $
                  104,387Non-investment
                      grade
                  
                  
                  491
                  
                  
                  -
                  
                  
                  -
                  
                  
                  491Internal
                      ratingsInvestment
                      grade
                  
                  
                  153
                  
                  
                  -
                  
                  
                  -
                  
                  
                  153Non-investment
                      grade
                  
                  
                  3,595
                  
                  
                  -
                  
                  
                  -
                  
                  
                  3,595Total
                  
                  $
                  96,611
                  
                  $
                  10,992
                  
                  $
                  1,023
                  
                  $
                  108,626
 
 The
            Company provides for losses due to market and credit risk. PNM Wholesale
            credit
            risk with its largest counterparty as of December 31, 2006 and December
            31, 2005
            was $29.7 million and $20.5 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. 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, 2006, 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 $20.9 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, 2006 was $18.4 million and the tenor of
            these
            exposures is less than two years.
 
 *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 1.8%, or $17.8
            million, if interest rates were to decline by 50 basis points from their
            levels
            at December 31, 2006. At December 31, 2006, the fair value of PNM's
            long-term debt was approximately $993.7 million as compared to a book value
            of $987.2 million. 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.
   A-94
  PNM’s
            $146.0 million, 2.1% pollution control bonds due in 2033 were required
            to be
            remarketed in April 2006. Following a successful remarketing, the interest
            rate
            on the pollution control bonds change to a fixed rate of 4.875%
            annually.
 
 During
            the year ended December 31, 2006, PNM contributed cash of approximately
            $4.3
            million to the PVNGS decommissioning trust. PNM contributed $6.7 million
            to
            other post retirement benefits trust. PNM did not make any contributions
            to the
            pension trust. The securities held by the trusts had an estimated fair
            value of
            $680.7 million at December 31, 2006, of which approximately 24.4% 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, 2006, the decrease in the fair value
            of the
            securities would be 3.6% or $6.0 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 0.6%, or $2.6
            million, if interest rates were to decline by 50 basis points from their
            levels
            at December 31, 2006. At December 31, 2006, the fair value of TNMP's
            long-term
            debt was approximately $422.6 million as compared to a book value of
            $420.5
            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, 2006, TNMP contributed cash of approximately
            $0.7
            million to other postretirement benefits for plan year 2006. The securities
            held
            by the trusts had an estimated fair value of $89.6 million at December
            31, 2006,
            of which approximately 26.9% were fixed-rate debt securities that subject
            TNMP
            to risk of loss of fair value with movements in market interest rates.
            If rates
            were to increase by 50 basis points from their levels at December 31,
            2006, the
            decrease in fair value of the fixed-rate securities would be approximately
            2.9%,
            or $0.7 million. TNMP, therefore, is at risk for shortfalls in its funding
            of
            its obligations due to investment losses. TNMP does not believe that
            long-term
            market returns over the period of funding will be less than required
            for TNMP to
            meet its obligations. However, this belief is based on assumptions about
            future
            returns that are inherently uncertain.
 
 *Equity
            Market Risk*
 
 PNMR
 
 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. 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, 2006.
            PNMR
            cannot predict when or if it will receive a return of the cash value
            of its
            investment in Wood River.
 
 A-95
 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, 2006. These equity securities also
            expose the
            Company to losses in fair value. Approximately 62.0% of the securities
            held by
            the various trusts were equity securities as of December 31, 2006. 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, 2006 .
            These
            equity securities also expose the Company to losses in fair value. Approximately
            52.7% of the securities held by the various trusts were equity securities
            as of
            December 31, 2006. TNMP does not recover or earn a return through rates
            on any
            losses or gains on these equity securities.
   A-96
  **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.BART
                    Best
                        Available Retrofit TechnologiesBLM
                    U.S.
                        Department of the Interior Bureau of Land ManagementBoard
                    Board
                        of DirectorsBTU
                    British
                        Thermal UnitCal
                        PX
                    California
                        Power ExchangeCal
                        ISO
                    California
                        Independent System OperatorCascade
                    Cascade
                        Investment, L.L.C.Company
                    PNM
                        Resources, Inc. and SubsidiariesCongress
                    United
                        States CongressConstellation
                    Constellation
                        Energy Commodities Group, Inc.Decatherm
                    1,000,000
                        BTUsDelta
                    Delta-Person
                        Limited PartnershipDOE
                    Department
                        of EnergyDuke
                    Duke
                        Energy CorporationEaR
                    Earnings
                        at RiskECJV
                    ECJV
                      Holdings, L.L.C.EEI
                    Edison
                        Electric InstituteEIP
                    Eastern
                        Interconnection ProjectEITF
                    Emerging
                        Issues Task ForceEnergyCo
                    Joint
                        Venture between PNMR and ECJVEPE
                    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 SubsidiariesFIN
                    FASB
                        Interpretation NumberFIP
                    Federal
                        Implementation PlanFour
                        Corners
                    Four
                        Corners Power PlantFPL
                    FPL
                        Energy New Mexico Wind, LLCGAAP
                    Generally
                        Accepted Accounting Principles in the UnitedStates
                        of America
  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.IRS
                  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 DepartmentNOPR
                  Notice
                      of Proposed RulingNRC
                  United
                      States Nuclear Regulatory CommissionNSPS
                  New
                      Source Performance StandardsNSR
                  New
                      Source ReviewNYMEX
                  New
                      York Merchantile ExchangeOASIS
                  Open
                      Access Same Time Information SystemOATT
                  Open
                      Access Transmission TariffOPEB
                  Other
                      Post Employment BenefitsO&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 AgreementPSA
                  Power
                      Supply AgreementPUCT
                  Public
                      Utility Commission of TexasPUHCA
                  The
                      Public Utility Holding Company ActPVNGS
                  Palo
                      Verde Nuclear Generating StationReeves
                  Reeves
                      Generating StationREC
                  Renewable
                      Energy CertificateREP
                  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 OrganizationSAB
                  SEC
                      Staff Accounting BulletinSCE
                  Southern
                      California Edison CompanySCPPA
                  Southern
                      California Public Power AuthoritySDG&E
                  San
                      Diego Gas and Electric Company
 
  B-2
   
 SEC
                  United
                      States Securities and Exchange CommissionSenate
                      Bill 7
                  Legislation
                      that established retail competition in TexasSFAS
                  Statement
                      of Financial Accounting StandardsSJCC
                  San
                      Juan Coal CompanySJGS
                  San
                      Juan Generating StationSO2
                  Sulfur
                      DioxideS&P
                  Standard
                      and Poors Ratings ServicesTCEQ
                  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 RiskVCA
                  Voluntary
                      Compliance AgreementWood
                      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-149Schedule
                      I Condensed Financial Information of Parent Company
                  B-151Schedule
                      II Valuation and Qualifying Accounts
                  B-155
 
  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,
            2006.
 
 Management
            has excluded Twin Oaks from their report on internal control over financial
            reporting. The financial statements of Twin Oaks reflect total assets
            and
            revenues constituting 12 and 5 percent, respectively, of the related
            consolidated financial statement amounts as of and for the year ended
            December
            31, 2006. The Company has disclosed the material change in the Company’s
            internal control over financial reporting due to the acquisition, which
            occurred
            April 18, 2006.
 
 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,
            2006.
 
 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, 2006, 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 Twin Oaks which was acquired on April 18, 2006
            and whose
            financial statements reflect total assets and revenues constituting 12
            and 5
            percent, respectively, of the related consolidated financial statement
            amounts
            as of and for the year ended December 31, 2006. Accordingly, our audit
            did not
            include the internal control over financial reporting at Twin Oaks. 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, 2006 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, 2006, based
            on the
            criteria established in *Internal
            Control—Integrated Framework* issued
            by the Committee of Sponsoring Organizations of the Treadway Commission.
  B-7
  We
            have
            also audited, in accordance with the standards of the Public Company
            Accounting
            Oversight Board (United States), the consolidated financial statements
            and
            financial statement schedules  as
            of and
            for the year ended December 31, 2006 of the Company and our reports dated
            February 28, 2007 expressed an unqualified opinion on those consolidated
            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* and PNM
            Resources, Inc.’s acquisition of TNP Enterprises, Inc. in 2005, and the adoption
            of Statement of Financial Accounting Standards No. 123 (revised 2004), *Share-Based
            Payment* and
            Statement of Financial Accounting Standards No. 158, *Employers'
            Accounting for Defined Benefit Pension and Other Postretirement Plans
            (an
            amendment of FASB Statements No. 87, 88, 106, and 132R* in
            2006.
 
 
 /s/
            DELOITTE & TOUCHE LLP
  Dallas,
            Texas
 February
            28, 2007
 
 
  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, 2006, 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, 2006 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, 2006, 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
            and
            financial statement schedules  as
            of and
            for the year ended December 31, 2006 of the Company and our reports dated
            February 28, 2007 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,
            and the adoption of Statement of Financial Accounting Standards No. 123
            (revised
            2004), *Share-Based
            Payment* and
            Statement of Financial Accounting Standards No. 158, *Employers'
            Accounting for Defined Benefit Pension and Other Postretirement Plans
            (an
            amendment of FASB Statements No. 87, 88, 106, and 132R* in
            2006.
 
 /s/
            DELOITTE & TOUCHE LLP
 
 Dallas,
            Texas
 February
            28, 2007
  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, 2006 and 2005, 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, 2006. 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, 2006 and 2005, and the results of their operations and
              their cash
              flows for each of the three years in the period ended December 31,
              2006, 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 Financial Accounting Standards Board Financial Interpretation
              No. 47, *Accounting
              for Conditional Asset Retirement Obligations* in
              2005.
              As discussed in Notes 13 and 12, respectively, the Company adopted
              Statement of
              Financial Accounting Standards No. 123 (revised 2004), *Share-Based
              Payment* and
              Statement of Financial Accounting Standards No. 158, *Employers'
              Accounting for Defined Benefit Pension and Other Postretirement Plans
              - an
              amendment of FASB Statements No. 87, 88, 106, and 132R* in 2006.
              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, 2006, 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 February 28, 2007 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
 
 Dallas,
              Texas
 February
              28, 2007
  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 consolidated
              statements
              of capitalization of Public Service Company of New Mexico and subsidiary
              (the
“Company”) as of December 31, 2006 and 2005, 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,
              2006. 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, 2006 and 2005, and the results of their
              operations and their cash flows for each of the three years in the
              period ended
              December 31, 2006, 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 Financial Accounting Standards Board Financial Interpretation
              No. 47, *Accounting
              for Conditional Asset Retirement Obligations* in
              2005.
              As discussed in Notes 13 and 12, respectively, the Company adopted
              Statement of
              Financial Accounting Standards No. 123 (revised 2004), *Share-Based
              Payment* and
              Statement of Financial Accounting Standards No. 158, *Employers'
              Accounting for Defined Benefit Pension and Other Postretirement Plans
              - an
              amendment of FASB Statements No. 87, 88, 106, and 132R* in 2006.
 
 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, 2006, 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 February 28, 2007 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
 
 Dallas,
              Texas
 February
              28, 2007
  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 consolidated
              statements
              of capitalization of Texas-New Mexico Power Company and subsidiaries
              (the
“Company”) as of December 31, 2006 and 2005, and the related consolidated
              statements of earnings, retained earnings, comprehensive income (loss),
              and cash
              flows for the year ended December 31, 2006, for the periods June 6,
              2005 to
              December 31, 2005, and January 1, 2005 to June 6, 2005, and for the
              year ended
              December 31, 2004. 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, 2006 and 2005, and the related consolidated
              statements of earnings, retained earnings, comprehensive income (loss),
              and cash
              flows for the year ended December 31, 2006, for the periods June 6,
              2005 to
              December 31, 2005, and January 1, 2005 to June 6, 2005, and for the
              year ended
              December 31, 2004, 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 Financial Accounting Standards Board Financial Interpretation
              No. 47, *Accounting
              for Conditional Asset Retirement Obligations* in
              2005.
              As discussed in Notes 13 and 12, respectively, the Company adopted
              Statement of
              Financial Accounting Standards No. 123 (revised 2004), *Share-Based
              Payment* and
              Statement of Financial Accounting Standards No. 158, *Employers'
              Accounting for Defined Benefit Pension and Other Postretirement Plans
              - an
              amendment of FASB Statements No. 87, 88, 106, and 132R* in
              2006.
 
 
 /s/
              DELOITTE & TOUCHE LLP
 
 Dallas,
              Texas
 February
              28, 2007
  B-12
  **PNM
            RESOURCES, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
            STATEMENTS OF EARNINGS**
  **Year
                        Ended December 31,****2006**
                    
                    **2005**
                    
                    **2004**(In
                        thousands, except per share amounts)**Operating
                        Revenues:**Electric
                    
                    $
                    1,962,073
                    
                    $
                    1,564,077
                    
                    $
                    1,113,046Gas
                    
                    
                    508,410
                    
                    
                    510,801
                    
                    
                    490,921Other
                    
                    
                    1,186
                    
                    
                    1,932
                    
                    
                    825Total
                        operating revenues
                    
                    
                    2,471,669
                    
                    
                    2,076,810
                    
                    
                    1,604,792**Operating
                        Expenses:**Cost
                        of energy sold
                    
                    
                    1,445,790
                    
                    
                    1,274,647
                    
                    
                    945,309Administrative
                        and general
                    
                    
                    276,023
                    
                    
                    217,983
                    
                    
                    168,095Energy
                        production costs
                    
                    
                    164,169
                    
                    
                    165,580
                    
                    
                    146,153Depreciation
                        and amortization
                    
                    
                    152,271
                    
                    
                    138,722
                    
                    
                    102,221Transmission
                        and distribution costs
                    
                    
                    81,809
                    
                    
                    70,465
                    
                    
                    59,447Taxes,
                        other than income taxes
                    
                    
                    71,902
                    
                    
                    52,594
                    
                    
                    34,607Income
                        taxes
                    
                    
                    46,198
                    
                    
                    19,450
                    
                    
                    36,062Total
                        operating expenses
                    
                    
                    2,238,162
                    
                    
                    1,939,441
                    
                    
                    1,491,894Operating
                        income
                    
                    
                    233,507
                    
                    
                    137,369
                    
                    
                    112,898**Other
                        Income and Deductions:**Interest
                        income
                    
                    
                    39,682
                    
                    
                    42,829
                    
                    
                    38,007Investment
                        income
                    
                    
                    5,979
                    
                    
                    5,955
                    
                    
                    2,501Other
                        income
                    
                    
                    6,636
                    
                    
                    9,126
                    
                    
                    6,857Carrying
                        charges on regulatory assets
                    
                    
                    6,993
                    
                    
                    4,376
                    
                    
                    -Other
                        deductions
                    
                    
                    (6,861
                    )
                    
                    (21,546
                    )
                    
                    (7,445
                    )Other
                        income taxes
                    
                    
                    (17,772
                    )
                    
                    (13,411
                    )
                    
                    (13,185
                    )Net
                        other income and deductions
                    
                    
                    34,657
                    
                    
                    27,329
                    
                    
                    26,735Earnings
                        before interest charges
                    
                    
                    268,164
                    
                    
                    164,698
                    
                    
                    139,633**Interest
                        Charges**:Interest
                        on long-term debt, net
                    
                    
                    95,301
                    
                    
                    75,736
                    
                    
                    46,702Other
                        interest charges
                    
                    
                    50,221
                    
                    
                    17,941
                    
                    
                    4,673Net
                        interest charges
                    
                    
                    145,522
                    
                    
                    93,677
                    
                    
                    51,375**Preferred
                        Stock Dividend Requirements of Subsidiary**
                    
                    
                    528
                    
                    
                    2,868
                    
                    
                    572**Net
                        Earnings Before Cumulative Effect of Changes****in
                        Accounting Principle**
                    
                    
                    122,114
                    
                    
                    68,153
                    
                    
                    87,686**Cumulative
                        Effect of Changes in Accounting Principle,****Net
                        of Tax (Expense) Benefit of $0, $592, $0**
                    
                    
                    -
                    
                    
                    (926
                    )
                    
                    -**Net
                        Earnings**
                    
                    $
                    122,114
                    
                    $
                    67,227
                    
                    $
                    87,686**Net
                        Earnings per Common Share (see Note 10):****Basic**
                    
                    $
                    1.75
                    
                    $
                    1.02
                    
                    $
                    1.45**Diluted**
                    
                    $
                    1.73
                    
                    $
                    1.00
                    
                    $
                    1.43**Dividends
                        Declared per Common Share**
                    
                    $
                    0.880
                    
                    $
                    0.785
                    
                    $
                    0.665
  The
            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,****2006**
                    
                    **2005**
                    
                    **2004**(In
                        thousands)**Balance
                        at Beginning of Year**
                    
                    $
                    564,623
                    
                    $
                    550,566
                    
                    $
                    503,069Net
                        earnings
                    
                    
                    122,114
                    
                    
                    67,227
                    
                    
                    87,686Dividends:Common
                        Stock
                    
                    
                    (62,801
                    )
                    
                    (53,170
                    )
                    
                    (40,189
                    )**Balance
                        at End of Year**
                    
                    $
                    623,936
                    
                    $
                    564,623
                    
                    $
                    550,566
 
 The
            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,****2006**
                    
                    **2005**(In
                        thousands)**ASSETS****Utility
                        Plant:**Electric
                        plant in service
                    
                    $
                    4,263,068
                    
                    $
                    3,459,413Gas
                        plant in service
                    
                    
                    721,168
                    
                    
                    711,823Common
                        plant in service and plant held for future use
                    
                    
                    157,064
                    
                    
                    135,8495,141,300
                    
                    
                    4,307,085Less
                        accumulated depreciation and amortization
                    
                    
                    1,639,156
                    
                    
                    1,518,3703,502,144
                    
                    
                    2,788,715Construction
                        work in progress
                    
                    
                    230,871
                    
                    
                    168,195Nuclear
                        fuel, net of accumulated amortization of $14,008 and
                        $14,679
                    
                    
                    28,844
                    
                    
                    27,182Net
                        utility plant
                    
                    
                    3,761,859
                    
                    
                    2,984,092**Other
                        Property and Investments:**Investment
                        in lessor notes
                    
                    
                    257,659
                    
                    
                    286,678Other
                        investments
                    
                    
                    169,720
                    
                    
                    180,013Non-utility
                        property, net of accumulated depreciation of $2,812 and
                        $22
                    
                    
                    7,565
                    
                    
                    4,214Total
                        other property and investments
                    
                    
                    434,944
                    
                    
                    470,905**Current
                        Assets:**Cash
                        and cash equivalents
                    
                    
                    123,419
                    
                    
                    68,199Special
                        deposits
                    
                    
                    5,146
                    
                    
                    534Accounts
                        receivable, net of allowance for uncollectible accounts of
                        $6,899 and
                        $3,653
                    
                    
                    168,126
                    
                    
                    175,169Unbilled
                        revenues
                    
                    
                    116,878
                    
                    
                    105,438Other
                        receivables
                    
                    
                    73,744
                    
                    
                    64,285Inventories
                    
                    
                    63,329
                    
                    
                    52,037Regulatory
                        assets
                    
                    
                    17,507
                    
                    
                    28,058Other
                        current assets
                    
                    
                    122,726
                    
                    
                    102,577Total
                        current assets
                    
                    
                    690,875
                    
                    
                    596,297**Deferred
                        Charges:**Regulatory
                        assets
                    
                    
                    553,564
                    
                    
                    347,279Prepaid
                        pension cost
                    
                    
                    8,853
                    
                    
                    91,444Goodwill
                    
                    
                    495,738
                    
                    
                    499,155Other
                        intangible assets, net of accumulated amortization of $2,052
                        and
                        $742
                    
                    
                    102,202
                    
                    
                    78,512Other
                        deferred charges
                    
                    
                    117,589
                    
                    
                    57,025Total
                        deferred charges
                    
                    
                    1,277,946
                    
                    
                    1,073,415$
                    6,165,624
                    
                    $
                    5,124,709
  The
            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,****2006**
                    
                    **2005**(In
                        thousands)**CAPITALIZATION
                        AND LIABILITIES****Capitalization:**Common
                        Stockholders' equity:Common
                        stock outstanding (no par value, 120,000,000 shares authorized:
                        issued76,648,472
                        and 68,786,286 at December 31, 2006 and 2005,
                        respectively)
                    
                    $
                    1,040,451
                    
                    $
                    813,425Accumulated
                        other comprehensive income (loss), net of tax
                    
                    
                    28,909
                    
                    
                    (91,589
                    )Retained
                        earnings
                    
                    
                    623,936
                    
                    
                    564,623Total
                        common stockholders' equity
                    
                    
                    1,693,296
                    
                    
                    1,286,459Cumulative
                        preferred stock of subsidiary without mandatory redemption($100
                        stated value, 10,000,000 shares authorized: issued 115,293
                        atDecember
                        31, 2006 and 2005 respectively)
                    
                    
                    11,529
                    
                    
                    11,529Long-term
                        debt
                    
                    
                    1,765,907
                    
                    
                    1,746,395Total
                        capitalization
                    
                    
                    3,470,732
                    
                    
                    3,044,383**Current
                        Liabilities:**Short-term
                        debt
                    
                    
                    764,345
                    
                    
                    332,200Accounts
                        payable
                    
                    
                    214,229
                    
                    
                    206,648Accrued
                        interest and taxes
                    
                    
                    33,579
                    
                    
                    27,815Regulatory
                        liabilities
                    
                    
                    1,172
                    
                    
                    7,085Other
                        current liabilities
                    
                    
                    297,526
                    
                    
                    149,748Total
                        current liabilities
                    
                    
                    1,310,851
                    
                    
                    723,496**Long-Term
                        Liabilities:**Accumulated
                        deferred income taxes
                    
                    
                    577,443
                    
                    
                    451,263Accumulated
                        deferred investment tax credits
                    
                    
                    30,236
                    
                    
                    33,806Regulatory
                        liabilities
                    
                    
                    398,170
                    
                    
                    402,253Asset
                        retirement obligations
                    
                    
                    61,338
                    
                    
                    55,646Accrued
                        pension liability and postretirement benefit cost
                    
                    
                    134,799
                    
                    
                    227,202Other
                        deferred credits
                    
                    
                    182,055
                    
                    
                    186,660Total
                        long-term liabilties
                    
                    
                    1,384,041
                    
                    
                    1,356,830Commitments
                        and Contingencies (see Note 16)$
                    6,165,624
                    
                    $
                    5,124,709
 The
            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,****2006**
                    
                    **2005**
                    
                    **2004**(In
                        thousands)**Cash
                        Flows From Operating Activities:**Net
                        earnings
                    
                    $
                    122,114
                    
                    $
                    67,227
                    
                    $
                    87,686Adjustments
                        to reconcile net earnings to net cash flows from operating
                        activities:Depreciation
                        and amortization
                    
                    
                    173,650
                    
                    
                    162,391
                    
                    
                    132,454Allowance
                        for equity funds used during construction
                    
                    
                    (1,039
                    )
                    
                    (1,892
                    )
                    
                    (1,294
                    )Accumulated
                        deferred income tax (benefit)
                    
                    
                    47,331
                    
                    
                    28,318
                    
                    
                    39,966Cumulative
                        effect of a change in accounting principle
                    
                    
                    -
                    
                    
                    1,518
                    
                    
                    -Net
                        unrealized (gains)/losses on energy transactions
                    
                    
                    1,062
                    
                    
                    (2,455
                    )
                    
                    (1,640
                    )Realized
                        gains on investment securities
                    
                    
                    (5,871
                    )
                    
                    (8,562
                    )
                    
                    (2,584
                    )Carrying
                        charges on deferred stranded costs
                    
                    
                    (6,993
                    )
                    
                    (4,376
                    )
                    
                    -Rate
                        case expense deferral
                    
                    
                    (5,045
                    )
                    
                    -
                    
                    
                    -Interest
                        on retail competition transition obligation
                    
                    
                    1,658
                    
                    
                    743
                    
                    
                    -Carrying
                        charges on other regulatory assets and liabilities
                    
                    
                    (3,954
                    )
                    
                    (3,730
                    )
                    
                    (2,562
                    )Equity-linked
                        units charge
                    
                    
                    -
                    
                    
                    11,348
                    
                    
                    -Turbine
                        impairment
                    
                    
                    -
                    
                    
                    14,958
                    
                    
                    -Amortization
                        of fair value of acquired Twin Oaks sales contract
                    
                    
                    (70,851
                    )
                    
                    -
                    
                    
                    -Amortization
                        of emissions allowances
                    
                    
                    2,589
                    
                    
                    -
                    
                    
                    -Amortization
                        of fair value of acquired First Choice contracts
                    
                    
                    (2,197
                    )
                    
                    (4,184
                    )
                    
                    -Stock
                        based compensation expense
                    
                    
                    7,539
                    
                    
                    -
                    
                    
                    -Excess
                        tax benefit from stock-based payment arrangements
                    
                    
                    (1,072
                    )
                    
                    -
                    
                    
                    -Other,
                        net
                    
                    
                    (3,975
                    )
                    
                    1,861
                    
                    
                    (2,130
                    )Changes
                        in certain assets and liabilities:Customer
                        accounts receivable
                    
                    
                    25,279
                    
                    
                    (18,808
                    )
                    
                    (23,673
                    )Other
                        accounts receivable
                    
                    
                    (7,814
                    )
                    
                    (14,843
                    )
                    
                    (1,351
                    )Unbilled
                        revenues
                    
                    
                    (11,440
                    )
                    
                    5,464
                    
                    
                    (18,523
                    )Regulatory
                        assets
                    
                    
                    25,136
                    
                    
                    (29,904
                    )
                    
                    15,486Other
                        assets
                    
                    
                    (6,500
                    )
                    
                    (28,913
                    )
                    
                    (5,283
                    )Accrued
                        postretirement benefit costs
                    
                    
                    (4,141
                    )
                    
                    (1,539
                    )
                    
                    (4,535
                    )Accounts
                        payable
                    
                    
                    (18,555
                    )
                    
                    48,674
                    
                    
                    29,503Accrued
                        interest and taxes
                    
                    
                    10,434
                    
                    
                    17,945
                    
                    
                    (10,164
                    )Deferred
                        credits
                    
                    
                    (30,749
                    )
                    
                    (14,535
                    )
                    
                    (12,302
                    )Other
                        liabilities
                    
                    
                    7,828
                    
                    
                    (16,598
                    )
                    
                    16,088Net
                        cash flows provided by operating activities
                    
                    
                    244,424
                    
                    
                    210,108
                    
                    
                    235,142**Cash
                        Flows From Investing Activities:**Utility
                        plant additions
                    
                    
                    (309,286
                    )
                    
                    (211,160
                    )
                    
                    (135,795
                    )Nuclear
                        fuel additions
                    
                    
                    (11,832
                    )
                    
                    (10,654
                    )
                    
                    (9,915
                    )Proceeds
                        from sales of securities
                    
                    
                    96,624
                    
                    
                    104,623
                    
                    
                    81,218Purchases
                        of securities
                    
                    
                    (102,265
                    )
                    
                    (109,795
                    )
                    
                    (87,823
                    )Return
                        of principal PVNGS lessor notes
                    
                    
                    23,279
                    
                    
                    21,432
                    
                    
                    20,292Cash
                        acquired from purchase of TNP, net of cash paid
                    
                    
                    -
                    
                    
                    45,965
                    
                    
                    -Twin
                        Oaks business acquisition
                    
                    
                    (481,058
                    )
                    
                    -
                    
                    
                    -Luna
                        investment
                    
                    
                    -
                    
                    
                    -
                    
                    
                    (13,379
                    )Other,
                        net
                    
                    
                    (15,037
                    )
                    
                    5,289
                    
                    
                    1,564Net
                        cash flows used for investing activities
                    
                    
                    (799,575
                    )
                    
                    (154,300
                    )
                    
                    (143,838
                    )
 
 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,****2006**
                    
                    **2005**
                    
                    **2004**(In
                        thousands)**Cash
                        Flows From Financing Activities:**Short-term
                        borrowings (repayments), net
                    
                    
                    182,650
                    
                    
                    237,500
                    
                    
                    (31,218
                    )Short-term
                        interim financing for Twin Oaks acquisition
                    
                    
                    480,000
                    
                    
                    -
                    
                    
                    -Repayments
                        of interim financing for Twin Oaks acquisition
                    
                    
                    (230,505
                    )
                    
                    -
                    
                    
                    -Long-term
                        debt borrowings
                    
                    
                    15,000
                    
                    
                    339,832
                    
                    
                    -Long-term
                        debt repayments
                    
                    
                    -
                    
                    
                    (399,626
                    )
                    
                    -Issuance
                        of common stock
                    
                    
                    226,098
                    
                    
                    101,231
                    
                    
                    -Redemption
                        of TNP preferred stock
                    
                    
                    -
                    
                    
                    (224,564
                    )
                    
                    -Retirement
                        of PNM preferred stock
                    
                    
                    -
                    
                    
                    -
                    
                    
                    (1,118
                    )Proceeds
                        from stock option exercise
                    
                    
                    14,072
                    
                    
                    -
                    
                    
                    -Cash
                        expenditures from stock option exercises
                    
                    
                    (20,243
                    )
                    
                    (9,735
                    )
                    
                    (16,430
                    )Excess
                        tax benefit from stock-based payment arrangements
                    
                    
                    1,072
                    
                    
                    -
                    
                    
                    -Dividends
                        paid
                    
                    
                    (59,708
                    )
                    
                    (51,128
                    )
                    
                    (38,848
                    )Other,
                        net
                    
                    
                    1,935
                    
                    
                    1,686
                    
                    
                    811Net
                        cash flows provided by (used for) financing activities
                    
                    
                    610,371
                    
                    
                    (4,804
                    )
                    
                    (86,803
                    )Increase
                        in Cash and Cash Equivalents
                    
                    
                    55,220
                    
                    
                    51,004
                    
                    
                    4,501Beginning
                        of Period
                    
                    
                    68,199
                    
                    
                    17,195
                    
                    
                    12,694End
                        of Period
                    
                    $
                    123,419
                    
                    $
                    68,199
                    
                    $
                    17,195**Supplemental
                        Cash Flow Disclosures:**Interest
                        paid, net of capitalized interest
                    
                    $
                    140,459
                    
                    $
                    77,066
                    
                    $
                    46,469Income
                        taxes paid (refunded), net
                    
                    $
                    16,158
                    
                    $
                    (4,174
                    )
                    $
                    14,459**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
                    
                    $
                    1,317,554
  The
            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,****2006**
                    
                    **2005**(In
                        thousands)**Common
                        Stockholders’ Equity:**Common
                        Stock, no par value
                    
                    $
                    1,040,451
                    
                    $
                    813,425Accumulated
                        other comprehensive income, net of tax
                    
                    
                    28,909
                    
                    
                    (91,589
                    )Retained
                        earnings
                    
                    
                    623,936
                    
                    
                    564,623Total
                        common stockholders’ equity
                    
                    
                    1,693,296
                    
                    
                    1,286,459**Cumulative
                        Preferred Stock of Subsidiary:**Without
                        mandatory redemption requirements:1965
                        Series, 4.58% with a stated value of $100.00 and a current
                        redemption
                        price of $102.00; 115,293 outstanding shares at December
                        31, 2006 and
                        2005
                    
                    
                    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
                    
                    
                    -
                    
                    
                    46,0002.10%
                        due 2033
                    
                    
                    -
                    
                    
                    100,0004.875%
                        due 2033
                    
                    
                    46,000
                    
                    
                    -4.875%
                        due 2033
                    
                    
                    100,000
                    
                    
                    -4.00%
                        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
                    
                    
                    248,9356.25%
                        due 2009
                    
                    
                    167,690
                    
                    
                    167,690Other,
                        including unamortized discounts
                    
                    
                    16,162
                    
                    
                    (3,350
                    )Total
                        Senior Unsecured Notes
                    
                    
                    832,812
                    
                    
                    813,300Equity-Linked
                        Units:6.75%
                        due 2010
                    
                    
                    247,250
                    
                    
                    247,2506.625%
                        due 2010
                    
                    
                    100,000
                    
                    
                    100,000Total
                        Equity-Linked Units
                    
                    
                    347,250
                    
                    
                    347,250Total
                        long-term debt
                    
                    
                    1,765,907
                    
                    
                    1,746,395Total
                        Capitalization
                    
                    $
                    3,470,732
                    
                    $
                    3,044,383
  The
            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,****2006**
                    
                    **2005**
                    
                    **2004**(In
                        thousands)**Net
                        Earnings**
                    
                    $
                    122,114
                    
                    $
                    67,227
                    
                    $
                    87,686Other
                        Comprehensive Income:**Unrealized
                        gain (loss) on securities**:Unrealized
                        holding gains (losses) arising during the period,net
                        of tax (expense) benefit of $(8,403), $(2,948), and
                        $(1,212)
                    
                    
                    12,823
                    
                    
                    4,498
                    
                    
                    1,849Reclassification
                        adjustment for (gains) included in netincome,
                        net of tax expense of $261, $2,925, and $745
                    
                    
                    (398
                    )
                    
                    (4,464
                    )
                    
                    (1,137
                    )**Additional
                        minimum pension liability adjustment, net of tax****(expense)
                        benefit of $14,135, $8,322, and $14,415**
                    
                    
                    21,569
                    
                    
                    (12,701
                    )
                    
                    (21,996
                    )**Fair
                        value adjustment for certain derivative
                        transactions:**Change
                        in fair market value of designated cash flow hedges,net
                        of tax (expense) benefit of $(7,217), $(7,913), and
                        $(3,567)
                    
                    
                    10,873
                    
                    
                    11,844
                    
                    
                    5,443Reclassification
                        adjustment for (gains) losses included innet
                        income, net of tax expense (benefit) of $4,848, $624, and
                        $318
                    
                    
                    (7,132
                    )
                    
                    (953
                    )
                    
                    (485
                    )**Total
                        Other Comprehensive Income (Loss)**
                    
                    
                    37,735
                    
                    
                    (1,776
                    )
                    
                    (16,326
                    )**Total
                        Comprehensive Income**
                    
                    $
                    159,849
                    
                    $
                    65,451
                    
                    $
                    71,360
  The
            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,****2006**
                    
                    **2005**
                    
                    **2004**(In
                        thousands)**Operating
                        Revenues:**Electric
                    
                    $
                    1,115,362
                    
                    $
                    1,164,656
                    
                    $
                    1,113,046Gas
                    
                    
                    508,410
                    
                    
                    510,801
                    
                    
                    490,921Total
                        operating revenues
                    
                    
                    1,623,772
                    
                    
                    1,675,457
                    
                    
                    1,603,967**Operating
                        Expenses:**Cost
                        of energy sold
                    
                    
                    968,570
                    
                    
                    1,043,490
                    
                    
                    945,186Administrative
                        and general
                    
                    
                    173,328
                    
                    
                    176,641
                    
                    
                    165,942Energy
                        production costs
                    
                    
                    157,190
                    
                    
                    165,580
                    
                    
                    146,153Depreciation
                        and amortization
                    
                    
                    99,617
                    
                    
                    115,791
                    
                    
                    99,633Transmission
                        and distribution costs
                    
                    
                    60,906
                    
                    
                    58,231
                    
                    
                    59,447Taxes,
                        other than income taxes
                    
                    
                    34,992
                    
                    
                    31,175
                    
                    
                    31,270Income
                        taxes
                    
                    
                    24,372
                    
                    
                    8,217
                    
                    
                    37,964Total
                        operating expenses
                    
                    
                    1,518,975
                    
                    
                    1,599,125
                    
                    
                    1,485,595Operating
                        income
                    
                    
                    104,797
                    
                    
                    76,332
                    
                    
                    118,372**Other
                        Income and Deductions:**Interest
                        income
                    
                    
                    35,760
                    
                    
                    37,919
                    
                    
                    37,721Investment
                        income
                    
                    
                    5,957
                    
                    
                    8,533
                    
                    
                    2,969Other
                        income
                    
                    
                    3,571
                    
                    
                    8,698
                    
                    
                    7,037Other
                        deductions
                    
                    
                    (3,737
                    )
                    
                    (7,161
                    )
                    
                    (5,497
                    )Other
                        income taxes
                    
                    
                    (15,632
                    )
                    
                    (17,077
                    )
                    
                    (14,733
                    )Net
                        other income and deductions
                    
                    
                    25,919
                    
                    
                    30,912
                    
                    
                    27,497Earnings
                        before interest charges
                    
                    
                    130,716
                    
                    
                    107,244
                    
                    
                    145,869**Interest
                        Charges**:Interest
                        on long-term debt, net
                    
                    
                    51,069
                    
                    
                    49,102
                    
                    
                    49,015Other
                        interest charges
                    
                    
                    7,400
                    
                    
                    5,022
                    
                    
                    4,416Net
                        interest charges
                    
                    
                    58,469
                    
                    
                    54,124
                    
                    
                    53,431**Net
                        Earnings Before Cumulative Effect of Changes****in
                        Accounting Principle**
                    
                    
                    72,247
                    
                    
                    53,120
                    
                    
                    92,438**Cumulative
                        Effect of Changes in Accounting Principle,****Net
                        of Tax (Expense) Benefit of $0, $331 and $0**
                    
                    
                    -
                    
                    
                    (506
                    )
                    
                    -**Net
                        Earnings**
                    
                    
                    72,247
                    
                    
                    52,614
                    
                    
                    92,438Preferred
                        Stock Dividend Requirements
                    
                    
                    528
                    
                    
                    528
                    
                    
                    572**Net
                        Earnings Available for Common Stock**
                    
                    $
                    71,719
                    
                    $
                    52,086
                    
                    $
                    91,866  The
              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,****2006**
                    
                    **2005**
                    
                    **2004**(In
                        thousands)**Balance
                        at Beginning of Year**
                    
                    $
                    332,542
                    
                    $
                    371,455
                    
                    $
                    302,589Net
                        earnings
                    
                    
                    72,247
                    
                    
                    52,614
                    
                    
                    92,438Dividends:Cumulative
                        preferred stock
                    
                    
                    (528
                    )
                    
                    (528
                    )
                    
                    (572
                    )Common
                        Stock dividends paid to parent company
                    
                    
                    -
                    
                    
                    (90,999
                    )
                    
                    (23,000
                    )**Balance
                        at End of Year**
                    
                    $
                    404,261
                    
                    $
                    332,542
                    
                    $
                    371,455
 
 The
            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,****2006**
                    
                    **2005**(In
                        thousands)**ASSETS****Utility
                        Plant:**Electric
                        plant in service
                    
                    $
                    2,742,795
                    
                    $
                    2,576,182Gas
                        plant in service
                    
                    
                    721,168
                    
                    
                    711,823Common
                        plant in service and plant held for future use
                    
                    
                    72,806
                    
                    
                    74,8573,536,769
                    
                    
                    3,362,862Less
                        accumulated depreciation and amortization
                    
                    
                    1,279,349
                    
                    
                    1,205,3862,257,420
                    
                    
                    2,157,476Construction
                        work in progress
                    
                    
                    191,403
                    
                    
                    137,663Nuclear
                        fuel, net of accumulated amortization of $14,008 and
                        $14,679
                    
                    
                    28,844
                    
                    
                    27,182Net
                        utility plant
                    
                    
                    2,477,667
                    
                    
                    2,322,321**Other
                        Property and Investments:**Investment
                        in PVNGS lessor notes
                    
                    
                    257,659
                    
                    
                    286,678Other
                        investments
                    
                    
                    138,777
                    
                    
                    170,422Non-utility
                        property
                    
                    
                    966
                    
                    
                    966Total
                        other property and investments
                    
                    
                    397,402
                    
                    
                    458,066**Current
                        Assets:**Cash
                        and cash equivalents
                    
                    
                    11,886
                    
                    
                    12,690Special
                        deposits
                    
                    
                    376
                    
                    
                    263Accounts
                        receivable, net of allowance for uncollectible accounts of
                        $1,788 and
                        $1,435
                    
                    
                    122,648
                    
                    
                    154,904Unbilled
                        revenues
                    
                    
                    81,166
                    
                    
                    75,118Other
                        receivables
                    
                    
                    62,040
                    
                    
                    53,546Affiliate
                        accounts receivable
                    
                    
                    7,879
                    
                    
                    -Inventories
                    
                    
                    51,801
                    
                    
                    50,411Regulatory
                        assets
                    
                    
                    17,507
                    
                    
                    28,058Other
                        current assets
                    
                    
                    78,981
                    
                    
                    75,885Total
                        current assets
                    
                    
                    434,284
                    
                    
                    450,875**Deferred
                        Charges:**Regulatory
                        assets
                    
                    
                    410,979
                    
                    
                    223,325Prepaid
                        pension cost
                    
                    
                    -
                    
                    
                    91,444Other
                        deferred charges
                    
                    
                    78,969
                    
                    
                    41,720Total
                        deferred charges
                    
                    
                    489,948
                    
                    
                    356,489$
                    3,799,301
                    
                    $
                    3,587,751
  The
            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,****2006**
                    
                    **2005**(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, 2006 and 2005 respectively)
                    
                    $
                    765,500
                    
                    $
                    765,500Accumulated
                        other comprehensive income (loss), net of tax
                    
                    
                    8,761
                    
                    
                    (90,515
                    )Retained
                        earnings
                    
                    
                    404,261
                    
                    
                    332,542Total
                        common stockholder's equity
                    
                    
                    1,178,522
                    
                    
                    1,007,527Cumulative
                        preferred stock without mandatory redemption($100
                        stated value, 10,000,000 shares authorized: issued 115,293
                        atDecember
                        31, 2006 and 2005 respectively)
                    
                    
                    11,529
                    
                    
                    11,529Long-term
                        debt
                    
                    
                    987,205
                    
                    
                    987,068Total
                        capitalization
                    
                    
                    2,177,256
                    
                    
                    2,006,124**Current
                        Liabilities:**Short-term
                        debt
                    
                    
                    250,274
                    
                    
                    128,200Accounts
                        payable
                    
                    
                    138,577
                    
                    
                    170,517Affiliate
                        accounts payable
                    
                    
                    16,898
                    
                    
                    50,070Accrued
                        interest and taxes
                    
                    
                    28,118
                    
                    
                    15,951Regulatory
                        liabilities
                    
                    
                    1,172
                    
                    
                    7,085Other
                        current liabilities
                    
                    
                    125,358
                    
                    
                    91,668Total
                        current liabilities
                    
                    
                    560,397
                    
                    
                    463,491**Long-Term
                        Liabilities:**Accumulated
                        deferred income taxes
                    
                    
                    359,416
                    
                    
                    300,752Accumulated
                        deferred investment tax credits
                    
                    
                    29,404
                    
                    
                    32,266Regulatory
                        liabilities
                    
                    
                    344,036
                    
                    
                    346,007Asset
                        retirement obligations
                    
                    
                    60,493
                    
                    
                    54,940Accrued
                        pension liability and postretirement benefit cost
                    
                    
                    129,595
                    
                    
                    217,092Other
                        deferred credits
                    
                    
                    138,704
                    
                    
                    167,079Total
                        long-term liabilities
                    
                    
                    1,061,648
                    
                    
                    1,118,136Commitments
                        and Contingencies (see Note 16)$
                    3,799,301
                    
                    $
                    3,587,751
  The
            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,****2006**
                    
                    **2005**
                    
                    **2004**(In
                        thousands)**Cash
                        Flows From Operating Activities:**Net
                        earnings
                    
                    $
                    72,247
                    
                    $
                    52,614
                    
                    $
                    92,438Adjustments
                        to reconcile net earnings to net cash flows from operating
                        activities:Depreciation
                        and amortization
                    
                    
                    119,086
                    
                    
                    137,673
                    
                    
                    129,847Allowance
                        for equity funds used during construction
                    
                    
                    (769
                    )
                    
                    (1,757
                    )
                    
                    (1,228
                    )Accumulated
                        deferred income tax
                    
                    
                    (5,462
                    )
                    
                    20,039
                    
                    
                    38,162Cumulative
                        effect of changes in accounting principle
                    
                    
                    -
                    
                    
                    837
                    
                    
                    -Net
                        unrealized (gains)/losses on energy transactions
                    
                    
                    (327
                    )
                    
                    (185
                    )
                    
                    (1,640
                    )Realized
                        gains on investment securities
                    
                    
                    (5,856
                    )
                    
                    (8,562
                    )
                    
                    (2,584
                    )Carrying
                        charges on other regulatory assets and liabilities
                    
                    
                    (3,954
                    )
                    
                    (3,730
                    )
                    
                    (2,562
                    )Turbine
                        impairment
                    
                    
                    -
                    
                    
                    14,958
                    
                    
                    -Other,
                        Net
                    
                    
                    (5,948
                    )
                    
                    (7,651
                    )
                    
                    3,964Changes
                        in certain assets and liabilitiesCustomer
                        accounts receivable
                    
                    
                    31,903
                    
                    
                    (30,830
                    )
                    
                    (33,198
                    )Unbilled
                        revenues
                    
                    
                    (6,048
                    )
                    
                    2,010
                    
                    
                    (18,523
                    )Regulatory
                        assets
                    
                    
                    27,439
                    
                    
                    (26,783
                    )
                    
                    15,486Accrued
                        postretirement benefit costs
                    
                    
                    (3,491
                    )
                    
                    (3,052
                    )
                    
                    (6,373
                    )Other
                        assets
                    
                    
                    (51,791
                    )
                    
                    (22,112
                    )
                    
                    2,554Accounts
                        payable
                    
                    
                    (30,440
                    )
                    
                    53,986
                    
                    
                    36,462Accrued
                        interest and taxes
                    
                    
                    11,726
                    
                    
                    (8,564
                    )
                    
                    20,405Deferred
                        credits
                    
                    
                    (8,794
                    )
                    
                    (15,310
                    )
                    
                    (8,953
                    )Other
                        liabilities
                    
                    
                    (41,993
                    )
                    
                    17,679
                    
                    
                    (3,244
                    )Net
                        cash flows from operating activities
                    
                    
                    97,528
                    
                    
                    171,260
                    
                    
                    261,013**Cash
                        Flows From Investing Activities:**Utility
                        plant additions
                    
                    
                    (234,327
                    )
                    
                    (157,092
                    )
                    
                    (128,236
                    )Nuclear
                        fuel additions
                    
                    
                    (11,832
                    )
                    
                    (10,654
                    )
                    
                    (9,915
                    )Proceeds
                        from sales of securities
                    
                    
                    96,624
                    
                    
                    104,623
                    
                    
                    81,218Purchases
                        of securities
                    
                    
                    (102,265
                    )
                    
                    (109,795
                    )
                    
                    (87,823
                    )Return
                        of principal PVNGS lessor notes
                    
                    
                    23,279
                    
                    
                    21,432
                    
                    
                    20,292Purchase
                        of EIP Investment
                    
                    
                    -
                    
                    
                    -
                    
                    
                    (12,247
                    )Other,
                        net
                    
                    
                    9,354
                    
                    
                    555
                    
                    
                    4,942Net
                        cash flows used for investing activities
                    
                    
                    (219,167
                    )
                    
                    (150,931
                    )
                    
                    (131,769
                    )
 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,****2006**
                    
                    **2005**
                    
                    **2004**(In
                        thousands)**Cash
                        Flows From Financing Activities:**Short-term
                        borrowings (repayments), net
                    
                    
                    122,074
                    
                    
                    67,800
                    
                    
                    (64,500
                    )Long-term
                        debt repayments
                    
                    
                    (1,133
                    )
                    
                    (611
                    )
                    
                    -Retirement
                        of preferred stock
                    
                    
                    -
                    
                    
                    -
                    
                    
                    (1,118
                    )Dividends
                        paid
                    
                    
                    (528
                    )
                    
                    (91,527
                    )
                    
                    (23,586
                    )Change
                        in intercompany borrowings
                    
                    
                    -
                    
                    
                    255
                    
                    
                    (34,871
                    )Other,
                        net
                    
                    
                    422
                    
                    
                    (4
                    )
                    
                    (328
                    )Net
                        cash flows provided by (used for) financing activities
                    
                    
                    120,835
                    
                    
                    (24,087
                    )
                    
                    (124,403
                    )Increase
                        (Decrease) in Cash and Cash Equivalents
                    
                    
                    (804
                    )
                    
                    (3,758
                    )
                    
                    4,841Beginning
                        of Period
                    
                    
                    12,690
                    
                    
                    16,448
                    
                    
                    11,607End
                        of Period
                    
                    $
                    11,886
                    
                    $
                    12,690
                    
                    $
                    16,448**Supplemental
                        Cash Flow Disclosures:**Interest
                        paid, net of capitalized interest
                    
                    $
                    55,385
                    
                    $
                    51,593
                    
                    $
                    49,937Income
                        taxes paid, net
                    
                    $
                    503
                    
                    $
                    5
                    
                    $
                    18,002
 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,****2006**
                    
                    **2005**(In
                        thousands)**Common
                        Stockholder's Equity:**Common
                        Stock, no par value
                    
                    $
                    765,500
                    
                    $
                    765,500Accumulated
                        other comprehensive income, net of tax
                    
                    
                    8,761
                    
                    
                    (90,515
                    )Retained
                        earnings
                    
                    
                    404,261
                    
                    
                    332,542Total
                        common stockholders’ equity
                    
                    
                    1,178,522
                    
                    
                    1,007,527**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; 115,293 outstanding shares at December
                        31, 2006 and 2005
                    
                    
                    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
                    
                    
                    -
                    
                    
                    46,0002.10%
                        due 2033
                    
                    
                    -
                    
                    
                    100,0004.875%
                        due 2033
                    
                    
                    46,000
                    
                    
                    -4.875%
                        due 2033
                    
                    
                    100,000
                    
                    
                    -4.00%
                        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
                    
                    
                    1,335
                    
                    
                    1,198Total
                        Senior Unsecured Notes
                    
                    
                    401,360
                    
                    
                    401,223Total
                        long-term debt
                    
                    
                    987,205
                    
                    
                    987,068Total
                        Capitalization
                    
                    $
                    2,177,256
                    
                    $
                    2,006,124
  The
            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,****2006**
                    
                    **2005**
                    
                    **2004**(In
                        thousands)**Net
                        Earnings Available for Common Stock**
                    
                    $
                    71,719
                    
                    $
                    52,086
                    
                    $
                    91,866Other
                        Comprehensive Income (Loss):**Unrealized
                        gain (loss) on securities**:Unrealized
                        holding gains (losses) arising during the period,net
                        of tax (expense) benefit of $(8,403), $(2,948), and
                        $(1,212)
                    
                    
                    12,823
                    
                    
                    4,498
                    
                    
                    1,849Reclassification
                        adjustment for (gains) included in netincome,
                        net of tax expense of $261, $2,925, and $745
                    
                    
                    (398
                    )
                    
                    (4,464
                    )
                    
                    (1,137
                    )**Additional
                        minimum pension liability adjustment, net of tax****(expense)
                        benefit of $(14,144), $8,304 and $14,415**
                    
                    
                    21,582
                    
                    
                    (12,672
                    )
                    
                    (21,996
                    )**Fair
                        value adjustment for certain derivative
                        transactions:**Change
                        in fair market value of designated cash flow hedges,net
                        of tax (expense) benefit of $5,547, $(8,447) and $(3,567)
                    
                    
                    (8,464
                    )
                    
                    12,889
                    
                    
                    5,443Reclassification
                        adjustment for (gains) included in net income,net
                        of tax expense (benefits) of $5,523, $624 and $318
                    
                    
                    (8,427
                    )
                    
                    (953
                    )
                    
                    (485
                    )**Total
                        Other Comprehensive Income (Loss)**
                    
                    
                    17,116
                    
                    
                    (702
                    )
                    
                    (16,326
                    )**Total
                        Comprehensive Income**
                    
                    $
                    88,835
                    
                    $
                    51,384
                    
                    $
                    75,540
  The
            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****Post-Acquisition**
                      
                      **For
                          the Period**
                      
                      
                      **For
                          the Period**
                      
                      **Year
                          Ended****Year
                          Ended**
                      
                      **June
                          6-**
                      
                      
                      **January
                          1 -**
                      
                      **December
                          31,****Dectember
                          31, 2006**
                      
                      **December
                          31, 2005**
                      
                      
                      **June
                          6, 2005**
                      
                      **2004**(In
                            thousands)**Operating
                          Revenues:**Electric
                      
                      $
                      256,990
                      
                      $
                      154,350
                      
                      
                      $
                      112,820
                      
                      $
                      269,665Total
                          operating revenues
                      
                      
                      256,990
                      
                      
                      154,350
                      
                      
                      
                      112,820
                      
                      
                      269,665**Operating
                          Expenses:**Cost
                          of energy sold
                      
                      
                      103,021
                      
                      
                      58,014
                      
                      
                      
                      43,885
                      
                      
                      101,361Administrative
                          and general
                      
                      
                      34,035
                      
                      
                      14,165
                      
                      
                      
                      11,048
                      
                      
                      27,963Depreciation
                          and amortization
                      
                      
                      31,576
                      
                      
                      17,596
                      
                      
                      
                      12,954
                      
                      
                      29,691Transmission
                          and distribution costs
                      
                      
                      20,870
                      
                      
                      12,403
                      
                      
                      
                      9,111
                      
                      
                      19,314Taxes,
                          other than income taxes
                      
                      
                      24,351
                      
                      
                      14,261
                      
                      
                      
                      9,228
                      
                      
                      22,884Income
                          taxes
                      
                      
                      4,250
                      
                      
                      7,965
                      
                      
                      
                      5,055
                      
                      
                      13,680Total
                          operating expenses
                      
                      
                      218,103
                      
                      
                      124,404
                      
                      
                      
                      91,281
                      
                      
                      214,893Operating
                          income
                      
                      
                      38,887
                      
                      
                      29,946
                      
                      
                      
                      21,539
                      
                      
                      54,772**Other
                          Income and Deductions:**Interest
                          income
                      
                      
                      922
                      
                      
                      1,001
                      
                      
                      
                      650
                      
                      
                      677Other
                          income
                      
                      
                      1,108
                      
                      
                      528
                      
                      
                      
                      523
                      
                      
                      844Carrying
                          charges on regulatory assets
                      
                      
                      6,993
                      
                      
                      4,376
                      
                      
                      
                      (1,407
                      )
                      
                      32,006Other
                          deductions
                      
                      
                      (200
                      )
                      
                      (74
                      )
                      
                      
                      (79
                      )
                      
                      (254
                      )Other
                          income taxes
                      
                      
                      (3,085
                      )
                      
                      (2,071
                      )
                      
                      
                      154
                      
                      
                      (12,711
                      )Net
                          other income and deductions
                      
                      
                      5,738
                      
                      
                      3,760
                      
                      
                      
                      (159
                      )
                      
                      20,562Earnings
                          before interest charges
                      
                      
                      44,625
                      
                      
                      33,706
                      
                      
                      
                      21,380
                      
                      
                      75,334**Interest
                          Charges**:Interest
                          on long-term debt, net
                      
                      
                      25,728
                      
                      
                      14,650
                      
                      
                      
                      11,077
                      
                      
                      25,855Other
                          interest charges
                      
                      
                      3,198
                      
                      
                      1,225
                      
                      
                      
                      1,043
                      
                      
                      2,836Net
                          interest charges
                      
                      
                      28,926
                      
                      
                      15,875
                      
                      
                      
                      12,120
                      
                      
                      28,691**Net
                          Earnings Before Extraordinary Item****and
                          Cumulative Effect of Change in****Accounting
                          Principle**
                      
                      
                      15,699
                      
                      
                      17,831
                      
                      
                      
                      9,260
                      
                      
                      46,643**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)**
                      
                      $
                      15,699
                      
                      $
                      17,450
                      
                      
                      $
                      9,260
                      
                      $
                      (51,193
                      )
 The
            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****Year
                          Ended**
                      
                      **For
                          the Period**
                      
                      
                      **For
                          the Period**
                      
                      **Year
                          Ended****December
                          31,**
                      
                      **June
                          6 -**
                      
                      
                      **January
                          1-**
                      
                      **December
                          31,****2006**
                      
                      **December
                          31, 2005**
                      
                      
                      **June
                          6, 2005**
                      
                      **2004**(In
                            thousands)**Balance
                          at Beginning of Year**
                      
                      $
                      5,450
                      
                      $
                      -
                      
                      
                      $
                      (6,795
                      )
                      $
                      50,398Net
                          earnings
                      
                      
                      15,699
                      
                      
                      17,450
                      
                      
                      
                      9,260
                      
                      
                      (51,193
                      )Dividends:Common
                          Stock dividends paid toparent
                          company
                      
                      
                      -
                      
                      
                      (12,000
                      )
                      
                      
                      -
                      
                      
                      (6,000
                      )**Balance
                          at End of Year**
                      
                      $
                      21,149
                      
                      $
                      5,450
                      
                      
                      $
                      2,465
                      
                      $
                      (6,795
                      )
 The
            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,****2006**
                      
                      **2005**(In
                          thousands)**ASSETS****Utility
                          Plant:**Electric
                          plant in service
                      
                      $
                      925,538
                      
                      $
                      877,893Construction
                          work in progress
                      
                      
                      13,799
                      
                      
                      7,138Common
                          plant in service and plant held for future use
                      
                      
                      589
                      
                      
                      589939,926
                      
                      
                      885,620Less
                          accumulated depreciation and amortization
                      
                      
                      326,404
                      
                      
                      296,611Net
                          utility plant
                      
                      
                      613,522
                      
                      
                      589,009**Other
                          Property and Investments:**Other
                          investments
                      
                      
                      511
                      
                      
                      548Non-utility
                          property, net of accumulated depreciation of $3 and $3
                      
                      
                      2,120
                      
                      
                      2,120Total
                          other property and investments
                      
                      
                      2,631
                      
                      
                      2,668**Current
                          Assets:**Cash
                          and cash equivalents
                      
                      
                      2,542
                      
                      
                      16,228Accounts
                          receivable, net of allowance for uncollectible accounts
                          of $31 and
                          $100
                      
                      
                      10,317
                      
                      
                      13,191Federal
                          income tax refund
                      
                      
                      36,392
                      
                      
                      36,392Unbilled
                          revenues
                      
                      
                      6,000
                      
                      
                      6,679Other
                          receivables
                      
                      
                      1,515
                      
                      
                      6,087Inventories
                      
                      
                      1,509
                      
                      
                      1,478Other
                          current assets
                      
                      
                      944
                      
                      
                      1,211Total
                          current assets
                      
                      
                      59,219
                      
                      
                      81,266**Deferred
                          Charges:**Stranded
                          costs
                      
                      
                      89,949
                      
                      
                      87,316Carrying
                          charges on stranded costs
                      
                      
                      41,584
                      
                      
                      33,918Other
                          regulatory assets
                      
                      
                      11,052
                      
                      
                      2,720Goodwill
                      
                      
                      363,764
                      
                      
                      367,245Prepaid
                          pension cost
                      
                      
                      8,853
                      
                      
                      -Other
                          deferred charges
                      
                      
                      9,205
                      
                      
                      4,948Total
                          deferred charges
                      
                      
                      524,407
                      
                      
                      496,147$
                      1,199,779
                      
                      $
                      1,169,090
 The
            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,****2006**
                      
                      **2005**(In
                          thousands)**CAPITALIZATION
                          AND LIABILITIES****Capitalization:**Common
                          stockholder’s equity:Common
                          stock outstanding ($10 par value, 12,000,000 shares authorized:issued
                          9,615 at December 31, 2006 and 2005 respectively)
                      
                      $
                      96
                      
                      $
                      96Paid-in-capital
                      
                      
                      492,812
                      
                      
                      494,287Accumulated
                          other comprehensive income (loss), net of tax
                      
                      
                      562
                      
                      
                      (29
                      )Retained
                          earnings
                      
                      
                      21,149
                      
                      
                      5,450Total
                          common stockholder’s equity
                      
                      
                      514,619
                      
                      
                      499,804Long-term
                          debt
                      
                      
                      420,546
                      
                      
                      415,864Total
                          capitalization
                      
                      
                      935,165
                      
                      
                      915,668**Current
                          Liabilities:**Accounts
                          payable
                      
                      
                      11,332
                      
                      
                      11,913Affiliate
                          accounts payable
                      
                      
                      15,673
                      
                      
                      -Accrued
                          interest and taxes
                      
                      
                      19,029
                      
                      
                      24,250Other
                          current liabilities
                      
                      
                      10,102
                      
                      
                      8,784Total
                          current liabilities
                      
                      
                      56,136
                      
                      
                      44,947**Long-Term
                          Liabilities:**Accumulated
                          deferred income taxes
                      
                      
                      145,641
                      
                      
                      139,405Accumulated
                          deferred investment tax credits
                      
                      
                      832
                      
                      
                      1,540Regulatory
                          liabilities
                      
                      
                      54,134
                      
                      
                      56,246Accrued
                          pension liability and postretirement benefit cost
                      
                      
                      5,203
                      
                      
                      10,110Other
                          deferred credits
                      
                      
                      2,668
                      
                      
                      1,174Total
                          long-term liabilities
                      
                      
                      208,478
                      
                      
                      208,475Commitments
                          and Contingencies (see Note 16)$
                      1,199,779
                      
                      $
                      1,169,090
  The
              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**
                    
                    **Post-Acquisition**
                    
                    
                    **Pre-Acquisition**
                    
                    **Pre-Acquisition****Year
                        Ended**
                    
                    **For
                        the Period**
                    
                    
                    **For
                        the Period**
                    
                    **Year
                        Ended****December
                        31,**
                    
                    **June
                        6-December 31,**
                    
                    
                    **January
                        1- June 6,**
                    
                    **December
                        31,****2006**
                    
                    **2005**
                    
                    
                    **2005**
                    
                    **2004**(In
                        thousands)**Cash
                        Flows From Operating Activities:**Net
                        earnings (Loss)
                    
                    $
                    15,699
                    
                    $
                    17,450
                    
                    
                    $
                    9,260
                    
                    $
                    (51,193
                    )Adjustments
                        to reconcile net earnings tonet
                        cash flows from operating activities:Depreciation
                        and amortization
                    
                    
                    33,194
                    
                    
                    18,619
                    
                    
                    
                    14,042
                    
                    
                    32,279Allowance
                        for equity funds used during construction
                    
                    
                    (270
                    )
                    
                    (112
                    )
                    
                    
                    (60
                    )
                    
                    (384
                    )Accumulated
                        deferred income tax
                    
                    
                    4,055
                    
                    
                    9,870
                    
                    
                    
                    (1,267
                    )
                    
                    43,135Carrying
                        charges on deferred stranded costs
                    
                    
                    (6,993
                    )
                    
                    (4,376
                    )
                    
                    
                    1,407
                    
                    
                    (32,006
                    )Rate
                        case expense deferral
                    
                    
                    (5,045
                    )
                    
                    -
                    
                    
                    
                    -
                    
                    
                    -Cumulative
                        effect of change in accounting principle
                    
                    
                    -
                    
                    
                    615
                    
                    
                    
                    -
                    
                    
                    -Disallowance
                        of stranded costs, net of tax benefit
                    
                    
                    -
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    97,836Deferred
                        purchase power and fuel costs
                    
                    
                    -
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    (511
                    )Interest
                        on retail competition transition obligation
                    
                    
                    1,658
                    
                    
                    285
                    
                    
                    
                    -
                    
                    
                    -Other,
                        net
                    
                    
                    (2,965
                    )
                    
                    220
                    
                    
                    
                    787
                    
                    
                    -Changes
                        in certain assets and liabilities:Accounts
                        receivable
                    
                    
                    2,943
                    
                    
                    (510
                    )
                    
                    
                    149
                    
                    
                    820Unbilled
                        revenues
                    
                    
                    (2,535
                    )
                    
                    246
                    
                    
                    
                    (356
                    )
                    
                    1,225Accrued
                        postretirement benefit costs
                    
                    
                    (751
                    )
                    
                    (1,021
                    )
                    
                    
                    (412
                    )
                    
                    -Other
                        assets
                    
                    
                    (4,715
                    )
                    
                    (977
                    )
                    
                    
                    (193
                    )
                    
                    -Accounts
                        payable
                    
                    
                    4,431
                    
                    
                    (6,755
                    )
                    
                    
                    (5,379
                    )
                    
                    2,347Accrued
                        interest and taxes
                    
                    
                    (4,554
                    )
                    
                    (1,979
                    )
                    
                    
                    (4,134
                    )
                    
                    (16,621
                    )Acquisition
                        related benefit program
                    
                    
                    -
                    
                    
                    (2,604
                    )
                    
                    
                    -
                    
                    
                    -Payments
                        for stranded/fuel costs
                    
                    
                    -
                    
                    
                    (4,284
                    )
                    
                    
                    -
                    
                    
                    -Receipt/Payments-retail
                        competition transition obligationobligation
                    
                    
                    (18,214
                    )
                    
                    16,336
                    
                    
                    
                    -
                    
                    
                    -Change
                        in affiliate accounts
                    
                    
                    17,537
                    
                    
                    10,846
                    
                    
                    
                    297
                    
                    
                    -Other
                        liabilities
                    
                    
                    314
                    
                    
                    (126
                    )
                    
                    
                    1,339
                    
                    
                    (9,520
                    )Net
                        cash flows provided by operating activities
                    
                    
                    33,789
                    
                    
                    51,743
                    
                    
                    
                    15,480
                    
                    
                    67,407**Cash
                        Flows From Investing Activities:**Utility
                        plant additions
                    
                    
                    (47,659
                    )
                    
                    (27,801
                    )
                    
                    
                    (17,895
                    )
                    
                    (42,817
                    )Other,
                        net
                    
                    
                    93
                    
                    
                    3,111
                    
                    
                    
                    (169
                    )
                    
                    (356
                    )Net
                        cash flows used for investing activities
                    
                    
                    (47,566
                    )
                    
                    (24,690
                    )
                    
                    
                    (18,064
                    )
                    
                    (43,173
                    )
  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**
                    
                    **Post-Acquisition**
                    
                    
                    **Pre-Acquisition**
                    
                    **Pre-Acquisition****Year
                        Ended**
                    
                    **For
                        the Period**
                    
                    
                    **For
                        the Period**
                    
                    **Year
                        Ended****December
                        31,**
                    
                    **June
                        6-December 31,**
                    
                    
                    **January
                        1- June 6,**
                    
                    **December
                        31,****2006**
                    
                    **2005**
                    
                    
                    **2005**
                    
                    **2004****Cash
                      Flow From Financing Activities:**Long-term
                        debt costs and repayments
                    
                    
                    -
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    (9,382
                    )Redemption
                        of common stock
                    
                    
                    -
                    
                    
                    (62,000
                    )
                    
                    
                    -
                    
                    
                    -Dividends
                        paid
                    
                    
                    -
                    
                    
                    (12,000
                    )
                    
                    
                    -
                    
                    
                    (6,000
                    )Other,
                        net
                    
                    
                    91
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    -Net
                        cash flows provided by (used for)financing
                        activities
                    
                    
                    91
                    
                    
                    (74,000
                    )
                    
                    
                    -
                    
                    
                    (15,382
                    )Increase
                        (Decrease) in Cash and Cash Equivalents
                    
                    
                    (13,686
                    )
                    
                    (46,947
                    )
                    
                    
                    (2,584
                    )
                    
                    8,852Beginning
                        of Period
                    
                    
                    16,228
                    
                    
                    63,175
                    
                    
                    
                    65,759
                    
                    
                    56,907End
                        of Period
                    
                    $
                    2,542
                    
                    $
                    16,228
                    
                    
                    $
                    63,175
                    
                    $
                    65,759**Supplemental
                        Cash Flow Disclosures:**Interest
                        paid, net of capitalized interest
                    
                    $
                    27,231
                    
                    $
                    (609
                    )
                    
                    $
                    12,868
                    
                    $
                    26,145Income
                        taxes paid, net
                    
                    $
                    2
                    
                    $
                    (20,014
                    )
                    
                    $
                    2,456
                    
                    $
                    8,434
  The
            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,****2006**
                    
                    **2005**(In
                        thousands)**Common
                        Stockholder’s Equity:**Common
                        stock outstanding, par value $10 per share
                    
                    $
                    96
                    
                    $
                    96Paid-in-capital
                    
                    
                    492,812
                    
                    
                    494,287Accumulated
                        other comprehensive income (loss), net of tax
                    
                    
                    562
                    
                    
                    (29
                    )Retained
                        earnings
                    
                    
                    21,149
                    
                    
                    5,450Total
                        common stockholder's equity
                    
                    
                    514,619
                    
                    
                    499,804**Long-Term
                        Debt:****Issue
                        and Final Maturity**Senior
                        Notes:6.125%
                        due 2008
                    
                    
                    248,935
                    
                    
                    248,9356.25%
                        due 2009
                    
                    
                    167,690
                    
                    
                    167,690Total
                        Senior Notes
                    
                    
                    416,625
                    
                    
                    416,625Other,
                        including unamortized discounts
                    
                    
                    3,921
                    
                    
                    (761
                    )Total
                        long-term debt
                    
                    
                    420,546
                    
                    
                    415,864Total
                        Capitalization
                    
                    $
                    935,165
                    
                    $
                    915,668
 The
            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**
                    
                    **Post-Acquisition**
                    
                    
                    **Pre-Acquisition**
                    
                    **Pre-Acquisition****Year
                        Ended**
                    
                    **For
                        the Period**
                    
                    
                    **For
                        the Period**
                    
                    **Year
                        Ended****December
                        31,**
                    
                    **June
                        6 -**
                    
                    
                    **January
                        1 -**
                    
                    **December
                        31,****2006**
                    
                    **December
                        31, 2005**
                    
                    
                    **June
                        6, 2005**
                    
                    **2004**(In
                        thousands)**Net
                        Earnings**
                    
                    $
                    15,699
                    
                    $
                    17,450
                    
                    
                    $
                    9,260
                    
                    $
                    (51,193
                    )Other
                        Comprehensive Income (Loss):Interest
                        rate hedge net of reclassification adjustment,net
                        of tax (expense) benefit of $0, $0, $(1,084) and $(317)
                    
                    
                    -
                    
                    
                    -
                    
                    
                    
                    1,761
                    
                    
                    516Additional
                        minimum pension liability adjustment,net
                        of tax (expense) benefit of $8, $18, $0 and $0
                    
                    
                    (13
                    )
                    
                    (29
                    )
                    
                    
                    -
                    
                    
                    -**Total
                        Other Comprehensive Income (Loss)**
                    
                    
                    (13
                    )
                    
                    (29
                    )
                    
                    
                    1,761
                    
                    
                    516**Total
                        Comprehensive Income (Loss)**
                    
                    $
                    15,686
                    
                    $
                    17,421
                    
                    
                    $
                    11,021
                    
                    $
                    (50,677
                    )
  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, 2006, 2005 and 2004**
 **(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 primary subsidiaries are PNM, TNMP, First Choice and
          Altura. 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. PNM began service to TNMP’s New Mexico
          customers effective January 1, 2007. TNMP is a regulated utility operating
          in
          Texas and through December 31, 2006 in New Mexico. In Texas, TNMP provides
          regulated transmission and distribution services. In New Mexico, TNMP provided
          integrated electric services that included the transmission, distribution,
          purchase and sale of electricity to its New Mexico customers. First Choice
          is a
          competitive retail electric provider operating in Texas. Altura operates
          the
          Twin Oaks plant. 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.
 
 *Twin
          Oaks Acquisition*
 
 On
          April
          18, 2006, PNMR’s wholly owned subsidiary, Altura, purchased the Twin Oaks
          business, including the Twin Oaks power plant located in central Texas.
          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.
 
 *TNP
          Acquisition*
 
 On
          June
          6, 2005, PNMR completed the acquisition of TNP. 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.
          Other intangible assets were also recorded. Adjustments to goodwill and
          intangible assets were recorded in 2005 and 2006 (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 the “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.
 
 *Corporate
          and Other*
 
 PNMR
          Services Company provides corporate services to PNMR and its subsidiaries
          including Avistar, Altura, First Choice, PNM, TNMP and TNP based on shared
          services agreements. These services are billed at cost and are allocated
          to PNMR
          and its subsidiaries.
 
 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, 2006, 2005 and 2004**
 *Segment
          Information*
 
 Financial
          information relating to amounts of sales, revenue, net income and total
          assets
          of the Company’s reportable segments is contained in Note 3 in the Notes to
          Consolidated Financial Statements.
 
 *Accounting
          for the Effects of Certain Types of Regulation*
 
 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.
 
 *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
          2006 or 2005 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 (see Note 20) have been eliminated.
 
 *Financial
          Instruments*
 
 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.
 
 *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.
 
 *Cash
          and Cash Equivalents*
 
 Investments
          in highly liquid investments with original maturities of three months or
          less at
          the date of purchase are considered cash equivalents.
 
 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, 2006, 2005 and 2004**
 
 *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).
 
 In
          2006,
          2005, and 2004, PNM recorded $4.1 million, $4.2 million, and $2.9 million,
          respectively, of allowance for funds used during construction on certain
          projects. In 2006, 2005 and 2004, TNMP recorded $0.5 million, $0.4 million,
          and
          $0.8 million, respectively, of allowance for funds used during construction.
 
 *Capitalized
          Interest*
 
 In
          accordance with SFAS No. 34, *“Capitalization
          of Interest Costs”* (“SFAS
          34”), PNMR capitalizes interest on its construction projects not included
          in
          rate base. Interest was capitalized at the overall weighted average borrowing
          rate of 5.9%, 5.6%, and 5.2% for 2006, 2005, and 2004, respectively. PNMR’s
          capitalized interest was $3.0 million, $1.4 million, and $1.0 million in
          2006,
          2005, and 2004, 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, 2006, the accrual for carrying costs was $41.6 million net of one month’s
          amortization.
 
 *Inventories*
 
 Inventory
          consists principally of materials and supplies, natural gas held in storage
          for
          eventual resale, and coal held for use in electric generation.
 
 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.
 
 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, 2006, 2005 and 2004**
 
 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
          on the
          coal piles and any material adjustments would be recorded as identified.
 
 Inventories
          consisted of the following at December 31:
 
 **PNMR**
                
                **PNM**
                
                **TNMP****2006**
                
                **2005**
                
                **2006**
                
                **2005**
                
                **2006**
                
                **2005**(In
                    thousands)Coal
                
                $
                12,642
                
                $
                11,410
                
                $
                11,777
                
                $
                11,410
                
                $
                -
                
                $
                -Gas
                    in underground storage
                
                
                9,824
                
                
                12,487
                
                
                9,823
                
                
                12,487
                
                
                -
                
                
                -Materials
                    and supplies
                
                
                40,863
                
                
                28,140
                
                
                30,201
                
                
                26,514
                
                
                1,509
                
                
                1,478$
                63,329
                
                $
                52,037
                
                $
                51,801
                
                $
                50,411
                
                $
                1,509
                
                $
                1,478
 
 *Investments*
 
 In
          1985
          and 1986, PNM entered into operating leases for interests in certain PVNGS
          generation facilities (see Note 7). The remaining lessor notes that were
          issued
          by the owners of the assets subject to these leases are now held by the
          PVNGS
          Capital Trust. The leases continue in existence and are classified as operating
          leases. PNM understands that the PVNGS Capital Trust intends to hold the
          lessor
          notes until such notes mature. The notes are classified as held-to-maturity
          debt
          securities and are carried at amortized cost.
 
 The
          Company’s other investments are comprised of United States, state, and municipal
          government obligations and corporate securities. 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, 2006 and 2005, 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.
 
 The
          Company holds investment securities in a nuclear decommissioning trust.
          In
          accordance with SFAS No. 115, *“Accounting
          for Certain Investments in Debt and Equity Securities”* (“SFAS
          115”), the Company evaluates these investment securities for impairment on
          an
          on-going basis. Since third party investment managers have sole discretion
          over
          the purchase and sales of the nuclear decommissioning trust securities,
          the
          Company records impairment losses for any securities that have a market
          value
          that is less than cost at the end of each quarter. For the year ended December
          31, 2006, the Company recorded impairment losses on securities held in
          the
          nuclear decommissioning trust of $0.6 million.
 
 *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.
          In 2006, the Company completed its purchase accounting for the TNP
          acquisition.
 
 
 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, 2006, 2005 and 2004**
 
 The
          changes in the carrying amount of goodwill by reportable segment (see Note
          3)
          for the year ended December 31, 2006 and 2005 were as follows:
 
 **TNMP
                    Electric**
                
                **First
                    Choice**
                
                **Total**
                  **PNMR**(In
                    thousands)Balance
                    as of January 1, 2005
                
                $
                -
                
                $
                -
                
                $
                -Purchase
                    of TNP during 2005
                
                
                367,245
                
                
                131,910
                
                
                499,155Balance
                    as of December 31, 2005
                
                
                367,245
                
                
                131,910
                
                
                499,155Tax
                    adjustments during 2006
                
                
                (3,481
                )
                
                64
                
                
                (3,417
                )Balance
                    as of December 31, 2006
                
                $
                363,764
                
                $
                131,974
                
                $
                495,738
 
 Of
          the
          $79.3 million of acquired intangible assets from the TNP acquisition, $68.8
          million relates to the trade name “First Choice.” The trade name has an
          indefinite useful life; therefore, no amortization is recognized, but the
          asset
          is 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; and is
          being
          amortized on a straight-line basis over this period. The purchase in 2006
          of the
          Twin Oaks plant included the development rights for a possible 600-megawatt
          expansion of the plant valued at $25 million, which PNMR has classified
          as an
          intangible asset. The rights have an indefinite life; therefore no amortization
          is recognized, but the asset is being evaluated for impairment each reporting
          period.
 
 The
          components of PNMR’s identifiable intangible assets at December 31, 2006 are as
          follows:
 
 **Gross
                    Carrying Amount**
                
                **Accumulated
                    Amortization**(In
                    thousands)Amortized
                    intangible asset:First
                    Choice customer list
                
                $
                10,480
                
                $
                2,052Unamortized
                    intangible assets:First
                    Choice trade name
                
                
                68,774
                
                
                -Twin
                    Oaks expansion rights
                
                $
                25,000
                
                $
                -
 
 Expected
          future amortization expense for the First Choice customer list 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.
 
 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
          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).
 
 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, 2006, 2005 and 2004**
 
 *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’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 or costs of energy sold.
          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.
 
 *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:
 
 **2006**
                
                **2005**
                
                **2004**Electric
                    plant
                2.43%
                
                3.10%
                
                3.07%Gas
                    plant
                2.86%
                
                2.93%
                
                2.87%Common
                    plant
                7.55%
                
                8.65%
                
                8.08%
 
 
 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, 2006, 2005 and 2004**
 
 
 TNMP’s
          provision for depreciation and amortization of utility plant is made based
          upon
          rates approved by the PUCT and, through December 31, 2006, by the NMPRC.
          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:
 
 **2006**
                
                **2005**
                
                **2004**Electric
                    plant and common plant
                3.53%
                
                3.34%
                
                3.62%
 
 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.
 
 Due
          to
          the Company’s growth strategy in unregulated electricity generation and the
          purchase of Twin Oaks during 2006, the Company has an increasing amount
          of
          unregulated depreciable property. Other than nuclear fuel, which is depreciated
          based on units of production, depreciation of non-utility property, including
          property associated with the Twin Oaks purchase, is computed using the
          straight-line method over the following estimated useful lives:
 
 Structures
                    and improvements
                8
                    to 35 yearsOffice
                    and plant equipment
                8
                    to 35 yearsOffice
                    furniture and fixtures
                8
                    to 15 yearsTransportation
                    equipment/trailers
                12
                    to 17 yearsComputer
                    and communications equipment
                3
                    to 15 years
 
 *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.
 
 Under
          SFAS No. 149, “ *Amendment
          of Statement 133 on Derivative Instruments and Hedging
          Activities* ”
(“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.
 
 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, 2006, 2005 and 2004**
  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, 2006,
          2005, and
          2004, wholesale purchases of $48.5 million, $30.9 million, and $33.6 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 and related accruals are based on site-specific estimates
          of the costs for removing all radioactive and other structures at the site.
          PNM’s accruals for Units 1, 2 and 3 have been made based on such estimates,
          the
          guidelines of the NRC and the probability of a license extension (see Note
          15).
          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.
 
 *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*
 
 See
          Note
          13 for a comprehensive discussion of stock-based compensation
          expense.
 
 *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.
  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, 2006, 2005 and 2004**
  In
          July
          2006, the FASB issued Interpretation No. 48, “ *Accounting
          for Uncertainty in Income Taxes* ”
(“FIN
          48”). FIN 48 requires that the Company recognize only the impact of tax
          positions that, based on their merits, are more likely than not to be sustained
          upon an IRS audit. It also requires expanded financial statement disclosure
          of
          such positions. The Company will adopt FIN 48 in the first quarter of 2007
          (see
          Note 21).
 
 *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.
 
 *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.”*
 
 *Change
          in Presentation*
 
 As
          of
          December 31, 2006, the Company adopted SFAS 158, “Employers' Accounting for
          Defined Benefit Pension and Other Postretirement Plans (an amendment of
          FASB
          Statements No. 87, 88, 106, and 132R)” (“SFAS 158”). SFAS 158 changes the
          recognition requirements for defined benefit plans. SFAS 158 requires that
          the
          current economic status of pension and postretirement plans be recognized
          in the
          financial statements. SFAS 158 has no effect on the income or expense recognized
          for pension or other postretirement plans but does impact the balance sheet
          presentation of defined benefit plans. SFAS 158 was implemented in 2006,
          but was
          not applied retrospectively. See Note 12 for additional
          information.
 
 During
          2006, the Company reclassified PNM Wholesale receivables at month end as
          accounts receivable rather than unbilled revenue for the receivables associated
          with wholesale power sales. PNM Wholesale is on a calendar month billing
          cycle
          whereas PNM Gas and Electric employ a utility cycle billing period requiring
          a
          portion of the accounts receivable to be accounted for as unbilled revenue.
          This
          change in presentation reclassified $46.3 million of unbilled revenue as
          accounts receivable in 2005 in accordance with 2006 presentation.
 
 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, 2006, 2005 and 2004**
  As
          of
          December 31, 2006, PNMR reclassified the presentation on its balance sheet
          of
          TNMP’s utility plant acquired as part of the acquisition of TNP in 2005. TNMP
          presents its utility plant on its balance sheet on a gross basis and also
          presents the corresponding amount of accumulated depreciation and amortization
          for its utility plant. Prior to December 31, 2006, PNMR had included TNMP’s
          utility plant on its balance sheet net of accumulated depreciation. The
          effect
          of the reclassification of TNMP’s utility plant on PNMR’s balance sheet at
          December 31, 2005 was to increase gross utility plant by $143.8 million
          and to
          increase accumulated depreciation and amortization by $143.8 million. PNMR
          made
          the reclassification to include TNMP’s utility plant on its consolidated
          financial statements on a consistent basis with TNMP and consistent with
          the
          application of SFAS 71 to purchase accounting. PNMR believes that the
          reclassification does not have a material impact on its financial statements
          because the reclassification did not change its net utility plant or total
          assets, including TNMP that was previously reported.
 
 Certain
          amounts in the 2005 and 2004 Consolidated Financial Statements and Notes
          thereto
          for PNMR, PNM and TNMP have been reclassified to conform to the 2006 and
          2005
          financial statement presentation. Specifically, certain amounts in the
          2005 and
          2004 Consolidated Financial Statements and Notes thereto of TNMP have been
          reclassified to conform to PNMR’s presentation for comparability.
 
 **(2)**
                **Acquisitions**
 
 *Twin
          Oaks*
 
 On
          April
          18, 2006, PNMR’s wholly owned subsidiary, Altura, purchased the Twin Oaks
          business, which included a 305 MW coal-fired power plant located 150 miles
          south
          of Dallas, Texas for $480.0 million in cash plus the assumption of contracts
          and
          liabilities. The results of Twin Oaks operations have been included in
          the
          Consolidated Financial Statements of PNMR from that date. PNMR acquired
          Twin
          Oaks to expand the Company’s merchant generation fleet in order to serve a
          growing wholesale market in ERCOT. PNMR secured interim financing for Altura
          to
          close the transaction (see Note 6). In addition, PNMR incurred transaction
          and
          other costs of $1.1 million.
 
 The
          following table presents the estimated fair values of the assets acquired
          and
          liabilities assumed at the date of acquisition.
 
 **At
                    April 18, 2006**(In
                    thousands)Net
                    utility plant
                
                $
                594,653Other
                    current assets
                
                
                10,341Other
                    intangible assets
                
                
                25,000Other
                    deferred charges
                
                
                99,598Total
                    assets acquired
                
                
                729,592Other
                    current liabilities
                
                
                95,758Other
                    deferred credits
                
                
                152,776Total
                    liabilities assumed
                
                
                248,534Net
                    assets acquired
                
                $
                481,058
 
 The
          Twin
          Oaks purchase agreement also includes the development rights for a possible
          600-megawatt expansion of the plant, which PNMR has classified as an intangible
          asset. An additional $2.5 million payment will be made to the seller 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. PNMR has not
          made a
          decision regarding the Twin Oaks expansion, but it is considering a variety
          of
          options, including self development or sale to a third party.
 
 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, 2006, 2005 and 2004**
 
 As
          part
          of the acquisition of Twin Oaks, PNMR determined the fair value of two
          contractual obligations to sell power. The first contract obligates PNMR
          to sell
          power through September 2007 at which time the second contract begins and
          extends for three years. In comparing the pricing terms of the contractual
          obligations against the forward price of electricity in the relevant market,
          PNMR concluded that the contracts were below market. In accordance with
          SFAS No.
          141, as amended, *“Business
          Combinations”* (“SFAS
          141”), the contracts were recorded at fair value and will be amortized as an
          increase in operating revenue over the contract lives. The amortization
          matches
          the difference between the forward price curve and the contractual obligations
          for each month in accordance with the contract as of the acquisition date.
          For
          the first contract, $94.9 million was recorded in other current liabilities
          and
          $52.4 million was recorded in other deferred credits for a contract total
          of
          $147.3 million. As of December 31, 2006, the Company had amortized $70.9
          million
          leaving a balance on the first contract of $76.4 million. For the second
          contract, $29.6 million was recorded in other deferred credits; the amortization
          will start in 2007.
 
 The
          following unaudited pro forma financial information presents a summary
          of PNMR’s
          consolidated results of operations for the year ended December 31, 2006
          and 2005
          assuming the acquisition of Twin Oaks had been completed as of January
          1, 2006
          and 2005, respectively, including adjustments, which are based upon preliminary
          estimates, to reflect the allocation of the purchase price to the acquired
          net
          assets. The pro forma financial information does not include 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 of
          these
          dates. In addition, the pro forma financial information does not include
          results
          of operations from TNP prior to its acquisition on June 6, 2005.
 
 **For
                    the Year Ended****December
                    31,****2006**
                
                **2005**(In
                    thousands, except per share amounts)Operating
                    revenues
                
                $
                2,531,377
                
                $
                2,252,630Operating
                    expenses
                
                $
                2,275,239
                
                $
                2,054,152Earnings
                    before extraordinary item
                
                $
                136,994
                
                $
                102,110Net
                    earnings
                
                $
                136,994
                
                $
                101,184Net
                    earnings per common share:Basic
                
                $
                1.96
                
                $
                1.53Diluted
                
                $
                1.94
                
                $
                1.51
 
 *TNP*
 
 On
          June
          6, 2005, PNMR acquired all of the outstanding common shares of TNP, including
          its principal subsidiaries, TNMP and First Choice. 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 results of TNP’s operations have been included in the Condensed
          Consolidated Financial Statements of PNMR from that date.
 
 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.
  
 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, 2006, 2005 and 2004**
  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 for this class of customer
          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 $367.3 million and $131.9 million, respectively, as restated.
          None of the total goodwill amount is expected to be deductible under Section
          197
          of the Internal Revenue Code.
 
 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
 
 
 
 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, 2006, 2005 and 2004**
 
 **(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 consists of the operations of PNM, a regulated utility. PNM Electric
          provides integrated electricity services that include 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
          the
          Wholesale and TNMP Electric segments.
 
 **TNMP
          Electric**
 
 TNMP
          Electric is a regulated utility operating in Texas and, through December
          31,
          2006, in New Mexico. TNMP’s operations are subject to traditional cost of
          service regulation. TNMP provides regulated transmission and distribution
          services in Texas under the TECA.
 
 Through
          December 31, 2006, TNMP provided integrated electric services that included
          the
          transmission, distribution, purchase and sale of electricity to its New
          Mexico
          customers as well as transmission to third parties and to PNM. Effective
          January
          1, 2007 TNMP’s New Mexico business was transferred to PNM. PNM Wholesale was
          TNMP’s sole supplier for TNMP’s load in New Mexico prior to the transfer of
          assets to PNM.
 
 **PNM
          Gas**
 
 PNM
          Gas
          distributes natural gas to most of the major communities in New Mexico.
          The
          customer base of PNM Gas includes both sales-service customers and
          transportation-service customers. PNM Gas purchases natural gas in the
          open
          market and resells it at cost to its sales-service customers. As a result,
          increases or decreases in gas revenues resulting from gas price fluctuations
          do
          not impact PNMR’s or PNM’s consolidated gross margin or earnings.
 
 **UNREGULATED
          OPERATIONS**
 
 **Wholesale**
 
 For
          PNMR
          and PNM, Wholesale consists of the generation and sale of electricity into
          the
          wholesale market. Wholesale sells the unused capacity of PNM's jurisdictional
          assets as well as the capacity of PNM’s wholesale plants excluded from retail
          rates. Although the FERC has jurisdiction over the rates of Wholesale,
          the
          Company includes Wholesale in the unregulated portion of its business because
          Wholesale is not subject to traditional rate of return regulation.
 
 The
          Wholesale segment included in PNMR’s results of operations also includes the
          results of Altura from the date of acquisition of Twin Oaks on April 18,
          2006
          (see Note 2). Altura is not included in the results of operations for
          PNM.
 
 Adjustments
          related to EITF Issue 03-11 are included in Corporate and Other. This requires
          a
          net presentation of non-trading gains and losses and realized gains and
          losses
          for certain non-trading derivatives. Management evaluates 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.
 
 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, 2006, 2005 and 2004**
  **First
          Choice**
 
 First
          Choice is a certified retail electric provider operating in Texas, which
          allows
          it to provide electricity to residential, small and large commercial, industrial
          and institutional customers. Although First Choice is regulated in certain
          respects by the PUCT, 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 Power Retail LP was formed in 2006 for the purpose of conducting
          business
          as a retail electric provider in Texas. In January 2007, the PUCT authorized
          the
          new entity to do business as a retail electric provider.
 
 **CORPORATE
          AND OTHER**
 
 PNMR
          provides energy and technology related services through its wholly owned
          subsidiary, Avistar, and those results are included in the Corporate and
          Other
          segment. PNMR Services Company is also included in the Corporate and Other
          segment.
   B-50
  PNMR
          Segment Information
 
 Summarized
          financial information for PNMR by business segment for the year ended December
          31, 2006 is as follows (in thousands):
 
 **Regulated**
                  
                  
                  
                  **Unregulated**Segments
                      of Business
                  
                  **PNM**
                  
                  **TNMP**
                  
                  
                  
                  
                  
                  **First**
                  
                  **Corporate****Electric**
                  
                  **Electric
                      ***
                  
                  **PNM
                      Gas**
                  
                  **Wholesale**
                  
                  **Choice
                      ***
                  
                  **&
                      Other**
                  
                  
                  **Consolidated****2006:**Operating
                      revenues
                  
                  $
                  582,979
                  
                  $
                  187,935
                  
                  $
                  508,410
                  
                  $
                  654,896
                  
                  $
                  584,759
                  
                  $
                  (47,310
                  )
                  (a)
                  $
                  2,471,669Intersegment
                      revenues
                  
                  
                  9,170
                  
                  
                  69,055
                  
                  
                  419
                  
                  
                  50,619
                  
                  
                  140
                  
                  
                  (129,403
                  )
                  
                  
                  -**Total
                      revenues**
                  
                  
                  592,149
                  
                  
                  256,990
                  
                  
                  508,829
                  
                  
                  705,515
                  
                  
                  584,899
                  
                  
                  (176,713
                  )
                  
                  
                  2,471,669Less:
                      Cost of energy
                  
                  
                  195,155
                  
                  
                  103,021
                  
                  
                  361,873
                  
                  
                  507,800
                  
                  
                  455,126
                  
                  
                  (177,185
                  )
                  (a)
                  
                  1,445,790Intersegment
                      energy transfer
                  
                  
                  (6,355
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  6,355
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  -**Gross
                      margin**
                  
                  
                  403,349
                  
                  
                  153,969
                  
                  
                  146,956
                  
                  
                  191,360
                  
                  
                  129,773
                  
                  
                  472
                  
                  
                  
                  1,025,879Operating
                      expenses
                  
                  
                  272,911
                  
                  
                  79,235
                  
                  
                  104,886
                  
                  
                  63,487
                  
                  
                  64,769
                  
                  
                  8,615
                  
                  (b)
                  
                  593,903Depreciation
                      and amortization
                  
                  
                  59,610
                  
                  
                  31,576
                  
                  
                  23,991
                  
                  
                  26,101
                  
                  
                  2,026
                  
                  
                  8,967
                  
                  
                  
                  152,271Income
                      taxes
                  
                  
                  14,212
                  
                  
                  4,258
                  
                  
                  2,266
                  
                  
                  25,687
                  
                  
                  22,152
                  
                  
                  (22,377
                  )
                  (b)
                  
                  46,198**Operating
                      income**
                  
                  
                  56,616
                  
                  
                  38,900
                  
                  
                  15,813
                  
                  
                  76,085
                  
                  
                  40,826
                  
                  
                  5,267
                  
                  
                  
                  233,507Interest
                      income
                  
                  
                  25,829
                  
                  
                  922
                  
                  
                  3,669
                  
                  
                  5,370
                  
                  
                  2,474
                  
                  
                  1,418
                  
                  
                  
                  39,682Other
                      income/(deductions)
                  
                  
                  4,098
                  
                  
                  7,902
                  
                  
                  467
                  
                  
                  1,669
                  
                  
                  (390
                  )
                  
                  (1,527
                  )
                  
                  
                  12,219Other
                      income taxes
                  
                  
                  (11,848
                  )
                  
                  (3,085
                  )
                  
                  (1,637
                  )
                  
                  (2,787
                  )
                  
                  (745
                  )
                  
                  2,330
                  
                  
                  
                  (17,772
                  )Net
                      interest charges
                  
                  
                  (34,931
                  )
                  
                  (28,926
                  )
                  
                  (12,356
                  )
                  
                  (36,887
                  )
                  
                  (802
                  )
                  
                  (31,620
                  )
                  
                  
                  (145,522
                  )**Segment
                      net income (loss) ****
                  
                  $
                  39,764
                  
                  $
                  15,713
                  
                  $
                  5,956
                  
                  $
                  43,450
                  
                  $
                  41,363
                  
                  $
                  (24,132
                  )
                  
                  $
                  122,114**Gross
                      property additions**
                  
                  $
                  174,864
                  
                  $
                  47,659
                  
                  $
                  32,824
                  
                  $
                  39,410
                  
                  $
                  272
                  
                  $
                  26,089
                  
                  
                  $
                  321,118**At
                      December 31, 2006:****Total
                      Assets**
                  
                  $
                  2,091,335
                  
                  $
                  1,156,842
                  
                  $
                  704,519
                  
                  $
                  1,097,375
                  
                  $
                  349,846
                  
                  $
                  765,707
                  
                  
                  $
                  6,165,624**Goodwill**
                  
                  $
                  -
                  
                  $
                  363,764
                  
                  $
                  -
                  
                  $
                  -
                  
                  $
                  131,974
                  
                  $
                  -
                  
                  
                  $
                  495,738
  (a)
                Reflects
                    EITF 03-11 impact, under which wholesale revenues and the associated
                    cost
                    of energy of $48.5 million are reclassified to a net margin basis
                    in
                    accordance with GAAP.
 (b)
                Includes
                    TNP and Twin Oaks acquisition integration costs of $4.3 million
                    and costs
                    associated with the formation of EnergyCo of $3.4 million and
                    an income
                    tax benefit of $3.0 million.
 
 
 
 B-51
 
 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**
                  
                  **First**
                  
                  **Corporate****Electric**
                  
                  **Electric***
                  
                  **PNM
                      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
                      energy transfer
                  
                  
                  (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
                      and amortization
                  
                  
                  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
                  )Net
                      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**Gross
                      property additions**
                  
                  $
                  135,632
                  
                  $
                  27,801
                  
                  $
                  31,019
                  
                  $
                  14,595
                  
                  $
                  482
                  
                  $
                  12,285
                  
                  
                  $
                  221,814**At
                      December 31, 2005:****Total
                      Assets**
                  
                  $
                  1,937,811
                  
                  $
                  1,169,090
                  
                  $
                  721,021
                  
                  $
                  421,377
                  
                  $
                  318,820
                  
                  $
                  556,590
                  
                  
                  $
                  5,124,709**Goodwill**
                  
                  $
                  -
                  
                  $
                  367,245
                  
                  $
                  -
                  
                  $
                  -
                  
                  $
                  131,910
                  
                  $
                  -
                  
                  
                  $
                  499,155
   (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 $14.5 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 $12.5 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 acquisition related costs of $2.5 million,
                    TNP debt
                    refinancing costs of $1.0 million in other income/(deductions)
                    and an
                    income tax benefit of $4.5 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, 2006, 2005 and 2004**
 
 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**
                  
                  **First**
                  
                  **Corporate****Electric**
                  
                  **Electric**
                  
                  **PNM
                      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
                      and amortization
                  
                  
                  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
                  )Net
                      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**Gross
                      property additions**
                  
                  $
                  89,124
                  
                  $
                  -
                  
                  $
                  35,547
                  
                  $
                  8,023
                  
                  $
                  -
                  
                  $
                  13,016
                  
                  
                  
                  $
                  145,710**At
                      December 31, 2004:****Total
                      Assets**
                  
                  $
                  1,764,032
                  
                  $
                  -
                  
                  $
                  512,538
                  
                  $
                  430,493
                  
                  $
                  -
                  
                  $
                  780,572
                  
                  
                  
                  $
                  3,487,635
  (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, 2006, 2005 and 2004**
 
 PNM
          Segment Information
 
 Summarized
          financial information for PNM by business segment for the year ended December
          31, 2006 is as follows (in thousands):
  Segments
                      of Business
                  
                  **PNM**
                  
                  
                  
                  **PNM**
                  
                  **Corporate****Electric**
                  
                  **PNM
                      Gas**
                  
                  **Wholesale**
                  
                  **&
                      Other**
                  
                  
                  **Consolidated****2006:**Operating
                      revenues
                  
                  $
                  582,979
                  
                  $
                  508,410
                  
                  $
                  529,764
                  
                  $
                  (48,495
                  )
                  (a)
                  
                  $
                  1,572,658Intersegment
                      revenues
                  
                  
                  8,675
                  
                  
                  419
                  
                  
                  -
                  
                  
                  (9,094
                  )
                  
                  
                  
                  -Affiliated
                      Sales
                  
                  
                  495
                  
                  
                  -
                  
                  
                  50,619
                  
                  
                  -
                  
                  
                  
                  
                  51,114**Total
                      revenues**
                  
                  
                  592,149
                  
                  
                  508,829
                  
                  
                  580,383
                  
                  
                  (57,589
                  )
                  
                  
                  
                  1,623,772Less:
                      Cost of energy
                  
                  
                  195,155
                  
                  
                  361,873
                  
                  
                  468,939
                  
                  
                  (57,397
                  )
                  (a)
                  
                  
                  968,570Intersegment
                      energy transfer
                  
                  
                  (6,355
                  )
                  
                  -
                  
                  
                  6,355
                  
                  
                  -
                  
                  
                  
                  
                  -**Gross
                      margin**
                  
                  
                  403,349
                  
                  
                  146,956
                  
                  
                  105,089
                  
                  
                  (192
                  )
                  
                  
                  
                  655,202Operating
                      expenses
                  
                  
                  272,911
                  
                  
                  104,886
                  
                  
                  50,505
                  
                  
                  (1,886
                  )
                  
                  
                  
                  426,416Depreciation
                      and amortization
                  
                  
                  59,610
                  
                  
                  23,991
                  
                  
                  13,041
                  
                  
                  2,975
                  
                  
                  
                  
                  99,617Income
                      taxes
                  
                  
                  14,212
                  
                  
                  2,266
                  
                  
                  10,124
                  
                  
                  (2,230
                  )
                  
                  
                  
                  24,372**Operating
                      income**
                  
                  
                  56,616
                  
                  
                  15,813
                  
                  
                  31,419
                  
                  
                  949
                  
                  
                  
                  
                  104,797Interest
                      income
                  
                  
                  25,829
                  
                  
                  3,669
                  
                  
                  5,120
                  
                  
                  1,142
                  
                  
                  
                  
                  35,760Other
                      income/(deductions)
                  
                  
                  4,098
                  
                  
                  467
                  
                  
                  1,655
                  
                  
                  (957
                  )
                  
                  
                  
                  5,263Other
                      income taxes
                  
                  
                  (11,848
                  )
                  
                  (1,637
                  )
                  
                  (2,682
                  )
                  
                  535
                  
                  
                  
                  
                  (15,632
                  )Net
                      interest charges
                  
                  
                  (34,931
                  )
                  
                  (12,356
                  )
                  
                  (15,970
                  )
                  
                  4,788
                  
                  
                  
                  
                  (58,469
                  )**Segment
                      net income (loss)**
                  
                  $
                  39,764
                  
                  $
                  5,956
                  
                  $
                  19,542
                  
                  $
                  6,457
                  
                  
                  
                  $
                  71,719**Gross
                      property additions**
                  
                  $
                  174,864
                  
                  $
                  32,824
                  
                  $
                  38,471
                  
                  $
                  -
                  
                  
                  
                  $
                  246,159**At
                      December 31, 2006:****Total
                      Assets**
                  
                  $
                  2,117,674
                  
                  $
                  713,028
                  
                  $
                  401,585
                  
                  $
                  567,014
                  
                  
                  
                  $
                  3,799,301
   (a)
                Reflects
                    EITF 03-11 impact, under which wholesale revenues and the associated
                    cost
                    of energy of $48.5 million are reclassified to a net margin basis
                    in
                    accordance with GAAP.
 
 
 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, 2006, 2005 and 2004**
 
 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**
                  
                  **Corporate****Electric**
                  
                  **PNM
                      Gas**
                  
                  **Wholesale**
                  
                  **&
                      Other**
                  
                  
                  
                  **Consolidated****2005:**Operating
                      revenues
                  
                  $
                  567,270
                  
                  $
                  510,801
                  
                  $
                  602,939
                  
                  $
                  (30,930
                  )
                  
                  (a)
                  
                  $
                  1,650,080Intersegment
                      revenues
                  
                  
                  6,418
                  
                  
                  641
                  
                  
                  -
                  
                  
                  (7,059
                  )
                  
                  
                  
                  
                  -Affiliated
                      Sales
                  
                  
                  288
                  
                  
                  -
                  
                  
                  25,089
                  
                  
                  -
                  
                  
                  
                  
                  
                  25,377**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
                  )Net
                      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**Gross
                      property additions**
                  
                  $
                  135,632
                  
                  $
                  31,019
                  
                  $
                  14,595
                  
                  $
                  (13,500
                  )
                  
                  
                  
                  $
                  167,746**At
                      December 31, 2005:****Total
                      Assets**
                  
                  $
                  1,937,811
                  
                  $
                  721,021
                  
                  $
                  421,377
                  
                  $
                  507,542
                  
                  
                  
                  
                  $
                  3,587,751
  (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 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, 2006, 2005 and 2004**
 
 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**
                  
                  **Corporate****Electric**
                  
                  **PNM
                      Gas**
                  
                  **Wholesale**
                  
                  **&
                      Other**
                  
                  
                  
                  **Consolidated****2004:**Operating
                      revenues
                  
                  $
                  552,563
                  
                  $
                  489,767
                  
                  $
                  588,243
                  
                  $
                  (33,609
                  )
                  (a)
                  
                  $
                  1,596,964Intersegment
                      revenues
                  
                  
                  5,849
                  
                  
                  1,154
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  
                  7,003Affiliated
                      Sales
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  
                  -**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
                      energy transfer
                  
                  
                  (42,769
                  )
                  
                  -
                  
                  
                  42,769
                  
                  
                  -
                  
                  
                  
                  
                  -**Gross
                      margin**
                  
                  
                  414,664
                  
                  
                  147,702
                  
                  
                  96,415
                  
                  
                  -
                  
                  
                  
                  
                  658,781Operating
                      expenses
                  
                  
                  258,182
                  
                  
                  97,412
                  
                  
                  46,442
                  
                  
                  776
                  
                  
                  
                  
                  402,812Depreciation
                      and amortization
                  
                  
                  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
                  )Net
                      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**Gross
                      property additions**
                  
                  $
                  89,124
                  
                  $
                  35,547
                  
                  $
                  8,023
                  
                  $
                  5,457
                  
                  
                  
                  $
                  138,151**At
                      December 31, 2004:****Total
                      Assets**
                  
                  $
                  1,764,032
                  
                  $
                  512,538
                  
                  $
                  430,493
                  
                  $
                  686,667
                  
                  
                  
                  $
                  3,393,730
  (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.
 
 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-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, 2006, 2005 and 2004**
 
 PNMR
 
 **December
                    31,****2006**
                
                **2005****Assets:**
                
                (In
                    thousands)Current:PGAC
                
                $
                217
                
                $
                24,885Gas
                    Take-or-Pay Costs
                
                
                149
                
                
                1,065Underground
                    Rate
                
                
                356
                
                
                790Gas
                    Mark-to-Market - PGAC
                
                
                16,748
                
                
                1,318Other
                
                
                37
                
                
                -Subtotal
                
                
                17,507
                
                
                28,058Non-Current:Mine
                    Reclamation Costs
                
                
                90,960
                
                
                94,758Deferred
                    Income Taxes
                
                
                80,646
                
                
                78,671Gas
                    Mark-to-Market
                
                
                3,297
                
                
                -Financing
                    Costs
                
                
                24,471
                
                
                25,362Pension
                    and OPEB
                
                
                185,225
                
                
                -Loss
                    on Reacquired Debt
                
                
                18,258
                
                
                17,398Renewable
                    Energy Certificates
                
                
                7,950
                
                
                5,739Stranded
                    Costs
                
                
                89,949
                
                
                87,316Carrying
                    Charges on Stranded Costs
                
                
                41,584
                
                
                33,918Rate
                    Case Expense
                
                
                4,905
                
                
                -Other
                
                
                6,319
                
                
                4,117Subtotal
                
                
                553,564
                
                
                347,279Total
                    Regulatory Assets
                
                $
                571,071
                
                $
                375,337**Liabilities:**Current:Gas
                    Mark-to-Market - PGAC
                
                $
                -
                
                $
                (7,085
                )Off-system
                    sales margin
                
                
                (1,172
                )
                
                -Subtotal
                
                
                (1,172
                )
                
                (7,085
                )Non-Current:Cost
                    of Removal
                
                
                (310,618
                )
                
                (298,307
                )Retail
                    competition transition obligation
                
                
                (65
                )
                
                (16,621
                )Deferred
                    Income Taxes
                
                
                (27,340
                )
                
                (30,070
                )Asset
                    Retirement Obligation
                
                
                (36,068
                )
                
                (33,367
                )Unrealized
                    Gain on PVNGS Decommissioning Trust
                
                
                -
                
                
                (7,251
                )PVNGS
                    Prudence Audit
                
                
                (2,734
                )
                
                (3,555
                )Pension
                    and OPEB
                
                
                (9,940
                )
                
                -Industrial
                    Fuel Credit
                
                
                (3,475
                )
                
                -Settlement
                    Due Customers
                
                
                (853
                )
                
                (1,075
                )Gain
                    on Reacquired Debt
                
                
                (380
                )
                
                (692
                )Gas
                    Mark-to-Market - PGAC
                
                
                -
                
                
                (5,564
                )TNP
                    Acquisition - Settlement Due Customers
                
                
                (2,671
                )
                
                (2,448
                )Other
                
                
                (4,026
                )
                
                (3,303
                )Subtotal
                
                
                (398,170
                )
                
                (402,253
                )Total
                    Regulatory Liabilities
                
                $
                (399,342
                )
                $
                (409,338
                )
 
 
 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, 2006, 2005 and 2004**
 
 PNM
 
 **December
                    31,****2006**
                
                **2005**(In
                    thousands)**Assets:**Current:PGAC
                
                $
                217
                
                $
                24,885Gas
                    Take-or-Pay Costs
                
                
                149
                
                
                1,065Underground
                    Rate
                
                
                356
                
                
                790Gas
                    Mark-to-Market - PGAC
                
                
                16,748
                
                
                1,318Other
                
                
                37
                
                
                -Subtotal
                
                $
                17,507
                
                $
                28,058Non-Current:Mine
                    Reclamation Costs
                
                
                90,960
                
                
                94,758Deferred
                    Income Taxes
                
                
                75,353
                
                
                75,951Financing
                    Costs
                
                
                24,471
                
                
                25,362Loss
                    on Reacquired Debt
                
                
                17,471
                
                
                17,398Pension
                    and OPEB
                
                
                185,158
                
                
                -Renewable
                    Energy Certificates
                
                
                7,950
                
                
                5,739Gas
                    Mark-to-Market - PGAC
                
                
                3,297
                
                
                -Other
                
                
                6,319
                
                
                4,117Subtotal
                
                
                410,979
                
                
                223,325Total
                    Regulatory Assets
                
                $
                428,486
                
                $
                251,383**Liabilities:**Current:Gas
                    Mark-to-Market - PGAC
                
                $
                -
                
                $
                (7,085
                )Off-system
                    sales margin
                
                
                (1,172
                )
                
                -Subtotal
                
                
                (1,172
                )
                
                (7,085
                )Non-Current:Cost
                    of Removal
                
                
                (269,964
                )
                
                (258,682
                )Deferred
                    Income Taxes
                
                
                (27,340
                )
                
                (30,070
                )Asset
                    Retirement Obligation
                
                
                (36,068
                )
                
                (33,367
                )Unrealized
                    Gain on PVNGS Decommissioning Trust
                
                
                -
                
                
                (7,251
                )PVNGS
                    Prudence Audit
                
                
                (2,734
                )
                
                (3,555
                )Settlement
                    Due Customers
                
                
                (853
                )
                
                (1,075
                )Gain
                    on Reacquired Debt
                
                
                (380
                )
                
                (692
                )Gas
                    Mark-to-Market - PGAC
                
                
                -
                
                
                (5,564
                )TNP
                    Acquisition - Settlement Due Customers
                
                
                (2,671
                )
                
                (2,448
                )Other
                
                
                (4,026
                )
                
                (3,303
                )Subtotal
                
                
                (344,036
                )
                
                (346,007
                )Total
                    Regulatory Liabilities
                
                $
                (345,208
                )
                $
                (353,092
                )
 
 
 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, 2006, 2005 and 2004**
 
 TNMP
 
 **December
                    31,****2006**
                
                **2005**(In
                    thousands)**Assets:**Non-Current:Stranded
                    Costs
                
                $
                89,949
                
                $
                87,316Carrying
                    Charges on Stranded Costs
                
                
                41,584
                
                
                33,918Deferred
                    Income Taxes
                
                
                5,293
                
                
                2,720Pension
                    and OPEB
                
                
                67
                
                
                -Loss
                    on Reacquired Debt
                
                
                787
                
                
                -Rate
                    Case Expense
                
                
                4,905
                
                
                -Subtotal
                
                
                142,585
                
                
                123,954Total
                    Regulatory Assets
                
                $
                142,585
                
                $
                123,954**Liabilities:**Non-Current:Cost
                    of Removal
                
                
                (40,654
                )
                
                (39,625
                )Industrial
                    Fuel Credit
                
                
                (3,475
                )
                
                -Pension
                    and OPEB
                
                
                (9,940
                )
                
                -Retail
                    competition transition obligation
                
                
                (65
                )
                
                (16,621
                )Total
                    Regulatory Liabilities
                
                $
                (54,134
                )
                $
                (56,246
                )
 
 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.
          Financing costs are amortized over the life of the debt, with the remaining
          amortization periods ranging from 2 to 29 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.
 
 With
          the
          issuance of SFAS 158, actuarial losses and prior service costs are required
          to
          be recorded in accumulated other comprehensive income; however, the amortization
          of these items is recoverable through the Company’s rates (see Note
          12.)
 
 For
          information related to TNMP’s stranded costs, 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.
 
 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, 2006, 2005 and 2004**
 
 Based
          on
          a current evaluation of the various factors and conditions that are expected
          to
          impact future cost recovery, the Company believes that future recovery
          of its
          regulatory assets are probable.
 
 **(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, 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
                
                
                -
                
                
                11,348Stock
                    based compensation
                
                
                -
                
                
                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
                
                $
                813,425Exercise
                    of stock options
                
                
                -
                
                
                (9,641
                )Tax
                    benefit from exercise of stock options
                
                
                -
                
                
                1,072Stock
                    based compensation
                
                
                -
                
                
                7,539Sale
                    of common stock
                
                
                7,777,097
                
                
                226,098ESPP
                    purchase
                
                
                85,089
                
                
                1,958**Balance
                    at December 31, 2006**
                
                
                76,648,472
                
                $
                1,040,451
 
 
 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, 2006, 2005 and 2004**
 
 **PNM**
 
 Changes
          in common stock for PNM are as follows:
 
 **Common
                    Stock****Number**
                
                **Aggregate****of
                    Shares**
                
                **Value**(Dollars
                    in thousands)**Balance
                    at December 31, 2004**
                
                
                39,117,799
                
                $
                752,350Equity
                    from parent
                
                
                -
                
                
                13,150**Balance
                    at December 31, 2005**
                
                
                39,117,799
                
                $
                765,500**Balance
                    at December 31, 2006**
                
                
                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, 2004**
                
                
                10,705
                
                $
                107
                
                $
                197,751**Post-Acquisition:****Balance
                    at June 6, 2005**
                
                
                10,705
                
                $
                107
                
                $
                -Purchase
                    accounting adjustments
                
                
                -
                
                
                -
                
                
                556,287Stock
                    redemption
                
                
                (1,090
                )
                
                (11
                )
                
                (62,000
                )**Balance
                    at December 31, 2005**
                
                
                9,615
                
                $
                96
                
                $
                494,287Tax
                    on goodwill adjustments
                
                
                -
                
                
                -
                
                
                (1,475
                )**Balance
                    at December 31, 2006**
                
                
                9,615
                
                $
                96
                
                $
                492,812
 
 *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 its operating subsidiaries.
 
 PNM
          did
          not pay any cash dividends to PNMR in 2006. PNM paid cash dividends of,
          $91.0
          million and $23.0 million to PNMR in 2005, and 2004, respectively. TNMP
          did not
          pay any cash dividends to PNMR in 2006. TNMP paid cash dividends of $12.0
          million to PNMR in 2005.
 
 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. 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. PNM can 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.
 
 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, 2006, 2005 and 2004**
 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.
 
 *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. PNM has 115,293 cumulative preferred shares outstanding. 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 for details related to PNMR’s issuance of equity-linked units and common
          stock.
 
 *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.
 
 **(6)**
                **Financing**
 
 *Borrowing
          Arrangements Between PNMR and Subsidiaries*
 
 In
          February 2006, the Board approved affiliate borrowing arrangements between
          PNMR
          and its subsidiaries that would authorize each subsidiary to borrow up
          to $50.0
          million from PNMR. Neither PNM nor TNMP has entered into an intercompany
          loan
          agreement under that authority in 2006. Subsequently, in January 2007,
          TNMP
          entered into an intercompany loan agreement with PNMR and can borrow up
          to $50.0
          million.
 
 As
          of
          December 31, 2006, TNMP had not entered into an intercompany borrowing
          arrangement under that PNMR authorization. On January 12, 2007, TNMP entered
          into a $25.0 million intercompany loan with PNMR under the
          authorization.
 
 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, 2006, 2005 and 2004**
  Pursuant
          to a separate borrowing arrangement, PNM has a $20.0 million promissory
          note to
          PNMR payable on or before September 30, 2007. Under this arrangement, PNM
          agrees
          to pay all applicable interest on the outstanding balance at the interest
          rates
          provided in the agreement. As of December 31, 2006 and December 31, 2005,
          there
          were no outstanding borrowings on the promissory note. PNM’s $20.0 million
          intercompany loan agreement with PNMR was put in place prior to the February
          2006 authorization.
 
 **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.
          One
          such extension option was exercised extending the maturity of $574.0 million
          of
          borrowing capacity to August 15, 2011. At December 31, 2006, no borrowings
          were
          outstanding under the PNMR Facility (see First Choice below); however,
          $63.3
          million of letters of credit are outstanding, which reduces the available
          capacity under the PNMR Facility.
 
 At
          December 31, 2006, 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,
          2006.
 
 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, 2006, PNMR had $263.6 million of commercial paper outstanding.
 
 At
          December 31, 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 December 31, 2006, First Choice had no borrowings
          outstanding under the PNMR Facility; however, First Choice had $5.0 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*
 
 Shelf
          Registration Statement
 
 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, 2006, PNMR had
          approximately $400.0 million of remaining unissued securities under this
          registration statement.
 
 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, 2006, 2005 and 2004**
  In
          August
          2006, PNMR filed a new universal shelf registration statement with the
          SEC.
          Under SEC rules, this new universal shelf registration statement may be
          amended
          to add additional securities. As a result, subject to certain conditions
          and
          limitations, this new shelf registration statement has unlimited
          capacity.
 
 *Interest
          Rate Swaps*
 
 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, 2006, to 6.01%. The swap is accounted for as
          a
          fair-value hedge with a liability position of approximately $4.2 million
          as of
          December 31, 2006.
 
 *Twin
          Oaks Financing*
 
 On
          April
          18, 2006, PNMR entered into a short-term loan agreement for temporary financing
          of the Twin Oaks acquisition (see Note 2). Under the term loan agreement,
          PNMR
          was permitted to borrow up to $480.0 million in a single draw on or after
          April
          18, 2006, to finance the acquisition of Twin Oaks and related expenses.
          Term
          loans made under this agreement bear interest at a base rate (the greater
          of the
          prime rate in effect and the Federal Funds Rate plus 1⁄2 of 1%) or an adjusted
          Eurodollar rate (equal to the British Bankers Association LIBOR rate plus
          an
          additional percentage based on PNMR’s then current long-term senior unsecured
          non-credit enhanced debt rating). On April 18, 2006, PNMR borrowed $480.0
          million under the term loan agreement. PNMR used the proceeds of the loan
          to
          make capital contributions totaling $480.0 million to Altura through the
          two
          wholly owned subsidiaries that are partners in Altura to provide the funds
          for
          the acquisition of Twin Oaks. PNMR must repay the loan by April 17, 2007,
          unless
          accelerated in accordance with the terms of the agreement or prepaid in
          whole or
          in part. As of December 31, 2006, $230.5 million of the term loan was
          repaid.
 
 *Forward
          Starting Swaps*
 
 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 were to 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%, to 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 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. These two interest rate swaps were sold on
          May 19,
          2006. The current amount recorded in other comprehensive income will be
          recognized in income over a 3 year period ending in November 2009.
 
 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, 2006, 2005 and 2004**
 *TNP
          Acquisition*
 
 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, 2006, 2005 and 2004**
 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, 2006
          was approximately 239,600 shares.
 
 *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 period is equal to or greater than approximately $32.65
          per
          share, as of December 31, 2006, the settlement rate will be 1.5402 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, as of
          December
          31, 2006, 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 1.8791 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
  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, 2006, 2005 and 2004**
  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. There was no dilution for the year
          ended
          December 31, 2006.
 
 *Sale
          of PNMR Common Stock*
 
 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 combined-cycle power plant near Deming,
          New
          Mexico and for other general corporate purposes.
 
 Pursuant
          to the terms of the PNM Direct Plan, PNMR began offering new shares of
          PNMR
          common stock through the plan beginning in June 2006. PNMR may also waive
          the
          maximum investment limit upon request in individual cases pursuant to the
          terms
          of the plan. In August 2006, PNMR entered into an equity distribution agreement
          to offer and sell up to 8 million shares of PNMR common stock from time
          to time.
          The agreement provides that PNMR will not sell more shares than needed
          for the
          aggregate gross proceeds from such sales to reach $200.0 million. For the
          year
          ended December 31, 2006, PNMR had sold a combined total of 2.0 million
          shares of
          its common stock through the PNMR Direct Plan and the equity distribution
          agreement for net proceeds of $55.3 million, at a weighted average price
          of
          $27.63.
 
 In
          December 2006, PNMR issued 5,750,000 shares of its common stock at $30.79
          per
          share. PNMR received net proceeds from this offering, after deducting
          underwriting discounts and commissions and estimated expenses, of approximately
          $170.8 million. PNMR used the net proceeds from these stock sales to prepay
          debt
          associated with the acquisition of Twin Oaks.
 
 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, 2006, 2005 and 2004**
 
 **PNM**
 
 *Long-Term
          Debt*
 
 PNM
          has
          total long-term debt outstanding in the amount of $987 million, which is
          comprised of $401 million of taxable senior unsecured debt and $586 million
          of
          tax-exempt debt. Out of $586 million tax-exempt bonds, $65 million is in
          the
          form of first mortgage bonds, with the mortgage lien on PNM’s ownership interest
          in PVNGS, and the rest is collateralized by the SUNs. In July of 2006,
          the City
          of Farmington adopted an inducement resolution, which is expected to support
          the
          future issuance of new tax-exempt bonds used to finance a portion of the
          environmental project at the San Juan plant.
 
 *Revolving
          and Other Credit Facilities*
 
 In
          August
          2005, PNM entered into a new $400.0 million unsecured credit agreement
          (the “PNM
          Facility”) to replace an existing $300.0 million facility. The PNM Facility was
          for a one-year term and was to expire August 17, 2006. On July 6, 2006,
          the
          NMPRC approved extending the maturity for this facility to August 17, 2010,
          which became effective upon receipt of the NMPRC order by the agent bank
          on
          August 10, 2006. The PNM Facility also includes two one-year extension
          options,
          which were also approved by NMPRC. One such extension option was exercised
          extending the maturity of $386.0 million of borrowing capacity to August
          17,
          2011. The remaining extension option is still subject to approval by a
          majority
          of the lenders and must be exercised no later than August 17, 2007. There
          were
          no amounts outstanding under the PNM Facility as of December 31, 2006.
 
 At
          December 31, 2006, PNM also had $13.5 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, 2006; however, $3.1 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,
          2006, PNM
          had $251.3 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, 2006, PNM had
          approximately $200.0 million of remaining unissued securities registered
          under
          its shelf registration statement.
 
 *Asset
          Securitization*
 
 PNM
          had
          an accounts receivable securitization program with a maximum borrowing
          capacity
          of $70.0 million. This program provided for the securitization of PNM’s retail
          electric service accounts receivable and retail gas service accounts receivable.
          Under the securitization program, PNM would periodically sell its accounts
          receivable, principally retail receivables, to a bankruptcy remote subsidiary,
          PNM Receivables Corporation, which in turn pledged 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
          expired in April 2006 and was not renewed.
 
 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, 2006, 2005 and 2004**
 *New
          Mexico Energy Investments LLC*
 
 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.
 
 On
          December 20, 2006, PNM entered into purchase and sale agreement with ESI
          Northeast Energy LP, Inc., an affiliate of FPL, and acquired an interest
          in the
          New Mexico Wind Energy Center by the purchase of a 1% membership interest
          in New
          Mexico Energy Investments, LLC for $21.2 million. At closing, PNM paid
          $6.2
          million in cash and obtained a secured promissory note for $15.0 million
          at an
          annual interest rate of 6%. PNM will make an annual payment of $2.7 million
          for
          principal and interest until the final maturity date of the promissory
          note on
          December 31, 2013. PNM will receive state and federal tax benefits from
          its
          ownership interest. PNM’s ownership interest terminates on December 31,
          2013.
 
 **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.
          TNMP is required to redeem the 6.125% senior notes if it receives proceeds
          from
          the securitization of stranded costs. As of December 31, 2006, this has
          not
          occurred.
 
 *Revolving
          and Other Credit Facilities*
 
 TNMP
          was
          added as a borrower under the PNMR Facility in September 2005 and can issue
          notes up to $100.0 million under the PNMR facility. Any borrowings made
          by TNMP
          under this sublimit are not guaranteed by PNMR. At December 31, 2006, TNMP
          had
          no outstanding borrowings under the PNMR Facility. However, TNMP had $2.0
          million letters of credit outstanding, which reduces the available capacity
          under the PNMR facility.
 
 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, 2006, 2005 and 2004**
 
 **(7)**
                **Lease
                    Commitments**
 
 **PNMR**
 
 PNMR’s
          operating lease expense, including TNP lease expense from June 6, 2005
          through
          December 31, 2005, was approximately $36.1 million in 2006, $36.7 million
          in
          2005, and $33.0 million in 2004. Aggregate minimum payments to be received
          in
          future periods under non-cancelable subleases are approximately $0.9
          million.
 
 PNMR’s
          future minimum operating and capital lease payments at December 31, 2006
          are:
 
 Operating
                
                Capital(In
                    thousands)2007
                
                $
                30,788
                
                $
                3,2982008
                
                
                31,724
                
                
                2,2342009
                
                
                27,962
                
                
                1,7882010
                
                
                26,755
                
                
                1,0922011
                
                
                27,074
                
                
                656Later
                    years
                
                
                184,864
                
                
                271Total
                    minimum lease payments
                
                $
                329,167
                
                $
                9,339
 
 
 Vehicles
                    Under Capital Lease
                Accumulated
                    Amortization$18,718
                $(9,379)
 
 **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
          for
          additional information about the Delta operating lease. PNM’s operating lease
          expense was approximately $28.4 million in 2006, $28.5 million in 2005,
          and
          $27.6 million in 2004. Aggregate minimum payments to be received in future
          periods under non-cancelable subleases are approximately $0.9
          million.
 
 PNM
          has
          several capital leases for certain fleet vehicles. At December 31, 2006
          and
          2005, $2.3 million and $1.5 million of these capital leases were recorded
          in
          long and short term debt.
 
 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, 2006, 2005 and 2004**
 
 PNM’s
          future minimum operating lease payments at December 31, 2006 are:
 
 Operating
                
                Capital(In
                    thousands)2007
                
                $
                27,075
                
                $
                7102008
                
                
                28,062
                
                
                6722009
                
                
                25,333
                
                
                5082010
                
                
                24,215
                
                
                2702011
                
                
                24,985
                
                
                91Later
                    years
                
                
                177,475
                
                
                55Total
                    minimum lease payments
                
                $
                307,145
                
                $
                2,306
 
 
 Vehicles
                    Under Capital Lease
                Accumulated
                    Amortization$3,318
                $(1,012)
 
 **TNMP**
 
 TNMP
          has
          several leases for certain fleet vehicles. At December 31, 2006, $6.9 million
          of
          these capital leases were recorded as long and short term debt. TNMP’s operating
          lease expense was approximately $1.4 million in 2006, $1.4 million in 2005,
          and
          $1.1 million in 2004.
 
 TNMP’s
          future minimum operating lease payments at December 31, 2006 are:
 
 Operating
                
                Capital(In
                    thousands)2007
                
                $
                374
                
                $
                2,5232008
                
                
                362
                
                
                1,5062009
                
                
                4
                
                
                1,2762010
                
                
                1
                
                
                8222011
                
                
                1
                
                
                566Later
                    years
                
                
                15
                
                
                216Total
                    minimum lease payments
                
                $
                757
                
                $
                6,909
 
 
 Vehicles
                    Under Capital Lease
                Accumulated
                    Amortization$15,069
                $(8,160)
 
 **(8)**
                **Fair
                    Value of Financial
                    Instruments**
 
 PNMR
          and PNM
 
 *Overview*
 
 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 the Company’s mark-to-market energy portfolio
          are based on closing exchange prices and over-the-counter
          quotations.
 
 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, 2006, 2005 and 2004**
 *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.
 
 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, 2006**
                
                **December
                    31, 2005****Carrying**
                
                
                
                **Carrying****Amount**
                
                **Fair
                    Value**
                
                **Amount**
                
                **Fair
                    Value**(In
                    thousands)Long-term
                    debt
                
                $
                1,765,907
                
                $
                1,796,903
                
                $
                1,746,395
                
                $
                1,828,990Investment
                    in PVNGS lessor notes
                
                $
                257,659
                
                $
                290,940
                
                $
                286,678
                
                $
                331,961
 
 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. (See Note 1 for
          additional information related to the fair value of investments.) 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, 2006****Unrealized
                    Gains**
                
                **Unrealized
                    Losses**
                
                **Fair
                    Value**(In
                    thousands)Available-for-sale:Equity
                    securities
                
                $
                24,710
                
                $
                -
                
                $
                83,648Municipal
                    bonds
                
                
                996
                
                
                (1
                )
                
                25,802U.S.
                    Government securities
                
                
                122
                
                
                -
                
                
                7,423Corporate
                    bonds
                
                
                12
                
                
                -
                
                
                2,518Other
                    investments
                
                
                -
                
                
                -
                
                
                8,719$
                25,840
                
                $
                (1
                )
                $
                128,110
 
 
 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, 2006, 2005 and 2004**
 
 
 **At
                    and For the Year Ended December 31, 2005****Unrealized
                    Gains**
                
                **Unrealized
                    Losses**
                
                **Fair
                    Value**(In
                    thousands)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
 
 At
          December 31, 2006, the available-for-sale securities held by PNMR had the
          following maturities:
 
 **Fair
                    Value**(In
                    thousands)Within
                    1 year
                
                $
                380After
                    1 year through 5 years
                
                
                5,400After
                    5 years through 10 years
                
                
                7,018Over
                    10 years
                
                
                22,945Equity
                    securities
                
                
                83,648Other
                    investments
                
                
                8,719$
                128,110
 
 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,****2006**
                
                **2005**
                
                **2004**(In
                    thousands)Proceeds
                    from sales
                
                $
                88,599
                
                $
                106,624
                
                $
                51,213Gross
                    realized gains
                
                $
                10,970
                
                $
                11,825
                
                $
                6,737Gross
                    realized losses
                
                $
                (5,256
                )
                $
                (3,176
                )
                $
                (4,068
                )
 
 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. 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 and December 31, 2006. PNMR cannot predict
          when
          or if it will receive a return of the cash value of its investment in Wood
          River.
 
 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, 2006, 2005 and 2004**
 
 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, 2006**
                
                **December
                    31, 2005****Carrying**
                
                
                
                **Carrying****Amount**
                
                **Fair
                    Value**
                
                **Amount**
                
                **Fair
                    Value**(In
                    thousands)Long-term
                    debt
                
                $
                987,205
                
                $
                993,740
                
                $
                987,068
                
                $
                1,052,736Investment
                    in PVNGS lessor notes
                
                $
                257,659
                
                $
                290,940
                
                $
                286,678
                
                $
                331,961
 
 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, 2006 and 2005 was $10.9 million and $12.0 million, respectively.
 
 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, 2006**
                
                **December
                    31, 2005****Carrying**
                
                
                
                **Carrying****Amount**
                
                **Fair
                    Value**
                
                **Amount**
                
                **Fair
                    Value**(In
                    thousands)Long-term
                    debt
                
                $
                420,546
                
                $
                422,587
                
                $
                415,864
                
                $
                432,792
 
 
 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, 2006, 2005 and 2004**
 
 **Derivative
          Instruments**
 
 The
          Company may enter into agreements for the sale or purchase of derivative
          instruments, including options and swaps, to manage risks related to changes
          in
          natural gas prices and electricity prices. At the inception of any such
          transaction, the Company documents the relationships between the hedging
          instruments and the items being hedged. This documentation includes the
          strategy
          that supports executing the specific transaction.
 
 The
          Company utilizes the following derivative instruments by commodity
          type:
 
 Energy
          Contracts - forward derivative physical and financial purchases and sales
          of
          electricity and natural gas with the intent of optimizing the Company’s net
          generation position and to take advantage of existing market opportunities.
 
 Gas
          Fixed-for-Float Swaps - forward financial and physical contracts and sales
          of
          fixed-for-float price and basis swaps to manage the price risk associated
          with
          electricity and natural gas and to hedge the variable component of certain
          heat-rate based power products.
 
 Options
          -
          forward physical and financial purchases and sales of electricity and natural
          gas option-type derivative instruments with the intent of optimizing the
          Company’s net generation position and to take advantage of existing market
          opportunities.
 
 PGAC
          portion of options, swaps and hedges - forward financial and physical
          transactions to hedge a portion of PNM’s winter gas purchase portfolio.
 
 **PNMR**
 
 In
          addition to the commodity transactions that PNM and TNMP enter into as
          described
          below, two other subsidiaries of PNMR enter into commodity
          transactions.
 
 *Normal
          Sales and Purchases Transactions*
 
 PNMR’s
          subsidiary, First Choice, enters into physical energy contracts to meet
          the
          needs of its competitive and price-to-beat customer load. These contracts
          qualify for “normal” accounting designation pursuant to SFAS 133, as the energy
          purchased is physically delivered and sold to First Choice customers within
          ERCOT. Expenses related to these purchases are recorded in cost of energy
          at the
          time of delivery.
 
 PNMR’s
          subsidiary, Altura, at the time of acquisition of Twin Oaks (see Note 2),
          assumed an existing contract for the energy output of the Twin Oaks facility.
          This contract qualifies for “normal” accounting designation pursuant to SFAS
          133, as the energy sold is physically delivered within ERCOT to meet the
          needs
          of the purchaser’s load requirements. Revenue related to this sale is recorded
          in electric revenues at the time of delivery.
 
 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, 2006, 2005 and 2004**
 
 *Hedge
          Accounting Transactions*
 
 First
          Choice also enters into natural gas swaps and options to hedge the variable
          component of certain heat-rate power contracts used to serve retail customer
          load. The heat-rate contracts are priced based on a gas-to-power conversion
          factor using the NYMEX last day natural gas rates. Both the natural gas
          swaps
          and options qualify for cash flow hedge accounting treatment under SFAS
          133. The
          natural gas swaps and the underlying power contract both contain like terms
          as
          both are indexed to NYMEX last day rates, therefore the transactions are
          effective and no hedge ineffectiveness is recorded. The settlement day
          for the
          natural gas option contracts is one day prior to NYMEX last day. The Company
          has
          tested the effectiveness and determined that the transactions are highly
          effective in offsetting changes associated with the underlying power contract.
          The ineffectiveness reported through the income statement as of December
          31,
          2006 was immaterial. The maximum length of time over which First Choice
          is
          hedging its exposure to the variability in future cash flows is October
          2007.
 
 Altura,
          at the time of the acquisition of Twin Oaks (see Note 2), assumed an existing
          forward contract for the energy output of the Twin Oaks facility. This
          forward
          physical contract is designated as a hedge of the cash flow risk associated
          with
          Twin Oaks’ forecasted excess generation. This hedge is effective in offsetting
          future cash flow volatility caused by changes in the forward price of
          electricity and qualifies for hedge accounting under SFAS 133. There is
          no hedge
          ineffectiveness on this transaction because the hedged transaction and
          the
          hedged item are based on the same forward curve. Any market changes in
          valuation
          are recorded in other comprehensive income. The length of time over which
          Twin
          Oaks is hedging its exposure to the variability in future cash flows is
          through
          December 2010.
 
 *Mark-to-Market
          Transactions*
 
 *Electricity
          Contracts*
 
 First
          Choice enters 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” or “hedge”
designation pursuant to SFAS 133, and are marked to market. The change
          in market
          valuation is recognized in earnings each period.
 
 *Gas
          Contracts*
 
 First
          Choice enters into various gas contracts to optimize market opportunities.
          These
          contracts are marked to market in accordance with SFAS 133. The change
          in market
          valuation is recognized in earnings each period.
 
 *SO* *2* *Allowances*
 
 The
          Company has entered into a fair value hedge to protect against fair-value
          changes to the Company’s SO *2* emission
          allowances inventory. The Company assessed the effectiveness of the fair
          value
          hedge based on the changes in the intrinsic value of the hedging instrument
          and
          the hedged item. At December 31, 2006, the Company recognized an ineffective
          gain on the hedging transaction of $0.9 million.
 
 
 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, 2006, 2005 and 2004**
 
 
 PNMR’s
          commodity derivative instruments are summarized as follows:
 
 **December
                    31,**
                
                **December
                    31,**
                
                **December
                    31,**
                
                **December
                    31,****2006**
                
                **2005**
                
                **2006**
                
                **2005****Type
                    of Derivative**
                
                **Mark-to-Market
                    Instruments**
                
                **Hedge
                    Instruments**(In
                    thousands)**Current****Assets**Energy
                    Contracts
                
                $
                17,773
                
                $
                11,650
                
                $
                7,208
                
                $
                6,616Gas
                    fixed for float swaps
                
                
                21,875
                
                
                6,488
                
                
                4,655
                
                
                10,465Options
                
                
                4,032
                
                
                3,719
                
                
                -
                
                
                261PGAC
                    portion of options, swaps and hedges
                
                
                -
                
                
                -
                
                
                16,748
                
                
                8,403Total
                    Current Assets
                
                
                43,680
                
                
                21,857
                
                
                28,611
                
                
                25,745Deferred
                    ChargesEnergy
                    Contracts
                
                
                2,666
                
                
                3,477
                
                
                26,991
                
                
                -Gas
                    fixed for float swaps
                
                
                7,288
                
                
                12,459
                
                
                1,872
                
                
                13,615Options
                
                
                1,028
                
                
                5,356
                
                
                -
                
                
                -PGAC
                    portion of options, swaps and hedges
                
                
                -
                
                
                -
                
                
                3,337
                
                
                5,563Total
                    Deferred Charges
                
                
                10,982
                
                
                21,292
                
                
                32,200
                
                
                19,178Total
                    Assets
                
                $
                54,662
                
                $
                43,149
                
                $
                60,811
                
                $
                44,923Current
                    LiabilitiesEnergy
                    Contracts
                
                $
                (16,499
                )
                $
                (7,333
                )
                $
                -
                
                $
                (503
                )Gas
                    fixed for float swaps
                
                
                (21,518
                )
                
                (7,151
                )
                
                (6,845
                )
                
                (3,456
                )Options
                
                
                (4,003
                )
                
                (3,234
                )
                
                (109
                )
                
                (1,358
                )PGAC
                    portion of options, swaps and hedges
                
                
                -
                
                
                -
                
                
                (16,748
                )
                
                (8,403
                )Total
                    Current Liabilities
                
                
                (42,020
                )
                
                (17,718
                )
                
                (23,702
                )
                
                (13,720
                )Long-Term
                    LiabilitiesEnergy
                    Contracts
                
                
                (7,472
                )
                
                (3,444
                )
                
                (154
                )
                
                -Gas
                    fixed for float swaps
                
                
                (862
                )
                
                (12,257
                )
                
                (1,915
                )
                
                -Options
                
                
                (842
                )
                
                (5,202
                )
                
                -
                
                
                -PGAC
                    portion of options, swaps and hedges
                
                
                -
                
                
                -
                
                
                (3,337
                )
                
                (5,563
                )Total
                    Long-Term Liabilities
                
                
                (9,176
                )
                
                (20,903
                )
                
                (5,406
                )
                
                (5,563
                )Total
                    Liabilities
                
                $
                (51,196
                )
                $
                (38,621
                )
                $
                (29,108
                )
                $
                (19,283
                )Net
                    Total Assets and Total Liabilities
                
                $
                3,466
                
                $
                4,528
                
                $
                31,703
                
                $
                25,640
 
 Gains
          or
          losses related to hedged instruments are reclassified from accumulated
          other
          comprehensive income when the hedged transaction settles and impacts earnings.
          The amount which will be reclassified to earnings in the next twelve months
          represents the net of current assets and current liabilities, excluding
          the
          PGAC, in the above table.
 
 
 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, 2006, 2005 and 2004**
 
 **PNM**
 
 *Normal
          Sales and Purchases Transactions*
 
 PNM
          enters into physical gas contracts to meet the needs of its gas retail
          sales-service customers. These contracts qualify for “normal” accounting
          designations pursuant to SFAS 133 and related interpretations.
 
 PNM
          also
          enters 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 enters into forward physical contracts for the
          purchase of retail needs, including reserves, when resource shortfalls
          are
          forecast to exist. PNM generally accounts for these as normal sales and
          purchases as defined by SFAS 133. From time to time PNM makes forward purchases
          to serve its retail needs when the cost of purchased power is less than
          the
          incremental cost of its generation.
 
 The
          operations of PNM, including both firm commitments and other wholesale
          sale
          activities, are managed primarily through a net asset-backed strategy,
          whereby
          PNM’s aggregate net open position is covered by its own excess generation
          capabilities. PNM is exposed to market risk if its generation capabilities
          were
          disrupted or if its retail load requirements were greater than anticipated.
          If
          PNM were required to cover all or a portion of its net open contract position,
          it would have to meet its commitments through market purchases.
 
 *Hedge
          Accounting Transactions*
 
 *PGAC*
 
 The
          NMPRC
          has authorized PNM to use financial instruments to hedge certain portions
          of
          natural gas supply contracts during the winter months to protect PNM’s
          sales-service gas customers from the risk of adverse price fluctuations
          in the
          natural gas market. PNM has elected to use call options and financial swaps
          to
          hedge certain portions of the physical gas purchase contracts used exclusively
          for resale to PNM’s sales-service gas customers. The contracts qualify for hedge
          accounting treatment under SFAS 133. Option premium expenses are deferred
          on
          PNM’s balance sheet as prepaid gas costs as incurred and amortized into the
          PGAC
          for recovery as a component of gas costs during the winter heating season.
          Option premium expense and hedge gains and losses from both types of instruments
          are passed through PNM’s PGAC with no income statement effect if deemed
          prudently incurred by the NMPRC.
 
 PNM
          also
          enters into financial swaps to hedge the variable portion of its winter
          gas
          portfolio. PNM has hedged 15.8 million MMBtus utilizing the fixed-for-float
          strategy for the 2006-2007 and the 2007-2008 winter heating season. Any
          settled
          fixed-for-float financial transactions are passed through PNM’s
          PGAC.
 
 *Wholesale
          Electricity*
 
 PNM
          enters into various forward physical contracts to hedge the cash flow risk
          associated with PNM’s forecasted excess generation. These hedges are effective
          in offsetting future cash flow volatility caused by changes in the forward
          price
          of electricity and qualify for hedge accounting under SFAS 133. There is
          no
          hedge ineffectiveness on these transactions because the hedged transactions
          and
          the hedged item are based on the same forward curve. Any market changes
          in
          valuation are recorded in other comprehensive income. The maximum length
          of time
          over which PNM is hedging its exposure to the variability in future cash
          flows
          is through September 2008.
 
 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, 2006, 2005 and 2004**
 
 *Wholesale
          Gas*
 
 PNM
          also
          enters into various fixed-for-float price swaps to manage the costs associated
          with running PNM’s gas-fired generation units. The hedges are effective in
          offsetting future cash flow volatility caused by changes in natural gas
          prices.
          There is no hedge ineffectiveness on these transactions because the hedged
          transactions and the hedged item are based on the same forward curve. Any
          market
          changes in valuation are recorded in other comprehensive income. The maximum
          length of time over which PNM is hedging its exposure to the variability
          in
          future cash flows is through June 2016.
 
 *Mark-to-Market
          Transactions*
 
 *Wholesale
          Electricity*
 
 PNM
          enters into various commodity derivative instruments, including but not
          limited
          to, forward physical contracts and options for the purchase and sale of
          electricity with the intent of optimizing market opportunities. These derivative
          contracts do not qualify for “normal” or “hedge” designation pursuant to SFAS
          133, and are marked to market. 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.
 
 *Wholesale
          Gas*
 
 PNM
          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. The change in market
          valuation is recognized in earnings each period.
 
 *Liquidity
          Reserves*
 
 The
          market prices used to value PNM mark-to-market energy transactions and
          cash flow
          contracts are based on index prices and broker quotations. PNM enters into
          long-term physical option contracts and long-term financial gas swap contracts
          that are classified as derivatives and consequently marked to market through
          earnings. Generally, market data to value these types of transactions at
          PNM is
          available for up to five years for gas swaps and up to 18 months for
          options.  The remaining periods are referred to as the illiquid
          period, and is valued using internally developed pricing data. As a result,
          PNM records liquidity reserves on these contracts for market gains and
          losses in
          the illiquid period. PNM regularly assesses the validity and availability
          of
          pricing data for the illiquid period of its derivative transactions and
          adjusts
          its liquidity reserves, accordingly.
 
 PNM
          also
          records liquidity reserves for the illiquid period for electricity contracts.
          This period is greater than five years which requires internal model assumptions
          and calculations to establish a forward market curve.
 
 Management
          evaluates the availability of market data for the Company’s commodity derivative
          instruments.  As of December 31, 2006, Risk Management has established that
          valid market pricing exists for gas swap commodities for up to 5 years.
          As of
          December 31, 2005, valid market price for gas swap commodities was
          available for up to 18-months.  The change in liquidity periods is
          a Change in Accounting Estimate under SFAS No. 154, “ *Accounting Changes
          and Error Corrections”* . 
          The effect on income from continuing operations was an increase of $2.5
          million
          before taxes. The impact on earnings per share is $0.02 per share. 
Fluctuating commodity prices on open positions prevent the Company from
          predicting with certainty the future impact of the change in accounting
          estimate.
 
 
 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, 2006, 2005 and 2004**
 
 
 PNM’s
          commodity derivative instruments are summarized as follows:
 
 **December
                    31,**
                
                **December
                    31,**
                
                **December
                    31,**
                
                **December
                    31,****2006**
                
                **2005**
                
                **2006**
                
                **2005****Type
                    of Derivative**
                
                **Mark-to-Market
                    Instruments**
                
                **Hedge
                    Instruments**(In
                    thousands)**Current****Assets**Energy
                    Contracts
                
                $
                16,374
                
                $
                6,126
                
                $
                1,057
                
                $
                6,616Gas
                    fixed for float swaps
                
                
                1,950
                
                
                2,074
                
                
                1,615
                
                
                9,150Options
                
                
                2,986
                
                
                2,109
                
                
                -
                
                
                -PGAC
                    portion of options, swaps and hedges
                
                
                -
                
                
                -
                
                
                16,748
                
                
                8,403Total
                    Current Assets
                
                
                21,310
                
                
                10,309
                
                
                19,420
                
                
                24,169Deferred
                    ChargesEnergy
                    Contracts
                
                
                2,666
                
                
                3,477
                
                
                -
                
                
                -Gas
                    fixed for float swaps
                
                
                7,101
                
                
                12,459
                
                
                1,872
                
                
                13,615Options
                
                
                825
                
                
                5,356
                
                
                -
                
                
                -PGAC
                    portion of options, swaps and hedges
                
                
                -
                
                
                -
                
                
                3,337
                
                
                5,563Total
                    Deferred Charges
                
                
                10,592
                
                
                21,292
                
                
                5,209
                
                
                19,178Total
                    Assets
                
                $
                31,902
                
                $
                31,601
                
                $
                24,629
                
                $
                43,347Current
                    LiabilitiesEnergy
                    Contracts
                
                $
                (10,928
                )
                $
                (5,931
                )
                $
                -
                
                $
                (503
                )Gas
                    fixed for float swaps
                
                
                (6,440
                )
                
                (351
                )
                
                (2,872
                )
                
                (1,255
                )Options
                
                
                (3,255
                )
                
                (2,158
                )
                
                -
                
                
                -PGAC
                    portion of options, swaps and hedges
                
                
                -
                
                
                -
                
                
                (16,748
                )
                
                (8,403
                )Total
                    Current Liabilities
                
                
                (20,623
                )
                
                (8,440
                )
                
                (19,620
                )
                
                (10,161
                )Long-Term
                    LiabilitiesEnergy
                    Contracts
                
                
                (7,472
                )
                
                (3,444
                )
                
                (154
                )
                
                -Gas
                    fixed for float swaps
                
                
                (421
                )
                
                (12,257
                )
                
                (1,915
                )
                
                -Options
                
                
                (801
                )
                
                (5,202
                )
                
                -
                
                
                -PGAC
                    portion of options, swaps and hedges
                
                
                -
                
                
                -
                
                
                (3,337
                )
                
                (5,563
                )Total
                    Long-Term Liabilities
                
                
                (8,694
                )
                
                (20,903
                )
                
                (5,406
                )
                
                (5,563
                )Total
                    Liabilities
                
                $
                (29,317
                )
                $
                (29,343
                )
                $
                (25,026
                )
                $
                (15,724
                )Net
                    Total Assets and Total Liabilities
                
                $
                2,585
                
                $
                2,258
                
                $
                (397
                )
                $
                27,623
 
 Gains
          or
          losses are reclassified from accumulated other comprehensive income when
          the
          hedged transaction settles and impacts earnings. The amount which will
          be
          reclassified in the next twelve months represents the net of current assets
          and
          current liabilities, excluding the PGAC, in the above table.
 
 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, 2006, 2005 and 2004**
 
 **TNMP**
 
 *Normal
          Sales and Purchases Transactions*
 
 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 have
          been
          defined by SFAS 133. In accordance with SFAS 133, management has determined
          that
          its contracts for electricity qualify for the normal purchases and sales
          exception. Revenue related to sales of electricity is recorded in electric
          revenues at the time of delivery. Expenses related to purchases of electricity
          are recorded in cost of energy at the time of delivery.
 
 **(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, 2006, the capacity and O&M charge was $8.2 million and the
          energy charges were $1.4 million. 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. 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, 2006 that PNM could be required to
          record
          in its Consolidated Statement of Earnings as a result of these arrangements
          totals approximately $4.6 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-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, 2006, 2005 and 2004**
 
 **(10)**
                **Earnings
                    Per Share**
 
 In
          accordance with SFAS No. 128, 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 the 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,****2006**
                
                **2005**
                
                **2004**(In
                    thousands, except per share amounts)**Basic:**Net
                    Earnings Before Cumulative Effect of Changes in
                
                $
                122,114
                
                $
                68,153
                
                $
                87,686Accounting
                    PrincipleCumulative
                    Effect of Changes in Accounting Principle,net
                    of tax of $0, $592 and $0
                
                
                -
                
                
                (926
                )
                
                -**Net
                    Earnings**
                
                $
                122,114
                
                $
                67,227
                
                $
                87,686Average
                    Number of Common Shares Outstanding
                
                
                69,829
                
                
                65,928
                
                
                60,414**Net
                    Earnings per Share of Common Stock (Basic)**
                
                $
                1.75
                
                $
                1.02
                
                $
                1.45Earnings
                    Before Cumulative Effect of Changes inAccounting
                    Principle
                
                
                1.75
                
                
                1.03
                
                
                1.45Cumulative
                    Effect of Changes in Accounting Principle, net of tax
                
                
                -
                
                
                (0.01
                )
                
                -**Net
                    Earnings per Share of Common Stock (Basic)**
                
                $
                1.75
                
                $
                1.02
                
                $
                1.45**Diluted:**Net
                    Earnings Before Cumulative Effect of Changes inAccounting
                    Principle
                
                $
                122,114
                
                $
                68,153
                
                $
                87,686Cumulative
                    Effect of Changes in Accounting Principle,net
                    of tax of $0, $592 and $0
                
                
                -
                
                
                (926
                )
                
                -**Net
                    Earnings**
                
                $
                122,114
                
                $
                67,227
                
                $
                87,686Average
                    Number of Common Shares Outstanding
                
                
                69,829
                
                
                65,928
                
                
                60,414Diluted
                    Effect of Common Stock Equivalents (a)
                
                
                807
                
                
                1,152
                
                
                926Average
                    Common and Common Equivalent Shares Outstanding
                
                
                70,636
                
                
                67,080
                
                
                61,340**Net
                    Earnings per Share of Common Stock (Diluted)**
                
                $
                1.73
                
                $
                1.00
                
                $
                1.43Earnings
                    Before Cumulative Effect of Changes inAccounting
                    Principle
                
                $
                1.73
                
                
                1.01
                
                
                1.43Cumulative
                    Effect of Changes in Accounting Principle, net of tax
                
                
                -
                
                
                (0.01
                )
                
                -**Net
                    Earnings per Share of Common Stock (Diluted)**
                
                $
                1.73
                
                $
                1.00
                
                $
                1.43
 
 (a)
                Excludes
                    the effect of average anti-dilutive common stock equivalents
                    related to
                    out of-the-money options of 653,398 shares, 433,957 shares and
                    5,883
                    shares for the years ended December 31, 2006, 2005 and 2004,
                    respectively.
 
 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, 2006, 2005 and 2004**
 
 **(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,****2006**
                
                **2005**
                
                **2004**(In
                    thousands)Current
                    federal income tax
                
                $
                15,341
                
                $
                4,390
                
                $
                10,634Current
                    state income tax
                
                
                1,510
                
                
                81
                
                
                2,495Deferred
                    federal income tax
                
                
                45,602
                
                
                28,070
                
                
                31,725Deferred
                    state income tax
                
                
                5,086
                
                
                3,872
                
                
                7,495Amortization
                    of accumulated investment tax credits
                
                
                (3,569
                )
                
                (3,552
                )
                
                (3,102
                )Total
                    income taxes
                
                $
                63,970
                
                $
                32,861
                
                $
                49,247Charged
                    to operating expenses
                
                $
                46,198
                
                $
                19,450
                
                $
                36,062Charged
                    to other income and deductions
                
                
                17,772
                
                
                13,411
                
                
                13,185Total
                    income taxes
                
                $
                63,970
                
                $
                32,861
                
                $
                49,247
 
 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,****2006**
                
                **2005**
                
                **2004**(In
                    thousands)Federal
                    income tax at statutory rates
                
                $
                65,314
                
                $
                36,362
                
                $
                48,127Investment
                    tax credits
                
                
                (3,569
                )
                
                (3,552
                )
                
                (3,102
                )Flow-through
                    of depreciation items
                
                
                1,775
                
                
                1,903
                
                
                2,091Gains
                    on the sale and leaseback of PVNGS Units 1 and 2
                
                
                (527
                )
                
                (527
                )
                
                (527
                )Reversal
                    of deferred income taxes accrued at prior tax rates
                
                
                (1,185
                )
                
                (2,086
                )
                
                (1,963
                )Research
                    and development credit
                
                
                (1,509
                )
                
                -
                
                
                -Affordable
                    housing credit
                
                
                (750
                )
                
                (750
                )
                
                (789
                )Allowance
                    for funds used during construction
                
                
                (364
                )
                
                (623
                )
                
                (453
                )Charitable
                    contribution of appreciated property
                
                
                -
                
                
                -
                
                
                (960
                )State
                    income tax
                
                
                4,587
                
                
                3,356
                
                
                6,357Other
                
                
                198
                
                
                (1,222
                )
                
                466Total
                    income taxes
                
                $
                63,970
                
                $
                32,861
                
                $
                49,247Effective
                    tax rate
                
                
                34.28
                %
                
                31.63
                %
                
                35.81
                %
 
 
 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, 2006, 2005 and 2004**
 
 The
          components of PNMR’s net accumulated deferred income tax liability were:
 
 **December
                    31,****2006**
                
                **2005**(In
                    thousands)Deferred
                    Tax Assets:Nuclear
                    decommissioning costs
                
                $
                25,363
                
                $
                27,610Regulatory
                    liabilities related to income taxes
                
                
                32,258
                
                
                37,506Pension
                    liability
                
                
                4,090
                
                
                72,443Other
                
                
                66,889
                
                
                59,688Total
                    deferred tax assets
                
                
                128,600
                
                
                197,247Deferred
                    Tax Liabilities:Depreciation
                
                
                (388,198
                )
                
                (346,693
                )Investment
                    tax credit
                
                
                (30,236
                )
                
                (33,806
                )Regulatory
                    assets related to income taxes
                
                
                (92,164
                )
                
                (90,705
                )Asset
                    retirement obligations
                
                
                (13,243
                )
                
                (16,213
                )Deferred
                    charges
                
                
                (9,647
                )
                
                (10,745
                )Other
                    intangibles
                
                
                (27,178
                )
                
                (26,861
                )Recoverable
                    stranded costs
                
                
                (47,958
                )
                
                (46,585
                )Other
                
                
                (127,655
                )
                
                (110,708
                )Total
                    deferred tax liabilities
                
                
                (736,279
                )
                
                (682,316
                )Net
                    Accumulated deferred income tax liabilities
                
                $
                (607,679
                )
                $
                (485,069
                )
 
 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, 2006**(In
                    thousands)Net
                    change in deferred income tax liability per above table
                
                $
                122,610Change
                    in tax effects of income tax related regulatory assets and
                    liabilities
                
                
                (6,707
                )Tax
                    effect of mark-to-market on investments available for sale
                
                
                (4,564
                )Tax
                    effect of excess pension liability
                
                
                (68,353
                )Other
                
                
                4,133Deferred
                    income tax expense
                
                $
                47,119
 
 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-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, 2006, 2005 and 2004**
 
 PNM
 
 PNM’s
          income taxes before cumulative effect of changes in accounting principles
          consist of the following components:
 
 **Year
                    Ended December 31,****2006**
                
                **2005**
                
                **2004**(In
                    thousands)Current
                    federal income tax
                
                $
                37,040
                
                $
                10,070
                
                $
                15,057Current
                    state income tax
                
                
                8,427
                
                
                2,289
                
                
                3,327Deferred
                    federal income tax
                
                
                (2,450
                )
                
                12,792
                
                
                30,252Deferred
                    state income tax
                
                
                (151
                )
                
                3,237
                
                
                7,163Amortization
                    of accumulated investment tax credits
                
                
                (2,862
                )
                
                (3,094
                )
                
                (3,102
                )Total
                    income taxes
                
                $
                40,004
                
                $
                25,294
                
                $
                52,697Charged
                    to operating expenses
                
                
                24,
                    372
                
                
                8,217
                
                
                37,964Charged
                    to other income and deductions
                
                
                15,632
                
                
                17,077
                
                
                14,733Total
                    income taxes
                
                $
                40,004
                
                $
                25,294
                
                $
                52,697
 
 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,****2006**
                
                **2005**
                
                **2004**(In
                    thousands)Federal
                    income tax at statutory rates
                
                $
                39,288
                
                $
                27,445
                
                $
                50,797Investment
                    tax credits
                
                
                (2,862
                )
                
                (3,094
                )
                
                (3,102
                )Flow-through
                    of depreciation items
                
                
                1,775
                
                
                1,903
                
                
                2,091Gains
                    on the sale and leaseback of PVNGS Units 1 and 2
                
                
                (527
                )
                
                (527
                )
                
                (527
                )Reversal
                    of deferred income taxes accrued at prior tax rates
                
                
                (969
                )
                
                (1,963
                )
                
                (1,963
                )Research
                    and development credit
                
                
                (1,333
                )
                
                -
                
                
                -Allowance
                    for funds used during construction
                
                
                (269
                )
                
                (615
                )
                
                (430
                )Charitable
                    contribution of appreciated property
                
                
                -
                
                
                -
                
                
                (960
                )State
                    income tax
                
                
                5,257
                
                
                3,694
                
                
                6,682Other
                
                
                (356
                )
                
                (1,549
                )
                
                109Total
                    income taxes
                
                $
                40,004
                
                $
                25,294
                
                $
                52,697Effective
                    tax rate
                
                
                35.64
                %
                
                32.26
                %
                
                36.31
                %
 
 
 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, 2006, 2005 and 2004**
 
 The
          components of PNM’s net accumulated deferred income tax liability were:
 
 **December
                    31,****2006**
                
                **2005**(In
                    thousands)Deferred
                    Tax Assets:Nuclear
                    decommissioning costs
                
                $
                25,363
                
                $
                27,610Regulatory
                    liabilities related to income taxes
                
                
                24,702
                
                
                27,526Minimum
                    pension liability
                
                
                4,456
                
                
                72,443Other
                
                
                19,241
                
                
                40,930Total
                    deferred tax assets
                
                
                73,762
                
                
                168,509Deferred
                    Tax Liabilities:Depreciation
                
                
                (258,240
                )
                
                (264,437
                )Investment
                    tax credit
                
                
                (29,404
                )
                
                (32,266
                )Regulatory
                    assets related to income taxes
                
                
                (77,315
                )
                
                (78,005
                )Asset
                    retirement obligations
                
                
                (13,243
                )
                
                (16,222
                )Other
                
                
                (84,380
                )
                
                (110,597
                )Total
                    deferred tax liabilities
                
                
                (462,582
                )
                
                (501,527
                )Net
                    Accumulated deferred income tax liabilities
                
                $
                (388,820
                )
                $
                (333,018
                )
 
 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, 2006**(In
                    thousands)Net
                    change in deferred income tax liability per above table
                
                $
                55,802Change
                    in tax effects of income tax related regulatory assets and
                    liabilities
                
                
                (2,134
                )Tax
                    effect of mark-to-market on investments available for sale
                
                
                8,880Tax
                    effect of excess pension liability
                
                
                (67,988
                )Other
                
                
                (23
                )Deferred
                    income tax expense
                
                $
                (5,463
                )
 
 
 
 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, 2006, 2005 and 2004**
 
 TNMP
 
 TNMP’s
          income taxes before extraordinary item and cumulative effect of change
          in
          accounting principle consist of the following components:
 
 **Post-**
                
                **Post-**
                
                
                **Pre-**
                
                **Pre-****Acquisition**
                
                **Acquisition**
                
                
                **Acquisition**
                
                **Acquisition****Year
                    Ended**
                
                **June
                    6-**
                
                
                **January
                    1-**
                
                **Year
                    Ended****December
                    31,**
                
                **December
                    31,**
                
                
                **June
                    6,**
                
                **December
                    31,****2006**
                
                **2005**
                
                
                **2005**
                
                **2004**(In
                    thousands)Current
                    federal income tax
                
                $
                2,752
                
                $
                958
                
                
                $
                5,634
                
                $
                6,364Current
                    state income tax
                
                
                739
                
                
                (60
                )
                
                
                676
                
                
                3,048Deferred
                    federal income tax
                
                
                5,013
                
                
                8,328
                
                
                
                (954
                )
                
                15,049Deferred
                    state income tax
                
                
                (462
                )
                
                1,268
                
                
                
                (127
                )
                
                2,652Amortization
                    of accumulated investmenttax
                    credits
                
                
                (707
                )
                
                (458
                )
                
                
                (328
                )
                
                (722
                )Total
                    income taxes
                
                $
                7,335
                
                $
                10,036
                
                
                $
                4,901
                
                $
                26,391Charged
                    to operating expenses
                
                $
                4,250
                
                $
                7,965
                
                
                $
                5,055
                
                $
                13,680Charged
                    to other income and deductions
                
                
                3,085
                
                
                2,071
                
                
                
                (154
                )
                
                12,711Total
                    income taxes
                
                $
                7,335
                
                $
                10,036
                
                
                $
                4,901
                
                $
                26,391
 
 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-**
                
                **Post-**
                
                
                **Pre-**
                
                **Pre-****Acquisition**
                
                **Acquisition**
                
                
                **Acquisition**
                
                **Acquisition****Year
                    Ended**
                
                **June
                    6-**
                
                
                **January
                    1-**
                
                **Year
                    Ended****December
                    31,**
                
                **December
                    31,**
                
                
                **June
                    6,**
                
                **December
                    31,****2006**
                
                **2005**
                
                
                **2005**
                
                **2004**(In
                    thousands)Federal
                    income tax at statutory rates
                
                $
                8,062
                
                $
                9,753
                
                
                $
                4,956
                
                $
                24,342Investment
                    tax credits
                
                
                (707
                )
                
                (458
                )
                
                
                (328
                )
                
                (722
                )Reversal
                    of deferred income taxes accruedat
                    prior tax rates
                
                
                (216
                )
                
                (123
                )
                
                
                (93
                )
                
                (216
                )Allowance
                    for funds used during construction
                
                
                (94
                )State
                    income tax
                
                
                140
                
                
                1,208
                
                
                
                549
                
                
                3,048Other
                
                
                150
                
                
                (344
                )
                
                
                (183
                )
                
                (61
                )Total
                    income taxes
                
                $
                7,335
                
                $
                10,036
                
                
                $
                4,901
                
                $
                26,391Effective
                    tax rate
                
                
                31.84
                %
                
                36.01
                %
                
                
                34.61
                %
                
                36.14
                %
 
 
 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, 2006, 2005 and 2004**
 
 The
          components of TNMP’s net accumulated deferred income tax liability at December
          31 were:
 
 **December
                    31,****2006**
                
                **2005**(In
                    thousands)Deferred
                    Tax Assets:Regulatory
                    liabilities related to income taxes
                
                $
                7,556
                
                $
                9,980Other
                
                
                1,428
                
                
                2,753Total
                    deferred tax assets
                
                
                8,984
                
                
                12,733Deferred
                    Tax Liabilities:Utility
                    plant, principally due to depreciation and basisdifferences,
                    including TNP One recoverable stranded cost
                
                
                (82,171
                )
                
                (82,108
                )Deferred
                    charges
                
                
                (9,647
                )
                
                (10,745
                )Investment
                    tax credit
                
                
                (832
                )
                
                (1,540
                )Other
                    recoverable stranded costs (non-current)
                
                
                (47,958
                )
                
                (46,585
                )Regulatory
                    assets related to income taxes
                
                
                (14,849
                )
                
                (12,700
                )Total
                    deferred tax liabilities
                
                
                (155,457
                )
                
                (153,678
                )Net
                    Accumulated deferred income tax liabilities
                
                $
                (146,473
                )
                $
                (140,945
                )
 
 
 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:
 
 **Year
                    Ended****December
                    31, 2006**(In
                    thousands)Net
                    change in deferred income tax liability per above table
                
                $
                5,528Change
                    in tax effects of income tax related regulatory assets and
                    liabilities
                
                
                (4,573
                )Tax
                    effect of excess pension liability
                
                
                (365
                )Other
                
                
                3,254Deferred
                    income tax expense
                
                $
                3,844
 
 **(12)**
                **Pension
                    and Other Postretirement
                    Benefits**
 
 PNMR
          and
          its subsidiaries maintain a qualified defined benefit pension plan, maintains
          an
          other postretirement benefit 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-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, 2006, 2005 and 2004**
  In
          September 2006, the FASB issued Statement No. 158. SFAS
          158
          requires a plan sponsor to ( *a* )
          recognize in its statement of financial position an asset for a plan’s
          overfunded status or a liability for a plan’s underfunded status; ( *b* )
          measure
          a plan’s assets and its obligations that determine its funded status as of the
          end of the employer’s fiscal year; and ( *c* )
          recognize changes in the funded status of a defined benefit postretirement
          plan
          in the year in which the changes occur. Such changes will be reported in
          comprehensive income. The requirement to recognize the funded status of
          a
          benefit plan and the disclosure requirements are effective to the Company
          as of
          the end of the fiscal year ending after December 15, 2006.
 
 SFAS
          158
          also requires unrecognized prior service costs and unrecognized gains/losses
          to
          be recorded in accumulated other comprehensive income and subsequently
          amortized. The amortization of these incurred costs will ultimately be
          included
          in SFAS 87 *“Employers’
          Accounting for Pensions”* (“SFAS
          87”) or SFAS 106 “ *Employers’
          Accounting for Postretirement Benefits Other Than Pensions”* (“SFAS
          106”), expenses in subsequent years. Due to the fact the amortization of these
          items will ultimately be recovered in future rates as SFAS 87 and SFAS
          106
          expenses, PNM and TNMP will record these items as a regulatory asset or
          regulatory liability due to the fact these costs will be recovered in future
          revenue due to their inclusion in the rate orders or due to the regulatory
          practice to permit recovery of these costs.
 
 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 *’* and
          SFAS
          No. 106, *’* as
          amended by SFAS 158, 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, as amended, 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.
 
 *Pension
          Plans*
 
 For
          defined benefit pension plans, the benefit obligation is the “projected benefit
          obligation,” which represents the actuarial present value, as of the measurement
          date, of all benefits attributed by the pension benefit formula to employee
          service rendered prior to that date using assumptions to future compensation
          levels.
 
 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, 2006, 2005 and 2004**
 
 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,****2006**
                
                **2005**(In
                    thousands)Benefit
                    obligation at beginning of year
                
                $
                549,925
                
                $
                517,225Service
                    cost
                
                
                504
                
                
                1,907Interest
                    cost
                
                
                30,842
                
                
                30,267Actuarial
                    (gain)/loss
                
                
                (18,053
                )
                
                26,453Benefits
                    paid
                
                
                (27,501
                )
                
                (25,927
                )Benefit
                    obligation at end of year
                
                $
                535,717
                
                $
                549,925
 
 
 **TNMP
                    Plan****Post-**
                
                **Post-**
                
                
                **Pre-****Acquisition**
                
                **Acquisition**
                
                
                **Acquisition****Year
                    ended**
                
                **June
                    6-**
                
                
                **January
                    1-****December
                    31,**
                
                **December
                    31,**
                
                
                **June
                    6,****2006**
                
                **2005**
                
                
                **2005**(In
                    thousands)Benefit
                    obligation at beginning of period
                
                $
                79,324
                
                $
                85,083
                
                
                $
                81,290Service
                    cost
                
                
                -
                
                
                1,353
                
                
                
                848Interest
                    cost
                
                
                4,339
                
                
                2,499
                
                
                
                1,875Actuarial
                    (gain)/loss
                
                
                (1,866
                )
                
                (2,691
                )
                
                
                3,708Benefits
                    paid
                
                
                (8,834
                )
                
                (4,501
                )
                
                
                (2,638
                )Amendments
                
                
                -
                
                
                (2,419
                )
                
                
                -Benefit
                    obligation at end of period
                
                $
                72,963
                
                $
                79,324
                
                
                $
                85,083
 
 
 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, 2006, 2005 and 2004**
 
 The
          following tables present the change in the value of pension plan assets
          and the
          pension plans’ funded status recognized as the pension asset/(liability) in the
          Consolidated Balance Sheets:
 
 **PNM
                    Plan****Year
                    Ended December 31,****2006**
                
                **2005**(In
                    thousands)Fair
                    value of plan assets at beginning of year
                
                $
                460,085
                
                $
                445,101Actual
                    return on plan assets
                
                
                53,191
                
                
                40,911Benefits
                    paid
                
                
                (27,501
                )
                
                (25,927
                )Fair
                    value of plan assets at end of year
                
                
                485,775
                
                
                460,085Funded
                    status
                
                
                (49,942
                )
                
                (89,840
                )Unrecognized
                    net actuarial loss
                
                
                N/A
                
                
                178,991Unrecognized
                    prior service cost
                
                
                N/A
                
                
                2,293Prepaid
                    pension cost
                
                
                N/A
                
                
                91,444Liability
                    for pension benefits recorded in balance sheet
                
                $
                (49,942
                )
                $
                N/A
 
 
 **TNMP
                    Plan****Post-**
                
                **Post-**
                
                
                **Pre-****Acquisition**
                
                **Acquisition**
                
                
                **Acquisition****Year
                    ended**
                
                **June
                    6-**
                
                
                **January
                    1-****December
                    31,**
                
                **December
                    31,**
                
                
                **June
                    6,****2006**
                
                **2005**
                
                
                **2005**(In
                    thousands)Fair
                    value of plan assets at beginning of period
                
                $
                81,837
                
                $
                80,176
                
                
                $
                82,364Actual
                    return on plan assets
                
                
                8,812
                
                
                6,162
                
                
                
                450Benefits
                    paid
                
                
                (8,833
                )
                
                (4,501
                )
                
                
                (2,638
                )Fair
                    value of plan assets at end of period
                
                
                81,816
                
                
                81,837
                
                
                
                80,176Funded
                    status
                
                
                8,853
                
                
                2,513
                
                
                
                (4,907
                )Unrecognized
                    net actuarial loss
                
                
                N/A
                
                
                (4,697
                )
                
                
                4,284Unrecognized
                    prior service cost
                
                
                N/A
                
                
                -
                
                
                
                (791
                )Accrued
                    pension liability
                
                
                N/A
                
                
                (2,184
                )
                
                
                (1,414
                )Asset
                    for pension benefits recorded in balance sheet
                
                $
                8,853
                
                $
                N/A
                
                
                $
                N/A
 
 
 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, 2006, 2005 and 2004**
 
 The
          following table presents a reconciliation of prior service cost and net
          actuarial loss/gain recognized in accumulated other comprehensive income
          in the
          Consolidated Statement of Comprehensive Income and amounts not yet recognized
          in
          net pension cost as of December 31, 2006. The table also shows the amounts
          removed from accumulated other comprehensive income and adjusted to the
          regulatory asset/liability as required under SFAS 71. Amortization amounts
          of
          prior service cost and net actuarial gain which are expected to be recognized
          in
          net pension cost in 2007 are shown underneath the respective ending
          balances:
 
 **PNM
                    Plan**
                
                **TNMP
                    Plan****December
                    31, 2006**
                
                **December
                    31, 2006****Prior
                    service cost**
                
                **Net
                    actuarial loss**
                
                **Net
                    actuarial gain**(In
                    thousands)Balance
                    at beginning of period
                
                $
                2,293
                
                $
                178,991
                
                $
                4,698Change
                    in actuarial assumptions
                
                
                -
                
                
                (30,688
                )
                
                3,661Regulatory
                    asset/liability adjustment
                
                
                (2,162
                )
                
                (139,805
                )
                
                (7,563
                )Amortization
                    recognized in net pension cost
                
                
                (18
                )
                
                (278
                )
                
                -Amounts
                    in accumulated other comprehensive income not yet recognized
                    in net
                    pension cost/(income) at end of year
                
                $
                113
                
                $
                8,220
                
                $
                796Amounts
                    expected to be recognized in pension cost/(income) in 2007
                
                $
                18
                
                $
                223
                
                $
                (1
                )
 
 The
          following table presents the incremental effect of applying SFAS 158 on
          individual line items in the Consolidated Balance Sheets:
 
 **PNM
                    Plan****Year
                    ended December 31, 2006****Before
                    application of SFAS 158**
                
                **Adjustments**
                
                **After
                    Application of SFAS 158**(In
                    thousands)AssetsRegulatory
                    asset
                
                $
                -
                
                $
                137,107
                
                $
                137,107Deferred
                    tax asset
                
                
                56,797
                
                
                (53,498
                )
                
                3,299Prepaid
                    pension cost
                
                
                95,498
                
                
                (95,498
                )
                
                -Intangible
                    assets
                
                
                1,977
                
                
                (1,977
                )
                
                -LiabilitiesAccrued
                    pension liability
                
                $
                (145,440
                )
                $
                95,498
                
                $
                (49,942
                )Total
                    stockholder’s equityAccumulated
                    other comprehensive income
                
                $
                86,666
                
                $
                (81,632
                )
                $
                5,034
 
 
 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, 2006, 2005 and 2004**
 
 
 **TNMP
                    Plan****Year
                    ended December 31, 2006****Before
                    application of SFAS 158**
                
                **Adjustments**
                
                **After
                    Application of SFAS 158**(In
                    thousands)AssetsPension
                    asset
                
                $
                494
                
                $
                8,359
                
                $
                8,853LiabilitiesDeferred
                    tax liability
                
                $
                -
                
                $
                (303
                )
                $
                (303
                )Regulatory
                    liability
                
                
                -
                
                
                (7,563
                )
                
                (7,563
                )Total
                    stockholder’s equityAccumulated
                    other comprehensive income
                
                $
                -
                
                $
                (493
                )
                $
                (493
                )
 
 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,****2006**
                
                **2005**
                
                **2004**(In
                    thousands)Service
                    cost
                
                $
                504
                
                $
                1,907
                
                $
                3,524Interest
                    cost
                
                
                30,842
                
                
                30,267
                
                
                29,891Expected
                    long-term rate of return on plan assets
                
                
                (40,556
                )
                
                (40,168
                )
                
                (39,037
                )Amortization
                    of net loss and regulatory asset
                
                
                4,839
                
                
                3,569
                
                
                3,956Amortization
                    of prior service cost and regulatory asset
                
                
                317
                
                
                317
                
                
                317Net
                    pension income
                
                $
                (4,054
                )
                $
                (4,108
                )
                $
                (1,349
                )
 
 
 The
          following significant weighted-average assumptions were used to determine
          the
          PNM projected benefit obligation and net pension cost/(income):
 
 **PNM
                    Plan****2006**
                
                **2005**
                
                **2004**Discount
                    rate for determining projected benefit obligationat
                    December 31
                6.10%
                
                5.75%
                
                6.00%Discount
                    rate for determining net pension cost/(income)
                5.75%
                
                6.00%
                
                6.50%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 6.10%
          at December 31, 2006 was determined based on a review of long-term high-grade
          bonds and management’s expectations. The discount rate was increased by 0.35% at
          December 31, 2006 over December 31, 2005, resulting in a decrease in the
          PNM
          pension benefit obligation of approximately $20.0 million at December 31,
          2006.
          The discount rate was reduced at December 31, 2005 by 0.25% resulting in
          an
          increase in the PNM pension benefit obligation of approximately $16.5 million
          at
          December 31, 2005. Should actual experience differ from actuarial assumptions,
          the projected benefit obligation and net pension cost/(income) would be
          affected.
 
 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, 2006, 2005 and 2004**
  The
          expected long-term rate of return on plan assets of 9.0% at December 31,
          2006
          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
          10.6% for the year ended December 31, 2006. 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 2007 net pension income to decrease approximately $4.7
          million (analogous change would result from a 1% increase).
 
 The
          following table presents the components of TNMP net pension (income)/cost
          recognized in the Consolidated Statements of Earnings:
 
 **TNMP
                    Plan**
                
                **Pension
                    Benefits****Post-**
                
                **Post-**
                
                
                **Pre-**
                
                **Pre-****Acquisition**
                
                **Acquisition**
                
                
                **Acquisition**
                
                **Acquisition****Year
                    Ended**
                
                **June
                    6-**
                
                
                **January
                    1-**
                
                **Year
                    Ended****December
                    31,**
                
                **December
                    31,**
                
                
                **June
                    6,**
                
                **December
                    31,****2006**
                
                **2005**
                
                
                **2005**
                
                **2004**(In
                    thousands)Service
                    cost
                
                $
                -
                
                $
                1,353
                
                
                $
                848
                
                $
                1,876Interest
                    cost
                
                
                4,339
                
                
                2,499
                
                
                
                1,875
                
                
                4,590Expected
                    long-term rate of return on plan assets
                
                
                (7,018
                )
                
                (4,155
                )
                
                
                (2,387
                )
                
                (6,040
                )Amortization
                    of prior service cost
                
                
                -
                
                
                -
                
                
                
                (49
                )
                
                (116
                )Net
                    pension benefit (income)/cost
                
                $
                (2,679
                )
                $
                (303
                )
                
                $
                287
                
                $
                310
 
 
 The
          following significant weighted-average assumptions were used to determine
          the
          TNMP projected benefit obligation and net pension cost/(income):
 
 **TNMP
                    Plan**
                **Post-**
                
                **Post-**
                
                **Pre-**
                
                **Pre-****Acquisition**
                
                **Acquisition**
                
                **Acquisition**
                
                **Acquisition****Year
                    Ended**
                
                **June
                    6-**
                
                **January
                    1-**
                
                **Year
                    Ended****December
                    31,**
                
                **December
                    31,**
                
                **June
                    6,**
                
                **December
                    31,****2006**
                
                **2005**
                
                **2005**
                
                **2004**(In
                    thousands)Discount
                    rate for determining projected benefitobligation
                    at the end of the period
                6.10%
                
                5.75%
                
                5.25%
                
                5.75%Discount
                    rate for determining net pensioncost/(income)
                5.75%
                
                5.25%
                
                5.75%
                
                6.00%Expected
                    long-term rate of return on plan assets
                9.00%
                
                9.00%
                
                7.80%
                
                7.80%Rate
                    of compensation increase
                N/A
                
                3.50%
                
                3.50%
                
                3.50%
 
 The
          assumed discount rate for determining the projected benefit obligation
          of 6.10%
          at December 31, 2006 was determined based on a review of long-term high-grade
          bonds and management’s expectations. The discount rate was increased by 0.35% at
          December 31, 2006 over December 31, 2005, resulting in a decrease in the
          TNMP
          pension benefit obligation of approximately $2.0 million at December 31,
          2006. 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. Should
          actual experience differ from actuarial assumptions, the projected benefit
          obligation and net pension cost/(income) would be affected.
 
 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, 2006, 2005 and 2004**
 
 The
          expected long-term rate of return on plan assets of 9.0% at December 31,
          2006
          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
          11.9% for the year ended December 31, 2006. 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 2007 net pension income to decrease approximately $0.8
          million (analogous change would result from a 1% increase).
 
 At
          December 31, 2006 and 2005, 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, 2006, 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,****2006**
                
                **2005**
                
                **2006**
                
                **2005**(In
                    thousands)Projected
                    benefit obligation
                
                $
                535,717
                
                $
                549,925
                
                $
                72,963
                
                $
                79,324Accumulated
                    benefit obligation
                
                $
                535,717
                
                $
                549,925
                
                $
                72,963
                
                $
                79,324Fair
                    value of plan assets
                
                $
                485,775
                
                $
                460,085
                
                $
                81,816
                
                $
                81,837
 
 The
          following table outlines the asset allocations for the pension
          plans:
 
 **PNM
                    Plan**
                
                **TNMP
                    Plan****December
                    31,**
                
                **December
                    31,****2006**
                
                **2005**
                
                **2006**
                
                **2005**Equity
                    securities
                59%
                
                60%
                
                56%
                
                66%Debt
                    securities
                22%
                
                23%
                
                22%
                
                24%Real
                    estate
                7%
                
                6%
                
                7%
                
                -Other
                12%
                
                11%
                
                15%
                
                10%100%
                
                100%
                
                100%
                
                100%
 
 
 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, 2006, 2005 and 2004**
 
 The
          pension plans are currently targeting the following asset allocations for
          the
          year ended December 31, 2007:
 
 **PNM**
                
                **TNMP****Plan**
                
                **Plan**Domestic
                    equity
                47.5%
                
                47.5%Non-US
                    equity
                10%
                
                10%Fixed
                    income
                22.5%
                
                22.5%Real
                    estate
                5%
                
                5%Private
                    equity
                5%
                
                5%Absolute
                    return
                10%
                
                10%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)2007
                
                $
                28,464
                
                $
                7,2852008
                
                $
                29,559
                
                $
                7,4982009
                
                $
                30,952
                
                $
                7,8212010
                
                $
                32,509
                
                $
                7,1512011
                
                $
                34,214
                
                $
                6,892Years
                    2012 - 2016
                
                $
                195,616
                
                $
                33,676
 
 PNM
          and
          TNMP do not plan to make any contributions to the plans in 2007.
 
 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, 2006, 2005 and 2004**
 
 *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.
 
 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,****2006**
                
                **2005**(In
                    thousands)Benefit
                    obligation at beginning of year
                
                $
                131,689
                
                $
                112,592Service
                    cost
                
                
                2,713
                
                
                2,764Interest
                    cost
                
                
                7,367
                
                
                6,765Participant
                    contributions
                
                
                1,381
                
                
                1,240Amendments
                
                
                (809
                )
                
                8,641Actuarial
                    (gain)/loss
                
                
                (5,348
                )
                
                7,605Benefits
                    paid
                
                
                (7,664
                )
                
                (7,918
                )Benefit
                    obligation at end of year
                
                $
                129,329
                
                $
                131,689
 
 **TNMP
                    Plan****Post-**
                
                **Post-**
                
                
                **Pre-****Acquisition**
                
                **Acquisition**
                
                
                **Acquisition****Year
                    Ended**
                
                **June
                    6-**
                
                
                **January
                    1-****December
                    31,**
                
                **December
                    31,**
                
                
                **June
                    6,****2006**
                
                **2005**
                
                
                **2005**(In
                    thousands)Benefit
                    obligation at beginning of period
                
                $
                12,807
                
                $
                12,864
                
                
                $
                12,209Service
                    cost
                
                
                424
                
                
                290
                
                
                
                195Interest
                    cost
                
                
                710
                
                
                376
                
                
                
                282Participant
                    contributions
                
                
                281
                
                
                505
                
                
                
                438Amendments
                
                
                -
                
                
                517
                
                
                
                -Actuarial
                    (gain)/loss
                
                
                (2,325
                )
                
                (817
                )
                
                
                514Benefits
                    paid
                
                
                (700
                )
                
                (928
                )
                
                
                (774
                )Benefit
                    obligation at end of period
                
                $
                11,197
                
                $
                12,807
                
                
                $
                12,864
 
 
 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, 2006, 2005 and 2004**
 
 
 The
          following table sets forth the change in the value of plan assets for the
          years
          ended December 31, the plans’ funded status recognized as the accrued
          postretirement benefit obligation liability in the Consolidated Balance
          Sheets:
 
 **PNM
                    Plan****Year
                    Ended December 31,****2006**
                
                **2005**(In
                    thousands)Fair
                    value of plan assets at beginning of year
                
                $
                58,484
                
                $
                56,689Actual
                    return on plan assets
                
                
                7,644
                
                
                2,063Employer
                    contributions
                
                
                6,945
                
                
                6,410Participant
                    contributions
                
                
                1,381
                
                
                1,240Benefits
                    paid
                
                
                (7,664
                )
                
                (7,918
                )Fair
                    value of plan assets at end of year
                
                
                66,790
                
                
                58,484Funded
                    status
                
                
                (62,539
                )
                
                (73,205
                )Unrecognized
                    net actuarial loss
                
                
                N/A
                
                
                84,511Unrecognized
                    prior service cost
                
                
                N/A
                
                
                (27,993
                )Accrued
                    postretirement benefit obligation
                
                
                N/A
                
                
                (16,687
                )Liability
                    for postretirement benefit obligation recorded in balance
                    sheet
                
                $
                (62,539
                )
                $
                N/A
 
 
 **TNMP
                    Plan****Post-**
                
                **Post-**
                
                
                **Pre-****Acquisition**
                
                **Acquisition**
                
                
                **Acquisition****Year
                    Ended**
                
                **June
                    6-**
                
                
                **January
                    1-****December
                    31,**
                
                **December
                    31,**
                
                
                **June
                    6,****2006**
                
                **2005**
                
                
                **2005**(In
                    thousands)Fair
                    value of plan assets at beginning of period
                
                $
                6,462
                
                $
                5,979
                
                
                $
                5,956Actual
                    return on plan assets
                
                
                381
                
                
                120
                
                
                
                15Employer
                    contributions
                
                
                738
                
                
                786
                
                
                
                344Participant
                    contributions
                
                
                281
                
                
                505
                
                
                
                438Benefits
                    paid
                
                
                (700
                )
                
                (928
                )
                
                
                (774
                )Fair
                    value of plan assets at end of period
                
                
                7,162
                
                
                6,462
                
                
                
                5,979Funded
                    status
                
                
                (4,035
                )
                
                (6,345
                )
                
                
                (6,885
                )Unrecognized
                    net transition obligation
                
                
                N/A
                
                
                -
                
                
                
                2,458Unrecognized
                    net actuarial loss
                
                
                N/A
                
                
                (697
                )
                
                
                1,610Unrecognized
                    prior service cost
                
                
                N/A
                
                
                517
                
                
                
                -Accrued
                    postretirement benefit obligation
                
                
                N/A
                
                
                (6,525
                )
                
                
                (2,817
                )Liability
                    for postretirement benefit obligation recorded in balance
                    sheet
                
                $
                (4,035
                )
                $
                N/A
                
                
                $
                N/A
 
 
 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, 2006, 2005 and 2004**
 
 The
          following tables present a reconciliation of prior service cost and net
          actuarial loss/gain recognized in accumulated other comprehensive income
          in the
          Consolidated Statements of Comprehensive Income and amounts not yet recognized
          in net pension cost as of December 31, 2006. The table also shows the amounts
          removed from accumulated other comprehensive income and adjusted to the
          regulatory asset/liability as required under SFAS 71. Amortization amounts
          of
          prior service cost and net actuarial gain which are expected to be recognized
          in
          net pension cost in 2007 are shown underneath the respective ending
          balances:
 
 **PNM
                    Plan****December
                    31, 2006****Prior
                    service cost/(gain)**
                
                **Net
                    actuarial loss**(In
                    thousands)Balance
                    at beginning of period
                
                $
                (27,993
                )
                $
                84,511Change
                    in actuarial assumptions
                
                
                (809
                )
                
                (7,574
                )Regulatory
                    asset/liability adjustment
                
                
                27,152
                
                
                (72,529
                )Amortization
                    recognized in net pension cost
                
                
                325
                
                
                (382
                )Amounts
                    in accumulated other comprehensive income not yet recognized
                    in net
                    pension cost/(income) at end of year
                
                $
                (1,325
                )
                $
                4,026Amounts
                    expected to be recognized in pension cost/(income) in 2007
                
                $
                (326
                )
                $
                338
 
 
 **TNMP
                    Plan****December
                    31, 2006****Prior
                    service cost**
                
                **Net
                    actuarial gain**(In
                    thousands)Balance
                    at beginning of period
                
                $
                517
                
                $
                697Change
                    in actuarial assumptions
                
                
                -
                
                
                2,250Regulatory
                    asset/liability adjustment
                
                
                (493
                )
                
                (2,813
                )Amortization
                    recognized in net pension cost
                
                
                (3
                )
                
                -Amounts
                    in accumulated other comprehensive income not yet recognized
                    in net
                    pension cost/(income) at end of year
                
                $
                21
                
                $
                134Amounts
                    expected to be recognized in pension cost/(income) in 2007
                
                $
                3
                
                $
                7
 
 
 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, 2006, 2005 and 2004**
 
 The
          following table presents the incremental effect of applying SFAS 158 on
          individual line items in the Consolidated Balance Sheets:
 
 **PNM
                    Plan****Year
                    ended December 31, 2006****Before
                    application of SFAS 158**
                
                **Adjustments**
                
                **After
                    Application of SFAS 158**(In
                    thousands)AssetsRegulatory
                    asset
                
                $
                -
                
                $
                44,441
                
                $
                44,441Deferred
                    tax asset
                
                
                -
                
                
                1,069
                
                
                1,069LiabilitiesAccrued
                    pension liability
                
                $
                (15,397
                )
                $
                (47,142
                )
                $
                (62,539
                )Total
                    stockholder’s equityAccumulated
                    other comprehensive income
                
                $
                -
                
                $
                1,632
                
                $
                1,632
 
 **TNMP
                    Plan****Year
                    ended December 31, 2006****Before
                    application of SFAS 158**
                
                **Adjustments**
                
                **After
                    Application of SFAS 158**(In
                    thousands)LiabilitiesAccrued
                    pension liability
                
                $
                (6,525
                )
                $
                2,490
                
                $
                (4,035
                )Regulatory
                    liability
                
                
                -
                
                
                (2,377
                )
                
                (2,377
                )Deferred
                    tax liability
                
                
                -
                
                
                (43
                )
                
                (43
                )Total
                    stockholder’s equityAccumulated
                    other comprehensive income
                
                $
                -
                
                $
                (70
                )
                $
                (70
                )
 
 
 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, 2006, 2005 and 2004**
 
 The
          following table presents the components of PNM postretirement benefit cost
          recognized in the Consolidated Statements of Earnings:
 
 **PNM
                    Plan**
                
                **Pension
                    Benefits****Year
                    Ended December 31,****2006**
                
                **2005**
                
                **2004**(In
                    thousands)Service
                    cost
                
                $
                2,713
                
                $
                2,764
                
                $
                2,286Interest
                    cost
                
                
                7,367
                
                
                6,765
                
                
                6,941Expected
                    long-term rate of return on plan assets
                
                
                (5,418
                )
                
                (5,300
                )
                
                (4,928
                )Amortization
                    of net gain and regulatory liability
                
                
                6,680
                
                
                6,105
                
                
                4,985Amortization
                    of prior service cost and regulatory asset
                
                
                (5,687
                )
                
                (6,290
                )
                
                (5,462
                )Adjustment
                    to unrecognized transition obligation and unrecognized prior
                    service
                    cost
                
                
                -
                
                
                -
                
                
                (968
                )Net
                    pension income
                
                $
                5,655
                
                $
                4,044
                
                $
                2,854
 
 
 The
          following significant weighted-average assumptions were used to determine
          the
          PNM accumulated postretirement benefit obligation and postretirement benefit
          cost:
 
 **PNM
                    Plan****2006**
                
                **2005**
                
                **2004**Discount
                    rate for determining accumulated postretirementbenefit
                    obligation at December 31
                6.10%
                
                5.75%
                
                6.00%Discount
                    rate for determining postretirement benefit cost
                5.75%
                
                6.00%
                
                6.50%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 6.10% was determined based on a review of long-term high-grade
          bonds and management’s expectations. The discount rate was increased at December
          31, 2006 by 0.35% and reduced at December 31, 2005 by 0.25% respectively,
          resulting in an increase and decrease in the PNM accumulated postretirement
          benefit obligation of approximately $4.9 million and $4.0 million at December
          31, 2006 and 2005. 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,
          2006
          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 13.0% for the year ended December 31, 2006. 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 2007 postretirement benefit
          cost to increase approximately $0.7 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 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.
 
 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, 2006, 2005 and 2004**
 The
          following table presents the components of TNMP postretirement benefit
          cost
          recognized in the Consolidated Statements of Earnings:
 
 **TNMP
                    Plan**
                
                **Post-**
                
                **Post-**
                
                
                **Pre-**
                
                **Pre-****Acquisition**
                
                **Acquisition**
                
                
                **Acquisition**
                
                **Acquisition****Year
                    Ended,**
                
                **June
                    6-**
                
                
                **January
                    1-**
                
                **Year
                    Ended****December
                    31,**
                
                **December
                    31,**
                
                
                **June
                    6,**
                
                **December
                    31,****2006**
                
                **2005**
                
                
                **2005**
                
                **2004**(In
                    thousands)Service
                    cost
                
                $
                424
                
                $
                290
                
                
                $
                195
                
                $
                411Interest
                    cost
                
                
                710
                
                
                376
                
                
                
                282
                
                
                679Expected
                    long-term rate of return on plan assets
                
                
                (456
                )
                
                (241
                )
                
                
                (136
                )
                
                (315
                )Amortization
                    of transition obligation
                
                
                -
                
                
                -
                
                
                
                136
                
                
                324Amortization
                    of prior service cost and regulatory asset
                
                
                60
                
                
                -
                
                
                
                -
                
                
                -Postretirement
                    benefit cost
                
                $
                738
                
                $
                425
                
                
                $
                477
                
                $
                1,099
 
 The
          following significant weighted-average assumptions were used to determine
          the
          TNMP accumulated postretirement benefit obligation and postretirement benefit
          cost:
 
 **TNMP
                    Plan****Post-**
                
                **Post-**
                
                **Pre-**
                
                **Pre-****Acquisition**
                
                **Acquisition**
                
                **Acquisition**
                
                **Acquisition****Year
                    Ended**
                
                **June
                    6-**
                
                **January
                    1-**
                
                **Year
                    Ended****December
                    31,**
                
                **December
                    31,**
                
                **June
                    6,**
                
                **December
                    31,****2006**
                
                **2005**
                
                **2005**
                
                **2004**(In
                    thousands)Discount
                    rate for determining accumulatedpostretirement
                    benefit obligation at the endthe
                    period
                6.10%
                
                5.75%
                
                5.25%
                
                5.75%Discount
                    rate for determining postretirementbenefit
                    cost
                5.75%
                
                5.25%
                
                5.75%
                
                6.00%Expected
                    long-term rate of return on plan assets
                6.90%
                
                6.90%
                
                5.50%
                
                5.50%Rate
                    of compensation increase
                N/A
                
                N/A
                
                N/A
                
                N/A
 
 The
          assumed discount rate for determining the accumulated postretirement benefit
          obligation of 6.10% was determined based on a review of long-term high-grade
          bonds and management’s expectations. The discount rate was increased by 0.35% at
          December 31, 2006 over December 31, 2005, resulting in a decrease in the
          TNMP
          pension benefit obligation of approximately $0.4 million at December 31,
          2006.
          The discount rate was increased at December 31 2005 by 0.50%, resulting
          in a
          decrease in the TNMP pension benefit obligation of approximately $0.6 million
          at
          December 31, 2005. Should actual experience differ from actuarial assumptions,
          the projected benefit obligation and net pension cost/(income) would be
          affected.
 
 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, 2006, 2005 and 2004**
  The
          expected long-term rate of return on plan assets of 6.9% at December 31,
          2006
          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 6.9% for the year ended December 31, 2006. 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 2007 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
          as of December 31, 2005. 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.
 
 The
          following table shows the assumed health care cost trend rates:
 
 **PNM
                    Plan**
                
                **TNMP
                    Plan****December
                    31,**
                
                **December
                    31,****2006**
                
                **2005**
                
                **2006**
                
                **2005**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%
                
                5.0%
                
                N/A
                
                N/AYear
                    that the rate reaches the ultimate trend rate
                2013
                
                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
                
                $
                1,106
                
                $
                (852
                )Effect
                    on postretirement benefit obligation
                
                $
                11,173
                
                $
                (9,645
                )
 
 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 2006 net
          periodic expense or the year-end 2006 postretirement benefit
          obligation.
 
 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, 2006, 2005 and 2004**
 
 The
          following table outlines the asset allocation for the other postretirement
          benefits:
 
 **PNM
                    Plan**
                
                **TNMP
                    Plan****December
                    31,**
                
                **December
                    31,****2006**
                
                **2005**
                
                **2006**
                
                **2005**Equity
                    securities
                68%
                
                50%
                
                21%
                
                23%Debt
                    securities
                32%
                
                50%
                
                79%
                
                77%100%
                
                100%
                
                100%
                
                100%
 
 The
          Company is currently targeting an asset allocation of 70% equity securities
          and
          30% debt securities in 2007 for both the PNM and the TNMP other postretirement
          benefits plan.
 
 PNM
          expects to make contributions totaling $6.5 million to the PNM postretirement
          benefit plan in 2007. TNMP expects to make contributions totaling $0.6
          million
          to the TNMP postretirement benefit plan in 2007.
 
 The
          following other postretirement benefit payments, which reflect expected
          future
          service, as appropriate, are expected to be paid:
 
 **PNM**
                
                **TNMP****Plan**
                
                **Plan**(In
                    thousands)2007
                
                $
                5,791
                
                $
                7102008
                
                $
                6,264
                
                $
                7272009
                
                $
                6,799
                
                $
                7442010
                
                $
                7,386
                
                $
                7842011
                
                $
                8,196
                
                $
                832Years
                    2012 - 2016
                
                $
                51,496
                
                $
                4,612
 
 
 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, 2006, 2005 and 2004**
 
 *Executive
          Retirement Programs*
 
 For
          the
          executive retirement programs, 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,****2006**
                
                **2005**(In
                    thousands)Benefit
                    obligation at beginning of year
                
                $
                19,121
                
                $
                20,458Service
                    cost
                
                
                55
                
                
                63Interest
                    cost
                
                
                1,054
                
                
                1,181Actuarial
                    gain
                
                
                (99
                )
                
                (992
                )Benefits
                    paid
                
                
                (1,534
                )
                
                (1,589
                )Benefit
                    obligation at end of year
                
                $
                18,597
                
                $
                19,121
 
 **TNMP
                    Plan****Post-**
                
                **Post-**
                
                
                **Pre-****Acquisition**
                
                **Acquisition**
                
                
                **Acquisition****Year
                    Ended**
                
                **June
                    6-**
                
                
                **January
                    1-****December
                    31,**
                
                **December
                    31,**
                
                
                **June
                    6,****2006**
                
                **2005**
                
                
                **2005**(In
                    thousands)Benefit
                    obligation at beginning of period
                
                $
                1,401
                
                $
                3,671
                
                
                $
                3,573Service
                    cost
                
                
                -
                
                
                -
                
                
                
                40Interest
                    cost
                
                
                75
                
                
                44
                
                
                
                78Actuarial
                    loss
                
                
                20
                
                
                511
                
                
                
                62Benefits
                    paid
                
                
                (171
                )
                
                (82
                )
                
                
                (82
                )Settlements
                
                
                -
                
                
                (2,743
                )
                
                
                -Benefit
                    obligation at end of period
                
                $
                1,325
                
                $
                1,401
                
                
                $
                3,671
 
 
 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, 2006, 2005 and 2004**
 
 The
          following tables present the change in the value of pension plan assets
          and the
          pension plans’ funded status recognized as the pension asset/(liability) in the
          Consolidated Balance Sheets:
 
 **PNM
                    Plan****Year
                    Ended**
                
                **Year
                    Ended****December
                    31,**
                
                **December
                    31,****2006**
                
                **2005**(In
                    thousands)Fair
                    value of plan assets at end of period
                
                $
                -
                
                $
                -Funded
                    status
                
                
                (18,597
                )
                
                (19,121
                )Unrecognized
                    net actuarial loss
                
                
                N/A
                
                
                3,993Unrecognized
                    prior service cost
                
                
                N/A
                
                
                49Accrued
                    pension liability
                
                
                N/A
                
                
                (15,079
                )Liability
                    for pension benefits recorded in balance sheet
                
                $
                (18,597
                )
                $
                N/A
 
 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 $4.3 million were in the trust at
          December 31, 2006. PNM did not make any contributions to the trust during
          the
          years ended December 31, 2006, 2005 or 2004.
 
 **TNMP
                    Plan****Post-**
                
                **Post-**
                
                
                **Pre-****Acquisition**
                
                **Acquisition**
                
                
                **Acquisition****Year
                    Ended**
                
                **June
                    6-**
                
                
                **January
                    1-****December
                    31,**
                
                **December
                    31,**
                
                
                **June
                    6,****2006**
                
                **2005**
                
                
                **2005**(In
                    thousands)Fair
                    value of plan assets at end of period
                
                $
                -
                
                $
                -
                
                
                $
                -Funded
                    status
                
                
                (1,325
                )
                
                (1,401
                )
                
                
                (3,671
                )Unrecognized
                    net actuarial loss
                
                
                N/A
                
                
                48
                
                
                
                464Unrecognized
                    prior service cost
                
                
                N/A
                
                
                -
                
                
                
                (557
                )Accrued
                    pension liability
                
                
                N/A
                
                
                (1,353
                )
                
                
                (3,764
                )Liability
                    for pension benefits recorded in balance sheet
                
                $
                (1,325
                )
                $
                N/A
                
                
                $
                N/A
 
 At
          December 31, 2006, of the liability for pension benefits recorded in the
          balances sheets for the executive pension plans, PNM and TNMP recognized
          $1.5
          million and $0.2 million as a current liability, respectively.
 
 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, 2006, 2005 and 2004**
 
 The
          following table presents a reconciliation of prior service cost and net
          actuarial loss recognized in accumulated other comprehensive income in
          the
          Consolidated Statements of Comprehensive Income and amounts not yet recognized
          in net pension cost as of December 31, 2006. The table also shows the amounts
          removed from accumulated other comprehensive income and adjusted to the
          regulatory asset/liability as required under SFAS 71. Amortization amounts
          of
          prior service cost and net actuarial gain which are expected to be recognized
          in
          net pension cost in 2007 are shown underneath the respective ending
          balances:
 
 **PNM
                    Plan**
                
                **TNMP
                    Plan****December
                    31, 2006**
                
                **December
                    31, 2006****Prior
                    service cost**
                
                **Net
                    actuarial loss**
                
                **Net
                    actuarial loss**(In
                    thousands)Balance
                    at beginning of period
                
                $
                49
                
                $
                3,993
                
                $
                48Change
                    in actuarial assumptions
                
                
                -
                
                
                (99
                )
                
                20Regulatory
                    asset/liability adjustment
                
                
                (46
                )
                
                (3,671
                )
                
                (68
                )Amortization
                    recognized in net pension cost
                
                
                (1
                )
                
                (6
                )
                
                -Amounts
                    in accumulated other comprehensive income not yet recognized
                    in net
                    pension cost/(income) at end of year
                
                $
                2
                
                $
                217
                
                $
                -Amounts
                    expected to be recognized in pension cost in 2007
                
                $
                1
                
                $
                6
                
                $
                -
 
 
 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, 2006, 2005 and 2004**
 
 The
          following table presents the incremental effect of applying SFAS 158 on
          individual line items in the Consolidated Balance Sheets:
 
 **PNM
                    Plan****Year
                    ended December 31, 2006****Before
                    application of SFAS 158**
                
                **Adjustments**
                
                **After
                    Application of SFAS 158**(In
                    thousands)AssetsRegulatory
                    asset
                
                $
                -
                
                $
                3,611
                
                $
                3,611Deferred
                    tax asset
                
                
                1,502
                
                
                (1,415
                )
                
                87Intangible
                    asset
                
                
                36
                
                
                (36
                )
                
                -LiabilitiesAccrued
                    pension liability - current
                
                $
                -
                
                $
                (1,483
                )
                $
                (1,483
                )Accrued
                    pension liability - deferred
                
                
                (18,597
                )
                
                1,483
                
                
                (17,114
                )Total
                    stockholder’s equityAccumulated
                    other comprehensive income
                
                $
                2,292
                
                $
                (2,160
                )
                $
                132
 
 
 **TNMP
                    Plan****Year
                    ended December 31, 2006****Before
                    application of SFAS 158**
                
                **Adjustments**
                
                **After
                    Application of SFAS 158**(In
                    thousands)AssetsRegulatory
                    asset
                
                $
                -
                
                $
                67
                
                $
                67Deferred
                    tax asset
                
                
                26
                
                
                (26
                )
                
                -LiabilitiesAccrued
                    pension liability - current
                
                $
                -
                
                $
                (157
                )
                $
                (157
                )Accrued
                    pension liability - deferred
                
                
                (1,325
                )
                
                157
                
                
                (1,168
                )Total
                    stockholder’s equityAccumulated
                    other comprehensive income
                
                $
                41
                
                $
                (41
                )
                $
                -
 
 
 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, 2006, 2005 and 2004**
 
 The
          following table presents the components of PNM net pension cost/(income)
          associated with the executive retirement plan recognized in the Consolidated
          Statements of Earnings:
 
 **PNM
                    Plan**
                
                **Pension
                    Benefits****Year
                    Ended December 31,****2006**
                
                **2005**
                
                **2004**(In
                    thousands)Service
                    cost
                
                $
                55
                
                $
                62
                
                $
                103Interest
                    cost
                
                
                1,055
                
                
                1,181
                
                
                1,239Amortization
                    of net loss
                
                
                99
                
                
                173
                
                
                132Amortization
                    of prior service cost
                
                
                13
                
                
                134
                
                
                150Net
                    pension benefit cost
                
                $
                1,222
                
                $
                1,550
                
                $
                1,624
 
 The
          following significant weighted-average assumptions were used to determine
          the
          PNM projected benefit obligation and net pension cost/(income):
 
 **PNM
                    Plan****2006**
                
                **2005**
                
                **2004**Discount
                    rate for determining projected benefit obligationat
                    December 31
                6.10%
                
                5.75%
                
                6.00%Discount
                    rate for determining net pension cost/(income)
                5.75%
                
                6.00%
                
                6.50%Expected
                    long-term rate of return on plan assets
                N/A
                
                N/A
                
                N/ARate
                    of compensation increase
                N/A
                
                N/A
                
                N/A
 
 The
          assumed discount rate for determining the projected benefit obligation
          of 6.10%
          at December 31, 2006 was determined based on a review of long-term high-grade
          bonds and management’s expectations. The discount rate was increased by 0.35% at
          December 31, 2006 over December 31, 2005, resulting in a decrease in the
          PNM
          pension benefit obligation of approximately $0.5 million at December 31,
          2006.
          The discount rate was reduced at December 31 2005 by 0.25%, resulting in
          an
          increase in the PNM pension benefit obligation of approximately $0.4 million
          at
          December 31, 2005. Should actual experience differ from actuarial assumptions,
          the projected benefit obligation and net pension cost/(income) would be
          affected.
 
 The
          following table presents the components of TNMP net pension cost associated
          with
          the executive retirement plan recognized in the Consolidated Statements
          of
          Earnings:
 
 
 **TNMP
                    Plan**
                
                **Pension
                    Benefits****Post-**
                
                **Post-**
                
                
                **Pre-**
                
                **Pre-****Acquisition**
                
                **Acquisition**
                
                
                **Acquisition**
                
                **Acquisition****Year
                    Ended**
                
                **June
                    6-**
                
                
                **January
                    1-**
                
                **Year
                    Ended****December
                    31,**
                
                **December
                    31,**
                
                
                **June
                    6,**
                
                **December
                    31,****2006**
                
                **2005**
                
                
                **2005**
                
                **2004**(In
                    thousands)Service
                    cost
                
                $
                -
                
                $
                -
                
                
                $
                40
                
                $
                214Interest
                    cost
                
                
                76
                
                
                44
                
                
                
                78
                
                
                199Amortization
                    of actuarial loss
                
                
                -
                
                
                -
                
                
                
                45
                
                
                157Amortization
                    of prior service cost
                
                
                -
                
                
                -
                
                
                
                (35
                )
                
                (83
                )Net
                    pension benefit cost
                
                $
                76
                
                $
                44
                
                
                $
                128
                
                $
                487
 
 
 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, 2006, 2005 and 2004**
 
 The
          following significant weighted-average assumptions were used to determine
          the
          TNMP projected benefit obligation and net pension cost/(income):
 
 **TNMP
                    Plan**
                **Post-**
                
                **Post-**
                
                **Pre-**
                
                **Pre-****Acquisition**
                
                **Acquisition**
                
                **Acquisition**
                
                **Acquisition****Year
                    Ended**
                
                **June
                    6-**
                
                **January
                    1-**
                
                **Year
                    Ended****December
                    31,**
                
                **December
                    31,**
                
                **June
                    6,**
                
                **December
                    31,****2006**
                
                **2005**
                
                **2005**
                
                **2004**(In
                    thousands)Discount
                    rate for determining projected benefitobligation
                    at the end of the period
                6.10%
                
                5.75%
                
                5.75%
                
                5.75%Discount
                    rate for determining net pensioncost/(income)
                5.75%
                
                5.25%
                
                5.75%
                
                6.00%Expected
                    long-term rate of return on plan assets
                N/A
                
                N/A
                
                N/A
                
                N/ARate
                    of compensation increase
                N/A
                
                N/A
                
                N/A
                
                N/A
 
 The
          assumed discount rate for determining the projected benefit obligation
          of 6.10%
          at December 31, 2006 was determined based on a review of long-term high-grade
          bonds and management’s expectations. The discount rate was increased by 0.35% at
          December 31, 2006 over December 31, 2005, resulting in an immaterial decrease
          in
          the TNMP pension benefit obligation at December 31, 2006. The discount
          rate was
          reduced at December 31 2005 by 0.50%, resulting in an immaterial increase
          in the
          PNM pension benefit obligation at December 31, 2005. Should actual experience
          differ from actuarial assumptions, the projected benefit obligation and
          net
          pension cost/(income) would be affected.
 
 At
          December 31, 2006 and 2005, the projected and accumulated benefit obligation
          for
          the PNM executive retirement plan are the same, as the PNM executive retirement
          plan was frozen June 2005. At December 31, 2006, the projected and accumulated
          benefit obligation for the TNMP pension plan are the same, as the TNMP
          pension
          plan was frozen in June 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,****2006**
                
                **2005**
                
                **2006**
                
                **2005**(In
                    thousands)Projected
                    benefit obligation
                
                $
                18,597
                
                $
                19,121
                
                $
                1,325
                
                $
                1,401Accumulated
                    benefit obligation
                
                
                18,597
                
                
                19,121
                
                
                1,325
                
                
                1,401Fair
                    value of plan assets
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
 
 The
          following executive retirement plan payments, which reflect expected future
          service, as appropriate, are expected to be paid:
 
 **PNM**
                
                **TNMP****Plan**
                
                **Plan**(In
                    thousands)2007
                
                $
                1,529
                
                $
                1612008
                
                $
                1,525
                
                $
                1602009
                
                $
                1,520
                
                $
                1592010
                
                $
                1,516
                
                $
                1582011
                
                $
                1,510
                
                $
                156Years
                    2012 - 2016
                
                $
                7,450
                
                $
                754
  
 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, 2006, 2005 and 2004**
  *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 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
          makes a
          non-matching contribution ranging from 3% to 10% of eligible compensation
          based
          on the eligible employee’s age. PNMR contributed $20.2 million, $15.5 million
          and $15.2 million in the years ended December 31, 2006, 2005 and 2004,
          respectively.
 
 PNMR
          also
          provides executive deferred compensation benefits through two unfunded,
          non-qualified plans - one of which was frozen in December 2004. 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
          $1.4 million, $0.9 million and $0.4 million in the years ended December
          31,
          2006, 2005 and 2004, respectively.
 
 TNMP
 
 TNMP
          sponsored a 401(k) defined contribution plan for eligible employees. The
          plan
          was frozen on December 31, 2005 and all eligible employees became participants
          in the PNMR Retirement Savings Plan. Assets were merged into the PNMR Retirement
          savings Plan on August 31, 2006. Eligible participants received a contribution
          during 2006 in the TNMP Thrift Plan representing an additional match earned
          under the 2005 Incentive Plan. TNMP contributions to the 401(k) plan consisted
          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 $0.3 million, $1.0 million and $0.4 million in the years ended
          December 31, 2006, 2005 and 2004, respectively. Effective August, 2006
          the TNMP
          plan was combined with the PNMR plan.
 
 **(13)**
                **Stock-Based
                    Compensation Plans**
 
 PNMR
          has
          various types of stock-based compensation programs, including stock options,
          restricted stock and performance shares granted under the Performance Equity
          Plan (“PEP”). 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.
 
 *Performance
          Stock Plan*
 
 PNMR’s
          Performance Stock Plan (“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.
          Awards granted in December 2000 vest ratably over three years on the anniversary
          of the grant date. All options vest upon death, disability, retirement,
          impaction or involuntary termination other than for cause and will lapse
          if not
          exercised within 10 years from 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.
 
 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, 2006, 2005 and 2004**
 
 *Performance
          Equity Plan*
 
 The
          PEP
          became effective in 2001 and has been subsequently amended. 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.
 
 *Source
          of Shares*
 
 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 is shares acquired on the open
          market,
          rather than newly issued shares. The source of shares for the ESPP is primarily
          newly issued shares.
 
 *SFAS
          123R*
 
 Effective
          January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), *“Share-Based
          Payment* ”
(“SFAS
          123R”), utilizing the modified prospective approach. Prior to the adoption of
          SFAS 123R, stock option grants, performance shares and ESPP issuances were
          accounted for in accordance with the intrinsic value method prescribed
          in
          Accounting Principles Board Opinion No. 25, *“Accounting
          for Stock Issued to Employees”* (“APB
          25”), and accordingly, no compensation expense was recognized for these awards.
          Restricted stock was also accounted for under APB 25 and compensation expense
          was recognized for restricted stock awards prior to the adoption of SFAS
          123R.
“Restricted stock” is the name of these awards provided for in the PEP and
          refers to awards of stock subject to vesting. It does not refer to restricted
          shares with contractual post-vesting restrictions as defined in SFAS
          123R.
 
 Under
          the
          modified prospective approach, SFAS 123R applies to all new awards and
          to awards
          that were outstanding on January 1, 2006 that are subsequently modified,
          repurchased or cancelled. Compensation expense recognized in 2006 includes
          compensation cost for all share-based payments granted prior to, but not
          yet
          vested as of January 1, 2006, based on the grant-date fair value estimated
          in
          accordance with the original provisions of SFAS 123, and compensation expense
          for all share-based payments granted subsequent to January 1, 2006, based
          on the
          grant-date fair value estimated in accordance with the provisions of SFAS
          123R.
          Prior periods were not restated to reflect the impact of adopting the new
          standard.
 
 The
          unearned stock-based compensation related to stock options and restricted
          stock
          awards is being amortized to compensation expense over the requisite vesting
          period, which is generally equally over three years. However, plan provisions
          provide that upon retirement, participants become 100% vested in stock
          options
          and restricted stock awards; therefore, in accordance with SFAS 123R,
          compensation expense for stock options and restricted stock awards to
          participants that are retirement eligible on the grant date is recognized
          immediately at the grant date and is not amortized over a period of
          time.
 
 Total
          compensation expense for stock-based payment arrangements recognized by
          PNMR for
          the year ended December 31, 2006 was $7.5 million. Of this total expense,
          $5.7
          million was allocated to PNM and $1.3 million was allocated to TNMP for
          the year
          ended December 31, 2006. Share-based compensation of $0.8 million and $1.4
          million for fiscal 2005 and 2004, respectively, was related to restricted
          stock
          awards. There was no share-based compensation expense related to stock
          options
          in fiscal 2005 and 2004, because we accounted for share-based awards using
          the
          intrinsic value method in accordance with APB 25.
 
 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, 2006, 2005 and 2004**
 
 PNMR
          receives a tax deduction for certain stock option exercises during the
          period
          the options are exercised, generally for the excess of the price at which
          the
          options are sold over the exercise prices of the options and a tax deduction
          for
          increases in the value of equity instruments issued under stock-based payment
          arrangements. Prior to the adoption of SFAS 123R, all tax benefits resulting
          from the exercise of stock options and stock-based payment arrangements
          were
          reported as operating cash flows in the Consolidated Statements of Cash
          Flows.
          In accordance with SFAS 123R, for the year ended December 31, 2006, PNMR’s
          Consolidated Statements of Cash Flows presentation reports the tax benefits
          from
          the exercise of stock options and stock-based payments as financing cash
          flows.
          For the year ended December 31, 2006, $1.1 million of tax benefits were
          reported
          as financing cash flows rather than operating cash flows in PNMR’s Consolidated
          Statements of Cash Flows.
 
 At
          December 31, 2006, PNMR had approximately $3.8 million of unrecognized
          compensation expense related to stock-based payments that is expected to
          be
          recognized over a weighted-average period of 1.5 years.
 
 The
          following table illustrates the reduction to PNMR’s earnings and basic and
          diluted earnings per share due to the adoption of SFAS 123R for the year
          ended
          December 31, 2006:
 
 **2006**(In
                    thousands, except per share amounts)Reduction
                    - PNMR income from operations
                
                $
                4,950Reduction
                    - PNMR income before income taxes
                
                $
                4,950Reduction
                    - PNMR net earnings
                
                $
                2,990Reduction
                    - PNMR earnings per shareBasic
                
                $
                0.04Diluted
                
                $
                0.04
 
 
 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, 2006, 2005 and 2004**
 
 The
          following table illustrates the effect on PNMR’s net earnings and diluted
          earnings per share had PNMR accounted for stock-based compensation in accordance
          with SFAS No. 123, *“Share-Based
          Payment* ”
for
          the
          years ended December 31:
 
 **2005**
                
                **2004**(In
                    thousands, except per share amounts)Net
                    earnings
                
                $
                67,227
                
                $
                87,686Add:
                    Stock compensation expense included inreported
                    income, net of related tax effects
                
                
                761
                
                
                1,362Deduct:
                    Total stock-based employeecompensation
                    expense determinedunder
                    fair value based method for allawards,
                    net of related tax effects
                
                
                (3,072
                )
                
                (4,177
                )Pro
                    forma net earnings
                
                $
                64,916
                
                $
                84,871Earnings
                    per share:Basic
                    - as reported
                
                $
                1.02
                
                $
                1.45Basic
                    - pro forma
                
                $
                0.98
                
                $
                1.40Diluted
                    - as reported
                
                $
                1.00
                
                $
                    1.43Diluted
                    - pro forma
                
                $
                0.97
                
                $
                    1.38
 
 *Stock
          Options*
 
 The
          Company uses the Black-Scholes option pricing model to estimate the fair
          value
          of stock-based awards with the following weighted-average assumptions for
          the
          indicated periods:
 
 The
          following table summarizes weighted-average fair value of options granted
          during
          the year:
 
 **2006**
                
                **2005**
                
                **2004**Dividend
                    yield
                
                
                3.33
                %
                
                2.55
                %
                
                3.26
                %Expected
                    volatility
                
                
                21.70
                %
                
                24.29
                %
                
                22.90
                %Risk-free
                    interest rates
                
                
                4.37
                %
                
                3.79
                %
                
                3.21
                %Expected
                    life
                
                
                4.1
                    years
                
                
                4.2
                    years
                
                
                5.7
                    years
 
 
 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, 2006, 2005 and 2004**
 
 The
          assumptions above are based on multiple factors, including historical exercise
          patterns of employees in relatively homogeneous groups with respect to
          exercise
          and post-vesting employment termination behaviors, expected future exercising
          patterns for these same homogeneous groups and both the implied and historical
          volatility of PNMR’s stock price.
 
 The
          following table summarizes activity in our share-based compensation plans:
 
 **Weighted**
                
                
                
                **Weighted****Stock**
                
                **Average**
                
                **Aggregate**
                
                **Average****Option**
                
                **Exercise**
                
                **Intrinsic**
                
                **Remaining****Shares**
                
                **Price**
                
                **Value**
                
                **Contract
                    Life**Outstanding
                    at December 31, 2003
                
                
                4,936,716
                
                $
                14.47Granted
                
                
                905,700
                
                $
                20.66Exercised
                
                
                (2,248,632
                )
                $
                14.61Forfeited
                
                
                (29,954
                )
                $
                17.05Expired
                
                
                (1,249
                )
                $
                13.03Outstanding
                    at December 31, 2004
                
                
                3,562,581
                
                $
                15.94Granted
                
                
                697,400
                
                $
                27.52Exercised
                
                
                (1,203,830
                )
                $
                14.81Forfeited
                
                
                (39,602
                )
                $
                23.02Expired
                
                
                -
                
                
                -Outstanding
                    at December 31, 2005
                
                
                3,016,549
                
                $
                18.97Granted
                
                
                817,200
                
                $
                24.07Exercised
                
                
                (720,711
                )
                $
                15.68Forfeited
                
                
                (113,432
                )
                $
                22.51Expired
                
                
                -
                
                
                -Outstanding
                    at December 31, 2006
                
                
                2,999,606
                
                $
                21.02
                
                $
                30,238,345
                
                
                7.13
                    YearsExercisable
                    at December 31, 2006
                
                
                1,587,840
                
                $
                17.86
                
                $
                21,029,121
                
                
                5.83
                    YearsOptions
                    Available for future grant
                
                
                3,364,123
 
 
 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, 2006, 2005 and 2004**
 
 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:
 
 The
          following table summarizes stock option activity for the years ended December
          31:
 
 **Stock
                    Options**
                
                **2006**
                
                **2005**
                
                **2004**(In
                    thousands,
                  except
                    per share amounts)Weighted-average
                    grant date fair value of options granted
                
                $
                3.87
                
                $
                5.41
                
                $
                3.69Total
                    fair value of options that vested during the period
                
                $
                3,338
                
                $
                4,713
                
                $
                7,051Total
                    intrinsic value of options exercised during the period
                
                $
                8,465
                
                $
                15,565
                
                $
                15,778
 
 *Restricted
          Stock*
 
 The
          PEP
          allows for the issuance of restricted stock awards. As noted above, “restricted
          stock” is the name of these awards provided for in the PEP and refers to awards
          of stock subject to vesting. It does not refer to restricted shares with
          contractual post-vesting restrictions as defined in SFAS 123R. The compensation
          expense for these awards was determined based on the market price of PNMR
          stock
          on the date of grant reduced by the present value of future dividends applied
          to
          the total number of shares that were anticipated to fully vest and then
          amortized over the vesting period.
 
 The
          Company estimates the fair value of restricted stock awards based on the
          market
          price of PNMR common stock on the date of grant reduced by the present
          value of
          estimated future dividends with the following weighted-average assumptions
          for
          the indicated periods:
 
 **2006**
                
                **2005**
                
                **2004**Expected
                    quarterly dividends per share
                
                $0.20
                
                N/A
                
                N/ARisk-free
                    interest rate
                
                4.64%
                
                N/A
                
                N/A
 
 The
          following table summarizes nonvested restricted stock activity for the
          year
          ended December 31, 2006:
 
 **Weighted-****Average****Grant-Date****Nonvested
                    Restricted Stock**
                
                **Shares**
                
                **Fair
                    Value**Nonvested
                    at beginning of period
                
                
                109,044
                
                $
                24.92Granted
                
                
                105,400
                
                $
                24.11Vested
                
                
                (40,887
                )
                $
                24.36Forfeited
                
                
                (11,788
                )
                $
                24.06Nonvested
                    at end of period
                
                
                161,769
                
                $
                24.55
 
 
 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, 2006, 2005 and 2004**
 
 The
          following table summarizes restricted stock activity for the year ended
          December
          31:
 
 **Nonvested
                    Restricted Stock**
                
                **2006**
                
                **2005**
                
                **2004**(In
                    thousands,
                  except
                    per share amounts)Weighted-average
                    grant date fair value of shares granted
                
                $
                24.11
                
                $
                26.46
                
                $
                20.80Total
                    fair value of shares that vested during the period
                
                $
                992
                
                $
                454
                
                $
                36
 
 *Performance
          Shares*
 
 The
          PEP
          allows for the issuance of performance share awards through December 31,
          2006.
          Under the provisions of SFAS 123R, the compensation expense for these awards
          was
          determined based on the market price of PNMR common stock on the date of
          grant
          applied to the total numbers of shares that were anticipated to be
          awarded.
 
 Under
          this plan, 0, 33,568, and 5,688 shares were issued during the years ended
          December 31, 2006, 2005, and 2004, respectively.
 
 *ESPP*
 
 Under
          the
          ESPP, employees were allowed to purchase shares of PNMR’s common stock at a 15%
          discount of the lower of the market price of stock at the beginning of
          the
          offering period and end of each purchase period for the six months ended
          June
          30, 2006. Under the provisions of SFAS 123R, the compensation expense for
          the
          shares issued under the ESPP was determined based on the fair value of
          PNMR’s
          common stock using the Black-Scholes model. Beginning July 1, 2006, the
          discount
          rate was changed to 5%, and the look-back feature was eliminated; therefore,
          the
          plan is no longer considered compensatory.
 
 The
          ESPP
          has been authorized to issue up to 375,000 new shares of PNMR common stock.
          Under the ESPP, 85,089, 85,354, and 76,100 shares were issued during the
          years
          ended December 31, 2006, 2005, and 2004, respectively. The source of shares
          for
          the ESPP is primarily new issued shares.
 
 **(14)**
                **Construction
                    Program and Electric Generating
                    Plants**
 
 PNMR
 
 PNMR’s
          construction expenditures for 2006 were approximately $321.1 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. As of December 31, 2006, PNMR’s wholly owned
          subsidiary, Altura, owned 305 MW of generation capacity from the Twin Oaks
          plant. (See Item 2. “Properties.”)
 
 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, 2006, 2005 and 2004**
 
 PNM
 
 PNM’s
          construction expenditures for 2006 were approximately $246.2 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, 2006, 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)
                
                $
                702,880
                
                $
                416,394
                
                $
                26,503
                
                
                46.30
                %PVNGS
                    (Nuclear) *
                
                $
                286,381
                
                $
                85,261
                
                $
                27,719
                
                
                10.20
                %Four
                    Corners Units 4 and 5 (Coal)
                
                $
                127,943
                
                $
                100,600
                
                $
                2,687
                
                
                13.00
                %Luna
                    (Gas)
                
                $
                47,951
                
                $
                1,472
                
                $
                1,641
                
                
                33.33
                %
 
 ·
                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, 2006, 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 13.0% undivided interest
          in Units
          4 and 5 of Four Corners.
 
 *Luna
          Plant*
 
 In
          April
          2006, construction of Luna, a combined-cycle power plant near Deming, New
          Mexico, was completed and the plant became operational. The Luna Energy
          Facility
          is owned 33.3% by PNM, 33.3% by Tucson Electric and 33.3% by Phelps Dodge.
          Along
          with 1/3 ownership of the plant, PNM also managed the construction project.
          Luna
          is operating as a PNM merchant facility and PNM’s 190-megawatt share of its
          power is being sold to wholesale electric customers in the Southwest.
 
 
 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, 2006, 2005 and 2004**
 
 **(15)**
                **Asset Retirement
                    Obligations**
 
 *SFAS
          143*
 
 The
          effects of adoption of SFAS 143 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,****2006**
                
                **2005**(In
                    thousands)Liability
                    at beginning of period
                
                $
                55,646
                
                $
                50,361Liabilities
                    incurred
                
                
                825
                
                
                1,251Accretion
                    expense
                
                
                4,867
                
                
                4,034Liability
                    at end of period
                
                $
                61,338
                
                $
                55,646
 
 PNM
 
 A
          reconciliation of PNM’s asset retirement obligations is as follows:
 
 **December
                    31,**
                
                **December
                    31,****2006**
                
                **2005**(In
                    thousands)Liability
                    at beginning of period
                
                $
                54,940
                
                $
                50,361Liabilities
                    incurred
                
                
                751
                
                
                545Accretion
                    expense
                
                
                4,802
                
                
                4,034Liability
                    at end of period
                
                $
                60,493
                
                $
                54,940
 
 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
          2006, PNM did not identify any material AROs associated with the transmission
          and distribution assets.
 
 TNMP
 
 A
          reconciliation of TNMP’s asset retirement obligations is as
          follows:
 
 **December
                    31,**
                
                
                **December
                    31,****2006**
                
                
                **2005**(In
                    thousands)Liability
                    at beginning of period
                
                $
                639
                
                
                $
                -Liabilities
                    incurred
                
                
                (7
                )
                
                
                639Accretion
                    expense
                
                
                54
                
                
                
                -Liability
                    at end of period
                
                $
                686
                
                
                $
                639
 
 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, 2006, 2005 and 2004**
  *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**
 
 *Overview*
 
 There
          are
          various claims and lawsuits pending against the Company. The Company is
          also
          subject to federal, state and local environmental laws and regulations,
          and is
          currently participating in the investigation and remediation of numerous
          sites.
          In addition, the Company periodically enters into financial commitments
          in
          connection with its business operations. It is not possible at this time
          for the
          Company to determine fully the effect of all litigation and other legal
          proceedings on its results of operations or financial position. It is the
          Company’s policy to accrue for expected legal costs in accordance 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.
          The
          Company is also involved in various legal proceedings in the normal course
          of
          its business. The associated legal costs for these routine matters are
          accrued
          when the legal expenses are incurred. The Company does not expect that
          any known
          lawsuits, environmental costs and commitments will have a material adverse
          effect on its financial condition or results of operations, although the
          outcome
          of litigation, investigations and other legal proceedings is inherently
          uncertain.
 
 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, 2006, 2005 and 2004**
 
 *Commitments
          and Contingencies Related to the Environment*
 
 PNM
 
 **Renewable
          Portfolio Standard**
 
 The
          Renewable Energy Act of 2004 was enacted to encourage the development of
          renewable energy in New Mexico. It establishes a mandatory renewable energy
          portfolio standard requiring a utility to acquire a renewable energy portfolio
          equal to 5% of retail electric sales by January 1, 2006 and increasing
          1% per
          year until a level of 10% is reached in the year 2011. The Act provides
          for
          streamlined proceedings for approval of utilities’ renewable energy procurement
          plans, assures utilities recovery of costs incurred consistent with approved
          procurement plans and requires the NMPRC to establish a reasonable cost
          threshold for the procurement of renewable resources to prevent excessive
          costs
          being added to rates.
 
 In
          August
          2006, PNM filed its annual renewable energy portfolio report and 2007 Renewable
          Energy Procurement Plan. In its procurement plan, PNM stated that it would
          continue to procure renewable energy and renewable energy certificates
          (RECs)
          from wind and solar photovoltaic facilities and to capitalize the costs
          for
          recovery in its next rate case in accordance with a stipulation approved
          by the
          NMPRC in 2003. The procurement plan requested the Commission to amend PNM’s
          solar photovoltaic program to eliminate the annual ceiling on new customer
          subscriptions, to approve the procurement of renewable energy and RECs
          from a
          biomass facility under a 20-year PPA beginning in 2009 and to authorize
          recovery
          of the costs of procurement under the PPA, including costs related to imputed
          debt. The NMPRC issued a final order on December 14, 2006 which approved
          the
          amendment to the photovoltaic program, approved the procurement under the
          biomass PPA, and recognized a “disputable presumption” of the reasonableness of
          the costs of energy and capacity under the PPA. The Commission denied PNM’s
          request to recover imputed debt costs, but gave PNM leave to present the
          issue
          again in a rate case.
 
 **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 $1.5 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, 2006, and 2005, $2.3 million and $2.5 million, respectively,
          was
          recognized on PNM’s Consolidated Balance Sheet for the obligation for
          decommissioning costs for the Person and Santa Fe Stations.
 
 **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.
 
 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, 2006, 2005 and 2004**
  PNM
          provided an additional $4.3 million, $3.6 million and $5.1 million funding
          for
          the years ended December 31, 2006, 2005 and 2004, respectively, into the
          qualified and non-qualified trust funds. The estimated market value of
          the
          trusts at December 31, 2006 and 2005 was $123.1 million and $105.7 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. Although the DOE has
          various estimates of when such a repository could be opened, ranging from
          2012
          to past 2015, the Company is unable to predict when a repository will be
          available.
 
 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, 2006, the operator of PVNGS has loaded 47 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 2005 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, 2006,
          2005
          and 2004, PNM incurred expense of $1.2 million, $1.0 million and $1.0 million,
          respectively. At December 31, 2006 and 2005, PNM had $14.0 million and
          $14.1
          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.
 
 **The
          Clean Air Act**
 
 *Regional
          Haze*
 
 In
          2005,
          the EPA issued the final rule addressing regional haze and guidelines for
          Best
          Available Retrofit Technology (“BART”) determinations. The purpose of the
          regional haze regulations is to address regional haze visibility impairment
          in
          the United States’ national parks and wilderness areas. The rule calls for all
          states to establish goals and emission reduction strategies for improving
          visibility in these areas. In October of 2006, the EPA issued the final
          BART
          Alternatives Rule which made revisions to the 2005 regional haze rules.
          In
          particular, the Alternatives Rule defines how an SO 2 emissions trading program developed by the Western Regional Air Partnership,
          a
          voluntary organization of western states, tribes and federal agencies,
          can be
          used by western states. New Mexico will be participating in the SO 2 program,
          which is a backstop trading program that will be implemented if SO 2 reduction milestones, which are still being developed, are not met. The
          NMED has
          requested a BART analysis for nitrogen oxides and particulate be done for
          each
          of the four units at SJGS. The Company is working to complete this analysis
          in
          early June 2007, and upon completion will submit the analysis to the NMED.
          Potentially, additional nitrogen oxide emission reductions could be required.
          The nature and cost of compliance with these potential requirements cannot
          be
          determined at this time.
 
 *New
          Source Review Rules*
 
 In
          2003,
          the EPA issued its rule regarding RMRR, clarifying what constitutes routine
          maintenance, repair, and replacement of damaged or worn equipment, subject
          to
          safeguards to assure consistency with the Clean Air Act. In March 2006,
          a panel
          of the Court of Appeals for the District of Columbia Circuit vacated this
          rule.
          The action by the court did not eliminate the NSR exclusion for routine
          maintenance, repair, and replacement work nor did the decision rule on
          what
          activities are physical changes. The EPA’s authority to write a rule based on
          the current NSPS hourly emission increase test remains in place, although
          the
          U.S. Supreme Court agreed to hear an appeal of the 4 th U.S.
          Circuit Court of Appeals ruling in favor of an energy company with respect
          to
          the hourly emission increase test. The case will decide whether the EPA
          can in
          fact use an hourly emission increase test. A decision in this case is expected
          in the first half of 2007. The Company is unable to determine the impact
          of this
          matter on its results of operations and financial position.
 
 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, 2006, 2005 and 2004**
  *Citizen
          Suit Under the Clean Air Act*
 
 PNM
          reached an impasse with the Grand Canyon Trust and Sierra Club (“Plaintiffs”)
          and with the NMED with respect to certain matters under the Consent Decree
          of
          May 10, 2005.  As a result, PNM filed petitions with the United States
          District Court for the District of New Mexico on October 6 and 12 2006
          seeking a
          determination that PNM had complied with the Consent Decree with respect
          to the
          matters at issue. The controversies related to PNM’s reports on Nox controls and
          demisters at SJGS.  PNM reached an agreement with the Plaintiffs and the
          NMED concerning these issues which was set forth in a Stipulated Order.
          The
          Court entered the Stipulated Order approving the settlement on December
          27,
          2006. The settlement does not require any additional material expenditures
          with
          respect to the implementation of the Consent Decree.
 
 *Navajo
          Nation Environmental Issues*
 
 Four
          Corners is located on the Navajo Reservation and is held under an easement
          granted by the federal government as well as a lease from the Navajo Nation.
          APS
          is the Four Corners operating agent and PNM owns a 13.0% ownership interest
          in
          Units 4 and 5 of Four Corners.
 
 The
          Navajo Acts, enacted in 1995, purport to give the Navajo Nation EPA authority
          to
          promulgate regulations covering air quality, drinking water, and pesticide
          activities, including those activities that occur at Four Corners. In 1995,
          the
          Four Corners participants filed a lawsuit in the District Court of the
          Navajo
          Nation, Window Rock District, challenging the applicability of the Navajo
          Acts
          as to Four Corners. The District Court stayed these proceedings pursuant
          to a
          request by the parties. 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. On
          March
          21, 2006, the EPA determined that the Navajo Nation was eligible for “treatment
          as a state” for the purpose of entering into a supplemental delegation agreement
          with EPA to administer the Clean Air Act Title V, Part 71 federal permit
          program
          over Four Corners. EPA entered into the supplemental delegation agreement
          with
          the Navajo Nation on the same day. Because EPA’s approval was consistent with
          the requirements of the Voluntary Compliance Act, SRP
          and APS sought and
          obtained dismissal
          of the District Court lawsuit to the extent the claims relate 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. In light of the execution of the Voluntary
          Compliance Act ,
          SRP and
          APS also sought and obtained dismissal of this lawsuit.
 
 *Four
          Corners Federal Implementation Plan Litigation*
 
 In
          September 1999, the EPA proposed a FIP to set air quality standards at
          certain
          power plants, including Four Corners. On July 26, 2006, the Sierra Club
          sued the
          EPA to compel the EPA to issue a final FIP to limit emissions at Four Corners.
          On September 12, 2006, the EPA again proposed a FIP to establish air quality
          standards at Four Corners.
 
 B-123
 APS,
          the
          Four Corners operator, intervened in the proceeding as a defendant in order
          to
          protect the interests of the participants. The Sierra Club and the EPA
          reached a
          settlement over the timing of the issuance of the FIP and a Consent Decree
          was
          lodged with the Court on December 13, 2006. Under the terms of the proposed
          Consent Decree, the EPA is to take final action on the proposed FIP on
          or before
          April 30, 2007.  The
          Company is unable to determine the impact of these matters on its results
          of
          operations and financial position or to predict whether the proposed FIPs
          will
          be adopted in the current form.
 
 In
          addition, on August 21, 2006, the EPA proposed a FIP to implement “minor New
          Source Review” on Tribal reservations. The FIP, if finalized, would apply to
          Four Corners and would require preconstruction review and permitting of
          plant projects that meet specified criteria. PNM does not currently expect
          this
          FIP to have a material adverse effect on its financial position, results
          of
          operations, cash flows or liquidity.
 
 **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.
 
 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.
 
 **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.
 
 **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.”
 
 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, 2006, 2005 and 2004**
 
 **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.
 
 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.  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.
 
 PNM
          has
          been verbally advised that the BLM and the USFS have decided to not pursue
          criminal actions, but no written confirmation has been received.  The BLM
          and the USFS have requested that PNM and Great Southwestern to conduct
          certain
          additional assessments of potential impacts to cultural and archeological
          resources within the jurisdiction of these agencies. PNM and Great Southwestern
          intend to comply with the request of the agencies.
 
 *Other
          Commitments and Contingencies*
 
 PNMR
 
 **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 is working on a settlement with the IRS appeals
          office. 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.
 
 **Coal
          Supply**
 
 Twin
          Oaks
 
 The
          coal
          requirements for Twin Oaks are being supplied by a long-term fuel supply
          agreement. This fuel supply agreement expires when Twin Oaks meets delivery
          of a
          specified number of decatherms. Based on current forecasts of usage, the
          Company
          estimates the contract will expire in 2029. If Twin Oaks were to take only
          the
          minimum delivery amounts specified under this contract, it would expire
          in
          approximately 2040. Altura is not responsible under this agreement for
          the
          decommissioning or reclamation costs of this mine. PNMR has issued a parental
          guarantee on behalf of Twin Oaks’ owner, Altura, guaranteeing Altura’s
          performance under this fuel supply agreement.
 
 PNM
 
 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.
 
 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, 2006, 2005 and 2004**
  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.
 
 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 and the estimate for decommissioning the Four Corners
          mine
          was also revised. The final cost of reclamation is expected to be $136.6
          million
          in future dollars excluding contract buyout costs paid to SJCC. During
          the year
          ended December 31, 2006, 2005 and 2004, PNM made payments of $11.6 million,
          $11.7 million and $12.9 million, respectively, against this liability.
          As of
          December 31, 2006, and 2005, $39.3 million and $48.3 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 increased decommissioning costs in conjunction with the
          electric
          rate case filed with the NMPRC in February 2007. In addition, PNM is also
          requesting to recover the portion of final underground mine reclamation
          costs
          related to New Mexico ratepayers in the electric rate case.
 
 The
          underground mine began commercial operation in January 2003. At December
          31,
          2006 and 2005, the balance on PNM’s Consolidated Balance Sheets for the
          reclamation liability related to mining activities was $0.9 million and
          $0.7
          million, respectively.
 
 **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 is subject to an annual limit of
          $15.0
          million per reactor per incident. 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. 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-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, 2006, 2005 and 2004**
 
 **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.
 
 PNM
          Electric, PNM Wholesale and TNMP Electric procure gas supplies independent
          of
          the Company and contract with PNM Gas for transportation services.
 
 **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 plants at Afton, Luna and Lordsburg. 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.
 
 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. 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, 2007. Similar one-year agreements were
          entered
          into in 2003 through 2006. PNM and BHP Billiton have negotiated for a long-term
          supplemental contract for SJGS with the Jicarilla Apache Nation ending
          in 2015.
          APS and BHP have negotiated a similar contract for Four Corners. These
          contracts
          are subject to certain federal and state approvals. 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 continued 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, PNM
          does not
          expect that the described litigation will not have a material adverse impact
          on
          its results of operation or financial position.
 
 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, 2006, 2005 and 2004**
 
 **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). 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
          with
          Western Gas for certain wells in the 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.
 
 **Western
          United States Wholesale Power Market**
 
 Various
          circumstances, including electric power supply shortages, weather conditions,
          gas supply costs, transmission constraints and alleged market manipulation
          by
          certain sellers, resulted in the well-publicized California energy crisis
          and in
          the bankruptcy filings of the Cal PX and of PG&E. As a result of the
          conditions in the western market, the FERC and other federal and state
          governmental authorities initiated investigations, litigation and other
          proceedings relevant to the Company and other sellers. The more significant
          of
          these in relation to the Company are summarized below.
 
 *California
          Refund Proceeding*
 
 SDG&E
          filed a complaint with the FERC in 2000 against sellers into the California
          wholesale electric market. In 2002, the FERC ALJ issued the Proposed Findings
          on
          California Refund Liability, in which it determined that the Cal ISO and
          Cal PX
          had, for the most part, correctly calculated the amounts of the potential
          refunds owed by most sellers and identified approximations for the amount
          of
          refunds due. In 2003, the FERC issued an order substantially adopting the
          findings from the ALJ’s 2002 decision, but requiring a change to the formula
          used to calculate refunds, which had the effect of increasing the refund
          amounts
          owed by most sellers. In August 2005, the FERC issued an order setting
          out the
          process by which sellers into the Cal ISO and Cal PX markets could make
          cost
          recovery filings pursuant to the FERC’s prior orders that indicated sellers
          would get the opportunity to submit evidence demonstrating that the refund
          methodology creates a revenue shortfall for their transactions during the
          refund
          period (of October 2, 2000 through June 20, 2001). Included in PNM’s submittal
          were objections to the limited amount of time the FERC allowed for sellers
          to
          complete their respective submittals, and the FERC’s arbitrary decision to allow
          only marketers, and not load serving entities such as PNM, to include a
          return
          component in their cost filings. PNM participated with certain other sellers
          to
          request rehearing of these issues before the FERC. In September 2005, PNM
          made
          its cost recovery filing identifying its costs associated with sales into
          the
          Cal ISO and Cal PX markets during the refund period. In January 2006, the
          FERC
          issued its order on the cost recovery filings, acting on 23 filings that
          were
          made by multiple sellers. The FERC accepted that portion of PNM’s filing
          submitted as prescribed by the FERC’s August 2005 order, but rejected the
          alternative filings that included a return component for PNM as a load
          serving
          entity. The effect of the FERC’s order is that PNM’s allowed cost offset against
          its refund liability is zero. In February 2006, PNM filed a petition for
          rehearing requesting FERC to reconsider its order and allow PNM to include
          a
          return on equity. While PNM believes it has meritorious legal arguments,
          the
          Company cannot predict the outcome of this cost recovery proceeding at
          this
          time.
 
 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, 2006, 2005 and 2004**
  As
          previously reported, there have been a number of additional appeals pending
          before the United States Court of Appeals for the Ninth Circuit with regard
          to
          FERC’s orders issued in the various California market refund dockets and PNM
          has
          participated in various appeals as one of the members of the Competitive
          Sellers
          Group. The Ninth Circuit has held a number of mediation conferences in
          these,
          and the multiple other appeals pending before it, to assess the opportunities
          for settlement, in which PNM has participated. The Ninth Circuit issued
          an order
          declaring a 45-day time out period to allow parties the opportunity to
          assess
          the recent court decisions and the potential for settlement of cases. In
          October
          2006, the Ninth Circuit extended the time out period in several of the
          cases. In
          September 2006, a mediation conference was convened at the California Public
          Utilities Commission to assess the potential settlement of the refund
          proceedings. The conference was attended by, among others, PNM, the other
          buyers
          and sellers, FERC personnel, a settlement judge and mediator from the Ninth
          Circuit, and a former FERC ALJ (whose help was enlisted by the Ninth Circuit)
          to
          aid in the mediation process. Representatives of PNM continue to attend
          and
          participate in the mediation sessions being hosted by the Ninth Circuit.
          By
          notice issued in January 2007, the parties to the appeals were advised
          that the
          former FERC ALJ will no longer participate in the mediation efforts. The
          Company
          cannot predict the ultimate outcome of FERC proceedings that may result
          from the decisions in these appeals, or whether PNM will be ultimately
          directed
          to make any additional future refunds as the result of these court decisions,
          or
          whether settlement will be reached in the case.
 
 *Pacific
          Northwest Refund Proceeding*
 
 Puget
          Sound Energy, Inc. filed a complaint at the FERC alleging that spot market
          prices in the Pacific Northwest wholesale electric market were unjust and
          unreasonable. In 2003, the FERC issued an order recommending that no refunds
          should be ordered. Several parties in the proceeding filed requests for
          rehearing and the FERC denied rehearing and reaffirmed its prior ruling
          that
          refunds were not appropriate for spot market sales in the Pacific Northwest
          during the first half of 2001. The Port of Seattle then filed an appeal
          of the
          FERC’s order denying rehearing in the Ninth Circuit, which is still pending.
          As
          a participant in the proceedings before the FERC, PNM is also participating
          in
          the appeal proceedings. Oral Argument in the case was held on January 8,
          2007.
          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 Order, the FERC asserted that certain entities,
          including PNM, acted in concert with Enron Corporation and other market
          participants to engage in activities that constitute gaming and/or anomalous
          market behavior in violation of the Cal ISO and Cal PX tariffs during 2000
          and
          2001. In 2003, PNM filed its responses to the Gaming Partnerships Order
          indicating that it did not engage in the alleged partnerships, alliances
          or
          other arrangements.
 
 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
   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, 2006, 2005 and 2004**
  motion
          to
          dismiss PNM from the Gaming Partnerships docket. In its order, the FERC
          found
          that PNM did not engage in prohibited gaming practices as defined in the
          FERC’s
          Gaming Partnership Order and also approved the settlement on the parking
          and
          lending services. The FERC also denied the California parties’ request to keep
          the docket open as to PNM and terminated the PNM docket. Subsequently,
          the
          California parties filed their petition for rehearing at the FERC objecting
          to
          the FERC’s dismissal of PNM from the Gaming Partnership investigation and
          objecting to the settlement reached with the FERC staff. The petition for
          rehearing is pending before FERC and PNM cannot predict the ultimate outcome
          of
          the rehearing petition. In August 2005, Enron, the final of the original
          13 PNM
          customers, entered into a settlement agreement with the FERC staff, the
          California parties and others that was contested by several parties. In
          November
          2005, the FERC issued an order approving the joint offer of settlement.
          Various
          parties have either objected to the settlement or otherwise sought efforts
          to
          stay or overturn FERC’s order. The Enron settlement proceedings continue to be
          ongoing at FERC. 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. In December 2006, PNM joined a group of sellers
          in
          filing a petition for writ of certiorari in the United States Supreme Court
          challenging the decision by the Ninth Circuit. See discussion above regarding “ *California
          Refund Proceeding* .”
The
          Company cannot predict the ultimate outcome of the FERC proceeding on remand,
          or whether PNM will be ultimately directed to make any additional refunds
          as the
          result of the decision.
 
 *California
          Antitrust Litigation*
 
 In
          May
          2005, the California Attorney General filed a lawsuit in California state
          court
          against PNM, PowerEx, and the Colorado River Commission alleging that PNM
          and
          PowerEx conspired to engage in unfair trade practices involving overcharges
          for
          electricity in violation of California state antitrust laws. In April 2006,
          the
          Federal District Court issued its decision denying the California Attorney
          General’s motion to remand the case back to the state court, and granted PNM’s
          and PowerEx’s motions to dismiss the case. The California Attorney General has
          appealed the case to the Ninth Circuit. Briefs have been filed in the case
          by
          the parties, but Oral Argument has not yet been scheduled. The Company
          cannot
          predict the final outcome of this litigation nor whether PNM will be required
          to
          make refunds or pay damages under these claims.
 
 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, 2006, 2005 and 2004**
  **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 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 defendants’ motion for summary
          affirmance of the district court was denied and the case was assigned to
          a
          merits panel for argument. The appeal 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.
 
 **Regional
          Transmission Issues**
 
 *Transmission
          Services*
 
 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. On
          May 18,
          2006, FERC issued a Notice of Proposed Rulemaking (NOPR) to reform its
          pro forma
          OATT. FERC emphasized that its purpose for the NOPR was not to create new
          market
          structures, redesign approved RTO or ISO markets, require transmission
          owners to
          divest control over transmission, impinge on state jurisdiction, or weaken
          the
          protection of native load customers. Core OATT elements were retained,
          including
          comparability requirements, protection of native load, state’s jurisdiction over
          bundled retail load, functional unbundling to address undue discrimination,
          and
          reciprocity. PNM and TNMP have filed Comments and Supplemental Comments
          in this
          proceeding. The NOPR is still pending before the FERC. The Company cannot
          predict what impact the final rule may have on its operations.
 
 *Transmission
          Pricing*
 
 In
          November 2005, the FERC issued a NOPR 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. In July 2006, FERC
          issued its Final Rule 679 to promote transmission investment through pricing
          reform. With its rule, FERC provided various incentives intended to promote
          transmission investment within the context of existing procedural requirements,
          with some flexibility. The FERC did not grant outright incentives to any
          public
          utility, but rather, identified incentives that it would allow
  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, 2006, 2005 and 2004**
  when
          justified in the context of individual utility petitions for declaratory
          orders
          or rate filings made pursuant to existing rate change requirements. Under
          the
          FERC’s rule, each applicant must demonstrate a nexus between the incentive
          sought and the transmission investment being made. In August 2006, various
          entities, including EEI, filed requests for rehearing requesting the FERC
          modify
          its rule. The Company supported EEI’s position in the filing. On December 22,
          2006, FERC issued its order on rehearing and retained its proposed rate
          treatments for transmission incentives, but modified the way in which theses
          incentives are applied in three principal respects to address the comments
          received on the rule. Initially, the order on rehearing will require each
          applicant to explain whether any siting process being relied upon for a
          rebuttable presumption that the project is necessary to ensure reliability
          or
          reduce congestion does contain such review. The rehearing order also clarified
          that this rebuttable presumption applies only to whether the project reduces
          congestion or encourages reliability, not the additional requirements of
          the
          Final Rule. Additionally, the rehearing order requires applicants to demonstrate
          that the total package of incentives being proposed is tailored to address
          the
          demonstrable risks or challenges faced by the transmission provider in
          undertaking the project. As such, if some of the incentives in the package
          reduce the risks of the project, that fact will be taken into account in
          any
          request for an enhanced ROE. The rehearing order also clarified that the
          Commission does not intend to grant incentive returns “routinely” or that, when
          granted, they will always be at the “top” of the zone of reasonableness. Rather,
          each transmission provider will, first, be required to justify a higher
          ROE
          under the required nexus test and, second, to justify where in the zone
          of
          reasonableness that return should lie. The rehearing order indicated the
          FERC
          will entertain requests for a specific ROE determination in a petition
          for
          declaratory order. The Company intends to continue to monitor and participate
          in
          additional developments in these FERC notices and rulemakings.
 
 **FERC
          Office of Market Oversight and Investigations**
 
 In
          November 2005, PNM received notice that the FERC Division of Operational
          Audits
          of the Office of Enforcement formerly known as the Office of Market Oversight
          and Investigations would perform a compliance audit of the Company. The
          audit
          covers the period from January 2004 to the present and will examine the
          Company’s compliance with the FERC standards of conduct and OASIS requirements,
          compliance of the Company’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.
 
 The
          audit
          is ongoing and 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.
 
 **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 joined 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. On October 20, 2006, the United States District
          Court for the District of Wyoming issued an order granting the motion and
          dismissing some of the defendants, including the Company. The relator has
          appealed to the U.S. Court of Appeals for the Tenth Circuit.
 
 The
          Company has reached an agreement in principle with the private relator
          pursuant
          to which the relator will move to dismiss his appeal, the Company will
          forego
          any efforts to seek attorney fees, costs and expenses, and the parties
          will
          provide mutual releases. When fully implemented, the Company will have
          no
          further potential liability from this litigation.
 
 B-132
 **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, 2006, 2005 and 2004**
  **Biomass
          Project**
 
 PNM
          has
          entered into a 20-year contract for the purchase of 35 MW of capacity from
          a
          renewable biomass power generation facility in central New Mexico to commence
          in
          2009.  The purchase power agreement is contingent upon the satisfaction of
          certain conditions precedent  as
          outlined in the purchase power agreement. T he
          deadline for satisfaction of the conditions has not passed including obtaining
          permits, completion of financial closing by April 2, 2007 and the start
          of
          construction by July 2, 2007.
 
 **Valencia
          Energy Facility**
 
 PNM
          has
          announced plans to enter into a power purchase agreement to purchase all
          of the
          electric capacity and energy from the Valencia Energy Facility, a proposed
          natural gas-fired power plant to be constructed near Albuquerque, New Mexico.
          PNM is negotiating with a third-party who would build, own and operate
          the
          facility while PNM would be the sole purchaser of the electricity generated.
          The
          total projected construction cost for the facility is between $100 million
          to
          $105 million. The term of the proposed power purchase agreement would be
          for 20
          years beginning June 1, 2008, with the full output of the plant estimated
          up to
          an average of 150 MW. PNM will have the option to purchase and own up to
          50% of
          the plant after it reaches commercial operation. PNM estimates that the
          plant
          will typically operate during peak periods of energy demand in summer (less
          than
          18% of the time on an annual basis).
 
 **(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 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.
 
 **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.
 
 **Price-to-Beat
          Base Rate Reset**
 
 Based
          on
          the terms of the Texas stipulation related to the acquisition of TNP, First
          Choice made a filing to reset its price-to-beat base rates in December
          2005.
          First Choice’s price-to-beat base rate case was consolidated with TNMP’s 60-day
          rate review (see “60-Day Rate Review” below). First Choice requested that the
          PUCT recognize in its new price-to-beat base rates the TNMP rate reduction
          and
          the synergy savings credit provided for in the TNP acquisition stipulation.
          In
          May 2006, TNMP, First Choice, the PUCT Staff and other parties filed a
          non-unanimous settlement agreement (“NUS”). On July 20, 2006, the ALJ reopened
          the record to accept argument concerning the
   B-133
 **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, 2006, 2005 and 2004**
  provisions
          for accumulated deferred federal income taxes and the carrying charges
          on
          stranded costs. Subsequently, on August 24, 2006, the ALJ issued a Proposal
          For
          Decision urging the PUCT to reject the NUS. After the parties filed exceptions
          to the Proposal For Decision, the PUCT unanimously rejected the ALJ’s proposal
          and approved the NUS on November 2, 2006. The PUCT made First Choice’s new
          price-to-beat base rates effective on December 1, 2006, as First Choice
          had
          requested. As Price-to-Beat rates expired on December 31, 2006, the approved
          rates are no longer applicable. In
          January 2007, TNMP’s 60 Day Rate Review proceeding, and the underlying NUS, was
          appealed by Cities to the district court, in Austin, Texas. TNMP and FCP
          are
          preparing a response and will defend the PUCT’s Final Order approving the
          NUS.
 
 **Price-to-Beat
          Fuel Factor**
 
 Under
          the
          PUCT’s final order approving the acquisition of TNP by PNMR, First Choice filed
          its post-true-up price-to-beat adjustment filing to adjust its price-to-beat
          fuel factor on September 21, 2006. First Choice’s filing calculated a 24.95%
          decrease in its price-to-beat fuel factors. The PUCT made the fuel factor
          reset
          effective December 1, 2006, as First Choice had requested. As Price-to-Beat
          rates expired on December 31, 2006, the adjustments approved by the PUCT
          are no
          longer applicable.
 
 **Energy
          Agreement**
 
 In
          2003,
          First Choice and Constellation executed a power supply agreement that resulted
          in Constellation being the primary supplier of power for First Choice’s
          customers through the end of 2006. Additionally, Constellation 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 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. The existing pricing mechanism under the Constellation power
          supply
          agreement expired on December 31, 2006. In addition, Constellation has
          agreed to
          supply power in certain transactions under the PSA beyond the date when
          that
          commitment expired.  The obligations of Constellation to act as a
          qualified scheduling entity continue until the expiration of the agreement
          on
          December 31, 2007.
 
 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.
 
 PNM
 
 **Gas
          Rate Case**
 
 On
          May
          30, 2006, PNM filed a general gas rate case that asked the NMPRC to approve
          an
          increase in the service fees charged to its 481,000 natural gas customers.
          The
          proposal would increase the set monthly fee, the charge tied to monthly
          usage,
          and miscellaneous on-demand service fees. Those fees are separate from
          the cost
          of gas charged to customers. The monthly cost of gas charge would not be
          affected by the fee increase. The petition requests an increase in base
          gas
          service rates of $20.5 million and an increase in miscellaneous on-demand
          service
  B-134
 **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, 2006, 2005 and 2004**
  rates
          of
          approximately $0.2 million. The request is designed to provide PNM’s gas utility
          an opportunity to earn an 11% return on equity, which is consistent with
          the
          average return allowed ten comparable natural gas utilities. The petition
          also
          requests approval of a line item that provides a true-up mechanism for
          operational costs when system-wide gas consumption is lower or higher than
          what
          is designed in the rates. A hearing on the case was conducted before a
          hearing
          examiner in December 2006. On January 25, 2007, the Commission voted to
          extend
          the suspension period for the new rates from March 25 for up to ninety
          days. A
          final order is expected from the NMPRC by the end of April 2007.
 
 **Transmission
          Rate Case**
  In
            March
            2005, PNM filed a notice with the FERC to increase its wholesale electric
            transmission revenues. 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, including Wholesale,
            that
            purchase wholesale transmission service from PNM. 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.
            In April
            2006, PNM and parties in the case filed an uncontested settlement agreement
            with
            the FERC settlement judge that, if approved, would result in an increase
            in
            electric transmission revenues of approximately $4.6 million annually.
            The FERC
            staff took issue with one element of settlement regarding the standard
            by which
            the FERC or a non-party to the settlement could challenge the settlement.
            PNM
            responded to the FERC staff’s expression of its issue and identified that the
            FERC had previously approved settlements containing the standard of review
            language reflected in PNM’s settlement. On February 27, 2007, the FERC approved
            the settlement.
 **Complaint
            Against Southwestern Public Service Company**
  In
            September 2005, PNM filed a complaint under the Federal Power Act against
            SPS.
            PNM believes that through its fuel cost adjustment clause, SPS has been
            overcharging PNM for deliveries of energy under three contracts, and
            continues
            to do so under the remaining contracts. PNM requested that the FERC investigate
            these charges for the period 2001 through 2004, and going forward. The
            hearing
            was held in that case and in May 2006, the ALJ issued an initial decision
            in
            that proceeding recommending that SPS make refunds to customers, including
            PNM,
            for misapplication of charges in its fuel cost adjustment clause. The
            parties in
            that proceeding have filed their exceptions to the initial decision,
            which has
            gone to the FERC for review. Fuel cost charges for 2005 and 2006 are
            being
            addressed as part of the finding in the original fuel charge adjustment
            clause
            case currently pending before the FERC, in which PNM is an intervenor.
            PNM’s
            complaint also alleges that SPS’ demand charge rates for interruptible power
            sales are excessive and requested that the FERC set a refund effective
            date of
            September 13, 2005 for these rates. Settlement conferences were held
            before a
            FERC settlement judge throughout the first quarter of 2006. Upon the
            failure of
            the parties to reach a settlement, the judge recommended the case proceed
            to
            hearing. Additionally, in November 2005, SPS filed an electric rate case
            proposing to unbundled and raise rates charged to customers effective
            July 2006.
            PNM intervened in the case and objected to the proposed rate increase.
            In
            September 2006, PNM and SPS filed a settlement agreement at FERC in which
            PNM
            settled its issues in the complaint proceeding, as well as its concerns
            with
            SPS’ proposed rate increases in the SPS rate case. On October 10, 2006,
            interested parties and FERC Trial Staff filed comments on the proposed
            settlement. Only one party opposed the settlement, which was supported
            or not
            opposed by the remaining active parties and the FERC Trial Staff. On
            October 19,
            2006, PNM, SPS and FERC Trial Staff each filed reply comments contending
            that
            Occidental’s opposition was without merit. The Settlement Judge and the
            Administrative Law Judge have certified the contested partial settlement
            and
            sent it to the Commission for final approval. The settlement must be
            approved by
            the Commission before it may be effective. The settlement has no impact
            on the
            initial decision of the ALJ in the fuel cost adjustment clause case or
            the
            pending petitions for rehearing in that docket. PNM cannot predict if
            the
            settlement will be approved by FERC or what the outcome of the fuel cost
            adjustment clause proceeding at the FERC will be.
 B-135
 **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, 2006, 2005 and 2004**
 TNMP
 
 **TNMP
          Competitive Transition Charge True-Up Proceeding**
 
 The
          purpose of the true-up proceeding was to quantify and reconcile the amount
          of
          stranded costs that TNMP may recover from its transmission and distribution
          customers. A 2004 PUCT decision established $87.3 million as TNMP’s stranded
          costs.
 
 In
          July
          2005, the PUCT issued a final order confirming the calculation of carrying
          costs
          and the amount of stranded costs allowed for recovery. TNMP and other parties
          appealed the July PUCT order. On July 24, 2006, the district court in Austin,
          Texas affirmed the PUCT order. TNMP has appealed that decision to the Texas
          Third Court of Appeals in Austin, Texas and has filed its initial brief.
 
 **Interest
          Rate for Calculating Carrying Charges on TNMP’s Stranded
          Cost**
 
 The
          PUCT
          approved an amendment to the true-up rule at its June 29, 2006 open meeting.
          The
          amendment will result in a lower interest rate that TNMP is allowed to
          collect
          on the unsecuritized true-up balance through a stranded cost. The PUCT
          concluded
          that the correct rate at which a utility should accrue carrying costs through
          a
          stranded cost is the weighted average of an adjusted form of its marginal
          cost
          of debt and its unadjusted historical cost of debt, with the weighting
          based on
          the utility’s most recently authorized capital structure. The new rate is yet to
          be determined, but this change will effect TNMP by lowering the current
          approved
          interest rate of 10.93%. This change in carrying charges will affect the
          rates
          set in TNMP’s stranded cost filing. The rule went into effect on July 20, 2006,
          and TNMP has made its compliance filing. Because the PUCT Staff disagrees
          with
          TNMP’s calculation of the interest rate, the matter was referred to SOAH for
          a
          hearing on the merits. The parties have filed testimony and the ALJ is
          scheduling a hearing date. Scheduled hearings were delayed and negotiations
          are
          on-going. At this time, the Company cannot predict the outcome of this
          matter.
 
 **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.
          As noted above, TNMP’s 60-day rate review, along with First Choice’s
          price-to-beat rate reset filing, were consolidated. See “Price-To-Beat Base Rate
          Reset” above for further updates. On November 2, 2006, the PUCT issued a signed
          order which would allow TNMP to begin collecting its true-up balance, which
          includes carrying charges over a 14 year period. The order also allows
          TNMP to
          collect expenses associated with several cases over a three year period.
          The
          PUCT allowed TNMP to begin collecting its competition transition charge
          and its
          rate case expenses on December 1, 2006. In January 2007, this proceeding
          was
          appealed by Cities to the district court, in Austin, Texas. TNMP and FCP
          are
          preparing a response and will defend the PUCT’s Final Order in this
          proceeding.
 
 B-136
 **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, 2006, 2005 and 2004**
 
 **(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).
 
 The
          Company’s recorded liability estimated to remediate its identified sites was as
          follows:
 
 **PNMR**
                
                **PNM**
                
                **TNMP****December
                    31,**
                
                **December
                    31,**
                
                **December
                    31,****2006**
                
                **2005**
                
                **2006**
                
                **2005**
                
                **2006**
                
                **2005**(In
                    thousands)$3,692
                
                $5,285
                
                $3,692
                
                $4,700
                
                $
                    -
                
                $585
 
 
 The
          Company expended the following for remediation:
 
 **Year
                    Ended December 31,****2006**
                
                **2005**
                
                **2004**(In
                    thousands)**PNMR**
                
                $
                747
                
                $
                465
                
                $
                267**PNM**
                
                $
                501
                
                $
                443
                
                $
                267
 
 
 **Post-**
                
                **Post-**
                
                
                **Pre-**
                
                **Pre-****Acquisition**
                
                **Acquisition**
                
                
                **Acquisition**
                
                **Acquisition****June
                    6-**
                
                **June
                    6-**
                
                
                **January
                    1-**
                
                **Year
                    Ended****Post-**
                
                **December
                    31,**
                
                
                **June
                    6,**
                
                **December
                    31,****2006**
                
                **2005**
                
                
                **2005**
                
                **2004**(In
                    thousands)**TNMP**
                
                $
                246
                
                $
                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, 2006 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-137
 **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, 2006, 2005 and 2004**
 
 
 **(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, 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
                )Period
                    change in:Additional
                    minimum pension liability adjustment
                
                
                -
                
                
                21,569
                
                
                -
                
                
                21,569Unrealized
                    holding gains arising from the period
                
                
                12,823
                
                
                -
                
                
                -
                
                
                12,823Reclassification
                    adjustment for gains included innet
                    income
                
                
                (398
                )
                
                -
                
                
                (7,132
                )
                
                (7,530
                )Change
                    in fair market value of designated cash flow hedges
                
                
                -
                
                
                -
                
                
                10,873
                
                
                10,873**Balance
                    at December 31, 2006**
                
                
                15,861
                
                
                (89,003
                )
                
                19,288
                
                
                (53,854
                )SFAS
                    158 transition
                
                
                -
                
                
                82,763
                
                
                -
                
                
                82,763**Balance
                    at December 31, 2006**
                
                $
                15,861
                
                $
                (6,240
                )
                $
                19,288
                
                $
                28,909
 
 B-138
 **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, 2006, 2005 and 2004**
 
 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, 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
                )Period
                    change in:Additional
                    minimum pension liability adjustment
                
                
                -
                
                
                21,582
                
                
                -
                
                
                21,582Unrealized
                    holding gains arising from the period
                
                
                12,823
                
                
                -
                
                
                -
                
                
                12,823Reclassification
                    adjustment for gains included innet
                    income
                
                
                (398
                )
                
                -
                
                
                (8,427
                )
                
                (8,825
                )Change
                    in fair market value of designated cash flow hedges
                
                
                -
                
                
                -
                
                
                (8,464
                )
                
                (8,464
                )**Balance
                    at December 31, 2006**
                
                
                15,861
                
                
                (88,961
                )
                
                (299
                )
                
                (73,399
                )SFAS
                    158 transition
                
                
                -
                
                
                82,160
                
                
                -
                
                
                82,160**Balance
                    at December 31, 2006**
                
                $
                15,861
                
                $
                (6,801
                )
                $
                (299
                )
                $
                8,761
 
 B-139
 **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, 2006, 2005 and 2004**
 
 TNMP
 
 **Additional**
                
                **Mark-to-****minimum**
                
                **market
                    for**
                
                **Accumulated****pension**
                
                **certain**
                
                **other****liability**
                
                **derivative**
                
                **comprehensive****adjustment**
                
                **transactions**
                
                **income
                    (loss)**(In
                    thousands)**Pre-Acquisition:****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
                )Period
                    change in:Additional
                    minimum pension liability adjustment
                
                
                (13
                )
                
                -
                
                
                (13
                )**Balance
                    at December 31, 2006**
                
                
                (42
                )
                
                -
                
                
                (42
                )SFAS
                    158 transition
                
                
                604
                
                
                -
                
                
                604**Balance
                    at December 31, 2006**
                
                $
                562
                
                $
                -
                
                $
                562
 
 
 B-140
 **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, 2006, 2005 and 2004**
 
 
 **(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, First Choice and Altura in accordance
          with
          shared services agreements. These services are billed at cost on a monthly
          basis
          and allocated to the subsidiaries. In addition, PNMR pays certain expenses
          for
          PNM and TNMP that are then reimbursed to PNMR.
 
 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. These agreements provide 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 years ended
          December 31, 2006, 2005 and 2004 PNM made tax-sharing payments of $32.7
          million,
          $2.9 million and $20.7 million, respectively, to PNMR. For the years ended
          December 31, 2006 and 2005 TNMP made tax-sharing payments of $7.0 million
          and
          $20.9, respectively, to PNMR. The TNMP 2005 payment was for the period
          from June
          6 through December 31, 2005.
 
 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. Neither PNM nor TNMP entered into an intercompany
          loan
          agreement under the authority in 2006. (See Note 6 for additional
          information.)
 
 PNM
          and
          TNMP engaged in various affiliate transactions during the business year
          to best
          utilize the resources held by both companies. These transactions primarily
          consisted 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.
 
 PNMR
          Services Company incurs capital expenditures related to buildings and software.
          These expenditures are normally reimbursed through management fee billings
          as
          the assets depreciate. In order to pay down line of credit borrowings,
          PNMR
          Services Company requires capital expenditures to be reimbursed more timely.
          In
          October 2006, all expenditures related to capital were billed to PNMR
          subsidiaries. The amount paid by the subsidiaries is in a deferred asset
          account
          that will be relieved as the assets on PNMR Services Company
          depreciate.
 
 PNMR
          and PNM
 
 Pursuant
          to an affiliate borrowing agreement, PNM has issued a promissory note for
          $20.0
          million to PNMR payable on or before September 30, 2007. 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, 2006 and December
          31, 2005, there were no outstanding balances on the promissory
          note.
 
 Through
          December 31, 2006, PNM sold electricity and energy-scheduling services
          to TNMP
          under a long-term wholesale power contract. Effective January 1, 2007,
          TNMP’s
          New Mexico customers were transferred to PNM.
 
 B-141
 **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, 2006, 2005 and 2004**
 
 The
          tables below describe the nature and amount of material transactions PNM
          has
          with PNMR and TNMP. TNMP became a related party effective on the date of
          PNMR’s
          acquisition of TNP, or June 6, 2005; therefore, the related party transaction
          amounts between PNMR, PNM and TNMP are reported after that date.
 
 **Year
                    Ended****December
                    31,****2006**
                
                **2005**
                
                **2004**(In
                    thousands)**PNMR
                    Transactions with PNM**Shared
                    services billings from PNMR to PNM
                
                $
                116,924
                
                $
                118,158
                
                $
                113,895PNMR
                    Services Capital expenditures fees to PNM
                
                $
                29,458
                
                $
                -
                
                $
                -**PNM
                    Transactions with TNMP**Electricity
                    & energy-scheduling billings to TNMP
                
                $
                49,529
                
                $
                24,239
                
                $
                -
 
 **December
                    31,****2006**
                
                **2005**
                
                **2004**(In
                    thousands)PNM
                    payable to PNMR
                
                $
                16,898
                
                $
                50,070
                
                $
                38,700PNM
                    receivable from TNMP(net
                    of transmission purchases)
                
                $
                7,779
                
                $
                4,130
                
                $
                -
 
 TNMP
 
 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.
 
 Through
          December 31, 2006, TNMP purchased 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
          sells transmission services to First Choice.
 
 B-142
 **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, 2006, 2005 and 2004**
 
 The
          tables below describe the nature and amount of transactions TNMP has with
          PNMR
          and PNM. TNMP became a related party effective on the date of PNMR’s acquisition
          of TNP, or June 6, 2005; therefore, the related party transaction amounts
          between TNMP, PNMR and PNM are reported after that date.
 
 **Year
                    Ended****December
                    31,****2006**
                
                **2005**(In
                    thousands)**TNMP
                    Transactions with PNMR**Shared
                    services billings from PNMR
                
                $
                30,397
                
                $
                9,048PNMR
                    Services Capital expenditures fees to TNMP
                
                $
                6,519
                
                $
                -**TNMP
                    Transactions with PNM**Electricity
                    & energy-scheduling billings from PNM
                
                $
                49,529
                
                $
                24,239**TNMP
                    Transactions with First Choice**Transmission
                    service billings to First Choice
                
                $
                68,555
                
                $
                45,947
 
 
 **December
                    31,****2006**
                
                **2005**(In
                    thousands)TNMP
                    payable to PNMR
                
                $
                5,445
                
                $
                3,043TNMP
                    payable to PNM (net of transmission sales)
                
                $
                7,779
                
                $
                4,130TNMP
                    payable to First Choice
                
                $
                2,449
                
                $
                -TNMP
                    receivable from First Choice
                
                $
                -
                
                $
                9,565
 
 
 
 B-143
 **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, 2006, 2005 and 2004**
  **(21)**
                **New
                    Accounting Pronouncements**
 
 *SFAS
          123 - Accounting for Stock-based Compensation*
 
 In
          December 2004, FASB issued SFAS 123 “Accounting for Stock-Based Compensation,”
as revised in SFAS No. 123I, as amended, “ *Share-Based
          Payment* ,”
(“SFAS
          123I”) SFAS 123I is effective for fiscal years after January 1, 2006. This
          Statement requires that the cost resulting from all share-based payment
          transactions be recognized in the financial statements. This Statement
          establishes fair value as the measurement objective in accounting for
          share-based payment arrangements and requires all entities to apply a
          fair-value-based measurement method in accounting for share-based payment
          transactions with employees except for equity instruments held by employee
          share
          ownership plans. See Note 13 for the impact to the financial
          statements.
 
 *SFAS
          155 - Accounting for Hybrid Instruments*
 
 In
          February 2006, the FASB issued SFAS 155, “ *Accounting
          for Certain Hybrid Instruments,” (an Amendment of FASB Statements No. 133 and
          140)* ”
(“SFAS
          155”). The standard is effective for all financial instruments acquired or
          issued after the beginning of an entity’s first fiscal year that begins after
          September 15, 2006. The standard allows financial instruments that have
          embedded
          derivatives to be accounted for as a whole, eliminating the need to bifurcate
          the derivative from its host, if the holder elects to account for the whole
          instrument on a fair value basis. SFAS 155 also establishes a requirement
          to
          evaluate interests in securitized financial assets to identify interests
          that
          are freestanding derivatives or that are hybrid financial instruments that
          contain an embedded derivative requiring bifurcation. The Company has evaluated
          SFAS 155 and believes it will not have a material impact on its financial
          statements.
 
 *SFAS
          157 - Fair Value Measurement*
 
 In
          September 2006, the FASB issued SFAS 157, “ *Fair
          Value Measurements* ”
(“SFAS
          157”). SFAS 157 is effective for fiscal years beginning after November 15,
          2007,
          with early adoption permitted. This statement does not call for any additional
          fair value measurements, but rather establishes a definition of fair value,
          a
          method for measuring fair value and a fair value hierarchy. In addition,
          SFAS
          157 requires additional disclosures surrounding items recorded at fair
          value.
          The Company is currently evaluating the impact of SFAS 157 on its financial
          statements.
 
 *SFAS
          158 - Pension Accounting*
 
 In
          September 2006, the FASB issued SFAS 158, “ *Employers’
          Accounting for Defined Benefit Pension and Other Postretirement Plans (an
          amendment of FASB Statements No. 87, 88, 106, and 132R)* ”(“SFAS
          158”). This statement is effective for fiscal years ending after December 15,
          2006. SFAS 158 changes the recognition requirements for defined benefit
          plans.
          Specifically, the statement requires that the current economic status of
          pension
          and postretirement plans be recognized in the financial statements. SFAS
          158 has
          no effect on the income or expense recognized for pension or other
          postretirement plans. Upon adoption of SFAS 158, it has been determined
          that the
          standard has a material impact to the balance sheets. See Note 12 for a
          complete
          analysis on its impact to the balance sheets.
 
 *SFAS
          159 - Fair Value Option*
 
 In
          February 2007, FASB issued SFAS 159, “ *The
          Fair Value Option for Financial Assets and Financial
          Liabilities* ”
(“SFAS
          159”). SFAS 159 is effective for fiscal years beginning after November 15,
          2007
          with early adoption permitted. This statement permits entities to irrevocably
          choose to measure many financial instruments and certain other items at
          fair
          value that are not currently required to be measured at fair value. Any
          unrealized gains and losses on items for which the fair value option has
          been
          elected would be reported in earnings at each subsequent reporting date.
          The
          Company is currently evaluating the impact of SFAS 159 on its financial
          statements.
 
 B-144
 **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, 2006, 2005 and 2004**
  *FIN
          48 - Uncertain tax positions*
 
 In
          July
          2006, the FASB issued Interpretation No. 48. FIN 48 is effective for fiscal
          years beginning after December 15, 2006. FIN 48 requires that the Company
          recognize only the impact of income tax positions that, based on their
          merits,
          are more likely than not to be sustained upon audit by a taxing authority.
          It
          also requires expanded financial statement disclosure of such positions.
          The
          Company will adopt FIN 48 in the first quarter of 2007.
 
 Subsequent
          to the issuance of FIN 48, the Company began evaluating its current tax
          positions in order to identify any material uncertain tax positions. A
          policy
          was developed surrounding a “unit of account” concept in identifying uncertain
          tax positions. The policy considers support for each tax position, industry
          standards, tax return disclosures and schedules and the significance of
          each
          position. The Company is currently evaluating impact of FIN 48 and can
          not
          estimate the impact on the financial statements.
 
 *SAB
          108 - Prior Year Misstatements*
 
 In
          September 2006, the SEC staff issued SAB 108, “ *Considering
          the Effects of Prior Year Misstatements When Quantifying Misstatements
          in the
          Current Year Financial Statements* ”
(“SAB
          108”). SAB 108 is effective for fiscal years ending after November 15,
          2006.  SAB 108 addresses the diversity in practice when quantifying the
          effect of an error on financial statements.  SAB 108 provides guidance on
          the consideration of the effects of prior year misstatements in quantifying
          misstatements in current year financial statements.  The Company has
          evaluated SAB 108 and determined it will not have a material impact on
          its
          financial statements.
 
 
 B-145
 **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, 2006, 2005 and 2004**
 
 **(22)**
                **Quarterly
                    Operating Results
                    (Unaudited)**
 
 PNMR
 
 The
          unaudited operating results for PNMR by quarters for 2006 and 2005 are
          as
          follows:
  **Quarter
                      Ended****March
                      31**
                  
                  **June
                      30**
                  
                  **September
                      30**
                  
                  **December
                      31**(In
                      thousands, except per share amounts)**2006:**Operating
                      Revenues
                  
                  $
                  655,801
                  
                  $
                  546,669
                  
                  $
                  650,165
                  
                  $
                  619,034Operating
                      Income
                  
                  
                  46,346
                  
                  
                  46,426
                  
                  
                  76,538
                  
                  
                  64,197Net
                      Earnings
                  
                  
                  26,325
                  
                  
                  16,307
                  
                  
                  43,844
                  
                  
                  35,638Net
                      Earnings Per Share (Basic):
                  
                  
                  0.38
                  
                  
                  0.24
                  
                  
                  0.63
                  
                  
                  0.50Net
                      Earnings Per Share (Diluted):
                  
                  
                  0.38
                  
                  
                  0.23
                  
                  
                  0.62
                  
                  
                  0.49**2005:**Operating
                      Revenues
                  
                  $
                  427,913
                  
                  $
                  405,254
                  
                  $
                  597,117
                  
                  $
                  646,526Operating
                      Income
                  
                  
                  37,942
                  
                  
                  16,580
                  
                  
                  50,158
                  
                  
                  32,689Net
                      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 Per Share
                  
                  
                  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
 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 the Company, all adjustments (consisting of
            normal
            recurring accruals) necessary for a fair statement of the results of
            operations
            for such periods have been included.
 
 B-146
 **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, 2006, 2005 and 2004**
 
 PNM
 
 The
          unaudited operating results for PNM by quarters for 2006 and 2005 are as
          follows:
  **Quarter
                      Ended****March
                      31**
                  
                  **June
                      30**
                  
                  **September
                      30**
                  
                  **December
                      31**(In
                      thousands, except per share amounts)**2006:**Operating
                      Revenues
                  
                  $
                  518,943
                  
                  $
                  328,167
                  
                  $
                  371,901
                  
                  $
                  404,761Operating
                      Income
                  
                  
                  37,529
                  
                  
                  12,792
                  
                  
                  27,455
                  
                  
                  27,021Net
                      Earnings
                  
                  
                  30,296
                  
                  
                  3,188
                  
                  
                  17,840
                  
                  
                  20,395**2005:**Operating
                      Revenues
                  
                  $
                  427,676
                  
                  $
                  352,266
                  
                  $
                  403,532
                  
                  $
                  491,983Operating
                      Income
                  
                  
                  38,809
                  
                  
                  11,069
                  
                  
                  18,039
                  
                  
                  8,415Net
                      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)
 
 (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 the Company, all adjustments (consisting of
            normal
            recurring accruals) necessary for a fair statement of the results of
            operations
            for such periods have been included.
  B-147
 **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, 2006, 2005 and 2004**
 
 TNMP
 
 The
          unaudited operating results for TNMP by quarters for 2006 and 2005 are
          as
          follows:
 
 **Quarter
                    Ended****March
                    31**
                
                **June
                    30**
                
                **September
                    30**
                
                **December
                    31**(In
                    thousands)**2006:**Operating
                    Revenues
                
                $
                62,685
                
                $
                61,456
                
                $
                70,241
                
                $
                62,608Operating
                    Income
                
                
                6,911
                
                
                8,776
                
                
                11,504
                
                
                11,696Net
                    Earnings
                
                
                1,156
                
                
                2,836
                
                
                5,990
                
                
                5,717
  **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
                  
                  
                  11,328
                  
                  
                  10,211
                  
                  
                  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)
 
 (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.
 On
            June
            6, 2005, PNMR completed the acquisition of TNP, parent company of TNMP,
            effective at 8:00 AM Central Daylight Time.
 
 In
            the
            opinion of management of the Company, all adjustments (consisting of
            normal
            recurring accruals) necessary for a fair statement of the results of
            operations
            for such periods have been included.
 
 
 B-148
 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, 2006 and 2005, and for each
            of the three years in the period ended December 31, 2006, management's
            assessment of the effectiveness of the Companies’ internal control over
            financial reporting as of December 31, 2006, and the effectiveness of
            the
            Companies’ internal control over financial reporting as of December 31, 2006,
            and have issued our reports thereon dated February 28, 2007 (which reports
            express unqualified opinions and include an explanatory paragraph regarding
            the
            adoption of Financial Accounting Standards Board Financial Interpretation
            No. 47, *Accounting
            for Conditional Asset Retirement Obligations* in 2005,
            and Statement of Financial Accounting Standards No. 123 (revised 2004), *Share-Based
            Payment* and
            Statement of Financial Accounting Standards No. 158, *Employers'
            Accounting for Defined Benefit Pension and Other Postretirement Plans
            - an
            amendment of FASB Statements No. 87, 88, 106, and 132R* in 2006
            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.
 
 As
            discussed in Note 1 to the Condensed Financial Information of Parent
            Company on
            Schedule I, the investment in subsidiaries and accumulated comprehensive
            income
            for 2005 have been restated.
 
 
 /s/
            DELOITTE & TOUCHE LLP
 
 February
            28, 2007
 Dallas,
            Texas
 
 
 
 B-149
 
 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, 2006 and 2005,
            and the related consolidated statements of earnings, retained earnings,
            comprehensive income (loss), and cash flows for the year ended December
            31,
            2006, for the periods June 6, 2005 to December 31, 2005, and January
            1, 2005 to
            June 6, 2005, and for the year ended December 31, 2004, and have issued
            our
            report thereon dated February 28, 2007 (which report expresses an unqualified
            opinion and includes an explanatory paragraph relating to PNM Resources,
            Inc.’s
            acquisition of 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
            and Statement of Financial Accounting Standards No. 123 (revised 2004), *Share-Based
            Payment* and
            Statement of Financial Accounting Standards No. 158, *Employers'
            Accounting for Defined Benefit Pension and Other Postretirement Plans
            - an
            amendment of FASB Statements No. 87, 88, 106, and 132R* in
            2006); 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 statements
            taken
            as a whole, presents fairly, in all material respects, the information
            set forth
            therein.
 
 /s/
          DELOITTE & TOUCHE LLP
 
 
 Dallas,
          Texas
 February
          28, 2007
  
 B-150
 
 **SCHEDULE
          I**
 
 **PNM
          RESOURCES, INC.**
 **CONDENSED
          FINANCIAL INFORMATION OF PARENT COMPANY**
 **BALANCE
          SHEETS**
  **As
                      of December 31,****2006**
                  
                  **2005**
                    **As
                      Restated,**
                    **see
                      Note 1**(In
                      thousands)**Assets**Cash
                      and cash equivalents
                  
                  $
                  9,045
                  
                  $
                  12,219Intercompany
                      receivables
                  
                  
                  109,565
                  
                  
                  144,510Other
                      current assets
                  
                  
                  3,896
                  
                  
                  14,390Total
                      current assets
                  
                  
                  122,506
                  
                  
                  171,119Property,
                      plant and equipment, net of accumulateddepreciation
                      of $8,013 and $7,063
                  
                  
                  25,379
                  
                  
                  20,289Long-term
                      investments
                  
                  
                  29,013
                  
                  
                  8,220Investment
                      in subsidiaries
                  
                  
                  2,438,757
                  
                  
                  1,719,452Other
                      long-term assets
                  
                  
                  11,982
                  
                  
                  15,999Total
                      long-term assets
                  
                  
                  2,505,131
                  
                  
                  1,763,960**Total
                      Assets**
                  
                  $
                  2,627,637
                  
                  $
                  1,935,079**Liabilities
                      and Stockholders' Equity**Short-term
                      debt
                  
                  $
                  513,045
                  
                  $
                  194,000Current
                      liabilities
                  
                  
                  50,819
                  
                  
                  94,348Long-term
                      debt
                  
                  
                  358,097
                  
                  
                  343,463Other
                      long-term liabilities
                  
                  
                  12,380
                  
                  
                  16,809Total
                      liabilities
                  
                  
                  934,341
                  
                  
                  648,620Common
                      stock outstanding (no par value, 120,000,000 shares
                      authorized:issued
                      76,648,472 and 68,786,286 at December 31, 2006 and 2005,
                      respectively)
                  
                  
                  1,040,451
                  
                  
                  813,425Accumulated
                      comprehensive income, net of tax
                  
                  
                  28,909
                  
                  
                  (91,589
                  )Retained
                      earnings
                  
                  
                  623,936
                  
                  
                  564,623Total
                      common stockholders' equity
                  
                  
                  1,693,296
                  
                  
                  1,286,459**Total
                      Liabilities and Stockholders' Equity**
                  
                  $
                  2,627,637
                  
                  $
                  1,935,079
  See
              note
              to parent company financial information, and notes to the consolidated
              financial
              statements.
 B-151
 
 
 **PNM
          RESOURCES, INC.**
 **CONDENSED
          FINANCIAL INFORMATION OF PARENT COMPANY**
 **STATEMENTS
          OF EARNINGS**
  **Year
                      ended December 31,****2006**
                  
                  **2005**
                  
                  **2004**(In
                      thousands)**Operating
                      Revenues**
                  
                  $
                  -
                  
                  $
                  -
                  
                  $
                  -**Operating
                      Expenses**
                  
                  
                  14,592
                  
                  
                  14,303
                  
                  
                  5,157Operating
                      income (loss)
                  
                  
                  (14,592
                  )
                  
                  (14,303
                  )
                  
                  (5,157
                  )**Other
                      Income and Deductions:**Equity
                      in earnings of subsidiaries
                  
                  
                  162,741
                  
                  
                  93,344
                  
                  
                  90,176Other
                      income
                  
                  
                  3,583
                  
                  
                  3,775
                  
                  
                  1,258Other
                      deductions
                  
                  
                  (58,283
                  )
                  
                  (32,426
                  )
                  
                  (932
                  )Net
                      other income and deductions
                  
                  
                  108,041
                  
                  
                  64,693
                  
                  
                  90,502**Income
                      Before Income Taxes**
                  
                  
                  93,449
                  
                  
                  50,390
                  
                  
                  85,345**Income
                      Tax Benefit**
                  
                  
                  (28,665
                  )
                  
                  (16,877
                  )
                  
                  (2,341
                  )**Net
                      Earnings Before Cumulative Effect of Changes in****Accounting
                      Principle**
                  
                  
                  122,114
                  
                  
                  67,267
                  
                  
                  87,686Cumulative
                      effect of changes in accounting principle, net oftax
                      expense of $0, $26 and $0
                  
                  
                  -
                  
                  
                  (40
                  )
                  
                  -**Net
                      Earnings**
                  
                  $
                  122,114
                  
                  $
                  67,227
                  
                  $
                  87,686
 See
            note
            to parent company financial information, and notes to the consolidated
            financial
            statements.
 
 
 B-152
 
 **SCHEDULE
          I**
 **PNM
          RESOURCES, INC.**
 **CONDENSED
          FINANCIAL INFORMATION OF PARENT COMPANY**
 **STATEMENTS
          OF CASH FLOWS**
 
 **Year
                    Ended December 31,****2006**
                
                **2005**
                
                **2004**(In
                    thousands)**Cash
                    Flows From Operating Activities:**Net
                    earnings
                
                $
                122,114
                
                $
                67,227
                
                $
                87,686Adjustments
                    to reconcile net earnings to net cash flowsfrom
                    operating activities:Depreciation
                    and amortization
                
                
                509
                
                
                677
                
                
                2,604Allowance
                    for equity funds used during construction
                
                
                -
                
                
                -
                
                
                (66
                )Accumulated
                    deferred income tax
                
                
                4,996
                
                
                (6,281
                )
                
                2,131Equity
                    in earnings of subsidiaries
                
                
                (162,741
                )
                
                (93,344
                )
                
                (90,176
                )Other
                
                
                8,214
                
                
                9,225
                
                
                -Changes
                    in certain assets and liabilities:Other
                    assets
                
                
                9,521
                
                
                (9,039
                )
                
                (9,030
                )Accounts
                    payable
                
                
                (4,605
                )
                
                (2,992
                )
                
                1,053Accrued
                    income tax
                
                
                (40,193
                )
                
                77,554
                
                
                (28,013
                )Other
                    liabilities
                
                
                28,691
                
                
                (28,360
                )
                
                14,999Net
                    cash flows provided (used) from operating activities
                
                
                (33,494
                )
                
                14,667
                
                
                (18,812
                )**Cash
                    Flows From Investing Activities:**Property
                    plant and equipment
                
                
                (5,980
                )
                
                (615
                )
                
                (7,256
                )Luna
                    investment
                
                
                -
                
                
                -
                
                
                (13,379
                )Investment
                    in subsidiaries
                
                
                (476,058
                )
                
                (557,229
                )
                
                -Sale
                    of bond investment
                
                
                -
                
                
                -
                
                
                12,247Cash
                    dividends from subsidiaries
                
                
                40,000
                
                
                140,500
                
                
                23,000Other
                
                
                (21,467
                )
                
                478
                
                
                174Net
                    cash flows provided (used) in investing activities
                
                
                (463,505
                )
                
                (416,866
                )
                
                14,786**Cash
                    Flows From Financing Activities:**Short-term
                    borrowings
                
                
                319,045
                
                
                160,000
                
                
                33,282Long-term
                    debt borrowings
                
                
                15,000
                
                
                347,250
                
                
                -Issuance
                    of common stock
                
                
                226,098
                
                
                101,231
                
                
                -Exercise
                    of employee stock options
                
                
                (9,641
                )
                
                (9,735
                )
                
                (16,430
                )Excess
                    tax benefit from stock-based payment arrangements
                
                
                1,072Dividends
                    paid
                
                
                (59,707
                )
                
                (51,128
                )
                
                (38,263
                )Change
                    in intercompany accounts
                
                
                -
                
                
                (135,620
                )
                
                24,980Other
                
                
                1,958
                
                
                2,032
                
                
                -Net
                    cash flows generated (used) by financing activities
                
                
                493,825
                
                
                414,030
                
                
                3,569Increase
                    (Decrease) in Cash and Cash Equivalents
                
                
                (3,174
                )
                
                11,831
                
                
                (457
                )Beginning
                    of Year
                
                
                12,219
                
                
                388
                
                
                845End
                    of Year
                
                $
                9,045
                
                $
                12,219
                
                $
                388**Supplemental
                    Cash Flow Disclosures:**Interest
                    paid, net of capitalized interest
                
                $
                (58,401
                )
                $
                16,780
                
                $
                (3,145
                )Income
                    taxes refunded, net
                
                $
                (11,586
                )
                $
                (4,179
                )
                $
                (3,098
                )Non-cash
                    dividends from subsidiaries
                
                $
                -
                
                $
                13,150
                
                $
                -
  See
            note
            to parent company financial information, and notes to the consolidated
            financial
            statements.
 B-153
  **(1)**
                  **Restatement**
 
 Subsequent
            to the issuance of the 2005 financial statements, the Company determined
            that
            the Investment in Subsidiaries on the Condensed Financial Statements
            of Parent
            Company was not properly recorded as of December 31, 2005.
 
 The
            correction affects the reported balance sheet of the Parent Company as
            of
            December 31, 2005 as follows:
 
 **As
                      Previously Reported**
                  
                  **Restatement**
                  
                  **As
                      Restated**(In
                      thousands)Investment
                      in Subsidiaries
                  
                  $
                  1,811,285
                  
                  $
                  (91,833
                  )
                  $
                  1,719,452Total
                      Assets
                  
                  $
                  2,026,912
                  
                  $
                  (91,833
                  )
                  $
                  1,935,079Accumulated
                      comprehensive income, net of tax
                  
                  $
                  244
                  
                  $
                  (91,833
                  )
                  $
                  (91,589
                  )Total
                      common stockholders’ equity
                  
                  $
                  1,378,292
                  
                  $
                  (91,833
                  )
                  $
                  1,286,459
 
 
 The
            correction has no effect on the Consolidated Balance Sheets of PNMR,
            nor does it
            impact the related disclosures in the Consolidated Financial Statements. 
There is no effect on the Statements of Earnings or Statements of Cash
            Flows of
            the Parent Company.
 B-154
 **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 31:2004
                    
                    $
                    9,284
                    
                    $
                    1,731
                    
                    $
                    -
                    
                    
                    
                    $
                    9,686
                    
                    $
                    1,3292005
                    
                    $
                    1,329
                    
                    $
                    2,780
                    
                    $
                    1,611
                    (a)
                    
                    
                    $
                    2,067
                    
                    $
                    3,6532006
                    
                    $
                    3,653
                    
                    $
                    19,368
                    
                    $
                    -
                    
                    
                    
                    $
                    16,122
                    
                    $
                    6,899(b)Allowance
                        for market and creditvolatility
                        year ended December 31:2004
                    
                    $
                    -
                    
                    $
                    110
                    
                    $
                    164
                    
                    
                    
                    $
                    210
                    
                    $
                    642005
                    
                    $
                    64
                    
                    $
                    115
                    
                    $
                    -
                    
                    
                    
                    $
                    6
                    
                    $
                    1732006
                    
                    $
                    173
                    
                    $
                    (1
                    )
                    $
                    -
                    
                    
                    
                    $
                    30
                    
                    $
                    142
 (a)  Represents
          the TNP allowance for doubtful accounts at June 6, 2005.
 
 (b)  Recorded
          in other deferred credits on the Consolidated Balance Sheets.
  
 B-155
  **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 31:2004
                
                $
                9,284
                
                $
                1,731
                
                $
                -
                
                $
                9,686
                
                $
                1,3292005
                
                $
                1,329
                
                $
                140
                
                $
                -
                
                $
                34
                
                $
                1,4352006
                
                $
                1,435
                
                $
                4,941
                
                $
                -
                
                $
                4,588
                
                $
                1,788(a)Allowance
                    for market and creditvolatility
                    year ended December 31:2004
                
                $
                -
                
                $
                110
                
                $
                164
                
                $
                210
                
                $
                642005
                
                $
                64
                
                $
                115
                
                $
                -
                
                $
                6
                
                $
                1732006
                
                $
                173
                
                $
                (1
                )
                $
                -
                
                $
                30
                
                $
                142
 
 
 (a)
                Recorded
                    in other deferred credits on the Consolidated Balance
                    Sheets.
  
 B-156
 
 **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
                    ***2004
                
                $
                356
                
                $
                (39
                )
                $
                -
                
                $
                126
                
                $
                191January
                    1 - June 6, 2005
                
                $
                191
                
                $
                (68
                )
                $
                -
                
                $
                52
                
                $
                71**Post-Acquisition
                    ***June
                    6 - December 31, 2005
                
                $
                71
                
                $
                100
                
                $
                -
                
                $
                71
                
                $
                1002006
                
                $
                100
                
                $
                25
                
                $
                -
                
                $
                94
                
                $
                31
 
 *
          On June
          6, 2005, PNMR completed the acquisition of TNP, parent company of TNMP,
          effective at 8:00 AM Central Daylight Time.
 
 
 B-157
  **ITEM
          9.**  **CHANGES
          IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
          DISCLOSURE**
 
 None.
 
 **ITEM
          9A.**  **CONTROLS
          AND PROCEDURES**
 
 PNMR
 
 (a)
          Evaluation of disclosure controls and procedures.
 
 PNMR
          maintains disclosure controls and procedures designed to ensure that it
          is able
          to collect the information it is required to disclose in the reports it
          files
          with the SEC, and to process, summarize and disclose this information within
          the
          time periods specified in the rules of the SEC. Based on an evaluation
          of its
          disclosure controls and procedures as of the end of the period covered
          by this
          report conducted by management, with the participation of the Chief Executive
          and Chief Financial Officer, the Chief Executive and Chief Financial Officer
          believe that these controls and procedures are effective to ensure that
          PNMR
          meets the requirements of SEC Regulation 13A, Rule 13a-15(e) and Rule
          15d-15(e).
 
 (b)
          Management’s report on internal control over financial reporting.
 
 “Management’s
          Annual Report on Internal Control Over Financial Reporting” appears on page B-5.
          This report is incorporated by reference herein. Management has excluded
          the
          acquired company, Twin Oaks, from their report on internal control over
          financial reporting. Twin Oaks’ results of operations are significant to PNMR’s
          consolidated financial statements. The financial statements of Twin Oaks
          reflect
          total assets and revenues constituting 12 and 5 percent, respectively,
          of the
          related consolidated financial statements as of and for the year ended
          December
          31, 2006. A material change in PNMR’s internal control over financial reporting
          due to the acquisition has been disclosed below.
 
 (c)
          Changes in internal controls.
 
 *Twin
          Oaks Acquisition*
 
 PNMR
          is
          currently undergoing a diligent effort to integrate Twin Oaks' and PNMR’s
          internal control activities to ensure that PNMR maintains its compliance
          with
          Section 404 of the Sarbanes-Oxley Act of 2002. It is expected that this
          effort
          will continue through the end of 2007.
 
 Except
          as
          described above, there have been no other changes in PNMR’s internal controls
          over financial reporting for the quarter ended December 31, 2006, that
          have
          materially affected, or are reasonably likely to materially affect, PNMR’s
          internal control over financial reporting.
 
 PNM
 
 (a)
          Evaluation of disclosure controls and procedures.
 
 PNM
          maintains disclosure controls and procedures designed to ensure that it
          is able
          to collect the information it is required to disclose in the reports it
          files
          with the SEC, and to process, summarize and disclose this information within
          the
          time periods specified in the rules of the SEC. Based on an evaluation
          of PNM’s
          disclosure controls and procedures as of the end of the period covered
          by this
          report conducted by management, with the participation of the Chief Executive
          and Chief Financial Officer, the Chief Executive and Chief Financial Officer
          believe that these controls and procedures are effective to ensure that
          PNM is
          able to meet the requirements of SEC Regulation 13A, Rule 13a-15(e) and
          Rule
          15d-15(e).
 
 (b)
          Management’s report on internal control over financial reporting.
 
 C-1
 “Management’s
          Annual Report on Internal Control Over Financial Reporting” appears on page B-6.
          This report is incorporated by reference herein.
 
 (c)
          Changes in internal controls.
 
 There
          have been no changes in PNM’s internal controls over financial reporting for the
          quarter ended December 31, 2006, that have materially affected, or are
          reasonably likely to materially affect, PNM’s internal control over financial
          reporting.
 
 TNMP
 
 (a)
          Evaluation of disclosure controls and procedures.
 
 TNMP
          maintains disclosure controls and procedures designed to ensure that it
          is able
          to collect the information it is required to disclose in the reports it
          files
          with the SEC, and to process, summarize and disclose this information within
          the
          time periods specified in the rules of the SEC. Based on an evaluation
          of its
          disclosure controls and procedures as of the end of the period covered
          by this
          report conducted by management, with the participation of the Chief Executive
          and Chief Financial Officer, the Chief Executive and Chief Financial Officer
          believe that these controls and procedures are effective to ensure that
          PNMR
          meets the requirements of SEC Regulation 13A, Rule 13a-15(e) and Rule
          15d-15(e).
 
 (b)
          Changes in internal controls.
 
 There
          have been no changes in TNMP’s internal controls over financial reporting for
          the quarter ended December 31, 2006, that have materially affected, or
          are
          reasonably likely to materially affect, TNMP’s internal control over financial
          reporting.
 
 **ITEM
          9B.**  **OTHER
          INFORMATION**
 
 None.
 
 
 C-2
 
 **PART
          III**
 
 **ITEM
                    10.**
                **DIRECTORS,
                    EXECUTIVE OFFICERS OF THE COMPANY AND CORPORATE
                    GOVERNANCE**
 
 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 22,
          2007 (the “2007 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 2007
          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 May 26, 2006.
 
 **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 2007 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 2007 Proxy Statement.
 
 **ITEM
          13.**  **CERTAIN
          RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
          INDEPENDENCE**
 
 Reference
          is hereby made to the 2007 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 2007 Proxy Statement. Independent auditor fees for PNM and TNMP
          are
          reported in the 2007 Proxy Statement for PNMR. All such fees are fees of
          PNMR.
   D-1
 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 2006, 2005, and 2004 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**10.2
                PNMR
                First
                    Amendment to Credit Agreement dated as of November 3, 2006 among
                    PNM
                    Resources, First Choice Power, L.P. and TNMP, as borrowers, the
                    lenders
                    party thereto and Bank of America, N.A., as administrative
                    agent12.1
                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 PNM Resources, Inc.23.3
                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 200231.3
                PNM
                Chief
                    Executive Officer Certification Pursuant to Section 302 of the
                    Sarbanes-Oxley Act of 200231.4
                PNM
                Chief
                    Financial Officer Certification Pursuant to Section 302 of the
                    Sarbanes-Oxley Act of 200231.5
                TNMP
                Chief
                    Executive Officer Certification Pursuant to Section 302 of the
                    Sarbanes-Oxley Act of 200231.6
                TNMP
                Chief
                    Financial Officer Certification Pursuant to Section 302 of the
                    Sarbanes-Oxley Act of 200232.1
                PNMR
                Chief
                    Executive Officer Certification Pursuant to Section 906 of the
                    Sarbanes-Oxley Act of 200232.2
                PNMR
                Chief
                    Financial Officer Certification Pursuant to Section 906 of the
                    Sarbanes-Oxley Act of 200232.3
                PNM
                Chief
                    Executive Officer Certification Pursuant to Section 906 of the
                    Sarbanes-Oxley Act of 200232.4
                PNM
                Chief
                    Financial Officer Certification Pursuant to Section 906 of the
                    Sarbanes-Oxley Act of 200232.5
                TNMP
                Chief
                    Executive Officer Certification Pursuant to Section 906 of the
                    Sarbanes-Oxley Act of 200232.6
                TNMP
                Chief
                    Financial Officer Certification Pursuant to Section 906 of the
                    Sarbanes-Oxley Act of 2002
  E-1
 
 
 99.22
                PNM
                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
 
 (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
                Restated
                    Articles of Incorporation of PNM Resources, dated August 3,
                    2006
                
                3.1
                    to the Company’s Quarterly Report on Form 10-Q for the quarter ended
                    September 30, 2006
                1-32462
                  PNMR3.2
                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
  E-2
  **Exhibit
                    No.**
                **Description
                    of Exhibit**
                ****
                **Filed
                    as Exhibit**
                **Registrant(s)
                    File No:****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
                  PNMR4.6
                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
   E-3
  **Exhibit
                    No.**
                **Description
                    of Exhibit**
                
                **Filed
                    as Exhibit:**
                **Registrant(s)
                    File No:****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
                  PNM4.14
                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
                  PNM
   E-4
  **Exhibit
                    No.**
                **Description
                    of Exhibit**
                
                **Filed
                    as Exhibit:**
                **Registrant(s)
                    File No:**4.19
                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
                  TNMP4.25
                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. and First Choice Power, L.P., as borrowers, 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
                First
                    Amendment to Credit Agreement dated as of November 3, 2006 among
                    PNM
                    Resources, First Choice Power, L.P. and TNMP, as borrowers, the
                    lenders
                    party thereto and Bank of America, N.A.,as administrative
                    agent
                
                10.2to
                    the Company’s Annual Report on Form 10-K for the year ended December 31,
                    2006
                1-32462
                  PNMR
   E-5
  **Exhibit
                    No.**
                **Description
                    of Exhibit**
                
                **Filed
                    as Exhibit:**
                **Registrant(s)
                    File No:**10.3
                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
                  PNMR10.4
                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
                  TNMP10.5
                Term
                    Loan Agreement, dated April 17, 2006, among PNM Resources, as
                    borrower,
                    the lenders identified therein and Lehman Commercial Paper, Inc.,
                    as
                    administrative agent
                
                10.4
                    to PNM Resource's Quarterly Report on Form 10-Q for the quarter
                    ended June
                    30, 2006
                1-32462
                  PNMR10.6
                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
                  PNMR10.7
                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
                  PNMR10.8
                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
                  PNMR10.9
                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
                  PNMR10.10
                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
                  PNMR10.11
                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
                  PNMR10.12
                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
                  PNMR10.13
                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
                  PNM
   E-6
  **Exhibit
                    No.**
                **Description
                    of Exhibit**
                
                **Filed
                    as Exhibit:**
                **Registrant(s)
                    File No:**10.14**
                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
                  PNMR10.15**
                First
                    Amendment to the PNM Resources, Inc. Amended and Restated Omnibus
                    Performance Equity Plan executed February 14, 2006
                
                10.1
                    to PNM Resources' Current Report on Form 8-K filed February 16,
                    2007
                333-125010
                  PNMR10.16**
                Form
                    of the award agreement for non-qualified stock options granted
                    prior to
                    2007 under the PEP
                
                10.1
                    to the Company's Current Report on Form 8-K filed February 17,
                    2006
                1-32462
                  PNMR10.17**
                Form
                    of the award agreement for non-qualified stock options granted
                    in 2007
                    under the PEP
                
                10.2
                    to PNM Resources' Current Report on Form 8-K filed February 16,
                    2007
                1-32462
                  PNMR10.18**
                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
                  PNMR10.19**
                Form
                    of award agreement for restricted stock rights granted in 2006
                    under the
                    PEP
                
                10.26
                    to the Company’s Annual Report on Form 10-K for the year ended December
                    31, 2005
                1-32462
                  PNMR10.20**
                Form
                    of award agreement for restricted stock rights granted in 2007
                    under the
                    PEP
                
                10.3
                    to the PNM Resources' Current Report on Form 8-K filed February
                    16,
                    2007
                1-32462
                  PNMR10.21**
                Form
                    of award agreement for performance shares granted for the 2004-2006
                    performance period under the PEP and a description of the Long-Term
                    Performance Share Program Amended Effective January 1,
                    2004
                
                10.4
                    to PNM Resources' Current Report on Form 8-K filed February 16,
                    2007
                1-32462
                  PNMR10.22**
                Long-Term
                    Performance Cash Program description effective January 1,
                    2004
                
                10.5
                    to PNM Resources' Current Report on Form 8-K filed February 16,
                    2007
                333-125010
                  PNMR10.23**
                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
                  PNMR10.24**
                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
                  PNMR10.25**
                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
                  PNMR10.26**
                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
                  PNMR10.27**
                Second
                    Amendment to the PNM Resources, Inc. Executive Savings Plan II
                    executed
                    September 29, 2006
                
                10.2
                    to the Company's Current Report on Form 8-K filed October 2,
                    2006
                1-32462
                  PNMR
   E-7
  **Exhibit
                    No.**
                **Description
                    of Exhibit**
                
                **Filed
                    as Exhibit:**
                **Registrant(s)
                    File No:**10.28**
                2007
                    Officer Incentive Plan
                
                10.6
                    to PNM Resources' Current Report on Form 8-K filed February 16,
                    2007
                1-32462
                  PNMR10.29**
                2006
                    Officer Incentive Plan as amended on September 29, 2006
                
                10.1
                    to the Company’s Current Report on Form 8-K filed October 2,
                    2006
                1-32462
                  PNMR10.30**
                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
                  PNMR10.31**
                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
                  PNM10.32**
                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
                  PNM10.33**
                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
                  PNM10.34**
                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
                  PNM10.35**
                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
                  PNM10.36**
                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
                  PNMR10.37**
                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
                  PNMR10.38**
                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
                  PNMR10.39**
                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
                  PNMR
   E-8
  **Exhibit
                    No.**
                **Description
                    of Exhibit**
                
                **Filed
                    as Exhibit**
                **Registrant(s)
                    File No:**10.40**
                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
                  PNM10.41**
                Fourth
                    Amendment to the PNM Resources Non-Union Severance Pay Plan executed
                    April
                    19, 2006
                
                10.43
                    to the Company's Quarterly Report on Form 10-Q for the quarter ended June
                    30, 2006
                1-32462
                  PNMR10.42**
                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
                  PNM10.43**
                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
                  PNM10.44**
                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
                  PNM10.45**
                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
                  PNM10.46**
                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
                  PNMR10.47**
                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
                  PNMR10.48**
                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
                  PNM10.49**
                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
                  PNM10.50**
                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
                  PNMR10.51**
                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
                  PNMR10.52**
                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
                  PNM10.53**
                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
                  PNMR
   E-9
  **Exhibit
                    No.**
                **Description
                    of Exhibit**
                
                **Filed
                    as Exhibit:**
                **Registrant(s)
                    File No:**10.54**
                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
                  PNMR10.55**
                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
                  PNMR10.56**
                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
                  PNMR10.57*
                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
                  PNMR10.58**
                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
                  PNMR10.59**
                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
                  PNM10.60**
                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
                  PNM10.61**
                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
                  PNM10.62**
                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
                  PNM10.63**
                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
                  PNMR10.64**
                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
                  PNMR10.65**
                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
                  PNMR
   E-10
  **Exhibit
                    No.**
                **Description
                    of Exhibit**
                
                **Filed
                    as Exhibit:**
                **Registrant(s)
                    File No:**10.66**
                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
                  PNMR10.67**
                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
                  PNM10.68**
                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
                  PNM10.69**
                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
                  PNMR10.70**
                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
                  PNMR10.71**
                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
                  PNMR10.72**
                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
                  PNMR10.73**
                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
                  PNMR10.74
                Supplemental
                    Indenture of Leasedated
                    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
                  PNM10.75
                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
                  PNM10.76
                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
                  PNM10.77
                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
                  PNM
   E-11
  **Exhibit
                    No.**
                **Description
                    of Exhibit**
                
                **Filed
                    as Exhibit:**
                **Registrant(s)
                    File No:**10.78
                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
                  PNM10.79
                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
                  PNM10.80
                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
                  PNM10.81
                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
                  PNM10.82
                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
                  PNM10.83
                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
                  PNM10.84
                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
                  PNM10.85
                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
                  PNM
   E-12
  **Exhibit
                    No.**
                **Description
                    of
                    Exhibit**
                
                **Filed
                      as Exhibit:**
                **Registrant(s)
                      File No:**10.86
                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
                  PNM10.87
                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
                  PNM10.88
                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
                  PNM10.89
                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
                  PNM10.90
                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
                  PNM10.91
                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
                  PNM10.92
                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
                  PNM10.93
                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
                  PNM10.94
                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
                  PNM10.95
                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
                  PNM
   E-13
  **Exhibit
                    No.**
                **Description
                    of
                    Exhibit**
                
                **Filed
                    as Exhibit:**
                **Registrant(s)
                  File No:**10.96
                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
                  PNM10.97
                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
                  PNM10.98
                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
                  PNM10.99
                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
                  PNM10.100
                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
                  PNM10.101
                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
                  PNM10.102
                Amended
                    and Restated San Juan Project Participation Agreement dated as
                    of March 3,
                    2006, 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.
                
                10.119
                    to PNM's Quarterly Report on Form 10-Q for the quarter ended
                    March 30,
                    2006
                1-6986
                  PNM10.103
                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
                  PNM
   E-14
  **Exhibit
                    No.**
                **Description
                      of
                      Exhibit**
                
                **Filed
                      as Exhibit:**
                **Registrant(s)
                    File
                    No:**10.104*
                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
                  PNM10.105*
                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
                  PNM10.106
                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
                  PNM10.107
                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
                  PNM10.108
                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
                  PNM10.109
                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
                  PNM10.110
                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
                  PNM10.111
                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
                  PNM10.112
                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
                  PNM
   E-15
  **Exhibit
                    No.**
                **Description
                    of
                    Exhibit**
                
                **Filed
                    as Exhibit:**
                **Registrant(s)
                    File
                    No:**10.113
                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
                  PNM10.114
                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
                  PNM10.115
                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
                  PNM10.116
                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
                  PNM10.117
                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
                  PNM10.118
                January
                    12, 1994 Stipulation
                
                10.53
                    to PNM’s Annual Report on form 10-K for fiscal year ended December 31,
                    1993
                1-6986
                  PNM10.119
                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
                  PNM10.120
                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
                  PNM
   E-16
  **Exhibit
                    No.**
                **Description
                    of
                    Exhibit**
                
                **Filed
                    as Exhibit:**
                **Registrant(s)
                    File
                    No:**10.121
                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
                  PNM10.122
                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
                  PNM10.123
                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
                  PNM10.124
                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
                  PNM10.125
                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
                  PNM10.126
                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
                  PNM10.127
                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/
                  TNMP10.128
                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/
                  TNMP10.129
                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
                  PNM
   E-17
  **Exhibit
                    No.**
                **Description
                    of Exhibit**
                
                **Filed
                    as Exhibit:**
                **Registrant(s)
                    File
                    No:**10.130
                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
                  PNM10.131
                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
                  TNMP10.132
                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
                  TNMP10.133
                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
                  TNMP10.134
                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
                  TNMP10.135
                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
                  TNMP10.136
                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
                  TNMP10.137
                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
                2-8980010.138
                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
                2-8980010.139
                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
                2-89800
   E-18
  **Exhibit
                    No.**
                **Description
                    of Exhibit**
                
                **Filed
                    as Exhibit:**
                **Registrant(s)
                    File No:**10.140
                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
                2-8980021
                Certain
                    subsidiaries of PNM Resources
                
                21
                    to the Company’s Annual Report on Form 10-K for the year ended December
                    31, 2006
                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
                  PNM99.3
                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
                  PNM
   E-19
 **Exhibit
                      No.**
                  **Description
                      of Exhibit**
                  
                  **Filed
                      as Exhibit:**
                  **Registrant(s)
                      File No:**99.3.3
                  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
                    PNM99.6
                  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
                    PNM99.8
                  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
                    PNM
   E-20
  **Exhibit
                      No.**
                  **Description
                      of Exhibit**
                  
                  **Filed
                      as Exhibit:**
                  **Registrant(s)
                      File No:**99.8.1*
                  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
                    PNM99.12
                  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
                    PNM
   E-21
  **Exhibit
                      No.**
                  **Description
                      of Exhibit**
                  
                  **Filed
                      as Exhibit:**
                  **Registrant(s) File
                      No:**99.14
                  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
                    PNM99.19
                  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
                    PNM
   E-22
  **Exhibit
                      No.**
                  **Description
                      of Exhibit**
                  
                  **Filed
                      as Exhibit:**
                  **Registrant(s)
                      File No:**99.20
                  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 the Company’s Annual Report on Form 10-K for the year ended December
                      31, 2006
                  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-23
 
 **SIGNATURES**
 
 Pursuant
            to the requirements of Section 13 or 15(d) of the Securities Exchange
            Act of
            1934, the Registrant has duly caused this report to be signed on its
            behalf by
            the undersigned, thereunto duly authorized.
 
 
 **PNM
                      RESOURCES, INC.**(Registrant)Date:
                      March 1, 2007
                  By
                  /s/
                      J. E. STERBAJ.
                      E. SterbaChairman,
                      President and
                    *Chief
                      Executive Officer*
 
 Pursuant
            to the requirements of the Securities Exchange Act of 1934, this report
            has been
            signed below by the following persons on behalf of the Registrant and
            in the
            capacities and on the dates indicated.
 
 **Signature**
                  **Capacity**
                  **Date**/s/
                      J. E. STERBA
                  Principal
                      Executive Officer and
                  March
                      1, 2007J.
                      E. Sterba
                    Chairman,
                      President and
                    *Chief
                      Executive Officer*
                  Chairman
                      of the Board/s/
                      C. N. ELDRED
                  Principal
                      Financial Officer
                  March
                      1, 2007C.
                      N. Eldred
                    Senior
                      Vice President and
                    *Chief
                      Financial Officer*/s/
                      T. G. SATEGNA
                  Principal
                      Accounting Officer
                  March
                        1, 2007T.
                      G. Sategna
                    Vice
                      President and
                    *Corporate
                      Controller*/s/
                      A. E. ARCHULETA
                  Director
                  March
                        1, 2007A.
                      E. Archuleta/s/
                      J. A. DOBSON
                  Director
                  March
                        1, 2007J.
                      A. Dobson/s/
                      W. L. HUNT
                  Director
                  March
                        1, 2007W.
                      L. Hunt/s/
                      C. E. MCMAHEN
                  Director
                  March
                        1, 2007C.
                      E. McMahen/s/
                      M. T. PACHECO
                  Director
                  March
                        1, 2007M.
                      T. Pacheco/s/
                      R. M. PRICE
                  Director
                  March
                        1, 2007R.
                      M. Price/s/
                      B. S. REITZ
                  Director
                  March
                        1, 2007B.
                      S. Reitz/s/
                      J. B. WOODARD
                  Director
                  March
                        1, 2007J.
                      B. Woodard
 
  E-24
  **SIGNATURES**
 
 Pursuant
            to the requirements of Section 13 or 15(d) of the Securities Exchange
            Act of
            1934, the Registrant has duly caused this report to be signed on its
            behalf by
            the undersigned, thereunto duly authorized.
   **PUBLIC
                      SERVICE COMPANY OF NEW
                      MEXICO**(Registrant)Date:  
                      March
                      1, 2007
                  By
                  /s/
                      J. E. SterbaJ.
                      E. SterbaChairman,
                      President and
                    *Chief
                      Executive Officer*
 
 Pursuant
            to the requirements of the Securities Exchange Act of 1934, this report
            has been
            signed below by the following persons on behalf of the Registrant and
            in the
            capacities and on the dates indicated.
  
 **Signature**
                  **Capacity**
                  **Date**/s/
                      J. E. Sterba
                  Principal
                      Executive Officer and
                  March
                        1, 2007J.
                      E. Sterba
                    Chairman,
                      President and
                    *Chief
                      Executive Officer*
                  Chairman
                      of the Board/s/
                      C. N. Eldred
                  Principal
                      Financial Officer
                  March
                        1, 2007C.
                      N. Eldred
                    Senior
                      Vice President and
                    *Chief
                      Financial Officer*/s/
                      T. G. Sategna
                  Principal
                      Accounting Officer
                  March
                        1, 2007T.
                      G. Sategna
                    Vice
                      President and
                    *Corporate
                      Controller*/s/
                      A. A. Cobb
                  Director
                  March
                        1, 2007A.
                      A. Cobb/s/
                         C. N. Eldred
                  Director
                  March
                        1, 2007C.
                      N. Eldred/s/
                      W. D. Hobbs
                  Director
                  March
                        1, 2007W.
                      D. Hobbs/s/
                      W. J. Real
                  Director
                  March
                        1, 2007W.
                      J. Real/s/
                      H. W. Smith
                  Director
                  March
                        1, 2007H.
                      W. Smith
  
  E-25
  **SIGNATURES**
 
 Pursuant
            to the requirements of Section 13 or 15(d) of the Securities Exchange
            Act of
            1934, the Registrant has duly caused this report to be signed on its
            behalf by
            the undersigned, thereunto duly authorized.
 
 **TEXAS-NEW
                      MEXICO POWER
                      COMPANY**(Registrant)Date: 
                      March
                      1, 2007
                  By
                  /s/
                      W. D. HobbsW.
                      D. HobbsPresident
                      and
                    *Chief
                      Executive Officer*
 
 Pursuant
            to the requirements of the Securities Exchange Act of 1934, this report
            has been
            signed below by the following persons on behalf of the Registrant and
            in the
            capacities and on the dates indicated.
 
 **Signature**
                  **Capacity**
                  **Date**/s/
                      W. D. Hobbs
                  Principal
                      Executive Officer and
                  March
                        1, 2007W.
                      D. Hobbs
                    President
                      and
                    *Chief
                      Executive Officer*
                  Director/s/
                      T. G. Sategna
                  Principal
                      Financial Officer and
                  March
                        1, 2007T.
                      G. Sategna
                    Vice
                      President,
                    *Controller
                      and Treasurer*
                  Principal
                      Accounting Officer/s/
                      A. A. Cobb
                  Director
                  March
                        1, 2007A.
                      A. Cobb/s/
                      J. E. Sterba
                  Chairman
                      of the Board
                  March
                        1, 2007J.
                      E. Sterba
 
 E-26